Visteon (VC) Q2 2019 Earnings Call Transcript

Visteon (VC -1.33%)
Q2 2019 Earnings Call
Jul 25, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kris Doyle

Good morning. I'm Kris Doyle, director of investor relations for Visteon. Welcome to our earnings call for the second 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 Visteon's 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 second-quarter results on Page 2. On subsequent pages, I will discuss highlights from the quarter and provide our perspective on the outlook for vehicle production for the remainder of 2019. Christian will then review our financial results in more detail.

Vehicle production at top Visteon customers was down significantly in the quarter across all regions with China leading the decline at high-teen levels. North America was weaker than expected, and the product mix also affected us negatively in this region. And while Europe was also lower than prior year, it was in line with our expectations. Overall, production volume at our top customers was down about 8% for the quarter.

Visteon recorded sales of $733 million in the quarter. Adjusted EBITDA was $46 million or 6.3% of sales, and adjusted free cash flow was $28 million for the quarter. Our profitability was impacted by lower OEM volumes and unfavorable mix, as well as by pricing and currency. Despite the severe weakness in the automotive market in China in the second quarter, Visteon's sales performed very well, growing 30% year over year.

We also won approximately $1 billion in new business wins in China year-to-date and have launched 27 new products in the past 12 months. We will talk more about China on a later page. On the operations front, we are on track to resolve the specific items that impacted us in the first quarter. The ramp-up of production of the central information display module is going as per plan.

We are steadily improving the yield, and the glass supplier is also improving the quality and throughput. The transfer of our plant in Reynosa, Mexico to a new facility nearby is also complete. We have increased our focus on engineering recoveries. And in the second quarter, we were able to accelerate payments from some customers that helped keep net engineering expenses on track for the quarter.

Demand at OEMs for new digital products for the cockpit continues to be strong, and our new business wins for the first half stand at $3.2 billion. I'm pleased that 62% of this business is based on our new digital platforms. I will discuss key wins for the second quarter later in this presentation. Our balance sheet remained strong with cash of $438 million and debt of $402 million.

We completed $20 million in share repurchases in the quarter and have remaining authorization for an additional $380 million. In summary, we are steadily recovering from the challenges that we faced in the first quarter while vehicle production and unfavorable mix remain as headwinds to the business. Turning to Page 3. Page 3 shows the key drivers of Visteon's sales performance for the second quarter.

Global vehicle production weakened in the second quarter and was down about 8% year over year, as shown by the chart on the left, which details industry production performance by region. Vehicle production for Visteon's top customers was lower than the industry in North America, whereas it was more in line with the industry in Europe and China. Visteon sales performed better than market and were down 2% year over year. With the exception of Japan, where we were impacted by the phase-out of infotainment business with Mazda, all regions had positive net new product roll-ons in the second quarter, which largely offset the impact of lower volumes.

Product mix in North America was unfavorable as more mature and high-margin products, mainly smaller displays and entertainment systems, experienced lower volumes than expected. The impact of this unfavorable mix is expected to continue for the rest of the year and is included in our updated outlook that Christian will discuss later. Pricing was in line with expectations and at the lower end of normal historical levels while currency was a headwind in the quarter driven by the euro and RMB. Our sales in China grew 30% in the second quarter despite the 19% drop in vehicle production year over year.

The main drivers of this performance are the high take rates we are experiencing on some specific products, as well as new product launches and the consolidation of a joint venture business in Q3 of 2018. Overall, it was a mixed quarter in terms of sales for the company. Lower production volumes in all markets and lower take rates for some specific products in North America and Europe were a headwind in the quarter. On the positive side, new product launches in all regions and higher take rates in China helped mitigate some of the market impact.

Turning to Page 4. The automotive market in China experienced significant decline in the second quarter. Compounding the already weak consumer demand, the market was impacted in the second quarter by the July deadline for the new emissions standard in many cities and provinces across the country. Vehicle production at many OEMs was reduced to clear out existing inventory resulting in the 19% drop year over year for the quarter.

Despite the challenging market environment, the company performed very well and delivered 30% year-over-year sales growth for the quarter. Several factors drove this outperformance. In the challenging market environment, OEMs are upgrading cockpit electronics content for competitive reasons, and this mix shift is helping us in China. We are experiencing higher take rates for digital clusters and infotainment with a specific customer in that market.

New product launches are a big driver of sales, and our launch velocity in China remains high with 27 launches over the past 12 months. The recent consolidation of our joint venture with FAW also contributed to the higher sales in this quarter. We are upgrading the design and manufacturing capability of this JV, which will improve our position with customers such as Toyota and VW in China. Currency was a headwind in China in the quarter offsetting some of the positive momentum, and customer pricing was in line with normal levels.

I'm pleased that we were able to sustain our strong performance in China despite the significant market downturn. However, it's important to note that we are expecting the China market in the second half to be lower than our earlier forecast. While we expect our product launches and the higher take rates to remain on track for the rest of the year, our growth will likely be muted compared with earlier expectations. Moving to Page 5, on this page, I will provide an overview of our operational performance in the second quarter.

Adjusted EBITDA was $46 million for the second quarter, which was an improvement of $5 million over the previous quarter. The specific operational challenges we faced with the launch of the display and the transfer of the plant in Mexico have largely been resolved. As mentioned earlier, we were impacted by lower sales of mature products in North America that have a better margin than some of the newer products that have been launched. On the positive side, the special focus on engineering recoveries is starting to have an effect with higher recoveries in the second quarter.

The ramp-up of manufacturing of the curved display that impacted us in the first quarter is now on track. The design issues are resolved and behind us, and the throughput and yield at both the glass cover lens supplier and -- at our own manufacturing plant are continuing to improve and are close to target levels. We expect to be able to clear the backlog and revert to normal freight and labor costs by the end of the third quarter. I would also like to mention that the second issue we faced in operations in the first quarter, which pertained to the relocation of our plant in Reynosa, Mexico, the material shortages and headcount reductions have been addressed and a new leadership team is in place at the plant.

We expect to see steady improvements in our operations and profitability at this plant going forward. Coming to the key highlights in the second quarter. We have significant new program launches in the quarter, including the SmartCore launch with Daimler Trucks, a digital cluster with Mitsubishi and a TFT display with Jaguar Land Rover, for a total of 23 program launches year-to-date. As part of our ongoing initiative to achieve a best-in-class engineering footprint, we opened two new engineering centers in India and Romania with capacity for about 600 employees.

These locations will mainly focus on software development for global customer programs in the areas of instrument cluster and infotainment. And we are on track with the reduction of engineering resources in high-cost locations that was initiated toward the end of last year. Visteon's reputation as an industry leader in cockpit electronics and software continues to strengthen as we successfully launch complex products with our customers. I'm pleased to report that Visteon received three notable customer excellence awards in the quarter with Jaguar Land Rover, Honda and Mahindra for our recent product launches with them.

This is the first time Visteon has received this recognition from these customers. Turning to Page 6. We had another strong quarter of new business wins bringing the first-half total to $3.2 billion in lifetime sales. The interest in digital cockpit electronics products, such as all-digital clusters and display audio and infotainment systems, remain strong, especially in the mass market segment of the industry.

The trend toward the virtual cockpit is driving new interest in large multi-display systems with optically bonded cover lens that are powered by integrated cockpit domain controllers. About two-thirds of our wins this year are for digital products, including all-digital clusters, infotainment, SmartCore and displays. Winning business on key electric vehicle platforms is an important part of our strategy, and about one-third of the wins this year are for electric vehicles. For the full year, I feel good about the pipeline of new business opportunities in front of us.

We are pursuing nearly $12 billion in new business mainly in the instrument cluster, display and infotainment products segments. In addition to cockpit electronics products, we are starting to see commercial opportunities for ADAS products based on our DriveCore technology. I will provide an update on customer engagements with DriveCore later in this presentation. Based on the business we have won year-to-date and the strong second-half pipeline, we are confident that we can achieve our new business win target for the full year.

Moving to Page 7, on this page, I will briefly discuss three key new business wins in the second quarter. As I mentioned on the previous page, we are continuing to see strong interest in digital products for the cockpit. Moreover, OEMs are looking to introduce these new products to the market faster than before. The first win highlighted here is for a display audio program with a European OEM based on our Android platform, making it a third win on this platform.

We are seeing mass market vehicles getting equipped with 10-inch display audio systems as the standard configuration with CarPlay and Android Auto as the key features. In the case of this system, it will support wireless CarPlay and Android Auto, making it even easier for consumers to use. The second win is for a multi-display module with a Korean automaker. We are seeing a general trend of the cluster and infotainment displays combined together under a single glass cover lens for better look and feel.

The instrument cluster functionality is integrated into the system with the infotainment display driven by a separate ECU from a different supplier. Both these wins are expected to start production in 2021 and are worth approximately $110 million each. The third key award highlighted on this page is a SmartCore win with a China-based automaker that will initially cover six vehicle lines, with more expected in the future. This is a major win and a strong endorsement of our SmartCore technology with projected lifetime sales of $350 million.

This customer has chosen SmartCore to support their latest-generation electrical architecture and Android-based connectivity ecosystem solution. This SmartCore system starts production even earlier in 2020 and will set the standard for next-generation cockpit domain controllers in terms of features and functionality. These new business wins are representative of the key trends that are impacting the industry in cockpit electronics. Visteon's digital platforms are well suited for these applications, and we expect to see more opportunities like these going forward.

Moving to Page 8, it has been some time since I provided an update on our efforts in the ADAS domain. I've previously discussed our approach of developing a centralized computing system for level 2-plus systems. Today, I would like to provide an update on our customer engagements with our DriveCore technology. As we have discussed previously, we have a core development program with GAC of China that's currently in process.

This system would offer advanced safety features, including highway copilot and driver-initiated lane change at speeds of up to 75 miles per hour. A joint team of approximately 200 engineers from both companies is working on this program. The feature development is expected to be complete by the end of 2019 on prototype vehicles, which will then be used by GAC to evaluate for commercial deployment. We are also in advanced stages of discussions with a European OEM of premium performance vehicles for augmenting their existing ADAS system with DriveCore.

The existing system is a level 2 system without highway copilot functionality. We have successfully demonstrated the ability of DriveCore to coexist with the current system and offer more advanced features. We are expecting to enter into an RFQ with this OEM in the third quarter with the start of production expected in 2022. The third opportunity highlighted here is for a different European OEM and also for level 2 functionality.

This OEM has developed their own algorithm software that needs to be integrated into the system. DriveCore is an ideal solution as it's open and provides very good tools for integration of third-party software. The RFQ for this opportunity is also expected in the third quarter with the start of production expected in 2023. In general, we are seeing increased interest at OEMs for enhanced level 2 systems instead of level 3 or level 4 systems that were being discussed earlier.

This fits very well with our approach to DriveCore, which is designed to deliver scalable processing power and an open software development framework. In short, Visteon has steadily built events and credibility in the ADAS domain with the DriveCore technology and early customer engagements. We are now starting to see commercial business opportunities based on DriveCore. There is still a long way to go, but I'm encouraged by the progress we have made in this new way of business for Visteon.

Turning to Page 9, on this page, I would like to discuss our outlook for the full-year 2019 in terms of vehicle production with our top OEM customers compared with our earlier expectations. The weakness that we experienced in the second quarter with our top customers in North America is expected to continue for the rest of the year. For the full year, we now think that vehicle production will be down by about 4% for our top customers in North America versus our prior forecast of a 3% decline. Europe is experiencing a slowdown in vehicle sales, and the slowdown accelerated in June.

Our updated outlook for vehicle production for top customers in Europe is now a decline of 4% for the full year versus the earlier forecast of a decline of 3%. In China, we have significantly reduced our full-year vehicle production outlook. We now expect production in China to decline by 10% for the full-year 2019 compared with our earlier projection of a 4% decline. The main drivers of this decline are listed on this page on the right.

It's a combination of multiple factors, including weak consumer confidence, the acceleration of China's six emissions in most of the market and the reduction in peer-to-peer financing platforms. It also appears that there is no appetite for significant incentives by the government to increase sales. The reduction in VAT and the introduction of OEM incentives appear to be insufficient to make any meaningful impact on consumer demand. All these factors contribute to our belief that vehicle production in the second half will be lower than earlier expectations and the market will experience a double-digit decline for the full year.

Turning to Page 10. On Page 10, I will summarize our results for the second quarter. We delivered $733 million in sales with $46 million of adjusted EBITDA. We continued to outperform the declining market in China driven by higher take rates and product launches.

In terms of operations, the specific challenges we faced in the first quarter with the display product ramp-up and the transfer of our manufacturing plant are on track for resolution. We launched several new programs in the second quarter bringing the total to 23 year-to-date. We have also started special initiatives with the focus on driving higher margins through value engineering and on engineering recoveries. Our new business wins remained strong as we increased our year-to-date wins to $3.2 billion in lifetime value.

The pipeline of new business opportunities for the second half is very robust at nearly $12 billion. We made good progress with our customer engagements for ADAS business with DriveCore technology, putting us in a good position to qualify for commercial business opportunities at multiple OEMs. As industry headwinds have strengthened, particularly in China, we have lowered our full-year outlook for vehicle production from our previous guidance. We are more focused than ever before on operational execution and cost control in this challenging market environment.

We're confident that our strategy of leading the digital revolution in cockpit electronics and delivering software-driven platforms that are key to the cockpit of the future will bring long-term success for the company. 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 12, we present our key financial results for the second quarter of 2019 versus the comparable period in 2018. Sales of $733 million in the second quarter decreased $25 million or 3% compared to last year as new product launches partially offset the impact of lower production volumes, currency and pricing. This year-over-year rate of decline is the lowest that we have registered since the start of the industry downturn in the third quarter of 2018.

Adjusted EBITDA was $46 million, representing a $35 million decrease from 2018. Besides the impact of lower revenues, we had unfavorable mix, higher engineering expense and costs associated with launch challenges discussed earlier. Adjusted free cash flow was positive $28 million, roughly flat with last year. Lower year-over-year profitability was offset by a higher contribution from trade working capital.

I will provide more detail on the following pages. On Page 13, we provide sales and adjusted EBITDA for the second-quarter 2019 versus 2018. Sales were negatively impacted by a challenging production environment and unfavorable mix from lower volumes of mature products in North America and Europe. Offsetting these factors are product launches and higher take rates, particularly for a next-generation infotainment system for an OEM in China.

Pricing reduced sales by $17 million, representing 2.2% of last year's sales at the lower end of our historical rate. So far, we have been able to mitigate pricing pressures, but we expect the second half to revert back toward the midpoint of historical levels between 2% and 3%. Adjusted EBITDA was negatively impacted by lower production volumes and unfavorable mix away from older higher-margin products. The negative impact to these items was offset by material cost savings and other efficiencies.

Annual price reductions lowered profitability by $17 million, and currency and other items had a $7 million negative impact. Visteon's net engineering expense in the second quarter increased by 10% due to timing. In fact, our second-quarter net engineering costs grew modestly at 2% from first-quarter levels, better than the guidance we discussed in the first-quarter earnings call, resulting from the favorable timing of recoveries. We continue to anticipate that on a full-year basis, engineering costs will increase by a mid-single-digit percent.

We incurred incremental launch costs associated with our display product of $5 million in the second quarter, consistent with our guidance. We are currently working on clearing the backlog and expect to incur additional costs in the third quarter. Page 14 provides our cash flow. Second-quarter adjusted free cash flow was $28 million, essentially flat to last year despite lower adjusted EBITDA due to strong working capital performance.

We saw improved inventory turns on a year-over-year basis. We also benefited from certain OEM reimbursements, as well as the timing of supplier payments. The decrease in other changes from first-quarter levels primarily relates to timing of capitalization for engineering costs. Cash at the end of the quarter was $438 million and debt was $402 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 differentiating technologies. We have $380 million of remaining board authorization for share repurchases, and we will announce our activities as they are implemented. Turning to Page 15, this page shows our updated guidance. As Sachin mentioned, the year-over-year decline in OEM global production volumes worsened in the second quarter and was most pronounced in China.

We anticipate that these industry headwinds will continue throughout the rest of the year. Before I discuss the full-year guidance, let me provide some comments on how we anticipate the third quarter to progress. The third quarter is seasonally the weakest quarter of the year due to timing of OEM plant shutdowns. As such, we project sales to be down sequentially in the low single digits.

At this level, this would translate to a modest year-over-year increase as we start to see the benefit of the cadence of our program launches and convert our backlog into revenue. For adjusted EBITDA for the third quarter, first, we are seeing reduced China production expectations and somewhat lower volumes for certain mature products. Second, we anticipate net engineering expenses to be down sequentially in the high single-digit range as we see the benefit of the restructuring activity we announced this time last year. We are also projecting increased engineering recoveries as the year progresses.

At this level, third-quarter net engineering expense will be up by mid-single digits against prior year, which is much lower than the double-digit year-over-year growth we saw in the first and second quarters of 2019. Third, we have made substantial progress during the second quarter in resolving all of the issues surrounding the launch challenges for the display product. In the third quarter, we're working on clearing the backlog, and we anticipate that we will incur additional freight, labor and supplier costs of approximately $3 million. As a result, we expect the third-quarter adjusted EBITDA to be quite similar to that of the second quarter with sequentially lower sales.

This will translate to a minimal sequential improvement in adjusted EBITDA margins from second-quarter levels. For the full year, we are currently projecting sales of $2.9 billion to $3 billion; adjusted EBITDA of $230 million to $250 million, representing an adjusted EBITDA margin of approximately 8%; adjusted free cash flow of $30 million to $50 million. Based on this and the detailed guidance I have provided for Q3, we expect fourth-quarter adjusted EBITDA to represent about 70% of the profitability we expect in the second half of 2019. This back-end weighting results from sales seasonality, higher benefit from restructuring efforts, increased engineering recoveries and improved margins from new programs to be launched in the fourth quarter.

To summarize, the drivers for the change in our full-year adjusted EBITDA guidance are market headwinds in the second half, particularly in China, representing two-thirds of the change with the rest comprising unfavorable mix and the incremental costs to clear the backlog of our display product in the third quarter. Turning to Page 16, we continue to execute on our long-term strategies amid a challenging market environment. In the second quarter, we continue to have strong momentum with our next-generation products, leveraging our platform-based approach that enables us to reduce time to market with additional awards in display audio, a multi-display module and SmartCore. Visteon technology platforms, which are enabling the cockpit of the future, will be the catalysts 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 & Answers:

Operator

[Operator instructions] Your first question comes from Brian Johnson of Barclays.

Brian Johnson -- Barclays -- Analyst

Yes. Good morning, Visteon team. Congratulations on that amazing growth in China. I want to talk a bit about the second-half profit guide.

A couple of questions. As you kind of think about especially the 4Q, is there any way to dimension how much of the profit improvement is due to overcoming the display launch challenges? And then how does that roll into 2020? And how much is dependent on engineering recoveries and other pricing actions with your OEM customers?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. Thank you for the question, Brian. So the way we are the projecting our fourth quarter, the components that drive the significant growth and profitability from Q3 levels to Q4 are the following. Half of the increase in the profitability is driven by engineering, thus, from the restructuring benefits that we've been discussing and higher recoveries, about -- let's say, about 25% to 30% from volume increase.

We're anticipating sales to get -- to go up by mid to high single-digits from Q3 to Q4; better margins from product launches; and the display product that we've been talking about, the incremental costs of about $3 million we pick up in Q4. Going forward in 2020, we do not anticipate any issues associated with the display product.

Brian Johnson -- Barclays -- Analyst

And in terms of engineering credits, is there a rough cut dollar amount for that or just margin impact?

Christian Garcia -- Executive Vice President and Chief Financial Officer

If you think about the levels that we saw in Q4 of last year, it's pretty much what we're expecting in the fourth quarter as well.

Brian Johnson -- Barclays -- Analyst

Which gets to my second question. Investors after Lear's warning about its e-systems business were flagged a strategic agreement with a customer, many of us think it might be mid-cycle price down, are worried about pricing in electronics and engineering recoveries, especially in electronics. So can you maybe talk about pricing in the quarter, which seemed relatively benign, but your level of comfort in actually getting those recoveries given the pressures on OEMs?

Sachin Lawande -- President and Chief Executive Officer

Yes. Sure, Brian. As you know, as complexity and capability of cockpit electronic systems has been increasing very quickly, it's also increasing the price that OEMs have to pay for the system. So there's a lot of pressure on suppliers to reduce price as a result.

I wouldn't say that this pressure is anything extraordinary than what we have seen in the past. But at the same time, there's even more pressure on OEMs to offer competitive solutions, and there's a lot of value for suppliers that can deliver these complex systems safely without putting vehicle launches at risk. So suppliers that have the capability, that can deliver these complex systems on schedule at cost, are in a much better position to handle these pricing pressures. So as you have seen, our -- the last few quarters, we have been able to address these pressures, and pricing is more or less in line with what we have seen, and we expect that to continue going forward at least for the next couple of quarters here.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Yes. In terms of the engineering recoveries, Brian, I think in my prepared remarks, we said that one of the favorability that we saw in engineering for the second quarter is the timing of recoveries. And therefore, we are seeing -- again, we've mitigated some of the issues around that with our OEMs, with customers.

Brian Johnson -- Barclays -- Analyst

OK. Great. Thank you very much.

Operator

Your next question comes from Itay Michaeli of Citi.

Itay Michaeli -- Citi -- Analyst

Great. Thanks. Good morning, everyone.

Sachin Lawande -- President and Chief Executive Officer

Good morning, Itay.

Itay Michaeli -- Citi -- Analyst

Maybe a first question just on revenue. Given the production pressures you talked about, you did keep the guidance flat. I was hoping you can talk a little bit about some of the offsets on take rates globally, as well as the impact that you mentioned on product mix, more mature programs, both on revenue and profitability for the full year.

Sachin Lawande -- President and Chief Executive Officer

Yes. Sure. So Itay, I would say the main components of our guidance or the main drivers have been the market environment, which has weakened, especially in China. The lower production outlook for the second half is the main driver for lowering the guidance.

Now in addition, we are seeing incremental impact from product mix. In the past, we have said that about 10% of our revenue comes from these old legacy products, and these are products such as clocks, key fobs, small displays, etc. And much of the decline was expected, and we have factored that into our earlier guidance as well. But what we had seen that started to appear in this second quarter, and we believe that's going to continue for the rest of the year is deeper decline in sales of some of these legacy products, in particular small displays, and that is one of the contributors, a small one but a meaningful contributor to our lower guidance.

And then that's -- also, in addition, we have this -- the ramp-up costs, the lingering costs that Christian talked about in his remarks, that will impact us mostly in the third quarter.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. So Itay, the only thing I would add to that is that you've noticed that we haven't really changed the revenue guidance. Because previously, in terms of our range, we were a little bit up on the upper end of the midpoint, and now we're solidly in the midpoint of the guidance. So it moved, but it is still within the range.

Itay Michaeli -- Citi -- Analyst

Got it. That's very helpful. And then just secondly on the engineering expense. Going back, it sounds like you still expect mid-single digit for the full year.

But based on the third-quarter guidance, it implies a pretty significant drop in the fourth quarter. So just curious how -- what the risk might be around that. Are you kind of depending on any customer negotiations or engineering recoveries? Or do you have a pretty good line of sight on that fourth-quarter engineering expense?

Christian Garcia -- Executive Vice President and Chief Financial Officer

That's a good point, Itay. So if you look at last year and you look at the amount of recoveries that moved from Q3 to Q4, we have the similar move this year, and it's about in the upper $20 million range, $26 million, $27 million. The rest is actually the restructuring benefits that we're seeing. And that is under our control.

So to give you kind of how we think our engineering will move between the third quarter and the fourth quarter.

Itay Michaeli -- Citi -- Analyst

Very helpful. And then just lastly, on the new business wins, it looks like based on the second-half pursuits of about $12 billion, and then I guess to hit your $6.5 billion of full-year target, you need to maybe get about a 30% win rate. And if that's true, can you just maybe talk about what Visteon's win rates have been in the last six months or a year or two just so we can kind of make that comparison?

Sachin Lawande -- President and Chief Executive Officer

Yes, yes. Sure. Our win rates have actually been higher than that. If you look at the last -- I would say, if you go back almost a year, our win rates are around 50%.

So we have a much bigger pipeline of opportunities. But as you know, these opportunities can shift in terms of the timing of the award. So yes, we are seeing $12 billion of mainly instrument clusters, displays, SmartCore and infotainment opportunities in front of us. So it is a very healthy pipeline.

In fact, I think at this point in time for the rest of the year, it's healthier than I've seen in a while. So that's good. I expect some of this to move out. And nonetheless, on account of our expectation of a higher win rate, we should be in a good position to achieve our full-year target.

Itay Michaeli -- Citi -- Analyst

That's very helpful. Thank you very much.

Operator

Your next question comes from Joe Spak of RBC Capital Market. We'll go to our next question from Emmanuel Rosner of Deutsche Bank.

Edison Yu -- Deutsche Bank -- Analyst

Hey, it's Edison on. Thanks for the question. Two things. First, is there any update on the supplier pricing that was discussed last quarter in terms of the -- from the Tier 2 perspective on electronic components? And then second question, and this has probably been kind of asked before but just trying to get an idea, in terms of the EBITDA guide down, can you just dimension what were the various drivers? Was it basically all of production?

Sachin Lawande -- President and Chief Executive Officer

Sure. I'll take the first part, and then I'll ask Christian to add to the second. So if you go back to what we were discussing on this -- on the first quarter with respect to material pricing, especially the passive electronics components, we were experiencing an inflationary pressure on those components, which actually started to show itself toward middle of last year, 2018. That pressure did continue.

However, in the second quarter, as we had indicated, we are seeing some relief on this material pricing, especially for these passives, as more capacity is starting to come online. We will still -- we expect for the full year to be in that half a point range of negative impact, but as we go further out to 2020, we expect this to largely dissipate. So it's a story that we will be living with for the rest of this year. Hopefully, next year, this is not going to be an issue.

Christian Garcia -- Executive Vice President and Chief Financial Officer

In terms of the guide down between our prior guidance and our updated guidance, if you look at the midpoint of the prior guidance versus the new guidance, there's a difference of about $17 million in adjusted EBITDA. So the drivers for the change -- about two-thirds of that change is due to the headwinds that we have been seeing, particularly in China. The rest of it is evenly split between the incremental costs to clear the backlog for our display product in the third quarter and the unfavorable mix that we discussed in our prepared remarks.

Operator

Your next question comes from Colin Langan of UBS.

Gene Vladimirov -- UBS -- Analyst

Hey, guys. Gene Vladimirov on for Colin.

Sachin Lawande -- President and Chief Executive Officer

Good morning.

Gene Vladimirov -- UBS -- Analyst

So ADAS looks to be a relatively small part of the pursuit pipeline. Can you talk about kind of the -- sort of the competitive environment that you're seeing in that segment?

Sachin Lawande -- President and Chief Executive Officer

Yes, sure. It's a very quickly evolving landscape, I would say. So if we were to look at the opportunities that were being discussed, let's say, about a year ago, a lot of the attention was on level 3 and higher capabilities. So one of the biggest changes that has occurred in the last, I would say, three to four quarters has been the realization that level 3 in particular, but even level 4, the challenges that we faced from a technology viewpoint are now much better appreciated.

And so as the industry is starting to think about the timing of the rollout of these capabilities, these times are now receding further out into the future. In the meantime, there has been a lot more interests in evolving the capabilities of these level 2 systems. If you look at the level 2 systems today, most of them have limitations in terms of the features that they enable our offer at certain speeds. Typically, the speeds that they work at are at lower urban driving speeds.

So there is interest in offering level 2 capabilities in particular, highway copilot, as well as driver-assisted lane change to operate at highway speeds. Now when you move to this level of speeds and these types of features and functions, you need to also move away from the very sensor-specific and fusion-less approach of the current level 2 systems and you have to move into a more centralized computing, a sensor-fusion processing for these types of features. So here, DriveCore is a very good solution because the DriveCore offers a very scalable hardware, offers this higher level of performance that's required for sensor fusion. It also offers open software platform, which enables us to integrate existing software that might have been done by the OEM or some of the other partners and run it on our platform.

So we are starting to see more opportunities to offer DriveCore as an extension of an existing level 2 system versus what we were discussing earlier of a fully centralized, integrated level 2-plus solution. So we expect to see more opportunities like this. I'm very happy that we are now on the supply panel, and we'll be receiving RFQs. A year ago, I wouldn't have been able to say this, given our lack of prior experience and credibility in the space.

So we have made a lot of progress. And hopefully, this is going to result in new business for us.

Gene Vladimirov -- UBS -- Analyst

Great. And then can you -- just a little housekeeping, can you give us color on the kind of the sale with -- embedded from the consolidation of the JV? And was that included in the original $2.9 billion to $3 billion sales set?

Christian Garcia -- Executive Vice President and Chief Financial Officer

Yes, it is. So if you look at the JV consolidation impact, it was about $14 million, $15 million in the quarter. And it is included -- it has always been included in our sales range.

Gene Vladimirov -- UBS -- Analyst

OK. Thank you very much.

Operator

Your next question comes from Dan Galvez of Wolfe Research.

Dan Galves -- Wolfe Research -- Analyst

Hey, good morning, and thanks for taking my questions. I know it's already been asked, but regarding the revenue guidance and in your ability to hold it, if I look at the adjusted production expectations of 1 point in North America, 1 point in Europe and going from 4% to minus 10%, in China, like maybe that's a 2% hit to your customer volumes, which would be about $60 million on kind of last year's revenue. Is that kind of the right way to think about it? And if so, like there must have been some sort of positive offset to allow you to kind of stay within the range of the guidance. If you could comment on that.

Sachin Lawande -- President and Chief Executive Officer

Yes, yes. So you are generally in the right direction there with your assumptions. The only difference that I would say is, we talked about the take rates being higher in China for us, which mitigates some of the volume reduction. So if you adjust for their take rate increase, you would be very much in line with how we look at it.

Christian Garcia -- Executive Vice President and Chief Financial Officer

Right. And so, Dan, I've mentioned this in previous question that we were above or close to the high-end of the range in our -- in the midpoint that that actually brings you to where -- pretty much where you are.

Dan Galves -- Wolfe Research -- Analyst

OK. Great. That's really helpful. And the second question is understanding you're already launching a lot of new business, but based on your longer-term targets, it looks like new business starts to ramp more significantly in 2020.

How should we think about the direction of net engineering costs and launch costs as the new business ramps start to accelerate?

Sachin Lawande -- President and Chief Executive Officer

Right. And so again, I'm thinking ahead to 2020. We will obviously update you on our margin outlook early next year as we always do. But let me share with you some of the things that we see that have happened to the business this year and how that's expected to play out going forward.

So if you look at what has happened since the last time, we provided our guidance earlier this year, the long-term guidance, there are several factors that have impacted our margin. There are, in fact, four in particular. So the biggest one has been the lower production volume. Second, we have had this unfavorable product mix, right? These legacy products that have been rolling off replaced by the newer products which have lower margin.

Third, we talked about the higher material costs mainly due to the passive electronics components, capacitors, transistors and some chips as well, and then this unexpected cost in the ramp-up of the display product. And so these four things have impacted our margins this year. As we look forward to 2020, we expect two out of these four, these costs associated with the ramp-up of the display system, as well as the increased material costs to dissipate. At the same time, we also believe that our volumes -- our sales, as you say, not volumes, our sales are going to be higher in 2020 almost, I would say, irrespective of the underlying production environment on account of new product launches, which are significantly more in number in 2020 than any other year.

So these factors, together with some internal initiatives that we have to drive higher margins, will result in over the next couple of years a very healthy margin expansion. That's how we see it. And obviously, we will be updating you next year in terms of exactly how that's going to play out.

Dan Galves -- Wolfe Research -- Analyst

OK. Great. Appreciate the answers. Thanks.

Operator

Your next question comes from David Leiker of Baird.

Erin Welcenbach -- Robert W. Baird and Co. -- Analyst

Hi. Good morning. This is Erin Welcenbach on for David. So my first question for you is related to your commentary on the better margins and product launching in Q4.

So can you just talk a little bit about sort of the puts and takes to some of those mix issues, given you're still seeing headwinds from those legacy product roll-offs? And maybe if you could even frame how we should be thinking about the margins of things rolling on from the backlog in 2020 kind of versus these mix issues.

Sachin Lawande -- President and Chief Executive Officer

Right. So Erin, what's happening here is that we have a few products that are launching. We're actually launching in Q3, as well as in Q4 that are higher margin than some of the products that we have in our backlog. So this second half of this year is a very active period for us in terms of new product launches, and this is going to contribute to an improvement in the margin sequentially going from the third quarter to the fourth quarter.

We expect that improvement to continue into next year. Now on top of that, based from what I just said about some of these things that are -- issues that we have faced more this year, these ramp-up costs and the material costs that are going to dissipate, we expect that to further contribute to the margin improvement next year.

Erin Welcenbach -- Robert W. Baird and Co. -- Analyst

OK. Great. And then a question from me on SmartCore. Can you just maybe dig a little bit deeper into the -- what you announced there with the Chinese OEM and whether there is potential to expand that business beyond the six vehicle models in the lineup that you had originally announced?

Sachin Lawande -- President and Chief Executive Officer

Yes, absolutely. So let me give you a little more color on what that system is and how to think about it. So -- but before I talk about that, I'm very happy that we have had now two wins in the quarter for SmartCore. We have now a total of six OEM customers and over 10 programs with SmartCore technology.

So this is really something that we believe we have made a big step forward, and I think we are separating ourselves from many of our competitors in this regard. But coming to this particular opportunity, it's for a cross-platform solution, not just for internal combustion engine vehicles, but also for their electric vehicles. So it's a fairly large investment on part of this OEM, and it's going to be a SmartCore system that run on a very advanced SOC that delivers a substantially higher level of processing power. It has instrument cluster functionality that we provide.

In addition to that, it has an Android-based infotainment system. But on this Android-based system, this OEM and their other partners, one of the larger ecosystem providers out of China, are bringing in AI and cloud services. And so this is expected to be a very -- sort of a groundbreaking approach to cockpit electronics. Probably, we'll set the standard in terms of what new cockpit electronics systems based on this domain controller concept are supposed to look like.

So we're very optimistic about it. We have six vehicles that are planned for taking this technology in their cycle plans. But as they develop their cycle plans further and forward, we expect to see more vehicles get added to it.

Erin Welcenbach -- Robert W. Baird and Co. -- Analyst

Great. Thanks for taking my questions.

Operator

Your final question comes from Steven Fox of Cross Research.

Steven Fox -- Cross Research -- Analyst

Thanks for squeezing me in. Just one big-picture question. It sounds like you're definitely not seeing any kind of de-contenting trends. As production slows, you're actually seeing the opposite.

So I was curious as competition heats up in a slower production environment, especially in China, like how far do you think the OEMs can take sort of the content higher and how much it could benefit you relative to just the overall economic environment? Thanks.

Sachin Lawande -- President and Chief Executive Officer

Right. That's a fairly complex question, but let me try to answer it. The way to think about it is where we have products that are more higher digital in nature and content, we are the beneficiary of this long-term trend that we see for our equipping the vehicles with more content. That's certainly the case for us in China.

And as we have been talking about our launch velocity of new products in China has been really high over the last little while, you can expect to see us being at the receiving -- the benefiting end of this more in China. What we are also starting to see is that mid-2020 and -- starting in 2020, I should say, is that we are starting to see us benefit from the stated improvements in these regions as well. A lot of the downside effect that we have experienced in the last couple of years has been on account of us having to lower content products in the regions outside of China, mainly North America and Europe. For the last three years, we've worked very hard to change the profile of our product mix in these regions.

So as we get into 2020, we should start to see the product mix look good or better, I should say, in regions outside of China as well.

Steven Fox -- Cross Research -- Analyst

Thanks. That's very helpful. Thank you.

Kris Doyle

This concludes our earnings call for the second-quarter 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: 59 minutes

Call participants:

Kris Doyle

Sachin Lawande -- President and Chief Executive Officer

Christian Garcia -- Executive Vice President and Chief Financial Officer

Brian Johnson -- Barclays -- Analyst

Itay Michaeli -- Citi -- Analyst

Edison Yu -- Deutsche Bank -- Analyst

Gene Vladimirov -- UBS -- Analyst

Dan Galves -- Wolfe Research -- Analyst

Erin Welcenbach -- Robert W. Baird and Co. -- Analyst

Steven Fox -- Cross Research -- Analyst

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