Visteon's (VC) CEO Sachin Lawande on Q2 2016 Results - Earnings Call Transcript

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Visteon Corporation (NYSE:VC)

Q2 2016 Earnings Conference Call

July 28, 2016 09:00 AM ET

Executives

Bob Krakowiak - VP, Treasurer and IR

Sachin Lawande - President and CEO

Bill Robertson - Interim CFO

Analysts

Matt Stover - SIG

Tavis McCourt - Raymond James

David Lim - Wells Fargo Securities

Eddie Hsieh - UBS

Steven Hempel - Barclays

Justin Barell - Citi

David Leiker - Baird

Patrick Nolan - Deutsche Bank

Bob Krakowiak

I’m Bob Krakowiak, Vice President, Treasurer and Investor Relations for Visteon. Welcome to our second quarter 2016 earnings call. All lines have been placed on a listen-only mode to prevent background noise. As a reminder, this conference is being recorded.

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

Presentation materials for today’s call were posted on the investors section of Visteon’s website this morning. Please visit www.visteon.com/earnings to download the material if you have not already done so. Our Form 10-Q was filed earlier this morning with the news release. Joining us today are Sachin Lawande, President and Chief Executive Officer; and Bill Robertson, Interim Chief Financial Officer. We have scheduled the meeting for an hour and will open the lines for your questions after Sachin and Bill’s remarks. Please limit your questions to one question and one follow-up.

We appreciate your interest in our company and again thank you for joining us. Now, I will turn it over to Sachin.

Sachin Lawande

Thanks Bob and good morning everyone. Earlier this morning we released strong results for the second quarter. Our Company continues to execute well and I'm pleased with our continued progress on our key metrics during the quarter. On page 2, let me briefly cover our second-quarter consolidated 2016 results which include our other operations. Sales were $773 million for the quarter and $1.6 billion for the first half. Adjusted EBITDA was $77 million for the quarter with a margin of 10% and $166 million for the first half. Adjusted free cash flow was $79 million and stands at $51 million for the first six months. Our adjusted earnings per share were $1.22 for the quarter and $2.43 for the first half. Our balance sheet remains strong with cash and debt of $852 million and $372 million respectively. Looking at results for our ongoing electronics business for the second quarter and through the first half, we have sales of $762 million in the quarter and $1.6 billion for the first six months.

Adjusted EBITDA was $79 million in the second quarter with a margin of 10.4% and $173 million for the first half. Adjusted free cash flow was positive $87 million in the second quarter and $65 million for the first two quarters. In addition, I'm pleased to say we had one new business in the quarter totaling $1.6 billion in lifetime sales. This increases our business backlog as of June 30th to $15.9 billion, an increase of $1 billion since the start of the year and $1.6 billion over the last nine months. Based on our performance in core electronics business and our current economic outlook we are reaffirming our full-year guidance for adjusted EBITDA and adjusted free cash flow and establishing a range for our sales guidance of $3.1 billion to $3.2 billion.

On page 3, we provide a breakdown of our second-quarter 2016 sales by region, customer and product. As shown on the chart on the left, global vehicle production increased by 3.2% in the second quarter year over year largely due to healthy growth in Europe and solid growth in North America and Asia. South America continues to decline with 15% reduction in vehicle production. As we continue to emphasize Visteon sales by region remain balanced and generally align with vehicle production around the world. As I've mentioned on prior calls I'm very pleased with Visteon's diversified customer base that’s also very balanced from a regional viewpoint. The 11 of the top 15 OEM customers each account for at least 3% of global sales. These are the automakers who are leading the way in the growing cockpit electronics market giving us a very solid foundation on which to build.

Page 4 compares our electronics revenue for the first and second quarters of this year with 2015. Electronic sales increased by $12 million year-over-year in the first quarter but decreased by $18 million in the second quarter. First and second quarter sales were favorably impacted by new product launches of which we are 35 during the first half of 2016. This benefit was partially offset by the impact of lower production volumes in South America and the decrease in sales related to non-core body control module business. Second quarter sales were also impacted by Mazda and China volumes. Mazda volumes were down 8% year over year in the second quarter and China volumes for key Visteon customers were flat during the quarter. This resulted in some softness in our Q2 sales versus Q1 of 2016. Year-over-year, our revenue on a constant currency basis was down 2.6% for the second quarter and up 0.9% year-to-date.

Page 5, gives you an overview of our second-quarter and year-to-date 2016 China domestic sales. As the world’s larger automotive market and historically one of Visteon's fastest growing markets, we know China is of interest to you. As shown on the chart in the left, China light vehicle production volumes increased 6% during the first half of 2016 compared with the previous year. Excluding currency, Visteon China domestic sales grew 7% in the same period slightly faster than the overall market. First half 2016 sales continued to benefit from strong product launches in the China market with 25 of Visteon's 35 global product launches coming out of China during the first half of 2016. The benefit of this launches was partially offset by the shift in China consumer preference away from sedans and towards SUVs which accelerated in the second quarter of 2016 and effective vehicle production with some of our key customers. We expect this trend to continue into the third quarter and recover in the fourth quarter as several of our key customers launched new SUV platforms with Visteon content. With the new product launches and the recovery in production volume with key customers, I’m confident that we will achieve higher growth in the second half of 2016.

As you can see in the lower right corner, not only is China an important domestic market for our company it’s also a growing export platform. We continue to believe our assets and capabilities in China are a significant competitive advantage. We remain confident that our sales in China will outpace domestic production growth as our new business launches over the next six months drives strong sales growth. Many of you have asked about the Japan earthquake and the impact of the June 23 referendum by British Waters to exit the European Union. On page 6, we examine the potential impact of both of these events which we expect to be relatively minor. As you know, following Brexit, the British pound has weakened considerably versus the US dollar. Visteon has no sales exposure to the British pound and has minimal cost exposure. As the British pound weakens, there is a slight benefit to Visteon EBITDA. However Brexit impacted many currency pairings neutralizing the impact on our EBITDA performance for the quarter. I also committed to update you on the impact of the earthquake in Japan. I can report that we've had minimal revenue or profit impact during Q2 related to the earthquake. We continue to monitor the supply situation and do not expect it to be material to our financial results.

As you can see on page 7, we had a very strong second-quarter in terms of new business wins. During the quarter, customers awarded Visteon new business with expected lifetime revenue of approximately $1.6 billion. This brings our new business wins to $2.8 billion for the first half of 2016. To put our progress in perspective, 2015 was a strong year with $4.3 billion in lifetime awards. New business wins are up 27% to-date versus 2015. Winning new business is the ultimate barometer in customer’s confidence in our company. I'm pleased with the positive feedback I've received from our OEM customers regarding our performance pursuing their business. I'm particularly pleased with our progress in instrument cluster; our superior technology and engineering capability in this area are allowing Visteon to drive market share increases in this core product category. As the pie chart on the right shows we are winning business in all regions of the world led by Asia Pacific with strong wins in North America and Europe as well.

Turning to page 8, we had another strong quarter of program execution with 18 product launches around the world including 13 in Asia. As we can see, these launches cover a full range of profit electronic solutions that we provide to the marketplace. I would like to highlight just a few of these key second-quarter launches. Visteon has successfully launched a new head of the state product for Honda, the Acura CDX is the first model from the Acura brand to be introduced in China. This is a mid-sized SUV aimed at positioning Acura as a luxury brand within the Chinese market. Three features of this product are, the most powerful LED on the market, a high-quality filter called the TFT filter that provides outstanding image clarity and an improved kinematics that make for a very quiet opening and closing of the combiner head-up display. We also launched the telematics control unit in the Acura MDX and TLX models in North America featuring new embedded phone technology to support the transition of Canadian and US network providers from CDMA to 4G LTE with VoLTE or Voice Over LTE. We also successfully completed the Mazda CMU navigation system upgrade with enhanced Japanese language usability. As we told you last quarter, 2016 is a strong year for launches with a total of 63 planned including 41 in China. As I mentioned earlier, I'm very pleased with our new business wins and our new product launches. I'm also pleased with the progress we're making with the new infotainment platform that we are developing.

Turning to page 9, I would like to update you on our approach to the next generation of infotainment which Visteon will debut early next year. Our next generation of infotainment will have several key technology differentiators. First it will be based on HTML 5 technology making it natively web application capable and enabling the development of third-party apps. The built HTML 5 technology capability in-house and are making good progress in developing this critical part of the solution. In addition, this new infotainment platform will provide state-of-the-art cyber security using the emerging J3061 framework and over the error software upgrade capability using technology that’s also develop in-house within Visteon. We believe that this technology will be the most advanced infotainment platform in the industry. There are several benefits to this technology. It provides rapid deployment for OEMs reducing time to market, it provides an opportunity for software developers to develop apps utilizing standard technology and tools. Most importantly it provides a rich experience for consumers while ensuring the highest levels of cyber security. Markus Schupfner and I are looking forward to speaking about this in more detail at the Citi Technology Conference in September and are excited to demonstrate this capability at the Consumer Electronics show in Las Vegas in January of 2017.

On page 10, we show you our awarded business in more detail. Over the last 12 months since I joined Visteon our backlog has increased by $1.7 billion or 12% keeping us on pace with our goal of double-digit growth for the year. Our backlog which represents cumulative remaining life of program book sales is at level more than five times greater than our 12 month sales, which underscores the health of our business and the effectiveness of our technology to the world's leading automakers. This bodes very well for the future of our business. Our backlog was $15.3 billion at the end of last quarter, it should be noted that they have modified our backlog to reflect a more conservative outlook for revenues beyond 2020. As I mentioned previously, new business wins amounted to $1.6 billion during Q2, exceeding our quarterly sales by $800 million and increasing our backlog to $15.9 billion. Our core product lines of instrument clusters, displays, entry and mid-infotainment and header displays are very competitors and doing well in the market. The strong increase in the backlog is a clear indication of the confidence that customers have in our products and technologies and points to higher sales and market share going forward.

Page 11 summarizes our full-year 2016 outlook, as I've previously discussed, we reaffirming our full-year 2016 guidance ranges for adjusted EBITDA and adjusted free cash flow. Our 2016 guidance is for adjusted EBITDA of $305 million to $335 million. We are also establishing a range for our sales guidance of $3.1 billion to $3.2 billion. With respect to sales, our new business launches will continue to positively impact sales throughout the rest of the year. However, as noted earlier we do see some slightly unfavorable impact on European production volume from Brexit and South America vehicle production volumes remain below our original expectations. With respect to adjusted EBITDA we are pleased with our first half performance and expect continued strong product mix and cost performance going forward. Overall, despite some headwinds our results for the first half of 2016 gives us confidence in our outlook for the remainder of the year.

Turning to page 12, in closing, I’m pleased with our achievements during the first half of 2016. We continue to deliver strong sales and profitability performance in our core cockpit electronics business by delivering technology at our customer's value and focusing on operational and cost discipline we generated strong adjusted EBITDA margins and adjusted free cash flow. We won $2.8 billion in new business increasing our backlog to a very healthy $15.9 billion. We launched 35 new products and are on track for another good year from a new product launch perspective. We are committed to driving shareholder value to new business wins, capital returns and focused mergers and acquisition activity such as the acquisition of AllGo Embedded Systems that we completed just after the quarter end bolstering our multimedia playback and smartphone connectivity software expertise for next-generation infotainment systems. We also reaffirmed our 2016 full-year guidance for adjusted EBITDA and adjusted free cash flow and continued to successfully recruit talented people across all functions to help us achieve our goal of being the world leader in corporate electronics.

And now Bill will walk you through our financial results for the quarter.

Bill Robertson

Thanks Sachin, on slide 14, we present our key financial results for second quarter 2016 versus the comparable period in 2015. As we have explained on prior calls, our financial results are impacted by a number of items that makes year-over-year comparisons difficult. The adjusted financial information presented on this slide excludes these items and represents how we manage the business internally as non-GAAP financial measures, this adjusted financial information is reconciled to US-GAAP financials in the attached appendix on pages 23 to 30. As we have also explained previously, we have reclassified the majority of our climate and interiors businesses as discontinued operations in our financial statements. As a result, our income statement has been adjusted to exclude both climate and interior-specific income and expense. Climate and interior’s net profit has been combined and reflected on one line as discontinued operations. The financials on this slide exclude discontinued operations, with the exception of free cash flow and adjusted free cash flow for consolidated Visteon.

Sales for the second quarter of 2016 were $773 million, $39 million lower than second quarter 2015. The year-over-year decrease largely reflects the sale of the German interiors facility in the fourth quarter of last year as well as slightly lower sales in our core electronics business. Electronic sales decreased by $18 million versus last year as Sachin discussed earlier higher volumes and new business win were more than offset by lower Mazda volumes and softness in Visteon’s China business. Adjusted EBITDA was $77 million in the quarter compared to $60 million for the same period last year. Adjusted EBITDA for electronics was $79 million, $19 million higher from second quarter 2015. The $19 million increase largely reflects favorable business equation including gross margin and SG&A cost savings. Adjusted free cash flow was positive $79 million in the quarter, an increase of $46 million versus the second quarter of 2015. Adjusted free cash flow for electronics in second quarter of 2016 was positive $87 million, $30 million higher than the same period last year.

I will cover each of these metrics in more detail on the following pages. On slide 15, we highlight electronics adjusted EBITDA and adjusted EBITDA margins for the last several quarters. As you can see we have achieved significant improvement in adjusted EBITDA in 2016 with first and second quarter electronics adjusted EBITDA increasing $10 million and $19 million respectively versus the comparable quarters in 2015. The increase largely reflects the benefit of new business win and the impact of cost savings actions. As expected adjusted EBITDA did decrease from the first quarter of this year to the second quarter, a $15 million decrease was in line with our expectations and reflects the seasonality of our operating results and the impact of a few items. These items include a sales decrease quarter over quarter impacting adjusted EBITDA by approximately $6 million, second engineering recoveries were $2 million lower in the quarter versus the first quarter. As we've discussed on previous calls recoveries tend to be highest in the first and fourth quarters of this year. Third our first-quarter adjusted EBITDA benefited from a $3 million warranty recovery that do not reoccur in the second quarter. And lastly we made a one-time $5 million investment in engineering related to the purchase of technology from one of our unconsolidated affiliates.

Despite the quarter over quarter decrease as Sachin said earlier second quarter results were strong and we continued to build upon our solid performance in the first quarter. Adjusted EBITDA as a percent of sales on a year-to-date basis was now 11.1% for electronics compared with 9.2% for the same period last year. Moving to slide 16, electronic sales for the second quarter of 2016 were $762 million. Adjusted EBITDA for electronics was $79 million. Sales decreased versus 2015 by $18 million as higher volume and new business wins were more than offset by lower Mazda volumes, softness in Visteon’s China business and customary price productivity given to customers. The currency impact on sales was slightly positive for the quarter as the favorable impact of the euro was partially offset by the Chinese yuan. Adjusted EBITDA increased $19 million in the second quarter versus 2015. Volume including new business was positive, while most of the year-over-year increase is was driven by favorable business equation of $18 million. The business equation includes net cost efficiencies impacting both gross margin and SG&A. Net cost efficiencies impacting gross margins included non-recurrence of a significant warranty charge in the second quarter of 2015 as well as material and manufacturing cost savings net of price productivity to our customers.

SG&A cost performance continues to be positive year over year and adjusted SG&A as a percent of sales continues to improve. Electronics adjusted SG&A for the quarter was $50 million or 6.5% of electronics sales, down from 7.1% of sales in the same period last year. We continue to focus on achieving our forecasted SG&A reductions in 2016. On slide 17, we take a look at cash flow. Total adjusted free cash flow was positive $79 million in the second quarter compared to $33 million in the second quarter of last year. On this slide, we have separated the electronics cash flows from the cash flows related to other operations and our discontinued operations. Our core electronics adjusted free cash generated positive $87 million in the quarter, $30 million higher than second quarter last year. As I pointed out on our last quarterly call, our free cash flow is seasonal, the first-quarter is typically a fast quarter for free cash flow generation with the second and fourth quarters contributing most of the free cash flow in the year. We continue to project that our 2016 full-year adjusted free cash flow will be in line with our guidance of $110 million to $150 million.

Cash and short-term investments at the end of the quarter were $852 million and debt was $372 million. We have a very strong capital structure with a net cash position and debt to EBITDA of 1.2 times. Turning to the slide 18, as Sachin said earlier we are reaffirming our full year 2016 financial guidance for adjusted EBITDA and adjusted free cash flow and establishing a range for our sales guidance. For the full year we are projecting sales of $3.1 billion to $3.2 billion, adjusted EBITDA of $305 million to $335 million and adjusted free cash flow of $110 million to $150 million. These amounts relate to our electronics operations only and exclude our other operations as well as our discontinued operations.

Now let me turn it back to Sachin for some closing comments.

Sachin Lawande

Thanks Bill, moving to slide 19, in closing I want to reiterate that we are very pleased with our performance in the second quarter. We delivered strong adjusted EBITDA with 10.4% margin, a 270 basis points increase versus the same period last year. We also won $1.6 billion in lifetime revenue during the quarter, a record high for our electronics business. Our backlog now stands at $15.9 billion or than five times our annual sales. Visteon has been has been committed to driving shareholder value and that focus will continue in the years to come. I'm really proud of the work that everyone at Visteon has done during the quarter to generate strong results and I'm confident that we have the right team in place to execute our strategy. As a significant long-term opportunity for our employees, customers and shareholders, as we continue to drive strong growth by investing in our core products and by continuing to expand our customer and geographical footprint.

Thanks for joining us today, now I would like to open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt Stover with SIG. Please go ahead.

Matt Stover

There is two things, one just on clarification, one-time investment expense on the technology purchase of $5 million versus 1Q, I presume that the negative year over your variance and that was just one time 2Q period expense as opposed to something that would persist for the balance of the year?

Sachin Lawande

Good morning Matt, it is a one-time negative expense and this was related to a technology that we acquired to help us in execution of a program that we won this year. It is an infotainment program.

Matt Stover

And then the second question is on the backlog, I mean it was just a so nice improvement and it looks as though you had a very strong bias in instrument clusters and Sachin, I'm just wondering if you could kind of give us a sense of how you feel about the profitability of the instrument cluster as we kind of transition to new reconfigurable clusters, is this a business that has similar better profitability to other elements of the infotainment package?

Sachin Lawande

What I would say is, first of all we are extremely pleased with our new business wins in this quarter and overall year-to-date. I think slide number 7, we show you our very nice development and I would say that we performed well across all of our strong product categories which include instrument clusters, infotainment, audio display [indiscernible]. But particularly with infotainment, we really exceeded, sorry not infotainment, instrument clusters we exceeded our expectations in that product segment. We seem to be in a really good position on a technology and capability point of view there. Across the board of all of our wins, overall our margins in the backlog is showing improvement over our current margins, so we are also pretty pleased about the quality of the business that we are winning.

Operator

Your next question comes from the line of Tavis McCourt with Raymond James. Please go ahead.

Tavis McCourt

A couple of questions, first on a follow up to that one Sachin, if we compare kind of the current business to what's represented in the backlog obviously instrument clusters are heavy in the backlog, it look like there is less display business as a percentage of the mix of the backlog as your current business. And I'm just wondering is there anything unique happening in that business with your competitors, or is it getting price aggressive or would you expect that to normalize over the couple of years? Sorry Sachin, but just to get my last question out, kind of an update on China, I think on the last call you talked about a lot of strength in China on the guidance this year, I noticed that the income from interest in JV, it looks like it’s a little lower now so maybe just an update on what you're seeing out of the China JV.

Sachin Lawande

To address the first question, I think we will see a normalization of various product categories as we go forward here. We did well as I mentioned on - across all of our key product segments, but for the first half of the year there were some fairly large cluster programs that skewed our wins more in favor of that part of category. As we go forward as we look into Q3 and Q4 the significant infotainment and domain controller opportunities that we are pursuing that should - and also display that should normalize that the balance of the various products categories. With respect to China, China - we are focused on that and this is a very important market for us, we have excellent position in that market with joint ventures with some of the key players. We also had 25 new product launches in the first half of this year, so clearly from an execution viewpoint we are doing all the right things. And we saw the benefit of the new product launches as well. On the flip side, we did see a negative impact on account of the product mix which has shifted from sedans to SUVs and we saw that impact even in Q1 but I believe it was more pronounced in Q2 and I expect that to continue into Q3 before recovering in Q4 as our customers are launching their own SUVs with our content in it. So, the shift has been going on for some time as you are aware, SUVs now constitute about 35% of the market and the initial market activities in the SUV area where essentially done by companies domestic Chinese OEMs not as much of a joint ventures that is changing their shifting and that is going to be favorable for us. We also believe as the new product launches start to ramp up, we will have a positive impact in the second half and I'm confident that for the year, we will still perform much better than the underlying production volume growth in China.

Tavis McCourt

Thanks. And if I could ask a follow-up, strategic, a lot of the business that you will be pitching from the, especially the infotainment stuff, it becomes a lot more software intensive than kind of Visteon’s historical electronics business and I'm wondering if you could talk about kind of your current software engineering scale and capabilities versus what you’re choosing to outsource on a development basis today and how you think that might need to change over time, if at all? Thanks.

Sachin Lawande

Yes. Sure. I would also just mention that in our new business wins, we won five awards year-to-date related to infotainment and you’re absolutely right that infotainment represents a much more software heavy domain than the other product categories, although I should say that the clusters are also becoming more multifunction and more software than many people realize. But focusing on infotainment, we have been tooling up our capabilities on the software side. We have, across the company, about half of our engineers, about 2000 of them are software engineers, a lot of people perhaps don't recognize that yet at Visteon. And we are, especially in Asia, very strong with our software capabilities.

So I’m pretty confident that we can execute and execute well, especially in the entry and mid-infotainment segments and the acquisition of AllGo, which we just closed in July, I should also mention that this is what gives us more of an edge than many of the established players in infotainment, who rely on outside help for that, what AllGo provides especially in the area of multimedia, software and in our smartphone connectivity are critical technologies for future success. So this makes our position in entry and mid really, really strong and the work that we're doing in developing the next gen platform will enable us to be stronger in the mid to high segment of infotainment. So I think overall, we’re doing the things that will position us very well as we go forward here.

Tavis McCourt

Great, thanks very much.

Operator

Your next question comes from the line of David Lim with Wells Fargo Securities. Please go ahead.

David Lim

Hi, good morning, everyone. So Sachin, just wanted to ask you on the infotainment side of the business, can you sort of give us an idea of breakdown of like within this quarter's backlog that you won, an idea of the infotainment mix and is it coming from all geographies or is it really focused from a couple of different geographies?

Sachin Lawande

Yes. So I would say if you look at slide 10, the breakdown of the backlog that we have, our new business wins even this year-to-date reflects quite a lot what we show there with a little bit more I would say weighting towards clusters. So we are in the 10% to 15% range of our backlog wins in infotainment and more of the infotainment wins year-to-date has come from Asia. So this is Japan, China, India, where as I mentioned before, we do have more strength in that particular product segment. We are building up our capabilities in Europe and in North America to go after opportunities there, but Europe and North America will be more, I think, will depend more on our ability to launch successfully the new platform that we are talking about. So we're relying on some new capabilities that this market needs more than just what anywhere else, especially with respect to cyber security, over-the-air operating capability as well as bringing in the ability to have third-party apps like no other infotainment system today is capable of.

David Lim

So just to be clear on your new infotainment platform, you haven't been marketing that as of yet, is that correct?

Sachin Lawande

Not yet. Because as you know in this industry, they want to see, and they want to be able to test it before they are willing to really engage with you on any serious discussions and we will only effectively do that beginning of next year after launching it at CES.

David Lim

Got you. I just have two more questions, one of which is, do you feel like a threat that there can be some cannibalization with display audio eating away maybe the mid-infotainment segment? And then, I wanted to get your thoughts on if you're seeing any kind of weakness in Ford production as we exited Q2 and maybe going to early Q3? Thank you.

Sachin Lawande

Sure. With respect to the first question, we do expect that display audio will grow very fast here in the future and we do not, however, think that that will in some way negatively impact the growth of infotainment. What we do see is that display audio will replace some of the higher audio products going forward. As you know, we are extremely well-positioned in the audio segment, and it allows us to transition into the emerging and fast-growing display audio product line very nicely. Also, again as a reminder, the acquisition of AllGo strengthens our hand in the display audio segment tremendously. So that is however not seen to really impact the mid and high infotainment segments which are still growing on account of the increase in take rates that we experienced in those segments.

So overall, I think this represents a tremendous opportunity for the industry and it’s not a zero-sum game, where for display audio to grow, infotainment has to reduce. So that is on that front. Again, we are extremely well-positioned in the entry segment, in the display audio segment. Today, we're not so well-positioned in to mid and high. We recognize that. We recognized that a year ago when I started, and we've put in a very ambitious and very, I think, compelling program to bring us to the forefront of technology leadership in that area. We will talk more about that at next -- in September at the Citi conference in terms of more details on our platform and again, we will launch it at CES.

With respect to Q3, Q4 volumes, as would happen in any quarter, it happened to us this quarter with Malta. There are ups and downs with any one customer in terms of their production volumes. All I want to assure you is that we have factored all those things into our forecast for the rest of the year. So we remain still pretty confident about our ability to achieve the guidance that we have put out and all of the things that Ford and the rest of the market, everything has been factored in. If you look at this very carefully, I am pretty confident that we are in good shape to achieve our guidance.

David Lim

Great, thank you so much.

Operator

Your next question comes from the line of Colin Langan with UBS. Please go ahead.

Eddie Hsieh

Yes. This is Eddie Hsieh on for Colin. Thanks for taking my question. Can you give us any color or update on SmartCore, I believe you mentioned last quarter that you’re in advanced stages of discussions with a couple of OEMs?

Sachin Lawande

Yes. So what I would say is that SmartCore, by the way, represents a broader trend, which is also known as the domain controller approach to aggregating multiple functions into a single ECU versus a fragmented multi-ECU approach that the industry has taken today. This concept is really starting to pick up steam in terms of its acceptance by OEMs, not just in cockpit electronics, but also in other parts of automotive electronics. At the same time, we should recognize that this represents a fairly big change to the current ways of operating for the industry, which means that it’s going to take a certain amount of time for OEMs to transition to this approach.

The value, the compelling value proposition is absolutely clear. In the first half of this year, in all our discussions that I was personally involved in many of the discussions with OEMs, in every single one of them, the question about SmartCore and the discussion around it does mean that once there is a lot of interest, number two, they recognize Visteon’s leadership in this emerging area of the future. This is extremely good for us, as I mentioned on the last call, we are having multiple discussions with several OEMs, they are continuing to progress well and I’m hopeful that in second half that we will be able to share with you some positive news in that regard.

Eddie Hsieh

Okay. And another question regarding your AllGo acquisition, presumably, the acquisition will help you control your software development costs, so do you think you can accelerate your timing to reaching your 12% margin target or do you think there is maybe upside to this target?

Sachin Lawande

That's a good question there. So first of all, you're absolutely right, it will help us control our development costs, that's one of the reasons why we have done this acquisition. At the same time, what I will say is that we plan to stick to our current guided time horizon for achieving the targets that we have set for ourselves. And the thing I would like to further provide some further clarification to that is, look, we are extremely happy with the product portfolio that we have. We will continue to look at opportunities to bolster those products in terms of specific technologies that positions us even more competitively in the industry. We are also looking at adjacencies. We are in a good position in our core cockpit electronics products and we are starting to look at ADAS. So when I consider everything and the new business wins, which does recognize the need more engineering investment as well, considering all of that, I believe we are in a very good position when we say that we will achieve our targeted EBITDA margin levels in the timeframe that we have been discussing.

Eddie Hsieh

Okay, great. Thanks for the color.

Operator

Your next question comes from the line of Brian Johnson with Barclays. Please go ahead.

Steven Hempel

Yeah. Good morning. This is actually Steven Hempel on for Brian Johnson. Just had a few questions here. I wanted to drill down on the next-generation infotainment platform here, it doesn't sound like that's in the backlog yet, but I guess what year would you expect that to potentially be helping the backlog? And then also, I understand it's a little early to potentially tell, but just wondering rough range of ASPs for this type of product, and also the associated profitability. And then lastly, just in terms of the technology, what's the kind of key differentiators from the current product offering from key competitors?

Sachin Lawande

Yes. I think I will start with the last part of your question first. I think it is really important to understand what the true differentiators are. I know that everybody in this industry says more or less the same things. So it’s important to be able to differentiate and see why we are truly excited and we believe we have a true differentiator on our hands. We talked about HTML5 as one of the key differentiators. Yes, it is true that many people will think that they have HTML5 today, but that's not where we are stopping. Our entire platform is built on HTML5, that's the one technology that’s driving the whole user experience and the applications that are developed for the platform. Many of the systems that claim HTML5 today have HTML5, doing only a small portion of the functionality. What it doesn't allow as a result is for third parties, developers to develop apps for the platform. The big insight is that we are developing an infotainment platform that is designed for developers in mind, not just the end customer. That means that developers would be able to create apps much more easily to this platform than ever before, without needing to know anything about how the infotainment system was built.

Today, across the board, with no exception, the only people who can't write apps to infotainment platforms are the same people who develop that infotainment system that is a very small group of people typically and cannot be expanded easily. So that's a huge differentiator. So quick deployment of very easy apps development and deployment. Plus the moment you bring HTML5 in, I call it, it is natively web application ready. There is no other technology today in the world that is natively designed to be web ready. HTML5 is and that is the reason why we have done that. Why is it so difficult, why cannot others simply copy what we are doing? The reason for that is you need deep HTML5 capabilities that are not easy to find. You need to have in your team the ability to develop browser technology, which, as you might know is extremely difficult and challenging.

We have been very lucky to bring on board some of the top browser technology experts in the world in Visteon and that’s what is giving us confidence that we can deliver this solution in the timeframe that we have put out. On top of that, we are adding cyber security from the bottom up, again cyber security is something that others will blame that they also do, but they are doing it more as a batch versus we are doing it from the ground up. This is what has taken the year that we are doing it to build, we want to do it right. And when we are going to launch it, I can assure you that we will be the only ones who have a completely new solution that addresses all the key points. So that's why, first of all, why we are so excited about what we have here. Talking about ASPs and margins, I don't expect it to be fundamentally different than the infotainment business that you know so well today. So I don't think I need to go into the specifics of that, you know what the business looks like. This will be very similar to that in the mid-to high range of infotainment.

Steven Hempel

Okay. And then any idea of when you would expect that to start hitting the backlog?

Sachin Lawande

I would expect it to start in 2017, so next year onwards.

Steven Hempel

In terms of national revenues hitting the top line revenues in 2017?

Sachin Lawande

No, no. Backlog, sorry. So, and as you know, lead times in this industry are anywhere between 2 to 3 years from the point of winning business. So depending upon again region which part of the world, et cetera, but 2 to 3 years from the point of winning business, we should start to expect to win business in 2017.

Steven Hempel

Got you. Okay. And then it looks like overall new program launches for fiscal year 16 was raised from 61 to 63. It looks like though Europe was reduced to 7 from 9 and Asia was up to 47 from 43. Just wondering if you could provide any color on the potential delays or cancellations in Europe, the reason for the decrease there and then also any color on the increase in Asia?

Sachin Lawande

Yes. So there was a few, a couple of products that were just delayed. There is no real cancellation that we have seen. So nothing out of the ordinary, by the way this type of shifting of program launches happens pretty regularly. So I would not necessarily read anything more into that.

Steven Hempel

Okay. And then just one follow-up on Matt’s question, in terms of the instrument cluster new business wins, was there any portion there that was reconfigurable?

Sachin Lawande

Quite a bit, yes, in fact. So we can say most of the business was in the mid and the high end of instrument clusters and with more activity happening on the high end, which is mainly reconfigurable. What we do see happening is, in post 2018 timeframe, we're starting to see in the market a much more higher percentage, a very significant shift occurring from the current hybrid approaches to fully configurable approach and I think depositions with our capabilities, especially in 3D graphics and the technologies related to that, we are in a great position to take advantage of this transition in the marketplace and I believe what you have seen in our new business wins year-to-date reflects exactly this transition that’s occurring and our position in the segment.

Steven Hempel

Okay. And if I could just squeeze in one more, in terms of the, you call that a sales decrease for certain non-core cockpit electronics products, just wondering what some of the color on one of these products were, how long you expect that to be a headwind and rough quantification for 2Q16?

Sachin Lawande

Yes. So the non-core products, one example of product could be a body control module, a BCM, as it’s sometimes referred to, we will always have a certain percentage of our revenue that’s non-core. Right. That is just opportunistic business that we do. There is not the focus here and these things will tail off over a fairly long period in time. By that I mean in the next 2 to 3 years. So that's all there is to say about there.

Steven Hempel

Okay, great. Thanks for taking my questions.

Operator

Your next question comes from the line of Itay Michaeli with Citi. Please go ahead.

Justin Barell

Great. Hey, this is Justin on for Itay. How are you guys? So, real quick, so on this 18 million that you guys recognize from business equation, can you give us a little bit of color I guess on the go forward basis how we should expect that to play out through the remainder of the year? And then maybe a quick follow-up on that, kind of touching back onto the cluster portion of it, you did mention the mid-to high-end with regards to reconfigurable in the 2018 plus timeline. Is there any particular region that you're really seeing like an increased adoption for those reconfigurable or full digital clusters versus the hybrid and obviously numbers in the analog, is it more developed or more emerging, what’s your view on that?

Sachin Lawande

Sure. I’ll answer the second part of your question first, and then I will transition it over to Bill Robertson, our interim CFO, to answer the first part of your question. So with respect to the reconfigurable clusters, we're starting to see a fairly significant activity in Western Europe. That region seems to lead the world right now in the transition and we are also seeing very, very quick adoption starting to happen in Asia. So if you were to ask me exactly the sequence, I would say, Europe, Asia, and perhaps then followed by North America. We have seen activity in North America as well, just not to the extent that other regions of the world are seeing.

Bill Robertson

Sure. And just following up on your question, Justin, about the business equation. If you look at slide 16, we do show $18 million or above positive good news in the business equation, it is distributed between both gross margin and SG&A. We have $11 million in gross margin and SG&A. Included in that gross margin good news, there is a non-recurrence of some warranty charges that we incurred in the second quarter of last year, so that explains a piece of it. That good news was partially offset by the investment in technology that Sachin talked earlier, so the net of those two items is probably $4 million or $5 million.

On top of that, we did see positive cost efficiencies, net of pricing, which delivered good news, adjusted EBITDA to the bottom line. A lot of that material and manufacturing cost savings will continue into the back of this year, but obviously the one-time items won’t. On the SG&A front, our SG&A peaked up a little bit in the second quarter of last year, so it's been pretty consistent through the first and second quarter of this year and we did see $7 million of a good news year-over-year related to just cost efficiency actions, and we expect that our SG&A will remain pretty stable going forward, and we are making good progress toward the SG&A targets that we have outlined previously.

Justin Barell

Perfect, very helpful. And then I guess so, Sachin, just one quick follow-up on the cluster comment with regards to the adoption occurrence and kind of the regional deployment. When you are thinking about this from a standpoint of optionality, are you typically seeing this being deployed on the more luxury vehicles or are you kind of seeing a fairly blended mix, I guess kind of trying to go to that standard versus optional play on this technology with regards to production?

Sachin Lawande

Yes. So it used to be the case that the fully reconfigurable were largely limited to the upper trims. What we're starting to see, and this is the transition point that I've been talking about 2018 and thereafter is that this is starting to appear in the lower segments as most standard options. So, along with that, the prices are also coming down, the cost of the components that make up the systems are also helping us bring this technology into more of the lower levels and also on standard equipment. So we're starting to see the transition occur as we speak, and I expect that to accelerate as we go forward.

Justin Barell

Perfect, that's very helpful. Thank you guys so much.

Sachin Lawande

Thank you.

Operator

Your next question comes from the line of David Leiker with Baird. Please go ahead.

David Leiker

Good morning, everyone. As we look, you were talking earlier about the backlog and what that's looking like for launches this year. If we look at that out for 2018 and ‘19, and you look at the pace of what you are expecting those launches to be, is there any movement in those numbers at all of either being pulled forward or pushed out a little bit or maybe scaled up because takes rates are expected to be higher?

Sachin Lawande

So, what we are seeing, David, is that there is a lot of activity in Asia that is the lead times of those programs tend to be shorter. We are not seeing much shift in the lead times with respect to programs in Europe or North America. But there seems to be a acceleration of bringing this cockpit technology into vehicles in Asia cluster. As you know, there were many OEMs in Asia that did not have these capabilities in their product lines. And that’s starting to become a problem for them competitively and that’s driving and that what I believe is driving the desire to have these technologies come in sooner than say the normal cycle. But outside of that, it is more or less the traditional lead times that we are seeing.

David Leiker

Okay. And then as we look at, I guess, particularly on the infotainment side, there are a lot of different players there, everybody is expecting some attrition there, for the fall out of that space. As you look at the quoting activity at the RFQs, are you seeing any of that happen where some of these players might be smaller, having won things in a while or just not participating any more, has that not happened yet?

Sachin Lawande

We are starting to see discussions around that. It's not yet settled, hence that we are not completely out of the game, but we're starting to see certain suppliers, I wouldn't take any names here, but there are players that used to be much more prominent in quoting activity in Europe, for example, in the past that are slowly starting to become less and less competitive and we see less and less of those players in the bids. I certainly expect to see that continue as we go forward as the software aspect of things just starts to make it challenging for players who are not well equipped to respond to that.

David Leiker

Okay. Thank you. And then just one last item here as it relates to AllGo and this is something honestly I probably should know. So you’ve mentioned a couple of times how from a competitive perspective this is a significant, present a significant advantage for you. Beyond just you owning the asset, what is it that AllGo has and brings to market that is so unique, relative to what other people might have?

Sachin Lawande

Yes. So AllGo has software components that are used across many suppliers, infotainment systems, us included and this happens to be one of the most critical areas of technology as it affects launching the product on time and quality and this is where typically cost overruns occur as well as customer satisfaction impact. Bringing this capability in-house enables us to integrate or I should say pre-integrate the technology in our platforms to reduce the risk of both cost overruns as well as quality issues and allow us to work together with AllGo to scale the resources, so that we are in a position to support our customers better.

As an independent supplier as we can imagine, they would have otherwise done so solely based on their commercial interest. Now, we can do this based on Visteon’s commercial interest and Visteon’s desire to break through in this particular segment. So what effectively we've done with this acquisition is taken the risk out of scaling up and our challenge really here is to win 10, 15 OEM infotainment projects and execute them really well and to be able to do so requires us to have these capabilities in-house and quickly. And this is what one solution of towards that goal and you get these really experienced resources that I've done this kind of stuff for many years that you can then leverage to grow faster than the market.

David Leiker

Great. And then is your intent here to make this a proprietary Visteon technology or share across the industry for it becomes at the back of your standard?

Sachin Lawande

We do intend to share it across the industry. We believe that the more suppliers use AllGo’s technologies, the more robust, the more hardened it gets and that’s a benefit to us as well as to our customers. So there is no desire to just keep it in-house.

David Leiker

Okay, great. Thank you very much.

Bob Krakowiak

Right. We have time for one more question.

Operator

Your final question comes from the line of Patrick Nolan with Deutsche Bank. Please go ahead.

Patrick Nolan

Good morning, everyone. Thanks for sneaking me in. Two questions on the backlog. Thanks for the color on the cluster business as far as the change in the mix of that business. Can you maybe expand on the cluster side, what you’re seeing as far as share shifts there, are you taking share in that business by your best estimate in the backlog and is that a function of the three biggest players in that market, just getting bigger at the expense of the smaller players?

Sachin Lawande

Very good question. Let me try to address it this way. So, if you look at our performance over the last 12 months, our backlog grew by 12% over that period. And if you were to focus just on the clusters, we grew even faster percent wise in clusters. So clearly, the industry isn’t growing at close to that rate. So we are taking market share. We are seeing real market share gains across the competitors that are very well established. We're not seeing a lot of small players really active in this space anymore. Their technology, as that shifts towards more and more all-digital fully reconfigurable clusters, it is taking out a lot of the players that were essentially supplying meter based products. And so the market in short, in clusters, is consolidating and I believe we are taking market share. We are gaining market share and I will update you as we do every year at the Deutsche Bank conference on the share details.

Patrick Nolan

Got it. Thank you very much. And just lastly, on the display part of the backlog, are we seeing the same similar shift in mix towards the mid and the high end?

Sachin Lawande

So in displays, what's happening is, this is a big trend towards making the displays from a look and feel viewpoint, much better than the poke through displays that many of the systems have today. So, it calls for more technology and the front of the LCD panel in terms of having better vessels, seamless, sort of all dark, normally black, it's called display with much better reflectivity, much better viewing angle and as the displays get better, there is a particular focus on how they appear design wise inside the cabin. So we're starting to see that shift occur more at the higher end as you'd expect, where larger displays are being used and we expect that to trickle down into the mid-portion of the market as well, simply because of the competitive pressures that that will generate with this technology entering into the high and wanting to then bring it down into the mid-range of the market.

Patrick Nolan

It's very helpful. Thank you very much.

Bob Krakowiak

Thank you very much, Sachin and Bill. I would like to thank everyone for their participation in today's call. If you have any additional questions, please feel free to contact me at your convenience. This concludes Visteon’s second quarter 2016 earnings call. You may now disconnect.

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