Q4 2023 Visteon Corp Earnings Call

Participants

Ryan Wentling; Vice President - Investor Relations and Treasurer; Visteon Corp

Sachin Lawande; President, Chief Executive Officer, Director; Visteon Corp

Jerome Rouquet; Senior Vice President and Chief Financial Officer; Visteon Corp

Joe Spak; Analyst; UBS Equities

Itay Michaeli; Analyst; Citi

Dan Levy; Analyst; Barclays

Luke Junk; Analyst; Robert W. Baird & Co., Inc.

John Babcock; Analyst; BofA Securities

Colin Langan; Analyst; Wells Fargo Securities, LLC

Mark Delaney; Analyst; Goldman Sachs

Presentation

Ryan Wentling

Good morning. I'm Ryan Woodley, 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 that 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 dot 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's 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 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, and 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%, SmartCore up by more than 20%, and PMS. 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 above the midpoint 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 record performance for the Company which will help sustain our growth in the midterm 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 cockpit 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 basis 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 our 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 digital 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 a SmartCore system with two new customers Harley-Davidson in the U.S. and GMC Ford in China. This brings the current number of SmartCore customers to eight OEMs, which is probably the most for any Tier one 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 as we move 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, SmartCore systems offer advanced camera base driver monitoring and surround view features that are fully implemented and software, which avoids the need for separate and dedicated ECUs. As is the case today, this in-house developed software demonstrates the growing capabilities that 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 eight as 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 Aldo Amstalden from the third quarter with two additional connected services wins in the fourth quarter, one with a global OEM and the other on a two liter. 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 the 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've 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. The GM these launches are the main driver of our BMS sales growth in 2024.
Now I would like to highlight several of our key Q4 launches. In China. We launched a SmartCore cockpit domain controller and a 12 inch display with GMC 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 XUV 400, 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 they have made with OEMs in the fast-growing Indian market. And lastly, we launched a 12 inch digital cluster on the Nissan Rogue for the North American market. This represents content on one of the best-selling SUVs in the market and reinforces our ability to deliver value as a key supplier 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, what about regions and 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 displays business across several OEMs. And importantly, we've 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 the 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 a B-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 launched the beginning of next year. Both the systems from the 10 inch display that's also supplied by this.
John, the third point I would like to highlight is for a 12 inch digital cluster and the 13 inch center display on the luxury SUV platform with the German luxury OEM. This is a follow-on then for the electric version of a platform that we won the iceberg last year.
Turning 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 double-digit market outperformance. We are expecting 2020 for 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 with launch 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 expected 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 multiyear 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. There's change in 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 midterm 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 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 DMS and digital cockpit products 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 2026 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 a 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% as 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 based sales grew 1% against a difficult prior-year 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 as well impacted by the timing of roll-offs and a slower ramp-up of new rollouts. As mentioned by Sachin earlier on, we expect these headwinds to be largely transitory and consistent with the first three quarters of the year. We continue to experience customer mix headwinds in China. We expect this to ease in 2024 as we continue to increase our exposure to domestic OEMs.
Semiconductor supply situation has improved significantly compared to the fourth quarter of last year. So PLEXION 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 of bucketed as pricing are passed through in nature, increasing sales neutral for adjusted EBITDA, but diluting margin percentages.
Adjusted EBITDA was 117 million for the quarter, an improvement of EUR14 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 of 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 billion, an increase of 12% or EUR400 million compared to prior year. The increase in base sales was driven by strong growth of market from robust product launches during the year and higher industry production. Customer recoveries, which are illustrated in the dotted boxes, totaled approximately EUR200 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 EUR14 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 EUR17 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-effected 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 the 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, which 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 build, 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 US, we had a noncash 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 was 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 EUR125 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 four to 4.2 billion, which at the midpoint represents an 8% increase in base sales. Focusing on the midpoint, we have assumed Visteon 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 470,000,500 million, representing adjusted EBITDA margin of 11.8% at the midpoint. 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 to 185 million, which at the midpoint 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're 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 such, I noted earlier, our sales targets for 2026 is EUR5 billion, which is an increase of over EUR1.2 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 been outlined earlier.
Our adjusted EBITDA margin target is 13.5%, a 250 basis point increase from 2023. The 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% kegger 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 in 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.

Question and Answer Session

Operator

(Operator Instructions) Joe Spak, UBS.

Joe Spak

Thanks.
Good morning, everyone.
I'm maybe just Good morning.
Maybe just to start, I know a couple on the, um, on the revised 26 I think beef prior commentary from from you guys was that you weren't necessarily taking management's targets for some of the EV programs and you were sort of making your own assessment now, obviously, sort of the world has drastically changed even since and since those comments, but maybe you could provide a little bit more more color as to sort of how what type of planning went into the revised 2026 top-line targets.

I'll take that to absorb the support on actually not all CMS, all the EB. production that that is driving the reduction. There are really three factors. Of course, driver is actually the overall global vehicle production outlook for our customers. And I would say that is contributing from zero to about half of the reduction. And then the second driver is on lower EV production again. And that protects both parties as for cockpit products as well as SPMS. and the last one is the customer mix in China, which arm it 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, of course, going forward into 2026.
Now if we look at just the on the specific VMS related revenues. The volume projection for 2020 was not come down significantly from our lower expectations from earlier in 2023, but the our being a little more conservative than the volumes of that has been shared with us by our customers. I would say that our expectations now are more in line with on 1st of April models and their production outlooks as for S&P Global, for example. So I would say really three factors, right? Overall reduction in a vehicle production number two, lowered EV production at our customers suggesting for a digital cockpit and our VMS sales. And then the customer mix of that is impacting us more in China. So having said that are expecting all of our product lines still to grow. And this new target that we have, it means that our base sales would grow for each one of those three years at a low double-digit level as compared to different pre-sales.

Okay, Sachin, thanks for that. And maybe just to follow onto that and I'll pass it on the in the low double digit growth over market, you're sort of assuming I guess, like a relatively flattish environment, some negative mix, as you mentioned, but with growth over market and we're seeing this across the supply base like you can't control that well in a part of the relative comparison. Now, obviously some of that it sounds like you're sort of counting on some of that negative negative mix, but know and share loss at some of your customers is clearly still possible. But would you say that and 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 or organic growth rate. And like understanding that, you know, if some of those customers are, 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 because the first thing I would say, Joe, is that we have already factored in and 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.

Then 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 a full exposure to that. But we've been looking more specifically at our customers for us. Our 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 of that a year that has passed since last year, beginning of last year when we give our 2026 guidance. What I can say is that figure in it as largely funds, by the way, we would have expected it to except that the BMS sales, it has been more suppressed. So this 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 PMICs. In other words, now 25 and 26, 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 as a target. But I believe that those are on it is nimble assumptions are in terms of what our customers would and should be able to accomplish.

Joe Spak

I guess maybe just a 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. Is that that also factored in to your expectation for of the volume for the programs you are on. So like that some of your customers may lives that I share.

Okay.

Thank you, Tessa.

This Absolutely.

Jerome Rouquet

Thank you.

Operator

Itay Michaeli, Citi.

Itay Michaeli

Great, thanks.
This is just in free time on.
So maybe a quick one on slide 14, you're providing a 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 24 and then maybe what you're assuming in that 26 guide as well?

Yes.

So good morning.

It's almost like that, but 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 should recall, we recovered, including open market purchases close to EUR500 million in 2022. In 2023. We'll have recovered close to EUR300 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 as some positive impact as we go into 24.
As it relates to surcharges, we see some programs rolling off that are more burden 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 a plan for 2024, which is going to contemplate a little bit less than EUR200 million of recoveries. And then we see that as well coming down because also of cost reductions from our suppliers into 26. And we've kept our assumptions the same for 26. We had full impact in March of 2023 and it is 100 million. So a slow reduction from the very high levels that we had in all42 the way down to EUR1 million in 2020 Perfect.

Ryan Wentling

Super helpful.

Sachin Lawande

And then maybe sticking to 26, do you have the percentage of target already booked on terms of sales?

Or if you can help us out maybe well, yes, yes, we can. We can talk a little about And so typically, but when we look at the targets of sales that need to be booked of, we have a range of between 75% to 80% of the sales three years out. And I would say that we are within that of 2026. And as you know, we had a pretty good robust level of new business wins in 2023. It 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 of some of these ICE and hybrid vehicles will it needs to be extended by our customers as they rethink their We model portfolio and go-to-market.

Operator

Dan Levy, Barclays.

Dan Levy

Your line is open Hi, good morning. Thank you for for taking the questions. Paul, first, wanted to ask a question about the margins. So Q4, you did 11.8% comp that was weighed down by by the strike, you're guiding to an 11.8% midpoint for 2024. And 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 current run rate, which I think you said was closer to 11%.

Jerome Rouquet

Thanks.
Thanks, Dan. So we always tried to normalize our EBITDA margin as we report our earnings and have 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 all came from the fact that we had a pretty low engineering spend in Q4 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 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 eight basis point improvement. Most of the improvement is going to come from the additional sales that we'll get in 2024. And 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 high.
Got you said 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 as a partial offset to our EBITDA and going into 24. 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 are You may remember that we had and we guided to 10.5% our EBITDA at the midpoint 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. And a follow-up on that. And then a second question. Just the follow-up is maybe you could just comment on on within the decline of recoveries, what the net EBITDA impact is it if it's neutral, reduced recoveries on reduced cost and then my my second question is on maybe you could just talk about the environment for uptake of the product XB. and S. We've heard about some extension of ICE platforms as automakers are delaying EVs, I think we know there's generally been a trend that EVs are adopting more of the premium content. So to what extent does your 2026 outlook contemplate maybe some extension of the platforms. To what extent are the other products like our digital clusters or domain controllers, it still intact despite slower EV uptake? Thank you.

Jerome Rouquet

Yes, I will take the first question and give the second to sanction. So in terms of recovery, that's a very good point. In fact, we are we are seeing a reduction in recoveries in 2024 as well, all the way to two 2026, generally, we are not assuming any negative P&L impact largely because the two reasons for the decrease in 24 are the fact that we're going to buy less open-market purchases and therefore we are going to recover less.
So it's neutral.
And the second reason I gave earlier on is the fact that we have this positive mix in some cases impacting us in a favorable way, and therefore, the associated recoveries are matching as well. The reduction in costs so that there is virtually no P&L impact on that side. As we go into 24, we have assumed a normal level of pricing like we normally give to our customers that has obviously an impact on P&L, but not the reduction in recoveries per se.

Thank you, Jerome and art, regarding this topic of the content on ICE and perhaps hybrid vehicles which are expected to on grow in the near term as of ICE or sorry, as of full electric perhaps slowdown in their growth. We are extremely well positioned to take advantage of that.
Great.
We have a very good our digital cockpit of the portfolio of products are ready. It engineered and launched on many of the programs that are going to benefit from the extension or introduction of our new models. And the content increase that we're seeing is not just restricted to two REV.s. By the way we are seeing a general increase in corporate content, even on ICE vehicles. That has been if you look at the last couple of years, the major driver of our growth over market, we have had 18 consecutive quarters of growth over market driven largely by the content increase that is happening in the cockpit and mostly on ice slush in the hybrid vehicles.
Well, with our customers were extremely well-represented. One, a data point is our digital clusters growth rate. If you look at on 2023, roughly half of our shipments of clusters were all digital compared to about 30, 35% for the industry. So there's a lot of runway ahead in terms of growth for our digital content in general. And I think to answer your question about how much of that has been already factored into our 2026?
Our guidance. There are a few of our programs where we know those extensions are are happening and we have factored those in. And I would say there is some further potential that we have not accounted for, and we will only do so once we have more formal confirmation with the customers about the extensions. So I would say if you use a slightly depressed, that's a net positive for us because majority of our revenue today is on ice and on the kind of content that is expected to grow to have these vehicles remain competitive.

Operator

Luke Junk, Baird.

Luke Junk

Thanks for taking the questions. To start, I'm hoping we could you could just disaggregate the 2024 growth over market drivers you highlighted in slide 6 specifically within that, just wanted to better understand your approach to forecasting EV volumes this year, both on in terms of comps, could our track launches as well as BMS incrementally this year. And within that, maybe if you could touch on trying to mix exiting 2023 and view to moderating impacts in 24 here.
Thank you.

Yes, sure.
Look, and so what I would like to say, again, is to reiterate our expectations for 2024 from a vehicle production viewpoint, as we have said on slide 6 on the expect there's still customers to continue to face some headwind. And we will see a negative customer mix, of course, also in 24, but it will moderate as compared to what we saw in 23. And largely, we expect that moderation to occur in China, as I said, still negative, but less so.
And as you look at the slide on the right I've ever identified the major drivers of growth over market of which are the number one driver continues to be of the high number of new products that we launched in 2023 as well as continuing into 2024. And as they start to ramp up in production, that's the them the first a major driver of our growth of our market. So the nonrecurrence of the one-timers, that's contributing to about 1% to 2% of growth over market.
And then the third one, which is on this VMS sales, which I mentioned, were they sort of delayed in terms of their ramp-up all through 2023 towards the end of 2023, we started to see them grow. We expect that growth to continue into 2024. We have launched on, I would say, about seven vehicles with GM so far already and more are planned also in 2024 in addition to that, we are diversifying our VMS business with a two additional OEMs with whom we will be having our first launches this year. So our DMS is going to be a strong growth driver for us, even though it is lower than our expectations earlier in the beginning of 2022 is still a strong growth.

Sachin Lawande

And I would say there's 10% to 12%.

Joe and Tom, if you think about 1% to 2% for the non-recurrence of the one-timers, the rest is split between the other two factors. This new model launches and the growth BMS or the BMS also includes new model launches.

Luke Junk

Got it.
That is helpful session. And then for my follow-up, hoping you could just comment on the award environment as we go into the beginning of the year here, obviously, OEMs grappling with evolving dynamics around EV, thinking about some of the things you mentioned in terms of maybe extensions to existing ICE and hybrid platforms. Hoping you could put a finer point on what that means in a good bad or otherwise for the number of awards and should we still be gearing to kind of a 6 billion plus number this year as a good starting point?

Yes, absolutely. And if you go back to what I've said earlier, if you think about our product portfolio and with the additions we have made toward our we have continuously expanded the market that is available to us. And also in terms of the digital cockpit of product line itself. The pipeline of new business opportunities that we see is pretty robust similar, I would say to what we had for 2023, and I would expect us to perform well there as well. And one of the things that you're seeing is that infotainment, in particular is going through a lot of a changes from a technology viewpoint with Android and connected services and vision services that are all coming together, not just at the upper end of the market, but now going more into the mass-market vehicles. So very strong, a pipeline of opportunities there.
Now when it comes to electrification beyond BMS, as we discussed, we have expanded our product line into power electronics, and we hope that we have a repeat this year as well with an extension of the win that we had last year and other customers as well. So I would say that we would feel pretty comfortable saying that we would have a similar year from the new business win performance this year, as does last year.

Operator

John Babcock, Bank of America.

John Babcock

Hey, good morning, guys.
Thanks for taking my questions.
I guess just on starting out as it pertains to the content that you guys provide and as you're talking to OEMs, I'm just kind of curious, I mean, how much, you know, obviously, a lot of this content has been much more used than higher-end vehicles kind of curious as to what demand you're starting to see for mass-market vehicles and how much of this technology might carry down into those vehicles and how quickly over time?
And then I have a follow-up on that.

Sachin Lawande

Yes, good question. And if you look at the software content of specialty digital clusters and infotainment on a lot of events are coming now for more mass-market vehicles, right? Just the upper end of the market either has or these products already.
And if we see opportunities, these are successor follow-on opportunities.
But the new opportunities that's growing the market in terms of adding a more content is all coming at the mass market segments, the segment, B and C of vehicles, which you would think of in the past were not typically the targets.
Now what's driving that?
Number one is on the digitalization trend, right? And within that are we talk about larger displays, talk about our infotainment content that brings in downloadable apps of more connected services and ROTH., and that requires fundamentally more capable electronics. And so that trend, we expect to see continue.
So a good perspective of the powertrain.
It is whether it is a small EV or an ICE or hybrid. This trend is a cutting across the powertrain and will continue to drive our business opportunities as we go forward.

John Babcock

Got it.
Thanks for that.
And then just a quick follow-up here. Is there a way to frame how much cost ultimately needs to come down on for that to be carried into the mass-market segment.

I think as we have demonstrated, in fact, with the two wins that we talked about on this call, those are our two, our infotainment wins, both are for mass market segment. So we the good work that Visteon has done is in working with the semiconductor supply base as well as the display supply base to drive the cost of the systems to where it is not very affordable for that segment of the market. And so we believe as a result of that, we have a good set of software technologies, hardware platforms, the manufacturing integration, the vertical integration that we have done, especially for displays, is putting us in a position to offer products at price points that are very competitive and affordable. So we do not see that as a hurdle for the industry, taking more of it as we go forward.

Sachin Lawande

Thanks, Noel.

Operator

Colin Langan, Wells Fargo Marco.

Colin Langan

So great.
Thanks for taking my questions. I just sorry, just to recap, I just want to make sure I get the puts and takes in the year. So sales, it is going to be up $150 million. But thinking of it more like 300 if we exclude the impact of the lower Sundi recoveries, is that right, then that would imply about $50 million increase in EBIT on, so about a 70% conversion on the EBIT, any other puts and takes we should be thinking on that conversion. I know there was the pre-call impact is R&D and SG&A up. It looks like those ratios look about flat. And then you also mentioned in Q4 there was some normalization help. Is that headwind as we go into next year? Is that sort of So continuing?

Yes, Hi, Colleen. So your home?
Yes. So you're right, the sales at face value increased by 4% year over year. But once you back out the impact of the recoveries which are coming down, you're in the low of just below $200 million of additional sales. And so in term, and that's obviously contributing to EBITDA. So in terms of other factors, we do have engineering going up year over year. We finished the year with engineering being a little bit lower than what we had originally expected. We were at 5.3% of sales, and we are forecasting for 2020 for a mid 5%. So an increase, a slight increase in percentage, but as well obviously, in dollar terms, given the percentage increase as well as the sales increase. So that's a negative as we go into next year. But we are obviously continuing to invest in engineering as we've done in the last few years, SG&A will be fairly flat in percentage. But again, it will be a slight increase in dollar terms. You have that in terms of other, we can take a slight negative FX that we've accounted for. And then as well, our normal pricing that we give to customers all this is offset as well by operational efficiencies that we've been able to de-lever over the last few years and will continue to deliver in 2024. So overall, we've got incrementals. Maybe that's another way to look at it on base sales of about in high single digits. It double digits I'm sorry, going into next year. And that's very consistent with the way we've been progressing in the last few years. And that's as well, the kind of incrementals we have going all the way to 2026.

Sir, you mentioned negative effect. So what are you referring to there?
The negative?

Yes, we do have a little bit of with the assumptions we've made for some currency. We do have a bit of a negative FX going into 2024 on sales and as well as EBITDA.

Colin Langan

And just a quick question. You mentioned tax wasn't changed. I mean, I kind of have your tax rates for a home for the life event. What should we be thinking a kind of backing into like 23, 24%. Is that the right range and why it doesn't change if you're releasing a deferred tax asset?

Usually?
Yes, no, it's a good question. So we've had a large of one-timer in Q4 with our valuation allowance release in the US to the tune of $313 million. So that's really a non-cash tax item. I think the key takeaways that from a cash tax standpoint, our profile will do very similar as we go into 24 than what we've seen in prior years. And generally our ETR is in the mid 20s. It varies obviously some variability, as you said, but I think if you can count on a a mid 20 as a good proxy for our ETR generally as well, our cash taxes converge over time towards our income tax expense. So I think that's a good proxy if you need to evaluate what cash taxes are going to be for 2024.

Operator

Mark Delaney, Goldman Sachs.

Mark Delaney

Yes, good morning.
And thank you very much for taking the questions. The Company expects customer mix to remain somewhat of a headwind. Can you comment more on how Visteon is positioned with the Chinese domestic auto OEMs? And do you see an opportunity to improve your exposure with the Chinese domestic OEMs?

Yes, that's a very good question, Mark. And as you know, in China, there has been what some might call a little bit of a wild west type of an environment. A lot of OEMs are in fighting it out for market share and on it's going to be very important for us, not to be caught in that environment, what are the ultimate views of what might prove to be the wrong set of customers? And we do not believe that this level of number of OEMs and what's happening there in the market is sustainable in the long run, we expect that to consolidate. So that's one thing now having said that on, that is also a mix shift between domestic and JV OEMs that we have touched upon previously as well. That mix on in 2023 was even more pronounced in favor of the domestic OEMs. It's about roughly of note 60 40 on and not too long ago. It used to be the other way around. So we have been addressing that by growing our business with domestic OEMs and with domestic OEMs that we believe have a longer term are in play like Geely, ARM and others are we talked about the launch with GMC Ford. They're very excited about the potential with them. And we have very good content and a set of vehicles that are our plan for launch so we are taking very measured steps to grow our exposure to the domestic OEMs without necessarily perhaps falling into some of the pitfalls so far, it has worked out well in the interim, we will see some mix, a negative mix dynamic, which will improve from where what we saw in Q4 will still be negative, but we believe we are in a very good position to navigate those waters and deliver the growth rates profitability that we have today.

Mark Delaney

I think session my initial question was with regards to the new 2026 forecast, what percent of your digital electronics revenue is coming from EV programs? And can you give us a sense of how agnostic you might be? And if your own EV is going to is your own OEM customers ship ICE or hybrid vehicles instead of EVs, you think you'd sell similar digital electronics of revenue onto those ICE and hybrids, just your customers do mix faster than you currently anticipate away from EVs?

Yes. As I had mentioned earlier, we're ready of we have our been growing our sales on of EV.s of it are customers in line with the market. And in 2023 of just over 10% of our total sales came from EVs, right? And only a small portion of that on a low single digits was BMS. So we are today well positioned with respect to the exposure to EVs outside China, as I mentioned, channel is somewhat different in that regard. But outside of channels, we are very well positioned and we expect to grow with the market outside of China as our customers launch new EV models now added to that our BMS revenues are going to see a faster acceleration. That's not net incremental revenue to us. And in addition to on the ramp-up of production of models with GM and the new launches that we will see with them this year. I mentioned also that we are launching with two others OEMs this year, which will further diversify and grow our VMS business. So our 2026, what we have assumed is largely a similar sort of exposure to EVs outside of BMS of that. We have customers in Europe and Americas and then the BMS growth that will follow on account of the the launches which are up is one of the faster growing parts of our business.

Ryan Wentling

This concludes our earnings call for the fourth quarter and full year 2023 results.
Thank you, everyone, for participating in today's call and your ongoing interest in Visteon.
Thank you.

Operator

And ladies and gentlemen, this concludes Visteon's Fourth Quarter and Full Year 2023 results earnings call. You may now disconnect.