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Edited Transcript of VC earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Visteon Corp Earnings Call

VAN BUREN TOWNSHIP Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Visteon Corp earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian A. Garcia

Visteon Corporation - Executive VP, CFO & Principal Accounting Officer

* Kristopher Doyle

Visteon Corporation - Director of IR and FP&A

* Sachin S. Lawande

Visteon Corporation - President, CEO & Director

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Conference Call Participants

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* Brian Arthur Johnson

Barclays Bank PLC, Research Division - MD & Senior Equity Analyst

* Daniel V. Galves

Wolfe Research, LLC - Director of Equity Research & Senior Analyst

* Emmanuel Rosner

Deutsche Bank AG, Research Division - Director & Research Analyst

* Erin Alexandra Welcenbach

Robert W. Baird & Co. Incorporated, Research Division - Analyst

* Itay Michaeli

Citigroup Inc, Research Division - Director and VP

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Ryan J. Brinkman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Steven Bryant Fox

Cross Research LLC - MD

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Presentation

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Kristopher Doyle, Visteon Corporation - Director of IR and FP&A [1]

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Good morning. I'm Kris Doyle, Director of Investor Relations for Visteon. Welcome to our earnings call for the third quarter of 2019. Please note this call is being recorded. (Operator Instructions)

Before we begin this morning 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 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 question after Sachin's and Christian's remarks. (Operator Instructions)

Again, thank you for joining us. Now I'll turn the call over to Sachin.

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [2]

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Thank you, Kris, and good morning, everyone. On page 2, I will start with an overview of our third quarter results. On the subsequent pages, I will discuss our performance in the quarter in more detail. Christian will then discuss the financial results before we open the line for questions.

Our third quarter sales came in at $731 million, up 7% year-over-year and 10 percentage points over market. Despite the generally weak market environment, this is the highest growth the company has delivered in at least the past 4 years. This growth was largely due to the strong performance of our digital cluster products driven by the trend of digitization of the cockpit. Adjusted EBITDA was $62 million or 8.5% of sales, an improvement over the second quarter. Adjusted free cash flow was $23 million for the quarter.

Our sales performance was also strong from a regional perspective with the Americas growing 12% and Asia up 10% year-over-year. Europe was down 1%, but better than the decline in vehicle production at our top customers in the region. Operationally, the third quarter was strong with 12 new products launched as well as the ramp-up of production of the display module that presented us with challenges in the first quarter. We also opened a new technical center in Mexico to support the company's growing business in the Americas region.

Our new business wins for the first 3 quarters reached $4.6 billion with 2/3 of this business based on new next-generation digital platforms. We added a new automaker to our customer base during the quarter, expanding our customer portfolio by 2 year-to-date. We have made slight adjustments to our full year 2019 guidance, which Christian will cover in more detail. We narrowed our sales range while keeping adjusted EBITDA unchanged. We have increased our guidance for adjusted free cash flow to range between $40 million and $60 million.

In summary, in the third quarter, the company executed very well on all fronts to deliver a strong quarter despite the continued softness in global vehicle production.

Turning to Page 3. Page 3 shows the progression of our sales growth over the past 3 quarters compared with vehicle production and the key drivers of sales growth in the third quarter. Our sales declined in the first quarter, following the sharp drop in the market, but have recovered since then due to the contribution of new products launched over the past 12 months. As these new products ramp up in volume, it has offset the impact of lower vehicle production at our customers.

In the third quarter, this trend resulted in our sales growing year-over-year by 7% and representing growth over market of 10 percentage points. I should note that JV consolidation contributed about 2 percentage points of sales in the quarter. This growth is due to the strong performance of our new digital products, including digital clusters, display audio and center information displays, which are very appropriate for the key trends impacting the cockpit. Digital clusters are leading the trend of digitization of the cockpit. And in the past 2 years, we have won the majority share of this business globally.

Digital cluster sales were up strongly in the third quarter and now represent nearly 30% of our total cluster sales as compared with 18% last year. Sales of digital clusters were particularly strong with the North American and European customers. Display audio is a relatively new product line for the company, and while the size of the business is currently small, the early signs are very encouraging.

In the third quarter, we experienced double-digit growth for this product line, mainly due to the ramp-up of 2 display audio programs for South America and Asia. The recently launched telematics gateway for a display audio system for a Japanese OEM in China also contributed to the sales growth in the quarter. The center information displays that we launched with a European OEM for Global Markets was also a key contributor to our sales growth. In the third quarter, we launch these displays on multiple vehicles with this customer.

In summary, our sales growth was strong in the third quarter, both year-over-year and over market. This is largely due to the success of our new digital products that have been launched over the past 12 months.

Turning to Page 4. On Page 4, we show our sales growth in each region year-over-year and against vehicle production at top Visteon customers. Despite vehicle production being down 3% for Visteon customers, our sales in the Americas were up 12% year-over-year. The main drivers of this growth are the ramp-up of production of displays and digital cluster products that were recently launched with European and U.S. OEMs, which more than offset the impact of lower production volume and roll off of legacy products.

Asia grew 10% due to another strong quarter in China. Take rates of infotainment and cluster product with one of our large customers remained high in the third quarter, continuing the trend from the second quarter. We also had 7 new product launches in the quarter in China and 17 year-to-date as well as the consolidation of the joint venture with FAW. Offsetting the strong performance in China was lower infotainment business with Mazda due to their alignment with Toyota for future infotainment systems.

In Europe, we are also seeing a turnaround in the Visteon sales, led by the growth of digital clusters and SmartCore products. In the third quarter, our sales were down 1% year-over-year compared with the 4% reduction in production volumes at Visteon customers. This performance is an improvement from the prior quarters and with additional new product launches that are being launched. We expect to see our sales in Europe turn to growth in the fourth quarter. In summary, our sales outperformed vehicle production in all 3 regions.

Moving to Page 5. On this page, I will share some highlights of our operational performance in the quarter. We launched 12 new products in the third quarter, maintaining our cadence of launching one new product per week and bringing the year-to-date total to 35 new products. We launched our first cluster with Great Wall motors, one of the leading car manufacturers in China. This cluster is for their Haval H9 SUV, which is the top-of-the-line vehicle in the lineup, and we're hopeful that this successful launch will lead to more business in the future with Great Wall.

We also launched 2 variants of a center information display with Mazda for multiple vehicles. This is the first of many displays that we are developing for Mazda, and we have additional launches with them in 2020. As you may recall, in the first quarter of 2019, we had a challenging launch of our display product that required new capabilities to be developed at Visteon. I'm pleased to report that all the operational challenges with this product are now resolved.

We have since launched these displays on multiple vehicle models with the customer with more launches to follow in the coming quarters. We have also won additional business this year with other OEMs for this complex displays, benefiting from the experience we gained in launching this first product.

To support the growth of the business, we have been growing our engineering capacity and capability, especially in software, while adjusting our footprint toward lower-cost location. In the third quarter, our gross engineering costs were lower by about 5% year-over-year. We opened a new tech center in Mexico, and this year, we have added approximately 600 engineers globally, mostly in software and in low-cost locations.

Turning to Page 6. Our new business win performance continued to be strong in the third quarter, despite the slowdown in China, resulting in year-to-date wins of $4.6 billion in lifetime value. North American OEMs accounted for most of the new business wins so far this year, mainly for digital cluster, infotainment and battery management systems.

Product development cycles at OEMs are typically 3 years. And to maintain a high level of new business wins each year requires winning business with different OEMs across the cycles. In 2018, we won significant business with European and Asian OEMs. And this year, we have won substantial business with the 2 largest OEMs in North America, which is very good for diversification of our business. We have also won over $700 million of displays' business year-to-date, which is a strong recovery for Visteon in this product category. The industry shift towards large complex displays is benefiting us on account of the vertical integration of displays' manufacturing.

We have further opportunities in the fourth quarter and hope to finish the year with close to $1 billion in displays' wins. We added one new OEM to our customer portfolio in the third quarter and 2 for the year, both based in Europe. I'm confident that we will develop these 2 customers into significant revenue opportunities for Visteon in the future. With the $4.6 billion in new business wins year-to-date, our backlog of awarded business is now $21.9 billion. Our outlook for the full year is to win between $6 billion and $6.5 billion, which should continue our long-term growth and lead to margin expansion.

Turning to Page 7. On this page, I will briefly discuss 3 key new business wins in the third quarter. The first win, highlighted here, is for a multi-display module for a new customer in Europe for the premium segment. This product is a single assembled component that includes 2 displays that are bonded together. The 12-inch display on the top is for infotainment content while the lower 8-inch display with touchscreen and haptic's technology replaces traditional buttons and knobs with digital controls.

This is the first business we have won with this customer, and it will initially launch on 2 vehicle models in mid-2021. The second win is for a 12-inch digital cluster, plus another 12-inch center information display driven by a separate infotainment system. This win is with a Japanese OEM for a new vehicle for the China market that will launch towards the end of 2021.

Both of these wins feature multiple displays that are optically bonded to a curved glass cover lens where we can leverage the capabilities that were developed for the recently launched CID display. The third win is an android-based display audio system with a 10-inch display for U.S. OEM for the South American market. The system will launch at the end of 2021. It's similar to the display audio system we are currently developing for a different OEM for the same market, which will launch early next year.

These new business wins are representative of the key trends that are impacting cockpit electronics. Visteon's digital platforms are well suited for these applications, and we expect to see more opportunities like these going forward.

Moving to Page 8. On Page 8, I will summarize the results for the third quarter. We delivered $731 million in sales, up 7% year-over-year with $62 million of adjusted EBITDA. Despite a weak market environment, we grew year-over-year in the Americas and Asia, and we're modestly down in Europe in the third quarter. Operationally, we continued our cadence of a high number of program launches with 12 launches in the quarter and 7 in China. At the same time, we were able to keep engineering costs in check, which were down year-over-year for the quarter.

In addition, we opened a new tech center in Mexico to support our business growth in the Americas region. Our new business wins were strong at $4.6 billion in lifetime value, and this puts us on track to continue to generate shareholder value. We expanded our customer base with the addition of a new customer in the premium segment of the market. The company executed well in the third quarter in all aspects of our business. For the fourth quarter, we expect to carry this momentum forward, and despite the weak production forecast, we anticipate continued growth.

This concludes my overview comments. Now before I turn it over to Christian to review the financial results, I want to take this opportunity to thank Christian for his dedicated service to Visteon. He has been a valuable partner to me and to the rest of the Visteon leadership team for the past 3 years, and we wish him all the best for the future. As we announced, our Board has approved the appointment of Bill Robertson to return to the company as interim CFO as we search for a permanent replacement. I look forward to working with Bill during this transition.

So thank you, Christian. And now I will turn it over to you.

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [3]

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Thank you, Sachin, and good morning, everyone. I would like to take a moment to thank Sachin, the Board and the entire Visteon team for the opportunity to contribute to the company's significant transformation for the last 3 years. As you can see from our release today, Visteon's results inflected in the third quarter. And while the growth rates may be uneven going forward, I am confident that the company's next stage of growth is firmly underway.

Now turning to Page 10. We present our key financial results for the third quarter of 2019 versus the previous year. Sales of $731 million in the third quarter increased $50 million or 7% compared to last year due to net new business and the consolidation of a joint venture partially offset by lower vehicle production volumes, currency and annual price reductions. This revenue increase is the highest level of absolute sales growth and the highest level of growth over market since Sachin joined the company in 2015. This quarter represents the direct result of winning record levels of new business over the last few years.

Adjusted EBITDA was $62 million, representing a $9 million decrease from 2018. Adjusted EBITDA was primarily impacted by the nonrecurrence of an incentive compensation accrual release in the third quarter of 2018, partially offset by lower engineering expense. Adjusted free cash flow was positive $23 million, representing a $65 million increase from 2018, primarily driven by a higher contribution from trade working capital. I will provide more detail on the following pages.

On Page 11, we provide sales and adjusted EBITDA for the third quarter 2019 versus 2018. In the quarter, industry production volumes declined by 3% compared to last year. And in addition, the company continues to see product roll-offs, including an infotainment system with Mazda that we previously discussed. Despite these headwinds, Visteon's sales increased by $50 million, primarily driven by $89 million of net new business.

The company strategy of focusing on next-generation products that digital clusters and display audio is bearing fruit. We expect that the high proportion of the company sales will be from this next-generation products and anticipate that they will fully offset the declines in legacy and noncore products in the coming years. Our third quarter sales also benefited from the consolidation of our Chinese joint venture, strengthening our relationship with Volkswagen and Toyota in that market. We started consolidating this joint venture towards the end of the third quarter of 2018. As such, we do not expect the same revenue increase contribution in the fourth quarter of 2019 as we have had in the first 3 quarters this year.

Pricing reduced sales by $16 million, representing 2.3% of last year's sales. This continues to be at the lower end of our historical rate. Adjusted EBITDA was $62 million with an adjusted EBITDA margin of 8.5%. Volume, mix and efficiencies offset the impact from annual price reductions. Net engineering expense was lower by $4 million or down by 5%, benefiting from the realization of savings associated with previously announced restructuring actions. This is evidence of the company's ability to constrain increases in engineering costs, despite an expansion in the number of development programs with higher complexity.

Going forward, the company will continue to transform its engineering capability towards supporting specific growth areas as Sachin mentioned. The nonrecurrence of an incentive compensation accrual release in 2018 and other expenses reduced adjusted EBITDA by $17 million.

Typically, the third quarter represents the weakest quarter every year due to scheduled OEM plant shutdowns. Despite this seasonality, our third quarter sales are flat against the second quarter with higher EBITDA and higher EBITDA margins. The sequential improvement resulted from lower engineering costs and manufacturing efficiencies. These results have helped to partially derisk our fourth quarter forecast.

Page 12 provides our cash flow. Third quarter adjusted free cash flow was $23 million, a significant improvement from last year due to strong working capital performance. Our working capital metrics improved compared with last year. The sales outstanding dropped by 4 days and inventory improved by 3 turns. The improvement in other changes relates to timing of capitalization for engineering costs and the nonrecurrence of an incentive compensation accrual release in 2018.

Cash at the end of the quarter was $446 million, and debt was $395 million, which continues to put us in a net cash position. We continue to have one of the strongest capital structures in the industry, which enables us to compete effectively in a challenging market while investing in differentiating technologies.

We have $380 million of remaining Board authorization for share repurchases. Our capital allocation policy has always been guided by a balance between prudence, given the headwinds in the industry, and the company's growth profile. Visteon has always been committed to shareholder distributions, and this commitment is bolstered by the company's ability to grow in a challenging environment. The company will announce its activities as they are implemented.

Turning to Page 13. This page shows our updated guidance. For the full year, we are currently projecting the following: we are narrowing our projected sales to between $2.925 billion and $2.975 billion. Adjusted EBITDA of $230 million to $250 million, representing an adjusted EBITDA margin of approximately 8% and adjusted free cash flow of $40 million to $60 million.

In the fourth quarter, we are forecasting growth on a regional basis in the Americas, Europe and China, our 3 major markets. This is partially offset by a reduction in other Asia related to the continued roll-off of an infotainment program with Mazda, as previously discussed. Our growth story has become more geographically diversified and less reliant on a single region. We expect Q4 industry production volumes to decline by 5% on a year-over-year basis, which is worst than the 3% decline in the third quarter.

In addition, as I mentioned earlier, we will not have the same revenue contribution from the joint venture that we started to consolidate at the end of the third quarter of 2018. Despite this market backdrop and lower revenue increase contribution from the joint venture, we expect to see a low single-digit percentage revenue increase year-over-year in the fourth quarter. This is in line with the organic market outperformance we delivered in the third quarter. We are maintaining our adjusted EBITDA range of $230 million to $250 million, representing approximately 8% adjusted EBITDA margin. Our third quarter performance helps derisk our fourth quarter forecasted sequential increase in adjusted EBITDA. This sequential increase is driven by lower net engineering cost as a result of high recoveries, similar to what we have experienced in previous years. We're also benefiting from higher sales sequentially and the nonrecurrence of cost associated with a CID display launch challenges that were fully resolved in the third quarter.

We are raising our guidance for adjusted free cash flow to $40 million to $60 million as a result of the favorable impact in trade working capital. Overall, our fourth quarter forecast represents a continuation of Visteon's growth over market while expanding margins.

Turning to Page 14. Throughout the challenging market environment, Sachin and the team have continue to execute on Visteon's long-term strategies, technology innovation, long-term growth and financial returns. It has been a pleasure to be part of Visteon through a period of significant transformation, and I wish the entire team continued success.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question come from David Leiker of Baird.

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Erin Alexandra Welcenbach, Robert W. Baird & Co. Incorporated, Research Division - Analyst [2]

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This is Erin Welcenbach on for David. First of all, congratulations on the nice quarter. My first question is just if we could dissect the recent win you have versus what's in the backlog. Is there any way you can kind of dimensionalize how the size of the wins compare in the content of those wins versus what you have in your backlog right now?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [3]

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Sure. So what I would say first Erin is that our digital products, namely digital clusters, displays and display audio, continue to do really well in the market. And we are now seeing digital clusters come down from the premium segment into more mass-market models. As that happens, we are starting to see that our value of the awards go up. So this is something that we have been discussing for a while that we were anticipating this to happen as the cost and the prices of these systems are coming down that we expect to see them come more into the mass market, and that's happening.

With respect to display audio, infotainment, in general, tends to be a strategic decision for OEMs that is often looked at as a gross platform decision. So the awards tend to be larger, and this is also reflected both in the wins as well as the pursuance that we have for the business.

What is new -- relatively new, I should say, is the fact that ASPs of these larger complex displays have gone up significantly as compared to, say, where we were at a year ago. And that's a very welcome development in the industry from our viewpoint. And as we discussed, we have significantly increased this time, this year, our display wins as compared to where we were at in the prior years.

So overall, I think this is moving along in a direction that we were expecting in terms of the trends, and our capabilities continues to be very well positioned to win the business, and that's reflected in our performance for new business wins.

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Erin Alexandra Welcenbach, Robert W. Baird & Co. Incorporated, Research Division - Analyst [4]

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Okay. That's helpful color. And then just my second question. Can you provide an update on what is going on in the infotainment market? What do trends look like there? And where are you focusing your efforts in that market?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [5]

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Yes. Sure. So if you go back, infotainment was really segmented into 3 very distinct products with the entry you had, the basic audio or radio system, bluetooth, maybe AM, FM, and then you had entry -- sorry, made it in a high infotainment system. What we are now starting to see is a collapse of this 3-tiered segmentation into, really, display audio, which is the entry infotainment system, which is also more connected, either going through the smartphone or within embedded TCU or a telematics unit. And then a high or mid- to high infotainment system. So this collapse is really creating opportunities for us with the segmentation that we can now take advantage of by focusing on the entry display audio system, and that's where the company's focus and strategy is.

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Operator [6]

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Your next question come from Itay Michaeli of Citi.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [7]

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Congrats, and Christian, best wishes to you. Absolutely. Maybe just to continue the discussion on the progress of digital clusters, I was hoping you could share at a high level what the broad take rate assumptions are for digital clusters in your backlog? When customers are coming to you, what are they assuming, and what are you assuming for take rates broadly in the next few years?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [8]

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Right. Right. So if you look at where we were with digital clusters the last couple of years, these products were really targeted at the premium segment of the market, and the take rates were also fairly high. By that I mean upwards of 80%. What is really different this time around is that we are starting to see digital clusters being targeted for the mass market segments, as I said. And the take rates here have started at initially a little lower, around 50%.

But in some cases, we are starting to see the OEMs increase the take rates again up to the 80% levels. Now in our backlog, we do not change the take rate assumption unless we are explicitly informed by the OEM of their intend to change. So there are 2 types of take rate changes that we see. Some of these are short term like what is happening in China, and that's a response to the specific situation of the market. And then there are the longer-term take rate changes, which we work with the OEM. And only if it's confirmed by them, we then reflect that in our backlog. So I want to be clear that what's in the backlog really just reflects what the customer has committed to us in terms of the volumes.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [9]

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That's very helpful. And the second question just on the EBITDA guidance, still a pretty wide range. Can you give us some scenarios of what could cause the company to hit sort of lower versus a higher end of the EBITDA range for the year?

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [10]

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Right. So let me take that, Itay. So as we guided, we expect to see a large increase in EBITDA sequentially driven by really 2 things to impact of higher sales, growth in the single digit sequentially with a significant increase in engineering recoveries. If you look at the previous years, last year, in particular. Engineering recoveries in Q4 2018 grew by somewhere around $20 million to $25 million from Q3 2018 levels, and we expect to be in the same range this year. So one of the things that we've put in our model -- in our guidance is some variability around engineering recoveries because of timing. So that is the reason why we did not necessarily change our EBITDA guidance.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [11]

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Sure. That's helpful. And then I'm going to sneak in one last one, maybe for Sachin. If you can update us on DriveCore. I remember I think last quarter, there were 2 awards that were potentially going to enter the RFQ phase just so that you can update us on those. That would be great.

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [12]

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Yes. That's a good question. We have the RFQs now as we had discussed, so it's progressing as we had expected. The RFQs are with us. We are preparing for the response. So on track is how I would describe it, Itay.

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Operator [13]

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Your next question come from Emmanuel Rosner of Deutsche Bank.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [14]

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Just an additional clarification on the net engineering cost. So I guess in the third quarter, for the first time, they weren't just -- go down sequentially as they often are. They also were down on a year-over-year basis, your net engineering cost. Is it something that we should expect into the fourth quarter as well?

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [15]

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Right. So as you know, our net engineering is made up of 2 components: one is our growth engineering spend and the second is the recoveries. Our recoveries are on track. We've provided guidance. We've hit our guidance on the recoveries front.

Now in the growth side, both came down sequentially as well as from prior year as we realize savings from our restructuring costs faster than what we anticipated. Now for growth, for growth expense, engineering expense, for the fourth quarter, we are forecasting a little bit higher expense for the -- for our tech centers in Taiwan and Mexico. But overall, we're still on track for a mid-single-digit increase for net engineering costs for the year.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [16]

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Understood. And so we think a small increase in the growth in the fourth quarter that was a year-over-year comment?

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [17]

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That's a sequential comment.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [18]

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Okay.

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [19]

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Year-over-year, it would be much lower than last year.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [20]

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Understood. Okay. And then sort of I wanted to ask you around your -- a question around your revenue outlook. Obviously, you have been able to maintain this -- your revenue outlook since the beginning of the year, despite considerably weaker macro and industry environment and the volumes, in particular. And so I'm wondering if you could talk about the implications for your longer-term walk. As it stands, as of January, you were expecting a fairly large step up in revenues to like $3.3 billion, $3.4 billion in 2020, in particular.

And obviously, I'm sure the volumes you had assumed are now sort of like probably shaping up weaker than what you saw at that time. But at the same time, it also seems like your sort of like have been offsetting this with maybe some faster new business launches. So any thoughts you're willing to share there?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [21]

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Yes. Yes. The first thing I would say is that with respect to the longer-term outlook, we will provide that guidance early next year when we discuss our fourth quarter and full year earnings for 2019. But having said that, the way we think about next year, in particular, we do not expect that vehicle production at customers are going to rebound from this year's levels.

Even going into the fourth quarter here, we are starting to see some softness in vehicle production, and we expect that given the microenvironments, all regions that this weakness will continue into next year. Now even with that weaker expectation of the market environment, we believe that our revenues will still grow, and they will grow because of the high number of new product launches that we've had. We had 56 new products that we launched last year. In the first 3 quarters of this year, we have launched 35. So we are on track for that one launch per week cadence that we talk about.

And as these products start to ramp up in production, we will see them being able to offset the headwinds of the production volumes being down and the normal roll-offs of the products that we experience. So we will provide more details clearly on our earnings call -- fourth quarter earnings call. But the take away that you should have from this discussion is we think, given our discussions with customers, the environment is going to continue to be weak. At the same time our performance, as indicated in Q3 and as we are implying for Q4, will continue into next year with respect to new product launch performance.

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Operator [22]

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Your next question come from Joseph Spak of RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Maybe just first one on the quarter. So look, the revenue obviously came in better than you expected or sort of guided at the end of the second quarter, maybe by $12 million to $14 million. But you also sort of talked about EBITDA would have sort of be flat, and it looks like all of that revenue, if not more of that better revenue, sort of flew through to EBITDA. So maybe if you could just help us. It sounds like maybe some of this is sort of the timing of the engineering between the third and fourth quarter. How much of it was related to that? And then what's the delta that cause EBITDA? Has it come in better than you thought?

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [24]

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Right, right. So let me take that chance. So if you think about the guidance that we had, which is still a small increase on a year-over-year for revenues, and it came out to be 7%. That's -- and the follow-through of that would actually be positive for EBITDA. And the second is our guide on the engineering. We guided that engineering would go up on a year-over-year basis by mid-single digits. It went down by mid-single digits. So those are the 2 things that drove the EBITDA.

And as we -- as I mentioned, the reason for the change in engineering is because we've realized the savings from our restructuring actions faster than we anticipated.

Now for the full year, we are adding a little bit higher expense in Q4 to support the new tech centers. We're building one, as you know, in Mexico, as Sachin mentioned as well as Taiwan. And so for the full year, our engineering expense continues to be in the mid-single-digit increase over last year.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [25]

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So it is fair to say that part of the better EBITDA in the quarter was timing of engineering, and that's not to say you didn't do better on engineering as well. But because you're doing better, you're also reinvesting more in engineering a little bit earlier than you otherwise would have?

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [26]

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That is correct.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Okay. And the second one, Sachin, just since you're always a good resource here, and you provide a little bit of color on sort of the market. But like if we look big picture broadly, there I thought -- I think there were some interesting developments you had. It looks like Auto Grade Linux gaining traction in China as I see sort of joined in there.

Then you had Android Auto with GM. So it seems like there is these different factions developing. It's unclear really who is winning. And I know in the past, you sort of said you're really agnostic. But is that really the case because like how portable is what you do on top of those operating systems, I guess, between those systems? Like do you need to place engineering that's on a -- on an OS winner.

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [28]

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Now that's a great question. And the way we think about how that's developing is we need to think about the market from a China perspective and the rest of the world. And I do not believe going forward that we will be able to offer a single solution for the global requirements. China will take a different path. So what we see happen in China is that the ecosystems that we all know of Alibaba, Baidu, Tencent are becoming more important for connected infotainment in China. They're moving up the value chain, especially in term of AI-based features, whether for voice or for better user experience, in general.

But when you look at it outside of China, we do see that there is a strong momentum towards Android and Android automotive. So the bets that we are placing is for outside of China for the rest of the world, it's on android and android-based infotainment.

Now in terms of China, we are really focused on our cockpit domain controller solution for that market. We are seeing some of the leading car OEMs want to differentiate themselves through technology, especially technology in the cockpit with larger displays in cockpit domain controllers. That's where we can truly differentiate more than, say, in the upper levels of the software in China where on account of the restrictions that you have there, our better strategy there is to partner with these larger ecosystem players. So that's been our approach, which seems to be working well so far. Again, these are things that you have to monitor on a regular basis and, of course, correct as required. But for now, I think this is how we see it, and so far, this seems to be the right approach.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [29]

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Is there -- if I could just follow up. Is there any scalability between sort of developing for the 2 platforms? And then it also sounds like what you're saying is just based on the sort of software opportunity. That's a bigger -- a higher-margin opportunity for you outside of China. And then in China, it's sort of more dependent on the domain controller opportunity.

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [30]

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Yes. And then there is scalability as well because even if you look at China where we are able to leverage what to do with the rest of the world is at the Android operating system level, not about the operating system. And where we can offer more value and more content outside of China is on top of Android. So if you can imagine, it's a sort of a scalable solution. Where, in China, we are able to go up to the Android level, but we add more value through the cockpit domain controller strategy. And outside of China where this cockpit domain controller seems to be taking a bit longer in terms of being adopted in the industry, we are able to go up the value chain more through Android and apps on top of Android.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [31]

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So just one more, a quick one and then -- maybe I missed this, but of the 20% of new business wins this year in China, how much of that is the cockpit domain controllers?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [32]

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It is -- a large component of that is the cockpit domain controller, and we have some interesting -- both new business opportunities as well as launches coming up in 2020 along those lines.

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Operator [33]

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Your next question come from Steven Fox of Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [34]

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First question, I was just curious if we could get a little bit more end-market color. Obviously, the growth over market is significant, but have you -- has the company had to adjust any of it's expectations for the ramps, given end markets.

In other words, are you saying slower ramps, any push outs in Q3 and into Q4? And in a similar vein, are the plant shutdowns at your OEM customers as expected to the end of the year? Or have you had to adjust for something there? And then I had a follow-up.

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [35]

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Yes. The short answer is no on both counts, on the lunches, the 35 that we have had year-to-date, have largely occurred on schedule. So nothing to report in terms of any delays of any sort. And the same goes with respect to the plant shutdowns. They have largely been as anticipated.

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Steven Bryant Fox, Cross Research LLC - MD [36]

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And do you view that as sort of a risk into next year? Or do you think you have that conservatively considered as your ramp? Or is this too early to tell?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [37]

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It's, I think, too early to say about what might happen next year. As you can imagine, we are in a lot of discussions with customers to understand their plans for next year. Mostly, I would say, given how long these programs take to be designed, developed and launched, we do not expect significant changes for next year's launches. If anything at all, it might be something further out. So for next year, we are largely locked and loaded and executing towards the launch, and that goes for all of the customers. So I think this was not something that in the near term will shift significantly.

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Steven Bryant Fox, Cross Research LLC - MD [38]

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Okay. And then you mentioned that you overcame the issues with this center information display console behind you. I think you talked about it being like $3 million benefit this quarter. Is that true?

And then now it sounds like it's flipping into a competitive advantage with some of the optical bonding capabilities you mentioned. So can you just sort of maybe delve into why it's such an advantage? And how we should think about how you can leverage it longer term?

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [39]

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Before I send it over to Sachin to talk about our competitive advantage, I just wanted to clarify, Steven, that it was a $3 million cost in Q3.

Go ahead.

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [40]

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So this particular product represents the highest volume curved display product that has been launched this year in the industry. Nobody has launched this level of complexity and volume, which has, as I mentioned, enabled us to develop certain capabilities, which have been very helpful in making a case with other customers that want to go down that path.

So following this product launch, we have one multiple business wins with other OEMs for similar large curved display products. And it's also very good development from an ASP, average selling price, viewpoint. So it's definitely a trend that we need to watch going forward in response to where we see this industry had, as Christian mentioned, we are investing in a display technology center that we are setting up in Taiwan that will bring industry experts that have decades of experience in building display products into Visteon to help us get even stronger and scale up in anticipation of the products that we've already won and the pursuits that we are seeing ahead of us.

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Operator [41]

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Your next question comes from Dan Galves of Wolfe Research.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [42]

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When we think about the continue mix shift towards digital clusters away from analog, are there any major differences between those products, maybe vertical integration or bill of materials that would create an inherently different margin profile?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [43]

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The digital clusters are inherently more heavier in terms of software content than there are analog counterparts. So what it does often than is the possibility for us to now built a software platform for digital clusters that can address the majority of the requirements across OEMs. So this is something that will keep us in a very strong position going forward because we are, I would say, one of the very few suppliers that have a deep understanding of the requirements of digital clusters across a broad swath of the OEMs that enables us to take that inside and build a platform that would then enable us, I should say, to lower the cost of developing these products, offering reuse as well as higher quality. So that's the next sort of step that we see us take this business.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [44]

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That's really helpful. Just one follow-up on kind of material cost inflation on electronic parts. That was offsetting some of your normal cost savings. But it looked like that may have kind of diminished in the quarter. Can you talk about that a little bit? And is there anything we should think about going forward in terms of material cost, maybe LCD pricing?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [45]

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Yes. So the specific materials, capacitors, resistors that had an increase in cost over '18, we are starting to see more capacity enter the market. And as a result, the prices have started to come down. They're still not at the levels that were when -- before it started to go up. So we are still focused on driving further efficiency out of it. There is still more opportunity, and I expect that as we get into next year, we should be in a much better position with respect to the prices there.

So hopefully, sometime end of first quarter, second quarter of 2020, those pricing issues should be behind us. With respect to displays and other products, I don't think there is anything noteworthy in term of the price or the cost movements. They are traditionally good components in terms of being able to drive efficiency, and I would expect that to continue.

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Operator [46]

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Your next question comes from Brian Johnson of Barclays.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [47]

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You mentioned some restructuring and engineering also with your H9 center. So as we kind of think about the net engineering spend, was the improvement this quarter really from restructuring? And are you still on track rather than acceleration of reimbursements from OEMs? And if so, or if not, what is the pace for reimbursements for 2Q?

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [48]

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Right. Yes. So I'll take that, Brian. But you're absolutely right. The difference in our net engineering from what we've guided is really in the growth spend. Recoveries actually came in equal to what we've guided. And the reason for the reduction in growth spend than what we've guided is because of the realization of the savings from the restructuring cost.

Now we're taking, as we are opening up new tech centers, we are reinvesting in Q4 for those tech centers. And as such, our -- both our growth and our engineering recoveries are pretty much in line with what we have originally guided, which is a mid-single-digit improvement from last year.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [49]

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Okay. And second question...

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Christian A. Garcia, Visteon Corporation - Executive VP, CFO & Principal Accounting Officer [50]

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Brian, let me just clarify. If I can just clarify, it's a mid-single-digit increase from last year, not an improvement.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [51]

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Right. Second, OEMs are under intense margin pressure worldwide, especially in China and in Europe. You did a good job on pricing, but another electronics focus, Tier 1 had a pretty big material drop in there, electronics business due to procurement pressures and onetime rebate from pay to play and all those things. So kind of as you look at your kind of request for price downs for OEMs and, in particular, look at old-generation small-screen displays versus the more advanced digital clusters, SmartCore and center information -- large center information integrated. What just -- what are you seeing in terms of the pricing environment around those products?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [52]

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Right. So Brian, as I might have said this before, the best way to fend off pressure from customers, in terms of pay to play, et cetera, is to ensure that your technologies and execution track record is flawless. And that enables you to maintain a premium over other suppliers that may have to just then compete on price. At the same time, as these products and their complexities increase, it is not simply a decision that OEMs can make, pay simply on price. At the end of the day, the suppliers will be able to deliver high-quality product. So we have been focused on a strategy of differentiation through technology, as we have said now several times, right, and focused on a section of the industry where that clearly is the most important determinant in the outcome in sourcing.

Now that doesn't mean that we win all of the time, but if you have seen our track record now over the last 2.5, 3 years, we have managed to win a greater share of the market than our current market share would imply. So clearly, that strategy seems to be working and will continue to focus on further sort of differentiating ourselves from our competitors based on technology.

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Operator [53]

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Your next question come from Ryan Brinkman of JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [54]

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You're showing strong growth over market as a result of your new business launches. I think based upon your previously communicated new business wins, it's pretty clear that this will continue or accelerate in 2020. Can you help us think though about what will be the margin impact from this growth?

I think on the one hand, the more digital, higher technology products you mentioned earlier, they're likely intrinsically higher margin. On the other hand, sometimes there is a headwind to margin while new programs are ramping. So I guess the question is, when you kind of take into account these different factors, how should investors think about the progression of margin relative to the progression of sales going forward now that we're in this new period where you're launching more and more new business?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [55]

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Right. So Ryan, I think we also said before that the margins of new launches lower is lower than their margins as they mature and are more, I would say, mid-flight in the lifespan. And as we are seeing a higher percentage of our revenue in this growth phase come from new product launches, we will see that our margin expansion will lag our revenue growth.

So this is how we should be thinking about it. Nonetheless, what I want to be very clear with is that we are going to see margin expansion from the current levels. It’s just that the growth of the margins will lag our revenue growth on account of what I just said.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [56]

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Actually, that's helpful. And then just lastly, I think it's probably a pretty minor issue for you with more of your GM exposure being in China than North America, but can you talk about the impact of the GM-UAW strike in 3Q, and what impact do you think it could potentially have in 4Q?

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Sachin S. Lawande, Visteon Corporation - President, CEO & Director [57]

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Yes. You're absolutely right. Our North American business with GM is currently still relatively small. It's going to change as we -- business we have one. But today, it's relatively small. And also they were able to pick up our product through the strikes. So we haven't really felt much of an impact from the strike itself. So I would say, it is minimal and nonmaterial.

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Kristopher Doyle, Visteon Corporation - Director of IR and FP&A [58]

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And this concludes our earnings call for the third quarter 2019. Thank you, everybody, for participating in today's call and your ongoing interest in Visteon. If you have any follow-up question, please contact me directly. Thank you.

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Operator [59]

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This concludes Visteon's third quarter 2019 earnings call. You may now disconnect.