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Visteon (NASDAQ:VC)
Q1 2019 Earnings Call
April 25, 2019 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Kris Doyle -- Director of Investor Relations

Good morning. I'm Kris Doyle, director of investor relations for Visteon. Welcome to our earnings call for the first quarter of 2019. Please note, this call is being recorded.

[Operator instructions] 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 the Visteon 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. [Operator instructions] 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 first quarter results on Page 2. On subsequent pages, I will discuss our key achievements in the quarter and provide our perspective on the outlook for vehicle production for the remainder of 2019. Christian will then take you through our financial results in more detail.

Vehicle sales and production were down globally in the first quarter. Visteon's first-quarter sales were $737 million, in line with our expectations and below last year by $77 million. Adjusted EBITDA was $41 million or 5.6% of sales and adjusted free cash flow was negative $30 million for the quarter. Our profitability was impacted by three specific items that I will mention briefly here and provide more details in the later pages.

First, we experienced multiple issues in the industrialization and launch of a new curved display module. Second, we incurred higher-than-expected costs in the transfer of our manufacturing plant in Reynosa, Mexico to new facilities. And the third item is the higher engineering costs in the quarter, which are largely due to timing of engineering recoveries that are more back-end loaded this year. I will discuss these items and the timing of the resolution in a couple of pages.

New business wins continue to be strong with $1.4 billion in lifetime sales awarded to Visteon in the quarter. In the first for Visteon, we were selected by U.S. automaker to provide a battery management system of the next generation of electric vehicles. We are optimistic that this product category will become more significant going forward.

We also expanded our business in the commercial truck segment by winning a digital cluster program with the European commercial truck manufacturer, a second customer in this segment of the market. The automotive market in China was very soft in the first quarter, down 13% year-over-year. Visteon, however, was able to outperform the market with sales of $108 million and organic growth of 11 percentage points above the market. China remains a bright spot for the company.

And with 28 new product launches in the past 12 months, we expect to see similar performance going forward. Our balance sheet remains strong with cash of $435 million and debt of $404 million, and we have remaining authorization for share repurchase of $400 million. Looking ahead to the rest of the year, we expect OEM production volumes in North America to stabilize, while Europe will continue to face headwinds due to new emissions testing requirements that go into effect in the third quarter and the continuing decline in demand for diesel-powered vehicles. In China, we expect OEM production volumes will improve on a year-over-year basis, with the full-year decline in the low single-digit percentage.

While the first-quarter performance in terms of profitability is a disappointment on account of the operational challenges, it does not change our view of the fundamentals of the business. Based on the continued strength of our new business wins, our confidence in achieving our long-term growth targets remain unchanged. Turning to Page 3. Visteon had sales of $737 million for the first quarter, down 9% year over year.

This decline is mainly due to the drop in vehicle production at Visteon customers and the impact of pricing and currency. Pricing was in line with historical trends at about 2%, while the impact of currency was about 3%, mainly driven by the euro and the Chinese RMB. In terms of a year-over-year comparison, the first quarter was further impacted by the exit from sedans in North America by Ford in Q2 of last year and the loss of infotainment business at Mazda, which we have discussed previously. The decline was partially offset by the positive contribution of 50 new product launches over the past 12 months, of which nine occurred in the first quarter.

Key product launches include an infotainment system with GM in China for a new high-volume vehicle. This system offers an eight-inch display with embedded navigation and online services. In Europe, we launched a seven-inch, all-digital cluster on PSA's upscale brand, the DS. And in India, we launched a SmartCore system, with dual 10.25-inch displays on the Harrier SUV from Tata Motors, our first SmartCore system in that fast-growing market.

Turning to Page 4. On this page, I will provide more details on the operational challenges in engineering costs that impacted us in the first quarter. The cumulative impact of these special items was $27 million on our margins in the first quarter. As shown at the top of this page, we were impacted by two operational items: Challenges with the launch of a center information display for the European OEM; and the higher-than-expected costs associated with the transfer of our Reynosa manufacturing plant to a new facility.

Combined, these two items had an impact of approximately $10 million. The central information display module includes several features that were relatively new to Visteon into the industry. Two features in particular, proximity sensing using infrared sensors and curved glass cover lens posed several challenges during design and development and later during the manufacturing ramp-up of the system. Additionally, the supplier of the glass cover lens was slow to achieve the level of production throughput required to support customer demand.

These types of challenges are not uncommon in the launch of new products, especially when they incorporate new technologies and capabilities. However, the lack of experience at Visteon in the specific display technologies and manufacturing processes led to delays in addressing the issues in a timely manner. We incurred increased costs due to higher inbound and outbound freight, scrap and engineering and manufacturing overhead to address these issues. The current status is that the design issues with the center information display have been addressed.

We have established a task force to work on manufacturing throughput at our plant and are making steady progress in improving the yield. And we are working with the glass supplier to improve their product quality and throughput. We expect to be able to resolve the throughput issues and reduce the higher freight and other costs associated with this product by the end of the third quarter. We realize that large and curved displays will be an important part of cockpit electronics going forward.

To address the evolving and increasingly complex display technologies, we are forming a new team to be based in Asia. We have already hired a leader from the display industry and expect to have the core team up and running by the end of this year. I'm confident that we will be able to design and manufacture large curved displays in the future without experiencing the kind of challenges we faced with this program. The second issue we faced in operations in the quarter had to do with the relocation of our plant in Reynosa, Mexico to a new state-of-the-art facility.

The transfer was not managed efficiently and resulted in additional costs of about $3 million. There were two main drivers of these inefficiencies: Higher levels of labor and overhead cost; and the poor management of materials that resulted in extra freight and labor costs. We responded quickly when the issues were identified. Fundamentally, this is a case of poor plant shop floor management and we have already replaced the management team at the plant.

Material shortages have been addressed and we are back to normal with respect to freight. The extra labor and overhead has also been addressed. We anticipate the headcount reductions will be completed by the end of the second quarter. At that point, we believe the inefficiencies related to the plant transfer should be resolved.

Unlike the operational challenges that I just mentioned, the engineering costs shown at the bottom of the page were largely anticipated on account of the increase in the number of customer programs, the timing of the recoveries and the lag in seeing the benefit from restructuring actions. In total, these costs amounted to an impact of approximately $17 million in the quarter. Engineering cost recoveries are dependent on completion of program milestones and commercial negotiations with the customers. And this year, they are weighted more toward the end of the year.

The benefits of restructuring in Europe start to become more significant at the second half upon the completion of the typical six-month period of [Inaudible]. As a result, we anticipate our full-year engineering costs to come in line with our expectations of an increase in the mid-single-digit percentage year over year. Visteon has focused on operational execution through our transformation, and we believe the operational challenges that affected our margins in the first quarter should be largely resolved in the second and third quarters. Turning to Page 5.

We are pleased to report another strong quarter for new business wins with $1.4 billion in lifetime sales. Most of these wins, over 70%, are based on our new digital products, including all-digital clusters, SmartCore and displays. We continue to see strong demand for all digital clusters and for cockpit domain controllers. We have been working to expand our business in electric vehicles.

And in the first quarter, about a third of the wins were for EV vehicles, including our first battery management system win. Another win of note is for a digital cluster with a heavy duty commercial truck manufacturer. This is a second customer in the commercial trucks category. Demand for digital cockpit systems is growing in this segment, driven by an increase in digital content, active safety systems similar to present-day vehicles.

We will discuss the key wins in more detail in the next page. As a result of a strong new business wins in the first quarter, we expanded our backlog to $22.1 billion. This is up 10% year over year. Moving to Page 6.

On Page 6, we highlight three key new business wins in the first quarter. The first win highlighted here is for a battery management system for next generation electric vehicles with a U.S. OEM. This BMS system uses wireless communication between cell modules, which reduces weight and the risk of malfunctioning due to wiring-related failures.

This will be a first for the industry. It's also a first win for Visteon in this product category and we hope to build upon it with other customers in the future. We continue to see a lot of interest for cockpit domain controller systems in all markets and the second win on the page is for a SmartCore-based system with an OEM in India. The system integrates digital cluster and Android-based infotainment and drives 2 10.25-inch displays.

It will include built-in connectivity with over-the-air updates and an App Store for third-party software. This is our second customer for SmartCore in India and the sixth customer overall. We continue to lead the industry in the number of car manufacturers and programs for cockpit domain controllers. The third key win is for a 12.3-inch, all-digital cluster with a heavy duty truck manufacturer in Europe to begin production in 2022.

Cockpit electronics for trucks are starting to undergo a similar transformation as passenger vehicles and the leading manufacturers are adopting new technologies such as digital clusters and domain controllers for their next-generation cockpits. We are already working on a SmartCore-based cockpit domain controller for a leading commercial truck manufacturer in Europe and this digital cluster win is with a second manufacturer in the same region. Commercial trucks are a three million units a year market. And with two customers, we are now well positioned to develop our business in this segment of the industry.

Turning to Page 7. Visteon's performance in China continues to be a highlight for the company despite the challenging market environment. Passenger vehicle production volumes in China declined by 13% year over year. As shown on the chart on the right, Visteon's China domestic sales grew 10% year over year in the first quarter.

Excluding the joint venture consolidation, Visteon organic sales were down 2%, outperforming the market by 11 percentage points. The main drivers of this outperformance are the high number of product launches and the increase in take rates for our infotainment products in China. We launched four new products in the quarter and 28 over the past 12 months. Our infotainment systems are also seeing higher take rates, driven by higher consumer demand.

We have a very good consumer mix in China and the consolidation of a joint venture with FAW and the upgrading of our capability in that JV will position it even better with key customers such as VW and Toyota in China. Moving to Page 8. On this page, I would like to discuss our outlook for the rest of 2019 by region in terms of the overall market and Visteon sales. Starting with the Americas, vehicle sales in the U.S.

were weak in the first quarter. Lower consumer demand is likely to make 2019 the first year with fewer than 17 million units in sales since 2014. For Visteon, new product launches are expected to offset the drop in sales due to the lower sedan business with Ford and the drop in revenue with Mazda. In Europe, we are expecting lower production volumes, mainly due to the ongoing shift away from diesel and the new emissions test referred to as RDE that goes into effect in the third quarter.

Visteon sales in Europe will be impacted by the weak market as well as potential restructuring actions at key customers. In Asia, we expect vehicle volumes in China to show some improvement due to the OEM and government incentives starting in the second quarter. Visteon sales during the rest of the year will reflect increased product launches in China, offset with the roll-off of Mazda infotainment business in Japan. Overall, we estimate that the full-year global vehicle production volumes of Visteon's top customers will be down by about 3% year over year, which is in line with our earlier expectations.

Moving to Page 9. On Page 9, I will summarize our results for the first quarter. We delivered $737 million in sales with $41 million of adjusted EBITDA. Our earnings were impacted by specific operational challenges, which I have outlined for you and which we anticipate to be largely resolved during the second and third quarters.

While our engineering costs in the first quarter were impacted by timing of recoveries, our full-year estimate remains in line with our guidance. Our new business wins remained strong as we generated a record backlog on the strength of $1.4 billion in wins in the first quarter. We continue to outperform the market in China, driven by new product launches and our full-year 2019 vehicle production outlook is unchanged from our previous guidance. Visteon's long-term fundamentals remain strong and we continue to operate our business for long-term growth.

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

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 the first quarter of 2019 versus the comparable period in 2018. Sales of $737 million in the first quarter decreased $77 million or 9% compared to last year as new product launches partially offset the impact of lower production volumes, currency and pricing. Excluding the impact of currency, sales would have been down by approximately 6%.

Adjusted EBITDA was $41 million, representing a decrease of $63 million from 2018. Besides the impact of lower revenues, we experienced unfavorable mix, higher engineering expense and operational challenges discussed earlier. Adjusted free cash flow was negative $30 million in 2019, which was lower than last year, primarily related to lower adjusted EBITDA and lower contribution from trade working capital. I will provide more detail on the following pages.

Slide 12 walks our adjusted EBITDA performance year over year. Adjusted EBITDA was negatively impacted by lower production volumes and unfavorable mix away from older but higher margin products, which have been offset by efficiencies. Annual price reductions lowered sales by $19 million or 2.3%, which is at the lower end of our historical rate of between 2% to 3%, while unfavorable currency impacted adjusted EBITDA by $9 million. Higher engineering expense as a result of timing and the operational challenges we faced in the first quarter combined to reduce adjusted EBITDA by $27 million.

As expected, Visteon's net engineering expense increased $17 million, representing a 25% year-over-year increase. Our net engineering expense is comprised of two components; gross engineering and recoveries. These recoveries are customer reimbursements for engineering costs either at the time these costs are incurred or are milestone based. These recoveries are weighted toward the end of the year.

Gross engineering for the quarter was $108 million, representing a $13 million increase year over year, but a $13 million reduction on a sequential basis. Recoveries which are typically lower in the first half of the year were $23 million in the first quarter of 2019. The benefits from restructuring actions we announced in the third quarter of 2018 had minimal impact in the first quarter as we continue to progress through the standard process with the appropriate work councils. We continue to anticipate that for a full-year basis, engineering costs will increase by mid-single-digit percent, in line with our previous guidance.

The operational challenges we experienced in the first quarter impacted the quarter by approximately $10 million. The additional costs incurred due to launch challenges with a curved information display were a result of lower volume shift, increased freight and higher scrap. The inefficiencies related to our plant transfer in Mexico increased costs in the first quarter due to premium freight as a result of material shortages and elevated labor expense for overtime and temporary workers. Of the $10 million impact, launch costs represent a little over two-third of this amount, with the remainder associated with the plant inefficiencies.

Page 13 provides our cash flow. First-quarter adjusted free cash flow was negative $30 million, lower than last year, primarily related to reduced adjusted EBITDA and a lower contribution from trade working capital. We typically have cash outflows in the first quarter every year. As we discussed last year, the first quarter of 2018 benefited from the timing of certain payments and receivable collections, which did not repeat in 2019.

The decrease in other changes primarily relates to timing of capitalization of engineering costs as well as lower incentive compensation. Cash at the end of the quarter was $435 million and debt was $404 million, which continues to put us in a net cash position. We continue to have one of the strongest capital structures in the industry, which enables us to compete effectively in a challenging market, while investing in trading technologies. We still have $400 million remaining of buyback authorization and we will announce our activities as they are implemented.

Turning to Page 14. This page shows our updated full-year guidance. Our normal practice is not to provide quarterly guidance. However, this is an unusual year.

And therefore, we will provide more color on the progression of our margins for the rest of the year, starting in Q2. Typically, we see a dip in revenue in the second quarter due to timing of plant shutdowns of certain OEMs. This year, however, we expect our second quarter sales to be sequentially flat to the first quarter of 2019, which differs from our historical seasonality driven by continued new program launches. At this level, this would represent a low single-digit decline on a year-over-year basis.

We anticipate that net engineering expenses will be up by mid-single digits sequentially in the first quarter of 2019. This would represent an increase of about 10% to 15% from last year's Level. For the full year, we are still expecting net engineering expense to be up in the mid-single digits as a result of higher recoveries in the later part of the year and the benefits we expect to realize on the restructuring actions previously announced. We expect that the impact from operational challenges will begin to diminish in the coming quarters, but will still negatively impact results by approximately $5 million in the second quarter.

As a result, we expect the second quarter margins to be similar to the first quarter of 2019. For the second half, we are projecting continued strong take rates for some of our products and accumulative impact of new product launches from the last 12 months. Thus, we anticipate that 2019 could be a mirror image of 2018. With this backdrop, we expect that our second half profitability could be quite similar to that of the first half of 2018.

In addition, our second-half margins will be weighted more toward the fourth quarter, driven by higher volumes and new launches as well as engineering recoveries that are more heavily pronounced toward the latter part of the year, as I mentioned earlier. Based on this, we expect that fourth quarter adjusted EBITDA to represent approximately two-thirds of the profitability we expect in the second half of 2019. For the full year, we are currently projecting sales of $2.9 billion to $3 billion. Adjusted EBITDA of $245 million to $270 million, representing an adjusted EBITDA margin of approximately 9%.

Adjusted free cash flow of $45 million to $70 million. This updated guidance includes the impact of unfavorable mix and currency as well as the operational challenges discussed in the call. We anticipate that the inefficiencies related to the plant transfer will be fully resolved in the second quarter, while launch-related challenges will be substantially resolved in the third quarter. Turning to Page 15.

Despite the challenges we faced in the quarter, we continue to execute on our long-term strategies. In the first quarter, we continue to see strong momentum with our next generation products with an additional SmartCore customer in India. Our leadership in cockpit electronics allows Visteon to expand into adjacent markets with our first win for our battery management system as well as Visteon's second win in the commercial truck market segment. Visteon's technology platforms, which are enabling the cockpit of the future, will be the catalyst for our long-term growth and provide returns to our shareholders.

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

Questions and Answers:

Operator

[Operator instructions] Your first question comes from Itay Michaeli from Citi. Your line is open.

Itay Michaeli -- Citi -- Analyst

Hi. Good morning, everybody. Just the first question, just on the guidance, the cadence you just mentioned was helpful. Let me just talk about the level of confidence a bit more in the second half of the year, I guess, to the implied margins there.

And to what extent some of the engineering timing recovery is contingent upon customer pricing and where are we in terms of those discussions and level of confidence around that?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. So as I pointed out, the walk that we are doing is that our margins are flat in the second quarter. 2019 will look like a mirror image of 2018. And the reason for that is, again, the cadence of our product launches that we are seeing as well as, as you've pointed out, our recoveries being back-end loaded.

OK? In terms of the recoveries, when you look at our recoveries, they are very, very program specific, really has nothing to do with pricing around that. Those are -- have already been set when we go into or get awarded at the new business wins. And therefore, based on the visibility that we have, the -- it is -- we are projecting that it is going to be much more weighted toward Q4 than we have seen in the past.

Itay Michaeli -- Citi -- Analyst

Got it. And are those recoveries contractual? Or were there engineering changes that you have to sort of go and renegotiate with your customers?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Yes. They are actually both. When you think about recoveries, there are really two types or three types of recoveries that we have. One is contractually with our OEM customers and they are paid us -- engineering costs are incurred.

The second are milestone based. So we perform or develop the program throughout the year, get the recoveries toward the end of the year when we hit milestones. And third, as you pointed out, are based on change requests.

Itay Michaeli -- Citi -- Analyst

That's helpful. And then just two quick follow-up questions. The first more broadly as we think about some of the challenges in Q1, how you're thinking about longer-term margins relative to the prior communication? And secondly, just on the new business wins in Q1, just how did that track relative to your internal expectations, both including the BMS program as well as excluding it?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. So let me tackle the first question that you have. How do we feel about the target of 14% as we said in the beginning of the year? If you recall, when we discussed the target margin of 14% for 2023 at the beginning of the year, if you look at the incrementals at that time, we were expecting incrementals or the implied incrementals for that projections was about 20% to 21%. Given our updated guidance, to be able to reach 14%, we now need to have an implied incrementals of somewhere in the 23% to 24%, which is higher than we would like.

There's absolutely no question about that. So if you apply the 21% incremental margins to the incremental revenues we expect, then that 14% is now 13.3%. So we haven't given up on the 14%, but we have to think about how we bridge that gap.

Sachin Lawande -- President and Chief Executive Officer

And regarding the new business wins, Itay, in terms of just the demand and the customer activity in terms of new programs, we continue to see very strong demand. The pipeline looks very good. And we have been focusing especially on electric vehicles as a lot of the investment in new platforms, new vehicles are going in electric vehicles. So our content for electric vehicles and -- as a percent of our new business wins has continued to increase.

A third -- almost a third of our wins in the first quarter were for EVs. And the margin profiles are consistent with the main business and our historical margins. So I do not see any change there. Now specifically with respect to the battery management system, this is the first program that we have won for battery management system.

So we will incur a higher level of engineering cost as we establish our capabilities in this area. Now we fully expect that we will be able to leverage this across additional customers. What's interesting about this win in this particular case is it's a fairly large win. The content is quite significant.

As I described in my prepared remarks, there are cell monitoring units and a vehicle interface controller that make up the battery management system and they are anywhere between eight to 16 cell monitoring units in a battery pack. So the content of electronics is high. This is why we like that business. And also, the technology in it is evolving.

It's moving away from wired cell monitoring units to wireless and this is where we believe we can bring our core capabilities to bear on this product line.

Itay Michaeli -- Citi -- Analyst

That's very helpful. Thank you for that color.

Operator

Your next question comes from David Leiker of Baird.

David Leiker -- Baird -- Analyst

Good morning. I want to follow up on a couple of things there with Itay, particularly on this 2023 target. If you look at the issues you're talking about today, the engineering costs, timing recovery now changed for the full year. The plant costs and the launch costs, so is there -- now I don't want to say the onetime items, but there are issues that impact today that theoretically have no impact on where the profitability is in 2023.

So given those are more kind of one-off type issues and not structural issues, why would that change the 2023 opportunity for you?

Christian Garcia -- Executive Vice President and Chief Financial Officer

No. Absolutely. You're absolutely right, David. But we are just bridging the updated guidance to the 14%.

And right now, we haven't given up on the 14%. So we always look at it. We look at the changes that we are seeing in terms of the environment as well as the program wins that we have. But at this point in time, we have not differed from the 14% target.

David Leiker -- Baird -- Analyst

OK. And I just want one clarification as it relates to I think something Itay was talking about on change requests. I mean these are issues that historically have come and go. As a supplier base, we had a pretty significant issue a year ago, where the supplier was still struggling with those and their ability to be able to recover in those engineering changes.

Why is -- I mean -- I'm sure you're somewhat familiar with that. Why is what you're dealing with different than what they are?

Sachin Lawande -- President and Chief Executive Officer

Yes. So David, in terms of change requests, I'd make one thing very clear. When we engage in change requests, we do not start the work until, first, the commercial agreements are completed. We do not lift the pen until that is done.

So that's very important and a departure from some of the practices I have seen the industry do, where the change requests are negotiated away either into the work being done or in many cases after. So the discipline that we have put in place here is that the change requests are only engaged upon if there is agreement on the commercials. By the way, our OEM customers actually like that because they don't want disputes on commercials very late in the game where it's very difficult to really understand what was contractually agreed upon and not. Now this is something that I put in place here, learning from our past experiences but we do not have that issue here.

David Leiker -- Baird -- Analyst

And then just one thing to close the loop on all of these. If we look at the guidance for the full year, have you not been dealing with the timing on the engineer side and the plant location and the launch cost issues? What's your guess on what that guidance -- would have been for the full year had you not experienced those exogenous items?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. Right. The -- certainly, in terms of the engineering, we have not changed our guidance of a mid-single-digit increase. The reason why there is some timing, again, is because of when we actually realized the benefits of the restructuring as well as the timing of the recoveries, which is very much weighted toward the latter part of the year.

So our guidance has no impact -- our engineering expense has no impact on our change in guidance.

David Leiker -- Baird -- Analyst

OK. And what about the other two items? Had those not happened, it sounds like you're in a position that your guidance wouldn't have changed. Is that correct?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Yes. So there are really three things that changed our guidance. One is the operational challenges that we talked about, right? So we -- it was -- still have about $15 million to $16 million. Currency is about $5 million, right, so -- of that.

And the remaining is -- what we talked about in my prepared remarks is unfavorable mix. And so we -- when you think about unfavorable mix, there's always some margin difference between older programs and newer programs. This difference has come in the form of higher costs associated with launching, learning curves and then margins improve over time because of efficiencies. We'll try to cover this increased cost through supplier negotiations.

Now going forward, we could see that price negotiations from suppliers could be somewhat constrained by lower industry volumes compounded by favorable environment in the broader market and an example of that would be capacitors, which is just one example. We go after this supplier savings, but felt it is appropriate to adjust our guidance at this point for this. This represent a little less than half a point. So those are the 3 things that walk us through the new guidance.

David Leiker -- Baird -- Analyst

Thank you for the time.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Thanks, David.

Operator

Your next question comes from Ryan Brinkman of JP Morgan.

Ryan Brinkman -- J.P. Morgan -- Analyst

Hi. Thanks for taking my question. Can you talk some more about how unique maybe the launch costs were relative to, say, the curved display nature of the product? Given that you have a lot of other launches coming in the next couple of years, can you talk about what proportion of those that are curved display? How you feel you are prepared for those launches? What if they pose the same level of engineering challenges you saw this quarter, etc.?

Sachin Lawande -- President and Chief Executive Officer

Yes. Yes. I'd be happy to. And I think it would be I think useful to provide a little more insight into what exactly the issues were.

So when you have a curved glass cover lens, that glass cover lens is built that way through hot forming. And typically, what happens when you curve using a hot forming process, the knee or the bend there can generate certain issues, which results in a lower yield. So this is a new capability that the industry is developing especially for larger displays. As an industry, we have not had to deal with how to industrialize this type of a product in high volume up till now.

Now this is very important as how do we go forward from here and on account of where we see the interest from the industry go toward. This is clearly an area where we need to go and develop very good capabilities in. Now on account of this being the first program, we faced challenges in the industrialization. By that I mean the ramp-up of the manufacturing of this product and the supplier had similar issues in terms of getting the yield high enough.

We are working through these issues. We are making good progress. I would say we are, from a supplier viewpoint, at a yield of about 50% to 55%. 70% is considered where we would say we are where we would need to be.

So we are getting very close. And we expect to be there between the second and the third quarter. Now to answer your question, how many other wins we have in this category and what do we see coming on into our pipeline. So we have 2 additional programs that use curved displays.

The one that launches after this is in 2020 and the second one launches in 2022. So you can see from that, that we have some time to be able to fix the issues, develop the process and manufacturing capabilities so as not to get into similar issues going forward. But we do expect that this would be one of our core capabilities and potentially a differentiator are being one of the early ones to adopt and to be able to drive high volume in this class of products.

Ryan Brinkman -- J.P. Morgan -- Analyst

That's very helpful. And did I hear Christian say that the inefficiencies were expected to be $5 million in 2Q and 3Q, that's related to this particular product? Have you already started to see a step-down thus far in calendar 2Q?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Yes. That is correct, Ryan. So the -- we had the $10 million. The $5 million is largely really primarily the launch costs -- the launch challenges that we were referring to.

Sachin Lawande -- President and Chief Executive Officer

And most of that is primarily freight -- premium freight.

Ryan Brinkman -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

Your next question comes from Brian Johnson of Barclays.

Jason Stuhldreher -- Barclays -- Analyst

Hi. This is Jason Stuhldreher on for Brian. Just a few quick questions. Firstly, on Mexico, can you give us a sense for what led to the decision to relocate from Reynosa? And I guess, specifically, we've heard of higher labor costs and strikes in Mexico.

How big of a risk is that for you? If you could just talk about what you're seeing there. That would be helpful.

Sachin Lawande -- President and Chief Executive Officer

Sure. Sure. So we have two plants in Mexico. This plant that we are talking about is in Reynosa.

It's our small plant of the two. And the lease at this plant was expiring. This was a plant that we acquired through an acquisition. And we decided to go to a new facility essentially in the same industrial park to a new facility because the older facility did not have the capabilities from a clean room viewpoint to meet the requirements of these new electronic products manufacturing, especially ISO 7 and higher.

So we decided to move into a state-of-the-art manufacturing facility, which, again, is something we have done in the past. Two years ago, we relocated our other plant in Mexico into a brand-new facility. And we did that flawlessly. So this is not something that we do not understand how to do.

Unfortunately, in this case, as I mentioned in my earlier remarks, this was clearly a case of, I would say, lack of good plant management and that caused us some issues with respect to materials management. So we ran into shortages of certain parts as well as a higher level of labor and overhead. What that meant was that we had to again incur premium freight to make up for the parts that were short in inventory and incur higher labor costs to be able to provide enough product to the customers. Now where we stand today with respect to that is we have replaced the management team.

So it's a new management team in charge. We have cleaned up all of the inventory issues. We do not see any premium freight now. So we are back to normal freight.

And the lobar and overhead, we are addressing as we speak and we should be all done in the next week or two with respect to that. So this would be definitely behind us by the time we are done with this quarter. With respect to the -- sorry, with respect to the other topic you mentioned, which is the labor unrest, etc., we do not see anything that is out of the ordinary and the wage increases I think that you mentioned as well, we have a negotiated rate with the unions. Things are calm and we do not see any real impact to our operations.

Jason Stuhldreher -- Barclays -- Analyst

OK. That's very helpful. And then just secondly, a little more on the engineering line item. Could you give us a sense for the cadence of just the gross engineering spend through the rest of 2019? So I understand Q2 is going to be a little higher.

And I would expect there'd be some puts and takes between savings in Europe and then new hiring for the new launches. But can you give us a sense for just the gross engineering spend? I think it would help us understand the risk to credits in 2019.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. So let me go ahead and do both. As you pointed out, there are really two components of our engineering cost. Gross engineering, as you mentioned, and then recoveries.

And both have their own vagaries. If you look at the first quarter, gross engineering costs were down by about 11% sequentially. The reason for this is due to decline of nonpersonnel expenses, which is -- which are costs associated with our outside technology suppliers. Some of those are OEM directed.

Now as I mentioned, we expect the gross engineering to be up by mid-single digits in the second quarter. And then, the way we are projecting it, it's pretty much -- it flattens out for the rest of the year as we see the benefits of our restructuring efforts. On the other hand, you look at recoveries, they were $23 million for the first quarter. That was compared to $60 million in the fourth quarter.

And that's actually normal seasonality. For the second quarter, we expect recoveries to be pretty much steady from the first-quarter levels and then start to increase in Q4 and then really spike up in -- I'm sorry, start to increase in Q3 and then really spike up in Q4, which is much like what we have seen in the past. So combining both of these components, gross engineering and recoveries, our net engineering expense should grow by mid-single digits in the second quarter. It starts to fall in the second half, which is consistent with previous years.

The only difference this year is that we see a more pronounced weighting of the recoveries in the fourth quarter than we have seen in the past. Again, it has nothing to do with anything else, but just how the cadence of our programs are. So in total, we expect net engineering expense to be up in the mid-single digits for the year, which is quite consistent with our guidance at the beginning of the year.

Jason Stuhldreher -- Barclays -- Analyst

OK. Thank you very much.

Operator

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

Joseph Spak -- RBC Capital Markets -- Analyst

Thanks, everyone. So thanks for all the color on the puts and takes to the EBITDA, but -- I guess I'm still having a little bit of trouble understanding the magnitude of decline because of the $63 million decline you identified, $27 million of it -- but then you still have a $36 million decline on $77 million in sales. And I think the delta is -- it seems like maybe historically, you've recovered more or you've had sort of more offsets to the pricing impact. And did something change this quarter where you weren't able to offset some of those price downs?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. So as we talked about unfavorable mix we are seeing in the first quarter, but we've actually helped offset that with efficiencies. The bigger issue as you pointed out is engineering is up by $17 million, right? There is a currency exchange issue, maybe that's not quite clear, of about $9 million. And then the operational challenges of $10 million.

Pricing, as we pointed out, impacted us close to $20 million. It's about 2% of last year's level.

Joseph Spak -- RBC Capital Markets -- Analyst

Right. I guess, historically, it seems like you've been able to sort of maybe offset more of the price downs. It just seems like even if you sort of back away the $27 million of more onetime items decremental seem a little bit steeper than we would have expected. So that's what I'm trying to get at.

Sachin Lawande -- President and Chief Executive Officer

Yes. And I think one thing that we should also mention is when you look at it from a year-over-year comparison, we had, for example, some products, especially with the sedans with Ford that are no longer part of our volume this year as well as the Mazda business that we talked about in the previous call, which is starting to decline. So these two products made up a fair amount and they had a higher margin profile than the products that are replacing those volumes. So that explains the difference too.

Joseph Spak -- RBC Capital Markets -- Analyst

OK. Thanks. And then just maybe you could sort of update us -- I think you didn't buyback any stock this quarter. And if you could update us on the plans or the go forward there, especially vis-a-vis the lower free cash flow guide.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. Right. So as we pointed out, we still are in a net cash position. And with an uncertain market, a lot of companies, including us, either would actually buyback stock because of undervaluation of the stock price or they would fortify the balance sheet, right, and keep the cash.

We are in the position because of our strong capital structure that we can do both. Where we would be in that continuum will be really dependent on the visibility of the markets we serve. The first sign of what we have seen so far is that historically, that we would see a softer Q2 compared to Q1. And right now, we are feeling like it's flattened, which is very atypical of the season that we have seen in the past.

So it actually bodes well for the rest of the year. And therefore, gives us a little bit more confidence around the market environment. So at this point, I'm not going to telegraph my actions, but we'll be -- we'll certainly be announcing what we have implemented.

Joseph Spak -- RBC Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from Anthony Deem of Longbow.

Anthony Deem -- Longbow Research -- Analyst

So a few here. I appreciate the contribution margin comments around the 2023 guide. I'm wondering if there's opportunity to bridge the gap in 2020, maybe when these headwinds reverse. Or do you now see the 2020 revenue coming on less profitably versus your expectation back in January, maybe we model the contribution margin next year in line with the prior kind of low 20% guidance?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Yes. So in terms of 2020, we actually look at the cadence of our program launches and we feel very comfortable with the top line in the 2020. We, I think, provided guidance of about 3.3 to 3.4 -- I'm sorry, $3.4 billion to $3.5 billion dollars. And therefore, we are on track with that.

Now given the launch issues -- launch challenges that we have as well as the plant inefficiencies associated with the plant transfer, we feel like there is a very good possibility that we could see a double-digit margin back to where we should be by 2020. So just to clarify my comments, the guidance is $3.3 billion to $3.4 billion for 2020.

Anthony Deem -- Longbow Research -- Analyst

OK. Very good. Thank you. And then I'm just curious, how long did it take to accumulate this $10 million operational headwinds in the first quarter? It seems like these challenges likely arose late February and in March.

So I'm just kind of wondering about the timing of this.

Sachin Lawande -- President and Chief Executive Officer

Yes. This -- both these issues were specific to the quarter and these are the things that we have been working on right from the beginning of the quarter in terms of the ramp-up of the center information display, the bigger challenge that we mentioned. And the other issue with respect to the plant transfer, the plant transfer issues that I mentioned had their roots in the mismanagement of the materials and the inventory issues that we faced. So I would say that they were slowly building up throughout the quarter.

We acted very quickly as soon as we got wind of the situation. And it was a tremendous amount of effort on part of the team to address the issues and frankly, bring them under control. Where we stand today, as I mentioned earlier, we are at the tail end of cleaning up most of these issues. So we feel pretty good about where we're at and that these things will be pretty clean by the time we are through with the end of the third quarter.

Kris Doyle

This concludes our earnings call for the first quarter of 2019. 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

[Operator signoff]

Duration: 57 minutes

Call Participants:

Kris Doyle -- Director of Investor Relations

Sachin Lawande -- President and Chief Executive Officer

Christian Garcia -- Executive Vice President and Chief Financial Officer

Itay Michaeli -- Citi -- Analyst

David Leiker -- Baird -- Analyst

Ryan Brinkman -- J.P. Morgan -- Analyst

Jason Stuhldreher -- Barclays -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Anthony Deem -- Longbow Research -- Analyst

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