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Visteon Corp  (NASDAQ:VC)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Kristopher Doyle -- Director, Investor Relations

Good morning. I'm Kris Doyle, Director of Investor Relations for Visteon. Welcome to our Earnings Call for the Fourth Quarter and Full Year 2018. Please note, this call is being recorded and all lines have been placed on listen-only mode to prevent background noise.

Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled, Forward-Looking Information for further details. Presentation materials for today's call were posted on the Investors section of Visteon's new website this morning. Please visit investors.visteon.com to download the material, if you have not already done so.

Joining us today are Sachin Lawande, President and Chief Executive Officer; and Christian Garcia, Executive Vice President and Chief Financial Officer. We have scheduled the call for one hour and we'll open the lines for your questions after Sachin's and Christian's remarks. Please limit your questions to one question and one follow-up. Again, thank you for joining us. Now I'll turn the call over to Sachin.

Sachin Lawande -- President and Chief Executive Officer

Thank you, Kris and good morning, everyone. I will start by providing an overview of our 2018 full year results on Page two. On subsequent pages, I will discuss our key achievements in the year and provide a perspective on the outlook for vehicle production for 2019. Christian will then take you through our 2018 financial results in more detail.

2018 was a challenging year due to a weak market, especially in the second half, which reduced vehicle production volume at our customers. Besides the sharp drop in vehicle sales and production in China, our key customers in North America and Europe were impacted by the move away from Sedans in the US and the troubles with diesel and WLTP in Europe.

Despite the challenging market environment, we delivered sales, profitability and free cash flow at the upper end of our latest guidance. Our technology leadership in the cockpit was reinforced with a launch of the first cockpit domain controller in the industry with Daimler in early 2018. We extended our technology portfolio with the introduction of an Android-based infotainment system and a scalable autonomous driving controller designed for Level 2 and higher systems.

The strength of our technology portfolio for the cockpit resulted in $6.9 billion of new business awards for the year, almost equal to prior year. Nearly three-fourths of these awards are for digital cluster and infotainment systems, which together with displays are becoming core products in our more streamlined product portfolio.

We are continuing to diversify our customer base and in 2018, I'm pleased to report that we added five new customers to our portfolio. China continues to be a bright spot for the Company, with sales outperforming the market by 10 percentage points. We launched 34 new products in China in 2018 which will help maintain our growth in that market in the coming quarters. We also won a record $2 billion in new business awards compared with $1.1 billion in 2017, returning capital back to shareholders is a key part of our capital deployment strategy.

In 2018, we repurchased $300 million of shares with authorization to repurchase another $400 million still remaining. The Company now has returned over $4 billion to shareholders since 2012. Our balance sheet remains strong with cash of $467 million and debt of $405 million. In summary, we made significant strides in the transformation of the business in 2018 and while the near-term market environment is soft, the long-term fundamentals for the business remain intact.

Turning to Page three. On Page three, we summarized our full year 2018 financial results. Our full year 2018 sales were $2.984 billion, which is down 5% year-over-year. The main driver of this decline is the lower production volume at Visteon customers which was partially offset by new product launches. Revenue from new product launches increased in 2018 and offset the phaseout of older products. Adjusted EBITDA for the full year came in at $330 million at an 11.1% margin, down 70 basis points year-over-year.

This decline was mainly due to lower sales and pricing partially offset by cost efficiencies. We reduced our fixed cost in 2018 in response to the near-term market headwinds, while maintaining our focus on customer programs which increased in number by 24% over the prior year, pointing to future revenue growth. Adjusted free cash flow was $107 million for the full year, down $39 million year-over-year due to lower profits.

In summary, Visteon's sales in 2018 were lower than the prior year largely due to lower vehicle production at customers. On a positive note, the conversion of order backlog to revenue is increasing each year and in 2018, it was able to offset the phaseout of older products. And our focus on operations and cost control is enabling us to execute more customer programs by limiting the impact on near-term profitability.

Moving to Page four. The vehicle cockpit is evolving at a rapid pace from a technology perspective as consumers are expecting similar digital capabilities and experiences from cockpit electronics as with their smartphones and tablets. Large displays with rich graphics, over-the-air software update capability and cloud-enabled apps are the new competitive battleground for car manufacturers. This trend is not impacted by the market slowdown as car manufacturers are forced to upgrade the cockpit to compete with rapidly evolving consumer devices.

The more immediate impact of this trend has been the conversion of the cockpit into a multi-display digital and connected environment. The instrument cluster is evolving from gauges and LEDs to a digital display-based system. Infotainment systems which used to be closed and proprietary are now connected at platforms even at the entry-level. Digital displays in the cockpit are growing, both in number as well as in size and the form factor is evolving into curved and non-rectangular shapes to fit with the design of the interior of the vehicles.

These trends are impacting the industry now and car manufacturers are looking for suppliers to provide these advanced solutions. Looking ahead, the emergence of artificial intelligence-based smart assistance coupled with higher levels of automated driving will enable the cockpit to effectively become a smart assistant on wheels. Early implementations of AI in the cockpit in China are already launched in the market and are indicative of the future of the cockpit. Visteon has been evolving our technology portfolio over the past three years to address this cockpit electronics trends.

Our digital cluster, displays and infotainment solutions are already performing well in the market. In 2018, we made further progress on our technology vision for the Company. We introduced the first cockpit domain controller solution in the industry with Daimler. We also introduced an Android-based infotainment system and an autonomous driving controller for Level 2 plus systems.

And at the CES Show in Las Vegas last month, we introduced two AI-based solutions for conversational voice assistant and driver monitoring applications as well as advanced multi-display system with sensor integration. Our technology portfolio has never been stronger with innovative technology platforms for rapid development of integrated digital cockpit systems. We are confident that our technology portfolio will continue to position Visteon as a leader in cockpit electronics technology help drive new business wins in the future.

Turning to Page five. As I mentioned on the previous page, our strategy has been to address the key trends impacting the automotive cockpit with innovative technology solutions. This has resulted in significant growth in new business wins in recent years, and 2018 was another strong year as well. We won $6.9 billion in new business similar to our performance in 2017. Our wins in the digital cluster and infotainment segments have grown each successive year and in 2018, these two products represented about three-fourths of the total new business.

With $2.8 billion in new business awards in digital clusters, which was up 18% over the prior year and almost doubled the value of wins in 2016, Visteon is the clear market leader in this segment. In Audio infotainment we won $2.3 billion in new business in 2018, an increase of 55% year-over-year. Our recently launched Android-based infotainment system together with the Linux and HTML5 based solution enables us to address more customers for display audio systems.

About a $1 billion of the digital cluster and infotainment business in 2018 was for cockpit domain controllers powered by our SmartCore technology. Six car manufacturers now use SmartCore technology which makes it the leading cockpit domain controller solution in the industry. The majority of the new business awards in 2018 were corporates wins and mostly at-large auto OEMs as indicated on the chart at the right of the page.

I should note that many of these OEMs were historically not large customers for Visteon such as VW, GM, Geely and Hyundai. We also added five new OEMs to our customer portfolio in the year, further diversifying our customer base and offering potential for future expansion of business with this new customers.

Our order backlog at the end of 2018 is much more balanced across OEMs and regions as a result. I'm pleased that we were able to repeat our performance in new business wins in 2018, following up on a strong 2017. The strength and competitiveness of our technology portfolio is enabling us to expand our business, achieve more balance across car manufacturers and regions.

Moving to Page six. In the fourth quarter, we won approximately $1.5 billion in new business. On this page I would like to highlight three of the most significant wins in the quarter. In North America, our cluster business has historically been concentrated with a few OEMs such as Ford and Honda. We have been working on diversifying our customer base in North America with more emphasis on SUVs and trucks.

We are pleased to report that in the fourth quarter, we won digital cluster business with another leading OEM in North America for their SUV and truck models with initial launch in 2021. This is a large award with further potential for growth through increased installation rates. The second win featured here is also for a digital cluster system for a leading Japanese carmaker.

The system is planned for launch in 2020 on multiple vehicles, including EVs. This is the first cockpit electronics business we have won with this OEM and we are very excited about this breakthrough as a potential for future growth is significant with this customer. These wins highlight the competitiveness of our digital cluster technology and our platform-based approach for rapid product development.

The third win on this page is for a SmartCore based cockpit domain controller system for an automaker in India. India is a 3.5 million unit market for passenger vehicles and is one of the fastest-growing emerging markets for cars. Cockpit electronics in that market are evolving rapidly in line with global market trends that we discussed earlier. We have seen similar developments in other emerging markets with respect to cockpit trends, most notably in Brazil.

The SmartCore-based system will integrate digital cluster and Android-based infotainment in a single ECU and will drive two separate displays, a 10-inch cluster display and a separate 10-inch center information display. It offers built-in connectivity to the Internet for over-the-air-software updates and apps. This system will initially launch on two vehicles starting in 2020 and on additional vehicles, thereafter. This is our second SmartCore business in India, with the first system launching with another OEM this year.

Turning to Page seven. 2018 was the first time in many years that the auto market in China contracted after several years of growth. The drop in sales and production was also steep, with the fourth quarter down by mid-teen percentage levels for both. For the full year, vehicle production in China was down about 4% for passenger vehicles. The one bright spot was the performance of electric vehicles which grew 80% year-over-year and crossed the 1 million mark in production for the first time. Despite the significant weakness in the market, Visteon sales grew 6% for the full year, outperforming the market by 10 percentage points.

The main driver of this outperformance was the high number of new product launches. We launched 34 new products in China in 2018 and together with the new products launched toward the end of 2017, they were able to offset the drop in vehicle production. We also won a record $2 billion in new business, almost double compared with the prior year, three-fourths of the wins were for digital clusters and infotainment, in line with the rest of the world.

Digital clusters are replacing traditional clusters even faster in China then elsewhere in the world. And traditional infotainment systems with embedded native apps are out replaced by connected systems that are integrated with the Internet ecosystems that are unique to China such as Alibaba and Tencent. We have built strong partnerships with both these Companies and have integrated desktop resolutions on our platforms.

The chart on the right of the page provides a breakdown of 2018 new business wins by customer. Our wins were very well balanced across domestic and international OEMs and I'm particularly pleased to note that we added four new customers in China, including Toyota, Great Wall and GAC. Almost half of the business awards are for electric vehicles which positions us well in this fast-growing segment.

In addition to digital clusters and infotainment, our SmartCore technology also did very well in China, winning about $600 million of new business in the year. Overall, I'm very pleased that we continue to outperform the market in China in sales and we finished the year with a strong book of business to drive continued growth in that market.

Moving to Page eight. On this page, I would like to discuss our outlook for vehicle production for 2019. The numbers shown on this page for vehicle production forecasts are for Visteon customers in the regions and our revenue weighted to adjust for our business with these customers. Starting with North America, vehicle sales in the US appear to have plateaued and 2019 sales are expected to be below last year's level. Vehicle production at our customers is expected to be down by about 3% compared with 2018. The first quarter will be more challenging in terms of year-over-year comparison due to the end of production of sedans at Ford last year.

In Western Europe, the slowdown in sales have started toward the end of 2018 is expected to continue into 2019. The shift away from diesel will continue to impact sales as some key Visteon customers this year. In addition, the second phase of WLTP is expected to impact some European automakers in 2019 as well, although lower than that in 2018. We expect production volume at Visteon customers in Europe to be down by about 3% as a result. This forecast excludes any impact from Brexit, which may introduce additional downside risk.

Now turning to China, we expect the first quarter to be down similar to fourth quarter of 2018 in terms of sales and vehicle production, where both were down by mid-teen percentage points. Consumer sentiment continues to be weak due to the macro environment and inventory remains at higher than ideal level.

For the full year, we expect vehicle production in China to be down by about 4% over last year. In summary, we expect that 2019 will be weaker than 2018 in terms of both sales and production, with the first quarter being impacted most significantly than the rest of the year. We expect vehicle production at Visteon customers to be down in high single-digits for the first quarter and about 3% for the full year.

Moving to Page nine. In summary, 2018 was a challenging year as vehicle production dropped significantly, impacting sales and profitability. Even though 2018 was a transitional year for Visteon, revenue from new product launches exceeded product roll-offs, but not enough to override the production volume decline.

On the operational front, we made significant progress toward our long-term goals. We strengthened our technology portfolio with the introduction of new solutions for the cockpit of the future. We won almost $7 billion in new business, expanding our order book with existing customers, while adding new customers to the portfolio. And we launched 58 new products in 2018, setting the stage for future revenue growth. As we look ahead, 2019 appears to be another challenging year in terms of the macro environment. While this will impact us in the near-term, the long-term fundamentals for the business remain strong. We're looking through the cycle and managing the Company for long-term growth.

This concludes my overview comments. Now Christian will take you through the financial details.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Thank you, Sachin and good morning, everyone. On Page 11, we present our key financial results for 2018 versus the comparable periods in 2017. Sales of approximately $2.98 billion for the full year 2018, decreased $162 million compared to last year, due to lower customer production volumes, impact of pricing net of design changes partially offset by net new launches and favorable impact of currency.

Adjusted EBITDA was $330 million, representing a $40 million decrease from 2017 due to the impact of production volumes and product mix partially offset by continued operating efficiencies across our organization and the impact of currency. Adjusted free cash flow was positive $107 million in 2018 and positive $72 million for the fourth quarter. Q4 cash flows benefited from favorable timing of trade working capital and higher engineering recoveries. I will provide more detail on the following pages.

Turning to Page 12, we provide sales and adjusted EBITDA for the full year 2018 versus 2017. Sales were negatively impacted by the challenging production environment with several key customers underperforming the global market average. However for the full year of 2018, I am happy to share that our product launches exceeded program roll-offs.

Besides the 34 product launches in China as Sachin mentioned, our 2018 new product launches include the industry's first cockpit domain controller with Daimler in select markets which is scheduled to expand over the next several years. We also launched a new display offering with BMW rolling out in the North American market and an infotainment program with smartphone integration with Volkswagen, to name just a few.

Offsetting revenues from new business are roll-offs which come from two areas: programs that have naturally come to the end of their production schedule; and specific actions made by certain OEMs. As an example as we communicated in the first quarter of 2018, we saw reduced revenues as Ford announced exiting the sedan business in North America starting in the second quarter.

In addition, Mazda entered into a tie-up with Toyota, and we started to see the roll-off of our Mazda infotainment program for specific vehicle models. This program will be phased out over a number of years and will be partially offset by our new Mazda business in clusters and displays. We've incorporated the impact of these roll-offs into our 2019 guidance.

Our new product launches were able to fully offset program roll-offs for the full year 2018, a trend we expect to continue in 2019 and beyond, on an annual basis. Pricing reduced sales by $80 million, representing 2.5% of last year's sales, lower than the 3% rate that we have seen historically. In 2019, we expect pricing to revert back to historical levels of about 3%. Our adjusted EBITDA for the year was $330 million and had positive contributions from efficiencies, despite the volume reductions, lower fixed costs and favorable impact from currency movements partially offsetting the flow-through from annual price reductions.

Page 13 provides our cash flow. Full year adjusted free cash flow was $107 million, representing another strong year of free cash flow generation despite a challenging market backdrop in 2018. Adjusted free cash flow for the quarter was positive $72 million which was higher than last year. Despite lower adjusted EBITDA, free cash flow was increased primarily as a result of favorable timing of trade working capital.

In our third quarter call, we mentioned that our inventory levels were elevated due to the declining production environment. I'm happy to say that we were able to reduce inventory levels to be in line with our historical inventory turn rate. The increase in other changes primarily relates to higher recoveries from our engineering activities.

Cash at the end of the quarter was $467 million and debt was $405 million, which continues to put us in a net cash position and a gross debt to last 12 months EBITDA ratio of 1.2 times. We continue to have one of the strongest capital structures in the industry which enables us to compete effectively in a challenging market, while investing in differentiating technologies and returning capital to our shareholders.

Turning to Page 14, I'd like to give you an update of our capital return activities. At the beginning of the year we had $700 million of board authorization. During 2018, we have repurchased 2.8 million shares of stock for $300 million in a combination of open market and accelerated share repurchase programs.

Currently, we have $28.4 million of diluted shares of common stock outstanding, representing a reduction of roughly 10% from the beginning of the year. Even after this return of capital to our shareholders, we still have $400 million remaining of board authorization and we will announce our activities as they are implemented.

Since 2012, Visteon has returned over $4 billion of cash to shareholders, and our actions in 2018 demonstrate our continued commitment to shareholder distributions. I will not be providing details on the progression of our future repurchased actions in this call, but our buyback cadence will be dependent on the visibility we have on the markets we serve.

Turning to Page 15, we discussed last month at the Detroit Auto Show Conferences, how we are leveraging our technology leadership in the cockpit of the future. At these conferences, we provided our 2019 guidance which we are reaffirming today. We are currently projecting sales of $2.9 billion to $3 billion; adjusted EBITDA of $280 million to $310 million, representing an adjusted EBITDA margin of approximately 10%; adjusted free cash flow of $80 million to $100 million.

Let me provide some comments on how we anticipate the year to progress. Overall, we are expecting production volumes of our customers to be down approximately 3% for the full year. In China, we expect a decline of 4% for the industry, but expect to see high single-digit increase in our domestic business driven by product launches.

The first quarter though is expected to be very challenging for the industry. We expect that production volumes for our top customers will be down in the high single-digits on a year-over-year basis for the first quarter with China declining in the mid-teens. Together with a typical pricing impact, we are estimating that our year-over-year sales decline will be in the low double-digits for Q1.

For adjusted EBITDA in addition to the impact of the reduced revenues, our engineering expenses are expected to increase by double-digits on a year-over-year basis in Q1. We anticipate that the growth of our engineering spend will moderate throughout the rest of 2019. This is due to the timing of recoveries as well as the benefit from our restructuring efforts announced last year, both of which will be more significant toward the second half.

For total year 2019, our engineering expense will be up by about 5% to support an increase in the number of customer programs and continued investments in new technologies. We expect to see our revenues, profitability and cash flows improve in the second half of the year as industry challenges abate. We will also see the contribution from our new product launches and increased engineering recoveries as the year progresses.

In summary, despite facing challenging market headwinds, we continue to execute on our long-term strategies. In 2018, we saw increased demand for our next-generation products, including display audio, cockpit domain controllers, all digital clusters and complex displays. This is evidence that the most significant automotive trends are strengthening Visteon's market position over the long-term. Visteon technology platforms which are enabling the cockpit of the future will be the catalyst for our long-term growth and provide continued returns to our shareholders.

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

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Anthony Deem of Longbow.

Anthony Deem -- Longbow Research -- Analyst

Hi, good morning.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Good morning.

Sachin Lawande -- President and Chief Executive Officer

Good morning.

Anthony Deem -- Longbow Research -- Analyst

So a question. Do you see Visteon as a true outlier in the industry? And when it comes to the human-machine interface, your products are really interacting with the driver most, and I know you're working with GAC launching Level 2 system late next year, some Level 4 activity in China with some of your partners. But I'm wondering ultimately, where does Visteon want to fit, DriveCore in this market in terms of partial or full automation, because. And just wondering if you see your products are having an advantage in any particular level, because there just seems to be a growing appetite in Level 2 plus, reduced on Level 4 and clearly there's some systems expertise or product differentiation here that Visteon can probably exploit and ultimately help deliver a greater results for the backlog may be as soon as next year or so. Just kind of wondering if I can get some thoughts there.

Sachin Lawande -- President and Chief Executive Officer

Absolutely. So the way we look at the more automated driving is that, if you look at what has happened in the industry in 2018, there is a better realization of when Level 4 plus, by that I mean, 4 and 5 solutions from a technology viewpoint might be ready for deployment. And that timeline has been pushed out on account of a better understanding of some of the technical challenges.

At the same time, there has been more interest in the industry for what you can call as Level 2 plus systems, which effectively bring the benefits of ADAS from not just at a lower speeds at which they are mostly effective today, to even highway speeds. So our strategy has been to really focus our DriveCore solution on the highway level speeds, bringing the benefits of advanced safety to that application. Now, that means, that we would also be implementing all of the lower speed suburban ADAS capabilities as well.

Now, the way we see this interact with the HMI is that, there is a very close interaction that needs to happen between the more automated driving system and HMI. The HMI of the past really had focused on enabling the driver to understand the vehicle health and the driving dynamics, but now as you bring more of this ADAS and more automated driving capabilities, that HMI has to extend itself and also bring in the outside perspective, like what is happening outside of the vehicle.

So we think with our HMI competence and now getting into this Level 2 plus solutions, we are in a great position to offer a completely integrated experience for the drivers. So we're very positive, very optimistic about what we think would be our opportunities in this more automated driving business over and beyond our traditional HMI business.

Anthony Deem -- Longbow Research -- Analyst

Very good. Thank you. And just my one follow-up for Christian. And I apologize if I missed this, but can you talk about any discrete tax items in the quarter -- effective fourth quarter? Thank you very much.

Christian Garcia -- Executive Vice President and Chief Financial Officer

I'm sorry, Anthony could you repeat that question?

Anthony Deem -- Longbow Research -- Analyst

Yeah. Any discrete tax items in the fourth quarter that you can call out?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Yes. Yeah, we had obviously if you look at our ETR for the quarter, it's about 4%. We had -- favorable audit outcomes and particularly in Asia if you back that out, it would have been in the 20% to 25% as we've guided. And so in 2019, the way we're modeling the business, let's say, an ETR, an effective tax rate in the mid-20s.

Anthony Deem -- Longbow Research -- Analyst

Very good. Thank you.

Operator

Your next question comes from Ryan Brinkman of JPMorgan.

Ryan Brinkman -- JPMorgan -- Analyst

Great. Thanks for taking my question. Can you remind us of your underlying revenue exposure to demand in China? As I think you've talked before to highlight that a portion of your reported revenue in China is actually exported out of that market. And then your new launches allowed you to actually grow pretty nicely in China in 2018. What does the pace of launches look like in 2019 there? Or, I guess that differently how would you rate your ability to outgrow the China market in 2019 versus in 2018?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. So, Ryan in terms of our exposure in China, there really two things happening there. Our total China is about 24% but that has two components to it. One is the domestic business that we serve. The China market that's about 13% and the rest are products that we actually manufacture in China, but exported out of China.

Sachin Lawande -- President and Chief Executive Officer

Yeah. With respect to Ryan, your second part of the question. As we mentioned, we had a very good year in terms of new business wins in China, right. We had total wins of about $2 billion significantly higher than the prior year. And these will -- some of these will be launching in our 2019. So we have a fairly healthy number of new product launches. I would say, at the mid-20s in number in China for '19. So we feel pretty good about how that should impact our revenue and market outperformance.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, thanks. And then just last question. Have you given any thought yet as to how Visteon might be impacted by Section 232 tariffs that they're extended from steel and aluminum to also include autos and auto parts now? How helpful have the automakers been in helping you offset the impact of Section 301? And how completely would you expect them to compensate the supply base for any sort of further inflation in your supply chain from any incremental tariffs?

Sachin Lawande -- President and Chief Executive Officer

Yeah, when you look at 232 from what has been discussed so far, clearly we are still waiting for the details just like everyone else. But from what has been kind of talked about in the media, we believe that our exposure to the vehicles that are imported from Europe to be roundabout 10% of our production in Europe. So overall, that amounts to between I would say, $50 million to $80 million of exposure to us on an annual basis.

It's too early to say how this thing will play out and what that impact exactly might be and how the recovery discussions with the OEMs would progress. We'll keep you all informed as to how that goes in the subsequent quarters. Any additional tariffs are disruptive, we are hoping that it doesn't come through, but we'll see.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, thanks.

Operator

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

Joseph Spak -- RBC Capital Markets -- Analyst

Thanks for taking the question. Just may be to follow up on tariffs, just to be clear what is embedded in terms of 301 for China? Do you have that sort of going back to -- do you have that sort of holiday being extended? Or you're sort of going back to the higher rate?

Sachin Lawande -- President and Chief Executive Officer

Yeah. So our forecast really assumes no further escalation, nor a solution comes off the trade disputes. So it is the current state of the business so to speak. And, Joe we are not really impacted that much by the tariffs on account of how and where we manufacture our products. We do not do any sort of cross shipments across the regions. So, so far we are in a pretty OK shape and if nothing changes there, we shouldn't be impacted by much.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. And then just sticking in China. So Ford is obviously a key customer for you there and the -- has always been a difficult situation over the past year and probably in sort of the first half of this year. Well how are you seeing that sort of play out I guess that in the back half? Are you -- do you anticipate some sort of recovery to that customer? Or are you sort of straight lining the headwinds that you've experienced recently?

Sachin Lawande -- President and Chief Executive Officer

Right, right. And so Ford, as you pointed out, was a much larger customer for us in China in 2018 on account of the reduction that they experienced in their volumes, I would say that they are no longer probably even in the top five. So thinking about the 2019 and how that might impact us, we are not necessarily assuming any recovery on their business in China. We are essentially flat-lining what happened in 2018 into '19. So, if there's any recovery that would be a good upside, but we are not counting on it.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay, that's helpful. Last one and I apologize, if I missed this. But how are you just -- how are you thinking about R&D spend in '19 versus '18? And then if -- even if you could sort of maybe break that down a little bit further like what is really sort of engineering for programs that are launching versus actual sort of true, I guess, research? Because I think I'm going to back to sort of CES, you talked about some initiatives in voice and ASIC and I was wondering if some of those spending dollar -- spending dollars start to kick in in '19?

Sachin Lawande -- President and Chief Executive Officer

Yeah. So, Joe the first thing I would say is that, our engineering costs tend to be a bit lumpy based on the timing of recoveries. And so from a quarter-over-quarter comparison viewpoint, those tend to shift around a bit. The second point is that, our engineering has gone up largely on account of the higher number of customer programs that we are executing. So if you look at when we ended 2017, we had roughly about 160 customer programs in active development. We ended '18 with that number approximating I think, 200. So a significant increase and this is good, because that drives our future revenue.

That's the predominant portion of our engineering expense. R&D -- pure R&D stuff that we talked about at CES for example, I would say is about approximately a point in terms of our total revenues, it's not the significant contributor. The third thing I would mention is that, as we are undertaking a higher number of customer programs, we are also continuously balancing our global footprint of engineering to be more efficient and these things do take some time in terms of being able to execute and see the impact to our financials. So, the actions that we have taken in '18 and are also taking in early '19 will have that impact appear in the second half of '19.

Christian Garcia -- Executive Vice President and Chief Financial Officer

So, Joe if I can add to that. As we pointed out in the auto conferences -- North American Auto Conferences that our engineering spend is going to go up on a year-on-year basis, about 5% to 6%, including all of the things that Sachin has mentioned. However in Q1, it's probably going be in the double-digit kind of growth rate against on a year-on-year basis.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. Thanks for all the color.

Operator

Your next question comes from Colin Langan of UBS.

Colin Langan -- UBS Securities -- Analyst

Great. Thanks for taking my question. It looks like your guidances for China down or some other buyers are indicating that maybe they're seeing clusters are down 8 or 10. Can you give us any like sensitivity if it is coming in down double-digits? How we should think about the downside risk...

Sachin Lawande -- President and Chief Executive Officer

Yeah, yeah. Colin and again, I think what that reflect is really all the uncertainty that we are seeing in China. So you see this forecast that of a little bit all over the place. So our assumptions for China are a double-digit decline in the first quarter, especially as the comps are challenging. First quarter last year was a significantly higher quarter. Our expectation would -- is that from the first quarter onwards, largely on account of more favorable comps, the decline reduces in Q2 and then it's effectively flat for the second half.

If you look at that structure, that amounts to a decline of somewhere around say 3% to 5% in that range. Now we will have to see what transpires. This has been our expectation. But the thing I would like to mention is that, our performance in China is less dependent on the underlying production volume. It is more dependent on our new product launches. So we still continue to expect a better than market performance by a double-digit margin in 2019 as well.

Colin Langan -- UBS Securities -- Analyst

Got it. I mean, but should we think of if market comes down where it's been obviously if you have a big backlog it won't matter like a 20% detrimental? Is that typical for a weakening underlying market or is that too high?

Christian Garcia -- Executive Vice President and Chief Financial Officer

And just wanted to make sure that you were asking for China in specific or just total?

Colin Langan -- UBS Securities -- Analyst

China, specific. Yeah.

Christian Garcia -- Executive Vice President and Chief Financial Officer

That's China. So it should be in the 20% to 25% range that much like what we've experienced last year for the total Company.

Colin Langan -- UBS Securities -- Analyst

Okay. And in the -- looking at Slide five, you have $2.3 billion in audio infotainment backlog. Is there any color on what the net rate are? How much is sort of the traditional audio? How much advanced displays and in particular, how much is the Phoenix part of the business?

Sachin Lawande -- President and Chief Executive Officer

Right, right. So it's virtually all of it is display audio. There's not much of audio in that, if any. So the real reason why we did very well and you see the jump from the prior year, is on account of the success that we've seen with Android-based display audio infotainment. We won several programs, both stand-alone infotainment and also infotainment that is integrated on our SmartCore platform. So had been a good year for us and I think the combination of this Linux and the HTML5 in our Phoenix platform as well as this Android-based infotainment really gives us that breadth of offering and display audio continues to be a big sort of a pull on for infotainment right now that we're seeing.

Colin Langan -- UBS Securities -- Analyst

So where would Phoenix fit in within that bar, will it be within that market or is that on another?

Sachin Lawande -- President and Chief Executive Officer

Within the same bucket. So what we're seeing is some OEMs are asking for a non-Android-based solution. Okay? And that's where the Phoenix HTML5 is being offered. And then there are others that are more comfortable with Android and so we have now the ability to offer both options.

Colin Langan -- UBS Securities -- Analyst

But the majority are coming in with Android?

Sachin Lawande -- President and Chief Executive Officer

That's correct.

Colin Langan -- UBS Securities -- Analyst

All right. Thanks for taking my question.

Operator

(Operator Instructions) Your next question comes from Emmanuel Rosner of Deutsche Bank.

Emmanuel Rosner -- Deutsche Bank Securities -- Analyst

Good morning, everybody.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Good morning.

Emmanuel Rosner -- Deutsche Bank Securities -- Analyst

So my apologies, I joined the call late. So if this -- I apologize if this has been asked before. I'm curious about how you're seeing about the cadence for revenue and margins in 2019. And more specifically, if you're expecting any sort of major differences between the back half and the first half? So on the revenue side, specifically obviously you have a lot of new business launches next year, curious if that will still benefits revenue growth in the back half of this year. And then on the margin side, whether there is any higher exit rate toward the end of the year that would position you well for margin expansion next year?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. So Emmanuel, let me start then may be Sachin would have additional comments. But there are really two drivers for the improved sales picture in the second half. One is the improved volumes on a year-on-year basis, as we provided in our prepared remarks, we estimate that the production volume for our key customers will be down about 3% for the year. However, as we pointed out there is a marked difference between the two halves. We estimate that there the production volumes will decline in the mid single-digits in the first half, while the second half reduction -- volumes will probably register as a slight growth. Again that's a mirror image of what we saw in 2018.

The second component of the improved sales picture is the cadence of our product launches. We have the lowest number of launches in the first quarter and then a steady number for the rest of the year as such the contribution from these new products would become more substantive as the year progresses. On the EBITDA side. So again, the EBITDA would actually move the same way as our sales picture, because of again the improved volumes as well as the product launches. In addition, the improved recoveries from engineering that we always the recoveries being much more weighted toward the second half of the year.

Sachin Lawande -- President and Chief Executive Officer

And the only thing I would add, Christian is that, some of the efficiency actions that we are taking we'll also see more impact on the second half.

Emmanuel Rosner -- Deutsche Bank Securities -- Analyst

So that -- that's great bridge to I guess my follow-up. So when you sort of look at your bridge between 2017 and '18 it is actually impressive, the amount of efficiencies that were sort of unlocked, because obviously your volume mix was a negative contributor and yet on the EBITDA bridge, it's obviously positive, net of efficiencies. So, how should we think about that as we're moving to this year? What kind of contribution can you expect? How much room is there still for efficiencies or is the margins story from here on just really just -- moves to revenue growth and the operational leverage that comes with it?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. Operational leverage is clearly a huge component of our business model. And so in 2019, when you think where the -- how the sales would be impacted as we pointed out in our prepared remarks, pricing will be down about 3% as we talked about. We think that customer volumes will be essentially down about 3% as we said. Currency would also be a little bit of a headwind, not too much. And so the net new business wins will be a huge driver for the rest of the sales picture. And as such when you do the flow-through of that, really it's going to be quite steady and the big difference as we pointed out in the North American Auto Show that we have an increased amount of engineering of 5% to 6%. And that's how we bridge the guidance for 2019.

Emmanuel Rosner -- Deutsche Bank Securities -- Analyst

Perfect. That's very helpful. And then just very finally and again, apologies, if that has been asked. But any updates in terms of customer interest or activity on DriveCore?

Sachin Lawande -- President and Chief Executive Officer

Yeah, that has been quite a bit of engagement that we've had on DriveCore. But the way we are looking at this part of the market is that, we are focused right now on developing DriveCore to offer this highway pilot capabilities as Level 2 plus capabilities that we are working on together with our lead customer. We expect to be in a position to have most of the technology implemented by the end of this 2019 calendar year.

And we are seeing more interest in these types of Level 2 solutions as I mentioned earlier. And so this is something that we are very optimistic about but in reality, I believe most of the opportunities will start to appear more in 2020 timeframe as we are able to demonstrate this functionality that we are currently developing.

Emmanuel Rosner -- Deutsche Bank Securities -- Analyst

Thank you very much.

Kristopher Doyle -- Director, Investor Relations

This concludes our earnings call for fourth quarter and full year 2018. Thank you, everyone for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me directly. Thank you.

Operator

This concludes Visteon's fourth quarter and full year 2018 earnings call. You may now disconnect.

Duration: 55 minutes

Call participants:

Kristopher Doyle -- Director, Investor Relations

Sachin Lawande -- President and Chief Executive Officer

Christian Garcia -- Executive Vice President and Chief Financial Officer

Anthony Deem -- Longbow Research -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Colin Langan -- UBS Securities -- Analyst

Emmanuel Rosner -- Deutsche Bank Securities -- Analyst

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