VC - NASDAQ

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to Visteon's Second Quarter 2025 Results Call. [Operator Instructions] I would now like to turn the call over to Kris Doyle, Vice President of Investor Relations and FP&A. Kris?

Good morning. I'm Kris Doyle, Vice President of Investor Relations and FP&A. Welcome to our earnings call for the second quarter of 2025. Before we begin this morning's call, I'd like to remind you that today's presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to various risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed. Please refer to the page titled Forward-Looking Information in our earnings material for more detail. Presentation materials for today's call were posted this morning on the Investors section of Visteon's website. You can download them at investors.visteon.com if you haven't 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 scheduled the call for one hour, and we'll open the lines for questions after Sachin's and Jerome's prepared remarks. Please limit your participation to one question and one follow-up. Thank you again for joining us. Now I'll turn the call over to Sachin.

Thank you, Kris, and good morning, everyone. Thank you for joining our second quarter 2025 earnings call. Visteon delivered another quarter of strong operating and financial performance demonstrating the strength of our business while continuing to execute on our long-term strategy. Net sales of $969 million came in higher than we had anticipated at the beginning of the quarter, driven by strong demand for our digital cockpit products, particularly in North America and Europe. Despite the robust sales performance, lower BMS sales in the U.S. and the ongoing market dynamics in China resulted in sales slightly underperforming customer vehicle production. This trend is expected to reverse in Q3 and for the second half, driven by new product launches and improving comps. Adjusted EBITDA was $134 million, representing a margin of 13.8% and adjusted free cash flow was $67 million for the quarter. As a result of our strong first half and outlook for the remainder of the year, we are reinstating and increasing guidance for the full year. Operationally, the company performed very well, launching 21 new products, expanding profit margins through various productivity measures and winning $2 billion in new business in the quarter. We continue to invest in the business, both organically and inorganically, while returning capital to shareholders. We closed another bolt-on engineering services acquisition, our second in the past 12 months. In addition, we are initiating a quarterly dividend starting in Q3, highlighting our confidence in generating free cash flow and our commitment to returning capital to shareholders. Turning to Page 3. Our Q2 sales came in better than we had anticipated at the time of our first quarter earnings call earlier this year despite the tariffs that went into effect in April and May of this year. To recap the tariff situation in early April, a 25% tariff went into effect for all vehicles being imported into the U.S. In addition, starting in early May, a 25% tariff for all non-USMCA compliant auto parts went into effect, while USMCA compliant parts remained exempt. For Visteon, virtually all goods that we ship from Mexico to the U.S. are USMCA compliant and our direct exposure to tariffs under the current tariff structure is very low. In Q2, vehicle production schedules in North America remained stable and were not materially impacted by the tariffs. For Visteon, sales of cockpit electronics products in Americas was strong in Q2. We benefited from the ramp-up of several recently launched products, including clusters and displays on Ford vehicles such as the Bronco, Maverick and Explorer, infotainment systems on VW Jetta and Polo, and a large display on the Murano SUV with Nissan. Battery management system sales came in lower than anticipated, but grew sequentially from the first quarter. GM is our largest customer for BMS. And despite the general slowdown of EV sales in the U.S., they had a strong quarter. However, on a year-over- year basis, our BMS sales are lower in Q2, as GM and Stellantis, our two customers for BMS in the U.S. were ramping up battery manufacturing in 2024. Q2 of last year was the highest quarter in terms of BMS sales to GM which makes the year-over-year comparison difficult for this quarter. Overall, in Americas, the growth in cockpit electronics sales partially offset the decline in BMS sales on a year-over-year basis, resulting in a 4 percentage point underperformance relative to customer vehicle production. In Europe, Visteon sales were up year-over-year, driven by new product launches despite a reduction in vehicle production. Electric vehicles performed well in Europe in Q2 with introduction of affordable hybrid and EV models by carmakers, and Visteon has cockpit electronics content on some that are doing well in the market. Key programs for Visteon in Q2 include displays and digital clusters on the R4 and R5 EVs from Renault, digital clusters on the Duster and Bigster vehicles with Dacia that come in ICE and hybrid versions and digital cluster and audio system on the popular Ford Transit that offers ICE, hybrid and all-electric powertrains. Our sales in Europe also benefited from R&D services offered to carmakers through our recent acquisitions. While these services revenues currently are relatively small, we plan to expand our services engagement with additional automakers in Europe in the future. Overall, our sales outperformed vehicle production by 8 percentage points in Europe in the second quarter. In rest of Asia, excluding China, we made good progress in Q2 on our strategic initiatives of growing sales with targeted carmakers such as Toyota, Hyundai, Mahindra and Mitsubishi and with select 2-wheeler manufacturers such as Honda and Royal Enfield. Overall, our sales continued the momentum from the first quarter with a growth over market of 8 percentage points. In China, our Q2 sales were down year-over-year, primarily due to the ongoing market share shift towards domestic OEMs that we have previously discussed. However, I'm pleased to note that sequentially, our Q2 sales were higher than Q1 with higher sales on vehicles such as the new Buick GL8 with GM and the Toyota Corolla. We are in the middle of a product transition with Geely, our largest customer in China, replacing an earlier generation cockpit domain controller with a new and more powerful system that's also priced higher that helped our sales in Q2. Overall, China represented a significant drag on our global growth over market, lowering it by 5 percentage points in Q2. We anticipate second half sales in China to modestly increase compared to the first half driven by new product launches. Combined with easier comps, we expect growth over market to improve and be less of a headwind in the second half. In summary, Q2 was a strong quarter for sales with our cockpit electronics products performing well and partially offsetting the anticipated decline in BMS revenues. Turning to Page 4. We had a very strong quarter of new business bookings with $2 billion of new business won in the quarter, bringing the year-to-date total to just under $4 billion through the first half of the year. This performance plus our pipeline for the second half of the year gives us confidence that we will exceed our $6 billion target for new business wins for the full year. Carmakers are extending existing vehicle platforms with hybrid and electric powertrain vehicles and delaying development of all new electric vehicle platforms. Offering larger and a greater number of displays in the cockpit is an attractive option to upgrade and refresh these vehicles, which is driving more opportunities for Visteon for displays and digital clusters. The right-hand side of the page highlights some of the key wins in the quarter. We won a 48-inch pillar-to-pillar OLED display with a leading German luxury automaker for their new hybrid and battery electric vehicles with first launch in 2028. This display will feature in all of the top-selling sedans and SUVs from this carmaker. The next win is for a 16-inch display and digital cluster with Hyundai for the vehicles in India. Our localization efforts and investments in India was a key reason we were able to secure this business. We won a 5-inch digital cluster product with Honda for the 2-wheeler market. This large program representing about $400 million in lifetime revenue establishes Visteon as a leading supplier to Honda in this segment of the market. The last win highlighted is for a cockpit domain controller for TRATON, a leading commercial vehicle manufacturer. We are an existing supplier to TRATON for our SmartCore product, and this win represents the next generation of the product, which will go across the customers' new vehicle architecture. This significant win represents about $350 million in lifetime revenue and will help build the foundation of a growing commercial vehicle business. Turning to Page 5. The second quarter was also strong in terms of new product launches. We launched 21 new products in the quarter with multiple automakers, including 4 products with commercial vehicle and 2-wheeler manufacturers. This page highlights some of the key launches, illustrating the diversity of launch activity across powertrains, products and vehicle markets. We launched a digital cluster with connected services with Royal Enfield, a leading motorcycle manufacturer in India and a SmartCore and digital cluster program with Volvo in their construction vehicles and heavy-duty trucks. We also launched new SmartCore products with Volvo and Polestar, two brands that are part of Geely. And finally, we launched a 25-inch panoramic display with Audi on the new Q3 vehicle, our first business with this carmaker. Audi has completely redesigned the vehicle with the focus on the cockpit anchored by Visteon's advanced display product. The panoramic display creates an immersive experience for the driver and was featured prominently in the market introduction of the vehicle. Turning to Page 6. We remain focused on executing our strategy, which is centered around offering products that are well aligned with key industry trends, supported by one of the best cost structure in the industry. This approach has enabled us to successfully navigate the evolving industry trends and position the company for growth. In parallel, we seek to balance the allocation of capital to initiatives that strengthen our execution capabilities and returning capital to shareholders. In Q2, we made significant progress on our long-term strategic priorities. With the car becoming increasingly software-defined, displays are a key part of the user experience. We have been investing to develop deep expertise in automotive display design and manufacturing for the past several years, and these investments are continuing to pay off. In Q2, our display sales were up about 20% over prior year as we launched several new display products, including the panoramic display for the new Audi Q3 that I discussed previously. The win of a large pillar-to-pillar display business with a leading luxury OEM, the biggest of its kind for OLED displays in the industry reinforces our strong position in the industry. Commercial vehicles, including heavy-duty trucks, buses and even construction equipment as well as 2-wheelers are converging on the same trends that passenger cars have been going through for some time. These adjacent transportation markets are an attractive growth opportunity for Visteon. And in Q2, we won about $750 million in new business for SmartCore and digital cluster products. We anticipate that these two markets could represent as much as 10% of our sales by the end of this decade, up from about 4% today. As noted previously, Asian automakers, such as Toyota, Hyundai, Honda and Maruti Suzuki represent an exciting growth opportunity for Visteon. In Q2, we secured key new business with Hyundai and Honda that builds up on the good progress we have made with Toyota and Maruti Suzuki that was reported previously. A 5-inch digital cluster win with Honda for 2-wheelers is particularly interesting as it's a large-sized display for that market. As the global leader in 2-wheelers, Honda is the technology trendsetter in that industry, and this product will likely spur other 2-wheeler manufacturers to follow, creating additional opportunities for Visteon. We also made progress on several vertical integration initiatives. We continue to bring key display-related capabilities in-house. Large displays require large metal frames to provide structural support that adds significant weight and cost to the overall product. We use a lightweight metal alloy that is injection molded using a special high-temperature process called pixel molding to create this frame. In Q2, we made progress in in-sourcing pixel molding capability at plants in Mexico and Tunisia. To our knowledge, we are the only supplier that has this capability in-house, which not only saves cost, but also derisk the supply chain from China dependency. We also made good progress on the in-sourcing of display backlight unit, which is a key electronics component of displays. Together with optical bonding and pixel molding, we are successfully bringing more of the display manufacturing process in-house. Lastly, we completed the acquisition of an engineering services company with about 250 people in Germany that specializes in automotive user interface design as a service to car manufacturers. With the trend of large displays and the anticipated introduction of Gen AI in the cockpit, user interface design in cars will likely require a complete reboot. This acquisition positions Visteon to engage with carmakers early during the concept phase of new cockpit UI designs. This is our second acquisition of engineering services company in the past 12 months. The first acquisition is also a similar-sized company, focused on vehicle connectivity and e-mobility technologies. Our objective with these acquisitions is to move up the value chain and engage early with our customers for next- generation technologies. It also offers the potential to drive meaningful sales and profit contribution as we expand the services offering across our customer portfolio. Turning to Page 7. I would like to provide an update on our outlook for the year. On our Q1 earnings call, we elected not to reaffirm guidance due to the potential risk of disruption to vehicle production due to tariffs. A quarter later, the risk to our original full year outlook has reduced even if it's not mitigated altogether. Our strong Q2 and first half performance, coupled with customer demand visibility, especially for Q3, puts us in a position to reinstate guidance and increased the midpoint for all 3 financial metrics of sales, adjusted EBITDA and adjusted free cash flow for the full year. Our outlook for customer vehicle production for the second half is based largely on S&P Global's latest forecast with some modifications based on customer input. S&P Global is forecasting vehicle production to be down 5% for the second half, both sequentially and year-over-year. Compared to our original guidance, second half customer production has worsened slightly. It should be noted that in our guidance, we are assuming that the tariff status remains unchanged, including that all USMCA-compliant parts remain completely exempt from tariffs. Compared to our original guidance, our outlook is benefiting from favorable currency and the contribution from our recent engineering services acquisitions, partially offset by BMS. We have assumed lower BMS revenues due to potential lower consumer demand from the phaseout of the EV tax credit by the end of September. Our sales growth over market in the second half is anticipated to improve from Q2 levels, mainly driven by upcoming new product launches for displays and cockpit domain controllers. We now anticipate growth over market of mid-single digit for the full year, a modest decline from original expectations due to lower BMS sales in China. In total, we remain cautiously optimistic despite the uncertain industry environment based on the strength of our product portfolio, the traction we are gaining in our strategic initiatives, as evident in our strong first half performance, and the visibility we have in near- term customer production schedules. Now I will turn the presentation over to Jerome.

Thank you, Sachin, and good morning, everyone. Similar to quarter 1, our second quarter was another strong quarter, both operationally and financially, allowing us to post excellent key metrics. Sales were $969 million, reflecting a 4% sequential improvement from Q1. It was better than anticipated and driven by robust demand for our digital cockpit products. Adjusted EBITDA for the quarter was $134 million, reflecting continued operational execution and cost discipline. Adjusted EBITDA margin for the quarter was a solid 13.8%, matching the record margin percentage that we set last quarter. We did benefit from some nonrecurring items and when normalizing for these items, our margins were in the mid-12% range, in line with our expectations. Adjusted free cash flow was $67 million, driven by a robust EBITDA performance as well as an inflow from working capital. In the quarter, we completed another bolt-on acquisition with a purchase price of $50 million, net of cash acquired. We ended the quarter with $361 million of net cash on the balance sheet, and we are well positioned to continue executing on our balanced capital allocation strategy. Overall, we delivered another strong quarter, driven by our ongoing focus on commercial and operational discipline as well as capital efficiency. Turning to Page 10. Sales were $969 million for the quarter, a decrease of $45 million compared to prior year. Customer production volumes were slightly negative year-over-year, declining in the low single digits in both the Americas and Europe, while production increased in Asia. Growth versus market was negative 1% in the quarter. Recently launched programs with Ford, VW, Renault and Nissan were positive contributors, while sales declines in BMS and China offset this growth. As a reminder, BMS sales peaked in Q2 last year as our U.S. customers ramped up production of batteries in anticipation of new product launches. Excluding China, growth over market was 4% in the quarter, even with the additional headwind from BMS sales. Contributions from M&A represented slightly less than 1% of sales. Customer recoveries, primarily related to semiconductor cost increases, reduced sales compared to prior year by approximately 2%. Normal annual price reductions to our customers were slightly below 2% and in line with our historical average. FX was a very modest benefit in the quarter. Adjusted EBITDA for the quarter was $134 million. Compared to prior year, adjusted EBITDA was essentially flat, mostly as a result of lower sales, offset by nonrecurring items which was a net positive on a year-over-year basis. The majority of these nonrecurring items are commercial in nature and highlight the commercial discipline that we have integrated in our operating model by negotiating recoveries from our customers for incremental costs incurred from prior periods. The timing of these recoveries depends on a variety of factors, and we're not expecting a significant level of nonrecurring items in the second half of the year. Net engineering as a percentage of sales was 5.4% for the quarter and includes the recent engineering services acquisitions we've made in the last 12 months. On a year-over-year basis, net engineering costs increased slightly due to the recent engineering services acquisitions, partially offset by lower personnel costs and timing of engineering recoveries. We continue to leverage our platform approach, our best cost footprint and have embarked as well on many initiatives that improve engineering productivity while continuing to invest in strategic engineering capabilities. Adjusted SG&A was 4.2%, which reflects a healthy balance between ongoing cost controls and investment in key teams and technologies for the future. Our normalized margins for the quarter are in the mid-12% range when adjusted for several favorable nonrecurring items as well as net engineering and SG&A that are slightly below our full year expectations on a run rate basis. Our normalized margins have improved year-over-year and reflect the benefits of the various ongoing cost initiatives we have undertaken, including product costing, engineering productivity, platform-based product development, AI-driven process improvements, just to name a few. Turning to Page 11. Visteon generated $105 million of adjusted free cash flow in the first half of the year. We continue to benefit from a robust level of adjusted EBITDA, and we were able to convert EBITDA to cash flow at a rate of 40%, in line with our original full year guidance. Trade working capital was an inflow and included a modest inventory reduction. Cash taxes were higher compared to last year, reflecting our continued improvement in profitability in most countries as well as timing of cash payments. Net interest continues to be a modest positive as the interest income earned on our cash slightly exceeds the interest expense paid on our debts. We also had an outflow in the first half of the year related to our 2024 annual incentive program, which was paid out at higher levels than prior year due to strong financial and operational performance in 2024. In addition to this payout in the first quarter, other changes in the first half also included U.S. pension contributions and the timing of various other cash flows. Capital expenditures were $66 million, representing 3.5% of sales and were slightly below our original full year expected run rate. In the first half of the year, in addition to ongoing investments supporting customer programs, we continue to invest in several in-sourcing initiatives. These initiatives include investments in various capabilities that are core to our product lines like magnesium injection molding, display bonding and assembly or camera assembly capabilities. In the quarter, we deployed a net $50 million of capital towards acquisitions. We ended the quarter with $671 million of cash and a net cash balance of $361 million. Turning to Page 12. We have elected to reinstate guidance this quarter while raising the midpoint of our outlook for sales, adjusted EBITDA and adjusted free cash flow. Our guidance range for sales is $3.7 billion to $3.85 billion, an increase of $25 million versus our February guidance at the midpoint. Compared to our original guidance, we are benefiting from favorable currency movements, primarily with the euro as well as a modest increase in sales related to our recent Q2 acquisition, partially offset by lower BMS sales. We are largely aligned with S&P latest outlook, which is forecasting that our customer production is down in the low single digits for the full year, slightly better than the forecast back in January. Compared to the first half of the year, our guidance assumes a sequential decline in the second half of the year, reflecting lower customer production volumes of approximately 5%. This includes a sequential decline in Q3 of 7% for our customer production volumes compared to Q2, partially driven by normal seasonality in the U.S. and Europe to account for summer plant closures. Offsetting this decline are new product launches, contributions from M&A and favorable currency. As a result, we anticipate Q3 will be close to Q1 2025 sales levels. Growth over market is anticipated to increase from Q2 levels steadily throughout the year to a full year growth over market in the mid-single digits, slightly below our original guidance. This is mostly due to lower BMS sales and higher customer production volumes in China on vehicles we do not have content on. Compared to Q2, growth over market will improve as a result of new product launches for displays and SmartCore, while the headwinds from BMS and China will reduce primarily in the fourth quarter. As a result, we expect growth over market will be higher in Q4 than in Q3. Adjusted EBITDA is expected to be between $475 million to $505 million, reflecting a 13% margin at the midpoint and an improvement of $25 million versus our previous guidance. We are integrating in our improved full year guidance, the net benefit from higher sales, the favorable nonrecurring items from the first half as well as ongoing strong operational performance. This equates to a second half margin in the low 12% range, in line with our normalized margins in the first half of the year once you adjust for the expected lower sales volumes. We anticipate net engineering to be approximately 6% of sales for the full year, reflecting the incremental engineering costs associated with our recent acquisitions. Adjusted free cash flow is expected to be between $195 million to $225 million, reflecting a 43% EBITDA conversion at the midpoint of guidance and an improvement of $20 million versus original guidance, primarily from higher profitability. CapEx is still expected to be approximately $150 million for the full year or 4% of revenue. Before moving on, let me provide some additional commentary on how we are modeling tariffs in our guidance. The midpoint of our guidance assumes no change in tariff policy or impact, including the assumption that USMCA-compliant goods crossing the Mexico-U.S. border remain completely exempt from tariffs. As a reminder, we have approximately $10 million of goods that cross the Mexico-U.S. border today on a weekly basis, out of which 97% are USMCA compliant and, therefore, currently do not incur any tariffs. If this situation were to change, we would seek to pass the cost on to our customers, although there would be likely a timing mismatch as we would work to get agreements in place. You can find additional information on our potential exposure to tariffs on our Q1 earnings call. Turning to Page 13. At our Investor Day in early 2023, we laid out our balanced capital allocation strategy that had 4 pillars: Maintaining a strong balance sheet, investing in the business, both organically and inorganically through M&A and returning capital to shareholders. Since our Investor Day, we have deployed approximately $650 million of capital towards these initiatives. We have been able to execute on this strategy as we continue to generate strong free cash flow, converting on average, 40% of our EBITDA into free cash flow annually. Of the capital we have deployed, approximately 50% of this capital went towards internal investments as we continue to generate robust returns with a return on invested capital in the high teens, one of the best return profiles in the industry. We also have made progress executing on our M&A strategy. In the last 12 months, we have closed on 3 acquisitions for a total investment of approximately $105 million. Each acquisition adds technology domain expertise to the company to further expand our product and service offerings to our customers. These acquisitions are bolt-on, representing just over 1% of sales on a full year run rate basis and are margin accretive to Visteon. We continue to have a robust M&A pipeline, and we'll look to close out additional acquisitions in the future. We also returned $176 million of capital through share repurchases. We temporarily paused repurchases in Q2 due to the uncertainty related to tariffs. Although this uncertainty remains, we intend to resume share repurchases in an opportunistic manner. In addition, we are announcing today the initiation of a quarterly dividend of $0.275 per share, representing about a 1% dividend yield on an annualized basis at today's stock price. The implementation of the dividend illustrates our confidence in our ongoing ability to generate cash and our commitment to returning capital to shareholders. This is in addition to our ongoing share repurchase program and not replacements. In summary, we have deployed a significant amount of capital since our Investor Day. At the same time, we have maintained one of the strongest balance sheets in the industry. Our current cash position plus the expectation of additional free cash flow generation in the second half of the year enables us to continue to execute on our balanced capital allocation strategy. We will continue to invest in the business, both organically and inorganically, while returning capital to shareholders. Turning to Page 14. Visteon remains a compelling long-term investment opportunity. We expect to benefit from higher demand for more digital content in a cockpit regardless of powertrain. Visteon is well positioned for long-term top line growth, margin expansion and free cash flow generation, while our strong balance sheet provides us with significant flexibility to pursue our capital allocation priorities. Thank you for your time today. I would like now to open the call for your questions.

[Operator Instructions] It looks like our first question today comes from the line of Itay Michaeli with TD Cowen.

Congrats on the quarter. Just first, maybe for Sachin. Another quarter of very strong bookings. It looks like you're gaining market share. I was hoping you could talk about, a, the drivers behind Visteon's recent market share gains and b, what these strong bookings do to kind of your longer-term growth expectations beyond the 5% previously guided for from 2025 through 2027?

Yes, in fact, we're very happy about how the new business bookings have performed. And if you look at our Q2 performance, it was very similar to Q1, driven mostly by displays and also clusters. And what it does is really reflects the transformation that's ongoing in the industry with the revised outlook for EVs outside of China. In China, as you know, EVs continue to grow and more importantly for us, our interest in AI-driven infotainment and autonomous driving is growing, which is our focus in that region. So what this transformation is doing, however, in the regions outside of China, it's causing OEMs to shift their focus to extend existing platforms and refresh them and displays are a great way to enable them to offer more value-added and innovative experiences inside the vehicles. And as we have also mentioned earlier, the investments we have been making in displays is really setting us apart from our competitors in terms of the depth and the scale of our capabilities, which I won't repeat here. But I would like to also say that we should look at our new business win performance over a multiyear period. I think it's actually quite useful to think about how it has evolved. If you go back a couple of years to 2023, they were actually driven by SmartCore and CDC and infotainment wins. Now that ratio at the time -- I should say, at the time in 2023, displays were actually a small portion of our new business wins. That ratio became a little more even in 2024. And we are still in the process of implementing the infotainment and CDC programs that we won then. And this year, our displays is taking the lead. But we fully expect as we go forward to see more of a balancing to happen, especially with the interest that's growing in higher-performance CDC systems with AI coming into the cockpit, which is creating this need for high-performance compute, which we clearly see happen now in China, but we expect it to also catch momentum outside of China soon. Now in terms of the long-term impact of this, clearly, this is helping greatly in terms of driving the sales and especially in cockpit electronics. So we feel good about many of the initiatives that we had outlined as key to our -- achieving our 2027 targets. That includes the progress that we are making with the targeted growth automakers, especially in Asia, progress on 2-wheelers and commercial vehicles as well, which has also have done well. And if you look at our first half performance, about close to 20% of our wins has been in commercial vehicles and 2-wheeler markets. So that's very encouraging. So that's all very good, and it's going to help us in our achieving that long-term target. The one thing I would like to highlight, however, which we need to understand how that's going to play out, is BMS. And so we'll need to see how GM, in particular, will react to this market changes, including the phaseout of the tax credit. We think that EVs continue to have interest from consumers. So I do not prescribe to the notion that EVs are necessarily going away. But we'll need to see how and what it does in the near term, and we'll be in a better position to comment on our long-term outlook later this year as we get more insights into that part of it.

Terrific. Maybe a quick follow-up for Jerome. With today's capital allocation announcement, can you just remind us how you're thinking about targeted net cash and future leverage, particularly with the business outlook improving?

Yes. No, thanks, Itay. Generally, we have given a $100 million net cash position as kind of our minimum target for net cash. And as you know, today, we are well in excess of this. So that is not the only reason, but one of the reasons why we feel very confident with initiating a dividend. We've been constantly generating good EBITDA as well as strong cash flows in the last few quarters and years, in fact, and we expect this to continue. So that's really a testament of the strong cash flow generation. We have still $125 million authorized on our $20 million share repurchase authorization, and we'll be reactivating this quarter on top of initiating the dividends.

And our next question comes from the line of Mark Delaney with Goldman Sachs.

Visteon has talked about the success it's had with Toyota, and you mentioned at a recent conference that Toyota could account for about 10% of your total revenue in 2028. Given how big and important Toyota is as a global OEM, I am hoping to better understand if you think there's the opportunity to further penetrate that customer beyond what you've done so far? And if success with Toyota could also position Visteon to get additional wins with other Japanese auto OEMs?

Yes. Mark, that's a good question, and let me take that first. So if you look at the progress that we have made with Toyota, it has really been on a few of their, I would say, very high-profile vehicles such as Global Camry, Land Cruiser. We also won content on the Tundra, Sequoia for North America and Corolla for China. And our wins have been mostly for digital clusters and to a smaller extent, displays. I should also mention we have won displays for the Nexus brand as well. So of the various products that we offer, it's still relatively, I would say, modest portion of the total opportunity that we see at Toyota. So we believe that this year, okay, we have done well with them so far. Last year, it was a very strong year in terms of new business wins, and we expect to continue to win business with Toyota as we go forward. At this stage, really what we need to be focused on is the execution of the many programs that we have won and the successful launch and introduction into the market. So far, so good. So we're very happy with where the relationship is standing today. And I'm looking forward to continuing this relationship and establishing even a stronger bond and a relationship here in the coming quarters. So I think everything so far is going as per we would have liked it to go and nothing more to comment on that, and we continue to remain very optimistic about the future.

My other question was on EBITDA margins. I believe EBITDA margin guidance is now about 13% at the midpoint compared to guidance in the mid-12% range that have been provided back in February. Jerome, you mentioned 1Q had some onetime benefits, but the full year is also tracking stronger. So can you help us better understand the different drivers of the improved EBITDA margin outlook? And also how much is coming from some of the M&A that you spoke about?

Yes, absolutely, yes. So we've raised EBITDA to your point, and we're now at $490 million or 13% at the midpoint. So an improvement of $25 million or about 60 basis points. So what we're doing in the guidance, we're integrating the very strong H1 performance that we had so far. And we had a very good operational run rate, in fact, in H1. So we are keeping that going. We also are adding, obviously, the nonrecurring items that we had in H1. I didn't give a specific number in my prepared remarks, but we're talking about $10 million in Q2 of nonrecurring items on top of the $15 million that we had in Q1. So about a $25 million of nonrecurring item. However, some of that was contemplated, I would say, in our original full year guidance, maybe $5 million to $10 million. So if you think about H1 and H2, we have also included the small benefit of the acquisition. It's not very material in the scheme of things. We are adding a little bit of exchange and also contemplating a little bit more engineering and SG&A, largely to account to -- for specific investments we're doing in AI, for example, in engineering. So if you step back and look at our -- what we call our normalized margins, which are essentially excluding the nonrecurring items, we're running at 12.5% in the first half of the year. And adjusting portfolio, that will be slightly lower in the second half. We'll be running at 12%. So that gives you the overall 13%, including the nonrecurring items that we've guided to for 2025.

And sorry, Jerome, can you just clarify what the nonrecurring items are?

Yes. So nonrecurring items are very similar to what we had in Q1. I would say about 2/3 of them are commercial items for items or costs that we have incurred on specific programs in prior years when the program didn't really materialize or go as planned. So we're negotiating recoveries with customers, and these are kind of claims, if you want. They are not large individually, but they add up, and we've been quite successful in Q1 and Q2, negotiating these items. We -- It's quite unusual to have such a large number of claims or commercial items, negotiating -- negotiated in Q1 and Q2. And therefore, we don't anticipate having much in Q3 and Q4 on this front.

And our next question comes from the line of Emmanuel Rosner with Wolfe Research.

Just maybe just a quick clarification on your last point, Jerome, just to make sure I understand. So you named essentially about $25 million worth of onetimes in the first half, but the guidance is basically on the EBITDA level raised by the same sort of amount. So were these mostly like timing where it was unusual that it was all in the first half, but you would have had them in the full year? Or are those incremental? And then basically, the onetimes are most of what's driving this improvement in guidance?

Yes. So as I just said, there's about $5 million to $10 million that was contemplated already in our guidance. So you cannot really add the $25 million on the full year. You can add probably $15 million to $20 million. The rest is essentially a little bit of higher volume, partially offset by a little bit more cost on SG&A and engineering, but nothing material there.

The second question I was hoping to double click a little bit on BMS. So I understand the challenging comparison in the second quarter. Can you maybe talk a little bit about how to think about cadence of comparisons on a go-forward basis for the rest of the year, but also a little bit longer term as well in the context of some of these new U.S. regulations that could squeeze EV demand. So I think you have that as, I guess, potential headwind for EV volumes, but then you also, I guess, still launching the program. So how do you think about the overall trajectory of BMS from here?

Yes. Yes. Let me take that, Emmanuel. This is Sachin. So yes, so first of all, I would like to share with you how this first half has performed relative to last year with BAMS. So last year, both our customers in North America, GM and Stellantis were in ramp- up mode in their battery manufacturing and the supply chain for battery tends to be pretty long, especially when it's in the ramp-up phase. So the level of demand that we had from these customers last year didn't necessarily reflect their vehicle production last year. Now what we are seeing this year with the inventory being built up and completed, is that our demand and our production of BMS, therefore, is reflecting what the vehicles or what these two OEMs are building this year as vehicles. So one thing I would say is, although it's lower on account of the reason I just mentioned with the buildup of inventory last year, Q2, sequentially, was higher than Q1, and it's very much in line with what we see as the demand that's driven from the sell-through of the vehicles at our customers. And we will have to see to your point about the go-forward basis what happens. We will have to see how these OEMs respond to these credits being -- this incentive being taken away by end of September. You probably know that the manufacturer credits still apply the 4 to 5x, and that remains. And we do anticipate that carmakers will continue to improve affordability of their vehicles. And as those investments that they are making in driving better affordability with the demand that we continue to see, especially in younger demographic, I do believe that EVs will continue to be part of the mix of powertrains that our customers will offer. And ultimately, consumers will have a choice to pick the powertrain that best meets their lifestyle. So I think we may have a short-term uncertainty, but longer term, I think it will stabilize. If you look at other parts of the world, Europe, of course, China, even emerging markets, demand for EVs has grown -- has not gone with the other way, incentives tend to be short term. At some point, this momentum picks steam and you hit critical mass. I do believe we have achieved that even here, especially with infrastructure improving and the understanding of the lower operating cost of EVs starting to become a little more widespread, I think we will see ongoing demand for it. Can't really quantify at this stage exactly what that's going to be, but we'll be in a better position as we go forward to make a better estimate of that.

And in terms of assumptions as well in our outlook and guidance, we have assumed that our BMS sales would be for Q3 and Q4, similar to what we've seen in Q2. And as Sachin said, it was a slight improvement from Q1. I think the good news these days is that there's more of a parity between production and demand. So that's very encouraging.

And our next question comes from the line of Joe Spak with UBS.

Actually I wanted to pick up a little bit there just on the BMS and EV discussion. I mean, if we think of Sachin about what you sort of just said, right, is whatever you're sort of implying for like a 4Q run rate on that business like bottom and we can be stable from there? And like how should we think and annualize that as sort of a go-forward rate unless we see some sort of recovery? Like -- and if so, like how should we think about how big that number is? And I guess just given this business didn't really maybe pan out as many thought a few years ago, I mean, it sounds like maybe you're getting some -- you mentioned you're getting recoveries for prior programs. I'm not sure it relates to this. But I guess I'm just wondering, are you rightsizing or restructuring your footprint for that business.

Yes, yes. Let me answer that second part of the question first. So in terms of how we think about go forward, for our electrification business, given the fact that the volumes are not going to be at the levels that we had originally expected. What we are doing is to expand our offering in that vehicle category to go beyond BMS into more power electronics as well. And so we expect to have greater content on those vehicles, where today, we may just have BMS to add other products to the mix and therefore, have greater content per vehicle. So we are well on our way in terms of executing on that strategy, both in Europe as well as in the U.S. And so that should help us in terms of offsetting some of the loss that we will see in pure BMS sales as we go forward. However, there is a window in time because those wins have to be launched in terms of power electronics and converted into revenue. In the meantime, we're still largely dependent on BMS. So for that portion, for the rest of the year, we do expect, as Jerome mentioned that Q1, Q2 run rate will essentially be at the same levels, at least for the rest of the year. Now going forward, beyond that, if you think about where this level is in terms of the overall share of the vehicle sales, that's less than 5% of the customers' sales in the region. And look at the overall market, we are still tracking at a penetration of 7%, 8% as a portion of the total sales. So we think that, that is probably a reasonable expectation for us so that it should be able to either hold or slightly improve from these levels. What's interesting is we have seen really good traction in the more affordable vehicle models that have been launched. And still there are very few that's available as a choice for consumers. So as they expand their vehicle models and especially in the case of GM, that is the new Bolt, for example, that's coming into production. We think that we will have more options and consumers will be able to pick from a wide variety of choice of better range performance and other things that we think that it may be a good thing to look at this level as kind of the floor.

Okay. That's helpful. The second question is just on sort of your broadening of the customer base, penetration with new customers that you've historically been underexposed to. You mentioned Toyota, you mentioned some others. And I want to marry that thought with the more recent news that it seems like a lot of these players might be making further investments into the US. And does that perhaps make your opportunity with them even larger or maybe even a little bit more accelerated given that you may already have some footprint here that existing suppliers may not?

Yes, yes. Overall, this trend towards having more of the supply be based in the region where you are building vehicles has been a big benefit for us, not just for the U.S., but also in other parts of the world, including Europe. So we have seen recently, for example, Chinese OEMs wanting to get suppliers in Europe supply components. We see the same thing here in the U.S. And with this recent news that you are alluding to, it definitely is a positive for us as well, especially given the investments we have made in vertical integration in many areas that we have mentioned on this call and previously as well. This is all very helpful for us in terms of future demand.

And our next question comes from the line of Colin Langan with Wells Fargo.

Maybe just to understand the sales guidance versus initial expectations. What are the major puts and takes just in terms of the market expectations, sounded pretty similar. FX, I think, was a negative 1% or something like that. Now that's flat and then recoveries are unchanged and growth over market is slightly worse. So the main factors in the change here is better FX and M&A offset a little bit by the growth over market? Or is there other things that we're missing in terms of the puts and takes?

Colin, it's Jerome. You've essentially summarized it pretty well. We have a $25 million improvement at the midpoint of the guidance. We've got favorable currency going into the second half, and that will represent versus our previous guidance, about 1% improvement. The acquisition is fairly minor in the scheme of things. And all this is partially offset by a growth over market being slightly lower, mostly on the BMS side. We were -- and we are slightly more conservative than what IHS has given just for BMS. So that's -- yes, these are essentially kind of the puts and takes.

Got it. And there's obviously headwinds in China, headwinds from sort of BMS demand. But could you frame the percent of sales that these issues are? Because I think China last year was only 11% of sales. So it feels like it's kind of shrunk to the point that maybe the impact of declines there is mitigating. And then BMS isn't that still a fairly small business, like maybe less than 3% of sales or something like that? Or any framing of the size of these businesses?

Yes. BMS is very small in the China context for us. So I would say for us, in China, it has been mainly the cockpit domain controller as our main product. And we have seen also a sort of a bottoming out of the demand, and we're expecting going forward here, additional launches. I mentioned this more powerful system that we are introducing with our largest customer. There are other launches as well. We did get some small benefit in terms of BMS in China this quarter. There were some vehicles that were launched by GM that uses our BMS that did well in Q2, and we'll have to see how it does in the second half of the year. So I would say things are -- after a few quarters of a decline -- sequential decline, things are flattening and then starting to turn the corner for us in China. So we are cautiously optimistic.

And I think that's the key. The year-over-year comparisons are pretty tough with China and BMS as well globally. But we are -- as Sachin said, we are seeing, in fact, for both China and as well BMS a slight improvement in Q2. We are planning to be fairly flat on the BMS side going forward, but we do see some minor increases in China for Q3 and Q4. Overall, China as Sachin said, 9% and BMS mid- to high single digit globally. Obviously, the business being mostly with our U.S. customers, which are GM, Stellantis and Honda as well. We do supply ultimately through Honda, through GM.

And our next question comes from the line of Luke Junk with Baird.

Maybe just one question for me. We've covered a lot already. Sachin, I would just be interested in getting your updated perspective on moving at China speed incrementally. And just generally, playing some offense in China as the cyclical and mix headwinds start to bottom out here. I guess I'm thinking about both the software side where I know you've made a lot of investments in modularity, but maybe if we could talk about hardware in parallel as well.

Yes. No, I think both are very good questions, Luke. And I will talk about the progress that we're making, especially with what you referred to as China speed. I'm giving you a couple of examples. One is the recent display win that we had with Geely that we talked about in the previous quarter. We won it last quarter, and we will launch it essentially next year, right? So at a speed, which I think very few people even in China can match. The second one is we are working on cockpit domain controllers in China that are designed, developed and launched under 2 years, which we can do largely because we have adapted ourselves to operating at China speed in China. And we have a platform approach, as you know, that goes now a few years and continues to get stronger. Today, we are at a point, especially for cockpit domain controllers that we can using our platform get to about 70% of the customers' requirements right out of the gate. So the very first release that we typically have, which is within 3 months of winning a business, we are able to meet a large number of the requirements. A great example is one that we are currently developing with another one of these targeted growth OEMs in Japan, Mitsubishi, where we have won for the very first time, an infotainment system business with them, which, by the way, I think will have many additional opportunities on the backs of as we go forward, including CDC opportunities with them. This program, just to give you some context, when we won it in Q1, already in this quarter, we are able to showcase to them a running system on a hardware, with all of the design choices that will be in the final design and the software is functioning and is able to meet quite a bit of the requirements. This is really only possible if you have a platform approach. And it takes a fair amount of time to put that in place. Today, I would say that in terms of being able to do these things at scale, very few companies can compare and meet our levels of scale and platformization both emerging at the same time. So that's really a testament to this progress that we have made on the strategy. Now with respect to the progress that we are making, I've mentioned Toyota already, so I won't comment on them. But just as a reminder, we have been talking about Honda, Hyundai, Maruti Suzuki. One thing I would say is when you look at Honda, they have the 2-wheeler side of their business but also very importantly, the 4-wheeler, right? And they have made a lot of progress in 2- wheelers. We still have a lot of opportunity to go after on the 4-wheeler side and the progress we made with Hyundai that we talked about and Maruti Suzuki in the previous quarter, I think all of these are well underway. At the same time, plenty of runway ahead of us.

And I think in these cases as well, it was not only innovation, cost, quality that differentiated us, but as well speed to market for all these customers. So I think that highly speaks to what we've been able to achieve.

And that does conclude the question-and-answer portion of today's call. I will now turn it back over to Kris Doyle. Kris?

Thanks. Thanks for participating in today's call. I'd like to quickly point your attention to Slide 26 in which we highlight several Investor Relations activities for the third quarter. If you are interested in learning more, please contact the Investor Relations team. This now concludes our earnings call for the second quarter of 2025. Thank you.