Visteon (VC) Q1 2020 Earnings Call Transcript

Visteon (VC 0.44%)
Q1 2020 Earnings Call
Apr 30, 2020, 9:15 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 first quarter of 2020. 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 additional 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 Jerome Rouquet, senior 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 and Jerome'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. Before I start with the presentation, I would like to acknowledge the hard work and commitment of our employees during these unprecedented times. Despite the disruption caused by the global outbreak of COVID-19, Visteon's first-quarter sales were $643 million, down 12% year-over-year, excluding the impact of currency while global production volume declined 23%. We were able to maximize our sales, first by successfully mitigating the supply chain disruption in China to keep our global customers up and running, and secondly, by launching 13 new products across multiple OEMs in the quarter.

Adjusted EBITDA was $33 million or 5.1% of sales, compared to $41 million or 5.6% last year. Our profitability was impacted by lower sales, which were partially offset by the nonrecurrence of 2019 operational challenges, cost performance and lower net engineering, which was down 13% year-over-year, excluding currency. We won $800 million in new business in the quarter, which is an exceptional performance, given the circumstances. Most of the new business was for new digital products, including digital clusters, SmartCore and displays, which reflects the successful pivot we have made toward next-generation digital corporate technologies.

These are uncertain times for the industry, and we are taking several measures to ensure that we have sufficient liquidity to withstand the crisis. With the drawdown of the revolver, we now have $825 million in cash and a net debt to last 12-month EBITDA ratio of negative 0.2. We are reducing all expenses in the near term while looking at ways to emerge stronger from the crisis through structural improvements. We plan to reduce our capital expenditures by 20% and have temporarily reduced compensation across the board.

I'm proud of the discipline and dedication demonstrated by the Visteon team in focusing on execution despite the challenging environment. I will elaborate further on our operational performance before handing it over to Jerome for a discussion on our financials. Turning to Page 3. In most regions, Visteon Q1 2020 sales outperformed the global industry production volumes compared to the same period last year as our digital products continue to do well in the market.

On this slide, I will discuss our performance in regions outside of China, and I will cover China separately on the next page. In the Americas, Visteon outperformed industry production volumes by 12 percentage points. The main drivers were the ramp-up of recently launched products at Ford, GM and Mazda and higher take rates of large displays and digital clusters at BMW and Ford. In Europe as well, we had several product launches at the end of last year, as well as three launches in the first quarter with PSA, JLR and Volkswagen, that helped our sales outperform industry production by 16 percentage points.

In Japan, unlike in other regions, we are in a product transition phase with the roll-off of infotainment at Mazda which continued into the first quarter. We were able to partially offset this roll-off through the launch of digital clusters and displays at Mazda, Hyundai and Nissan. Our business with Hyundai, in particular, is growing with multiple launches scheduled for this year. In North America and Europe, OEMs had to abruptly shut down their plants in the middle of March due to coronavirus, but Visteon was able to continue our shipment of products almost until the end of the month, which benefited our Q1 sales.

Turning to Page 4. Visteon has done very well in China for the past couple of years and has consistently outperformed the market, mainly driven by new product launches. That was also the case in the first quarter even under the very difficult substances due to COVID-19. Our sales in China in the first quarter were down 47%, compared to 46% for the market.

In addition to lower volume, we were impacted by the nonrecurrence of the special sales promotion with SGM last year. Excluding the nonrecurrence of the sales promotion, our sales in China were better than market by about 10 percentage points, mainly driven by new product launches over the past several quarters. Our launch cadence continued in the first quarter with seven new products, and we were able to work around the shutdown in February. We have several additional launches this year in China, which will help us greatly as the region returns to pre-COVID-19 level of production.

Despite COVID-19 restrictions, disrupting travel and face-to-face meetings for most of the quarter, we've managed to win over $300 million in new business in China. Most of these wins were for our new digital products, including SmartCore and digital clusters. Turning to Page 5. While responding to the crisis has consumed much of our attention and energy, the company continued to execute on its growth strategy in the first quarter.

We launched 13 new products with nine different OEMs in the quarter and made significant progress developing our first Android-based infotainment system, which we expect to launch shortly after production restarts. We made significant progress in reducing high-cost engineering resources in Western Europe by moving the work to lower-cost sites in Eastern Europe. Almost 80% of our engineering footprint now resides in best-cost countries. Despite the high number of new product launches, net engineering cost in the quarter was down 13%, excluding currency, with lower gross spend and higher recoveries from customers.

As I mentioned earlier, we won $800 million of new business in the quarter, which is a very good performance in light of the disruption that was caused across the globe. Over $500 million of this was for digital clusters, which underscores our strong position in this growing segment of the cockpit. We also won a significant SmartCore business in China in collaboration with Tencent. The other notable win was the extension of our Battery Management Systems business with an OEM in North America.

With this win, we will be the exclusive supplier of all components of the BMS system for this OEM. The sudden and unexpected impact of the rolling coronavirus outbreak across the different regions made quick cost adjustment a top priority. At Visteon, we were able to flex our manufacturing costs down quickly to align with production volume declines. We were also successful in managing our supply chain and inventory and cash conversion cycle was improved by about nine days versus last year.

The company has also proactively taken additional cost reduction measures in anticipation of further production decline in the second quarter. These actions include eliminating contract resources, placing strict controls on all expenses, implementing temporary salary reductions and postponing projects that are not critical in the near term. These steps will partially offset the impact of the drop in sales expected in the second quarter. Turning to Page 6.

This page illustrates our disciplined approach to safeguarding the health and safety of our employees, protect the company financially and serve our customers in an uncertain COVID-19 environment. Our first priority is to protect our 11,000 global employees. The company has developed comprehensive safety protocols and procedures for our plants and technical centers to safeguard our employees. We have deployed an effective work-from-home infrastructure with audio/video conferencing and virtual desktop for our engineers to work on customer programs remotely.

We are also able to bring smaller teams of people to our labs for work that cannot be done remotely while following strict safety protocols. As I mentioned earlier, we have taken several measures to preserve our cash, including the drawdown of the revolver and strict controls on all expenditures. We have implemented temporary salary reduction, starting with my salary being reduced by 40%, the company's executive committee by 30% and nonemployee directors cash compensation by 30%. Subject to local laws and regulations, all other employee salaries will be reduced by 20%.

We have also reduced the amount of raw materials we buy and renegotiated supplier contracts for improved payment terms. And we are reducing capital expenditures and working to ensure we receive payments on time from our customers. Car manufacturers outside of China are now planning the restart of the manufacturing operations, with some OEMs starting during the first week of May. We have been working closely with our customers and local authorities at our manufacturing sites to prepare for resumption of activities.

We expect to be fully prepared with the implementation of safety procedures and supply of raw materials to be up and running ahead of our customers. We are all painfully aware of the shortage of personal protective equipment for frontline medical caregivers in the battle against COVID-19. Visteon has plastic injection molding capabilities at many of our plants, and we are using some of these facilities to manufacture and donate up to 50,000 protective face shields to various hospitals in our communities. About 30,000 of these face shields have already been manufactured and donated to medical staff at several hospitals.

Turning to Page 7. The rolling impact of COVID-19 and the global nature of the industry supply chain has made it difficult to plan restart of operations outside of China. In China, we exited the first quarter with our manufacturing plants fully up and running. OEM production facilities are also back online, although many OEMs are operating on one shift basis instead of the normal two shifts, and the production level in March was at about 50% of pre-COVID-19 level.

We expect demand to continue to improve in China and production levels to slowly rise throughout the second quarter. Outside of China, COVID-19 has essentially brought industry production to a halt since the second half of March, and the shutdown has continued through all of April. There's a lot of discussion about the timing of the restart of production, and Visteon is in regular dialogue with our customers and suppliers to determine our return to work timetable. We expect our customers in Europe to start a little earlier than in North America, mostly in the first week of May.

By mid-May, we expect most customers to be starting production in Europe, as well as in North America, but at one shift per day initially. As most OEMs had to shut down abruptly in March, we believe there is some parts inventory at their plants already which will allow us to restart our plants concurrently. Beyond the first couple of weeks of low production, based on our experience in China, we expect production volume to slowly increase to about 50% of pre-COVID-19 levels toward the end of the second quarter. There was some stocking of inventory that occurred in the first quarter which will likely reverse in Q2, and dealer inventories are also high, which will keep production levels relatively low in the near term.

As a result of this uncertain and highly fluid situation, we expect production volumes to decline by 50% or more in the second quarter. Beyond the second quarter and for the rest of the year, production volumes will be determined more by the level of consumer demand, which is very unclear at this time. A lot will depend on how we're able to control the spread of coronavirus and if there are additional waves of outbreak. Due to the lack of sufficient visibility and the highly dynamic nature of the situation, we have withdrawn our 2020 and long-term guidance for the company.

Turning to Page 8. While we are responding to the crisis caused by coronavirus, we are also thinking about the post-COVID-19 scenario for the digital cockpit market. We believe the secular trends prior to the pandemic that were the main drivers of growth of cockpit electronics, will largely remain intact and continue to drive growth for the industry. The transition of the cluster from analog to digital is already in advanced stages, and it's expected to continue post-crisis.

The flexibility offered by digital clusters and rendering evolving features, such as ADAS features, is a key driver of this trend. Additionally, digital clusters with smaller displays are starting to become an important product for more affordable mass market vehicles. Traditional OEM infotainment systems are hugely expensive to develop and are yet limited in their ability to offer downloadable apps or new market-driven features. On the other hand, Android-based infotainment systems offer a much broader app ecosystem and can be more easily upgraded for new capabilities, such as voice assistance.

With respect to displays, we expect the market to focus on value and avoid the expensive pillar-to-pillar dashboard filling displays like those we have seen at recent CES shows. Mainstream displays will continue to grow in size and features, but with more focus on cost than before, which will likely result in further delays in introduction of OLED displays. Cockpit domain controllers, thus far, have demonstrated the ability to consolidate ECUs, but have often been too complex and difficult to develop, especially in terms of software. We expect the industry to develop new and unified software architecture for the cockpit that together with new silicon solutions offer improved cost and feature benefits to the OEMs.

And lastly, this crisis will likely push autonomous driving further out in time while ADAS will continue to evolve as new and cost-effective silicon and camera solutions become available. At Visteon, we are well-positioned with our product and technology portfolio to address these trends. In addition, our strategy of vertical integration and in-house development of new technology to reduce cost is even more appropriate and relevant in the post-COVID-19 world. Turning to Page 9.

In summary, our focus on execution resulted in better-than-market sales and lower costs compared to prior year despite the challenging environment. The company continued to build the foundation for future growth by launching 13 new products and winning $800 million in new business in the quarter. We have clear action plans to address the crisis with focus on three main topics: health and safety of our employees, preservation of cash and preparing for restart of operations. In anticipation of further decline of production volume in the second quarter, we have proactively taken several measures to reduce the use of cash.

And, lastly, we are confident that we will emerge from this crisis as a stronger company that continues to be aligned with the evolving product and technology trends and more efficient than before. Now I will turn the presentation over to Jerome to review the financial results.

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

Thank you, Sachin, and good morning, everyone. Our top priority is the safety of our employees, followed closely by our constant focus on ensuring that Visteon weathers the storm and emerges from the crisis as a stronger company. On Page 11, we provide an overview of some key balance sheet items, as well as the proactive measures we are taking to actively preserve cash and aggressively adjust our cost base. Visteon has entered this crisis with one of the strongest balance sheets in the industry.

Cash at the end of the quarter was $825 million, which translates into a $41 million net cash position and a net debt to trailing 12-month EBITDA of negative 0.2 times. In addition, the majority of our debt, including our term loan and the revolving credit facility, does not mature until 2024. To protect our strong balance sheet, we are proactively taking actions to preserve cash. As such, we're targeting a minimum 20% reduction in capital expenditures for the full year compared to 2019.

A large portion of our capex is related to new programs. As such, we're striking a balance between reducing near-term investments, while ensuring we continue to support future program launches and therefore, Visteon's future growth. Working capital management has also been at the center of our activities very early in the crisis, and our performance was solid at the end of Q1, with working capital balances below 5.5% when annualized as a percentage of Visteon sales. As COVID-19 began to impact businesses in China, we immediately set up a global task force to manage inventory levels, first, focus on ensuring supply continuity outside of China, then quickly pivoting to reduce inbound orders throughout the rest of the world as customers were progressively shutting down.

We have also been working in parallel with our suppliers to renegotiate payment terms. Finally, payments from our customers remained on track throughout the first quarter, and we will continue to monitor this closely. We're actively pursuing local government-supported cash deferral programs, which include, in some jurisdictions, partial deferral of payroll taxes, indirect taxes or income taxes, as well as pension contribution deferrals. In anticipation of steep volume reductions in Q2, and potentially beyond Q2, we have taken strong measures to reduce costs, actively reducing personnel expense and discretionary spending.

As previously announced, we have implemented a temporary reduction in wages and certain benefits for salaried personnel, which includes a 20% reduction of salary for all employees while the leadership team and the Board of Directors have taken larger reductions. Non-personnel spending yields are also being curtailed through strict cost controls and renegotiations, including reducing contractor and consultant spends throughout the organization. In our commercial pursuits, we continue to focus on pricing discipline during our negotiation with customers. All of these cost actions are also complemented by further structural actions.

We have announced restructuring plans which were being developed before COVID-19, but have become even more important to ensure we emerge stronger from this crisis and with a more streamlined organization. The restructuring programs announced in Q1 will impact headcount in manufacturing, engineering and administration and are expected to be completed by the middle of 2021 and have approximately a one-year payback on average. We are anticipating cash restructuring payments of approximately $40 million to $45 million for the full year for all programs that have been announced to date. Turning to Page 12.

On Page 12, we present our key financial results for the first quarter of 2020 versus the prior year. Sales of $643 million in the first quarter decreased $94 million or 13% compared to prior year. In comparison, global industry production volumes were down 23% as the spread of COVID-19 significantly disrupted operations throughout the automotive industry. Adjusted EBITDA was $33 million, representing an $8 million decrease from 2019, primarily due to the impact from lower sales and unfavorable mix, which were partially offset by improved manufacturing performance, lower net engineering and the nonrecurrence of 2019 operational challenges.

Excluding the 2019 operational challenges, decremental margins were approximately 20% for the quarter. Adjusted free cash flow was negative $14 million, representing an improvement of $16 million compared to the prior year and benefited from the improved year-over-year working capital levels and performance. On Page 13, we provide more detail on the year-over-year changes in sales and adjusted EBITDA. Sales of $643 million were negatively impacted by approximately $100 million as a result of COVID-19.

This impact is present in all categories shown in our sales variances at the bottom of the page, as lower activity decreased the level of volumes, mix, net new business partially reduced the level of annual pricing and created additional volatility in foreign exchange. Adjusted EBITDA was $33 million, with adjusted EBITDA margin of 5.1%. The impact from volume and unfavorable mix reduced sales but was essentially offset by positive manufacturing performance and the nonrecurrence of the 2019 operational challenges of approximately $10 million. Annual pricing reduced adjusted EBITDA by $15 million, representing about 2% of prior-year sales, which is on the lower end of our historical range.

Excluding the impact of currency, net engineering expenses decreased $11 million or approximately 13% compared to last year, primarily related to the benefits of previously announced restructuring actions, lower activity levels in China and the timing of program expenses and recoveries. Adjusted SG&A expense, excluding currency, decreased $1 million compared to prior year, while currency reduced adjusted EBITDA by $3 million. Excluding the nonrecurrence of operational challenges, decremental margins were approximately 20% and included the cost reductions we initiated, as well as favorable timing of engineering recoveries and program expenses. The outlook for Q2 is uncertain at this time.

And as Sachin highlighted, production volumes could be down 50% or more compared to prior year, representing a much more significant decline than experienced in Q1. As such, we expect decremental margins to be in the high 20% range for the quarter, which incorporates the cost initiatives we have implemented while also taking into account the severe decline in production volumes. Moving to Slide 14. Page 14 provides our adjusted free cash flow, as well as an overview of our net cash position for the first quarter.

First-quarter adjusted free cash flow was negative $14 million, representing a $16 million improvement compared to prior year, mainly due to the improved working capital metrics on a year-over-year basis, combined with lower volumes. This was partially offset by higher capital spending in Q1 2020, supporting a larger number of launches in 2020 versus 2019. Other assets and liabilities were also impacted by negative year-over-year cash outflows related to the annual incentive compensation plan, highlighting different payouts between 2018 and 2019. We are actively monitoring daily receipts from our customers, which have remained on track throughout the first quarter.

We're expecting that the level of collections will significantly decrease toward the end of the second quarter as payments are due for activity performed in late Q1 and earlier Q2, which were either significantly reduced or stopped altogether, as we previously discussed. In parallel, we are also working diligently with our supply base by entering into negotiations to extend payment terms. We ended the quarter with $180 million of inventory and are actively monitoring the situation to ensure we can support our customers' plans to restart operations while ensuring we control the level of inventory within our operations. Finally, Visteon completed $16 million of share repurchases in the first quarter before the impact of COVID-19 spread outside of China.

We are suspending our share repurchase activity in the near term until the industry begins to show signs of sustainable recovery, at which time we will assess our future plans. As previously mentioned, we have one of the strongest balance sheets in the industry, with a net cash position and no material near-term debt maturities. We will continue to monitor our cash position daily while taking actions to actively preserve cash and aggressively reduce costs. Turning to Page 15.

Despite the near-term uncertainty and challenges that the industry faces, Visteon remains a compelling long-term investment opportunity. As a pure-play cockpit electronics company, we're able to combine a deep understanding of the automobile industry with hardware and software know-how. As a result, we're able to quickly adapt to the changing environment, and we have created a product portfolio well aligned with the secular trends in the industry. Our continued focus on maintaining a strong balance sheet has put us in a great position to weather the storm, and we're taking proactive measures to reduce near-term cost while focusing on building an organizational structure that will emerge stronger once the near-term challenges dissipate.

Thank you for your time today. I would like now to open the call for your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question is from David Leiker with Baird. Your line is open.

David Leiker -- Robert W. Baird and Company -- Analyst

Good morning. Can you hear me now?

Sachin Lawande -- President and Chief Executive Officer

Yeah. Good morning, David. Go ahead. We can hear you.

David Leiker -- Robert W. Baird and Company -- Analyst

Yeah. I was trying to figure out how to do all this stuff that we do. I want to focus on one thing from a couple of different angles, and they literally could probably keep you up here all morning. But if we look at the new business number, clearly below trend, clearly some disruptions in the process of engineering and contract award biddings and things like that.

Can you characterize at all how much new business wins you might have lost in the quarter because of some of these disruptions? Because I think people are going to focus on that number versus the run rate that you've been at and, obviously, this is a lot lower, but if you can help bridge that in some context, that would be great.

Sachin Lawande -- President and Chief Executive Officer

Sure. Sure. Absolutely. So first of all, David, I would say that $800 million of new business wins under the circumstances, it is a pretty decent performance.

And as you know, new business wins tend to be lumpy as our quarterly pursuits vary, and they vary quite widely from quarter-to-quarter. Usually, we see anywhere between $2.5 billion to $5 billion of opportunities in a quarter and the win rates tend to be somewhere between 30% to 40%. Now even before the crisis, Q1 was expected to be the lightest quarter in 2020, and every successive quarter has more opportunities. And the third and the fourth quarter is where we see most of the decisions for awards to be made.

Now keep in mind, this is before any of the crisis-related impact. Now in Q1, on account of all of the restrictions that we had to work around, we saw roughly, I would say, about $300 million of impact to our new business win number. Now on top of that, perhaps not as well appreciated, is the impact of lowered volume expectations in the outer years, and that's about 10%. OK.

And so if you look at all of these impacts, I would have expected us to be somewhere between $1.3 billion to $1.5 billion in new business wins in Q1, if COVID was not to happen. Now that's still in line with what we have done in previous quarters this time of the year, but it is certainly not too far off, and we would expect the later quarters of the year to be the larger quarters from a new business wins viewpoint. Fundamentally, we don't see any change even now, even as we talk to our customers despite all of the restrictions, work from home, etc., there's still a lot of attention on the same technologies and trends that we have been talking about for the digital cockpit. So we don't see a fundamental shift as yet.

But Q2, we do expect to see some delays simply because the attention right now is on restart and a lot of energies going into that. But we expect to be able to catch up in Q3 and Q4, maybe not to the full extent, but there's opportunities, I don't believe, are going anywhere as the industry has a need to upgrade their technologies in the cockpit. I mean the days of analog gauges are done. It's about multiscreens, multimodal touch, voice interaction and user experience.

I'll just give you a quick anecdote. We are in the final stages of developing a system, a SmartCore system for a customer in China, and we were surprised to find out that they were doing all of their testing exclusively via voice even though the system has a touch interface. That's where the industry is headed. So we don't believe that we will see a sudden change in direction from the larger displays, voice modalities, connected, and applications coming into the cars.

So we think this should continue.

David Leiker -- Robert W. Baird and Company -- Analyst

OK. And then just one follow-up on that. The other piece of this equation is, it seems like every day or every other day there are announcements about new product program launches. We've been through multiple cycles here.

In times like this, everybody is trying to conserve cash, and one of those is to push out new launches. Can you characterize -- I know it's early, and I know it's hard, but is there any way to characterize the impact on the backlog converting to revenue? And how much of that might be pushed out or how we should look at that and...

Sachin Lawande -- President and Chief Executive Officer

Yeah. Yeah. Yeah. So this year, 2020 was also our year of the highest number of new launches over the past three to four years.

If you look at our prior performance, on an average, we've been launching about 50 new products each year. This year, when we started the year, we had 64 launches in 2020, and 13 of them in Q1. Q1, we were able to work around the restrictions in China. It was really felt only in China, and we were able to work around the stoppages and still launch all of the products.

And then the Q2, Q3 and Q4 have higher numbers of new launches. We are expecting delays on account of COVID anywhere between two to three months. But most of these will be still contained within the year. What we have been informed so far out of the 64 is that four launches, which were at the tail end of the year are toward the end of Q3 and then Q4.

Those four launches are being pushed out to 2021, but we still have 60 launches that are, at this point in time, on track to be launched yet this year. So we don't believe that there will be a significant delay simply because these programs are at a point where it doesn't make sense for the OEM to delay them any further. A lot of investment and effort has gone into them. And they need this fresh product out in a highly competitive environment as and when they start to come back.

So we don't really expect to see a huge amount of change. What we do expect is some product that was expected to launch, say, '21 and '22, there might be some level of adjustments being made, some portfolio pruning on the vehicle models that we might see. But those are still in early discussions. We expect OEMs to be going through those discussions internally now, and we will only know in a few weeks' time here as to how that might look like.

David Leiker -- Robert W. Baird and Company -- Analyst

OK. That's awesome. That's perfect. Exactly what I'm looking for.

Thank you.

Sachin Lawande -- President and Chief Executive Officer

Thank you.

Operator

The next question is from Dan Galves with Wolfe Research. Your line is open.

Dan Galves -- Wolfe Research, LLC -- Analyst

Good morning. Thanks. So your revenue in Q1 was 13% below Q4 level. Can you talk to us about how much lower your headcount was in Q1? And looking forward, how do you think about actions to resize the cost structure to what you anticipate might be production rates and demand, once the industry restarts?

Sachin Lawande -- President and Chief Executive Officer

Sorry. Yeah. I'll let Jerome address this question. Go ahead, Jerome.

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

Good morning. Yeah, Dan. Thanks, Sachin. So 13% down versus Q4, it's very similar to what we have as well versus prior year.

So I think Q1 was a fairly solid quarter in terms of execution. We were able, pretty early in the crisis, to adjust our cost. We had as well previously -- or prior to the COVID-19, we had as well taken actions like restructuring actions to reduce our cost base. So the good decremental margin percentage that we have, 20%, is the combination of both what we had done before COVID-19 and as well the quick actions we took after COVID-19.

Going into Q2, obviously, volumes will be much more severe in terms of decline than what we've seen in Q1. So we are expecting decremental margins to be in the high 20s, and we are integrating, obviously, the higher volume declines, the impact it has got on the fixed cost, but as well, all the actions that we are taking, headcount, but as well salary reductions, which are short-term actions, as well as the longer-term actions that we're taking in terms of restructuring.

Dan Galves -- Wolfe Research, LLC -- Analyst

OK. Great. And could you just give us a sense of over the last couple of quarters of launches on the profitability side, is there anything you can tell us on how the launches are performing from an incremental margin standpoint and launch costs versus expectations?

Sachin Lawande -- President and Chief Executive Officer

Right. Right. If you'll go back to last year's performance, remember the first quarter where we had this launch challenges with a display product, which we had to work through pretty much in the first half of the year. Since then, our performance has been on track.

We have not seen any issues with launches. Having said that, I think you understand that the launch margins tend to be lower than the margins of more mature products. But that's very normal, and we expected. So we have not seen any issues, and the same goes for the launches that we have had in the beginning of this year as well.

Dan Galves -- Wolfe Research, LLC -- Analyst

Great. Thank you.

Sachin Lawande -- President and Chief Executive Officer

Thank you.

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

And the next question is from Joseph Spak with RBC Capital Markets. Your line is open.

Joseph Spak -- RBC Capital Markets -- Analyst

Hi. Thanks. Good morning, everyone. Hope everyone is OK.

I guess just to start, maybe a couple of things on China. I thought you mentioned that you thought there was a little bit of an impact on your growth or outgrowth from an inventory build. I was wondering if you could quantify that impact in the first quarter because, obviously, that should reverse in the second. And then last year, as we all know, you benefited from some higher take rates in China which, I think, it was a promotional effort to help to move units.

Do you think there's a possibility such programs could return in 2020?

Sachin Lawande -- President and Chief Executive Officer

Yeah. Let me address that. And let me go back a little bit in terms of our market outperformance and what have you seen this quarter. So as you know, our market outperformance actually started in the second quarter of last year and continued into Q3 and Q4 last year, and we were expecting at the beginning of this year to continue that into 2020.

And January started on track as we were expecting with a double-digit growth that month. And in February, we had to react to the shutdown that happened in China. And a lot of our focus at the time was to -- as we were shutting down in China, secure enough supply of raw materials to keep our customers outside of China up and running. And then just as quickly as that was starting to get some level of control, we had to face another change and pivot to slowing down on the receiving of the raw material inventory as the rest of the world started to go into a shutdown.

So what we did toward the end of March, because most of the OEMs started to shut down some time, middle of March and through the rest of the month, we were still able to ship approximately a week's worth of product even though the OEMs were shut down. And that is the inventory we expect to be sitting at our customers' plants as, and when they come back and restart, that they would be able to use that. So we would not necessarily be required to ship product ahead of them starting their plants. And we are starting to see some of that activity happen in Europe as they are ramping up their engine plants and then they have plans to start their assembly plants.

We expect to see some inventory that's already sitting there that would impact us in this quarter, but it's roughly about, I would say, three to four days' worth of production from our side outside of China that is expected to roll back. So hopefully, Joe, I think that was your question. Now with respect to the specific promotion in China with SGM, SGM had a couple of vehicle models that needed the promotion, and we saw the benefit of that in '19. This year, they have discontinued one model.

And the second model that is still in production has, I would say, more normal levels of take rate of that specific product with that customer. However, I should say that even in the first quarter, we are seeing an increase in take rates with a broader set of customers in China, especially digital clusters that we expect to see continue through the rest of the year. And as the market is still somewhat depressed, we do expect that the vehicles would be up-contented with digital clusters that should help us for the rest of the year.

Joseph Spak -- RBC Capital Markets -- Analyst

Thanks. The second question is, Sachin, and you touched on this a bit, I was wondering if you could expand a little bit more. Just how customers are really thinking about UI/UX changes in the wake of COVID? I mean it doesn't seem -- it looks like you think they're rethinking screens, but to your point, maybe adding voice, maybe gesture, you could also sort of think about maybe additional functionality like maybe driver or passenger health monitors might be more important. So I just want to think about how you guys are thinking about that, how you can anticipate it, what your customers have sort of talked about?

Sachin Lawande -- President and Chief Executive Officer

Right. Right. So the way I would characterize it is that the broader trends are still ongoing, and so the displays are getting larger. There is a drive toward more safety features, Level 2, Level 2+ driver monitoring.

But the overall theme that we are now starting to hear is, of course, cost. And more than ever, the development cost, not just the product piece price cost. So the big shift, I think, is that the amount of money that's going to be spent on building new technologies and products is the one that's going to come under more scrutiny. And so suppliers will require to figure out a way that you can develop these products without spending the high amounts of engineering cost that used to be the case earlier and that's exactly what we have been anticipating even prior to COVID.

Now we didn't realize that it would happen on account of COVID necessarily. But the whole move toward platforms is exactly designed to serve that particular point, which is that we should be able to reduce the cost of engineering and developing the products below where it is at today. As an industry, we spend far too much money in the custom development of whether it's infotainment or clusters or displays and not making use sufficiently enough of platform approach, and that's the big shift that we see. We also see the drive toward integration of many of these discrete products, such as driver monitoring.

A great example where there is a push toward introducing that feature, but that's an incremental cost. In these times, that's going to be a very difficult proposition. So that's one theme. Now with respect to infotainment, I believe that there is going to be a bigger shift toward more open platforms like Android, and the days of custom infotainment might finally be now over with the impact of COVID.

So those are the general themes. This is still early days, Joe. And I think we will learn a whole lot more, but that's what we feel at this point in time.

Joseph Spak -- RBC Capital Markets -- Analyst

Thanks.

Sachin Lawande -- President and Chief Executive Officer

Thank you.

Operator

And the next question is from Brian Johnson with Barclays. Your line is open.

Brian Johnson -- Barclays -- Analyst

Yes. Thank you, and good morning. Good afternoon. A lot of good questions got answered before.

I usually like to do the more strategic ones. So I'll get some of the financial ones. So if we kind of think about -- I know you don't want to give guidance, but I'm just trying to think through a second half where maybe China is closer to normal, let's call it, down 15%, Europe is off significantly, call it, 30% to 40% and North America, which, as we pointed out on the supply side is just as uncertain as demand side is down. So if we're kind of looking at, let's call it, a global production environment down 25%, 30%, how do you think about your margins in that and sort of resizing to a global production base that feels more like 2011-2012 than like 2017-2018?

Sachin Lawande -- President and Chief Executive Officer

Right. Brian, let me start, and then I'll ask Jerome to also step in here. But we're looking at it in two different perspectives. First of all, our internal planning is exactly assuming a scenario where production can be down by about 30% for the full year.

So in some sense, we are a little more conservative than where IHS is today. And so we are looking at our costs. We have several actions that we have already taken and some under way to drive our cost structure down. But at the same time, we want to make sure that we protect our future growth.

So it's that balance that we are trying to strike between how do we protect our growth. And we actually see this as an opportunity as we are, I believe, much more nimble than many of our competitors. I believe we are in a much better position with respect to the technology, as well as the cost associated with it that we should be looking at this as an opportunity to take market share and not just focus on the very near term. So it's that balance that we are trying to strike.

So if you look at our costs, besides the cost of the raw materials that go into the product, we have manufacturing and engineering as the two big cost elements. So there's a tremendous amount of focus right now on aligning manufacturing because that's the one that's going to be impacted most in the near term. And we have a lot of different strategies to reduce our manufacturing costs, fixed costs to align with the new production levels. Then when we look at engineering, we have a very strong focus internally on a couple of directions.

Number one, to move our cost structure to lower cost places, and the second is to use a platform approach. And I can't emphasize the platform approach enough. And what it means is that we should be in a position to opt to OEMs a ready-to-deploy product at much, much lower cost than what they are accustomed to today. Now to be able to do that, they would have to also accept certain restrictions and not be demanding specific and unique features to them as much as they used to do in the past.

But even that, we should be in a position to support to a certain extent. So that's the general direction that we are getting organized to set up the company in, and I will ask Jerome to jump in here with maybe more of the...

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

Yeah. Thanks, Sachin. If I can maybe add two points. The first one is that very early, we took some actions on the restructuring side.

So in fact, before COVID-19 started in January, we announced one plan, and we then announced the second one in March. So the idea was really to adjust this cost structure that Sachin was talking about and get ready some benefits in this year, and it will be largely Q3 and Q4 and will help us mitigate some of the volume decline which in some of our scenarios are pretty steep, as mentioned. The second thing, I just would like to come back on engineering. We were able to reduce engineering year-over-year by about 13% in Q1.

And we see this continuing as well with, again, all the actions we're taking long term and short term. We should be able to get great benefits from a cost standpoint on the engineering side. If you just look at Q2, we don't see any further increases in engineering. If anything, we'll see a lower level in Q2.

And that's, at a high level will give you a 20% year-over-year decrease for just Q2 on the net engineering side. So early actions and benefiting manufacturing, SG&A, but as well, obviously, engineering.

Brian Johnson -- Barclays -- Analyst

OK. And just back to Sachin's comments about platforms because, certainly, I remember the great work you did at Harman last decade on moving to platforms. I mean how far along is the software and hardware platformization, if you will, at Visteon? What's left to do? And is it more a question of kind of getting the OEMs on board? Or do you have additional work to do to get a customizable platform out?

Sachin Lawande -- President and Chief Executive Officer

Yeah. We are in a very good position with infotainment, and the reason for that is that we didn't really have a big legacy of infotainment that I had to work through after I came here. So by the way, the first product just got launched yesterday, using their platform with VW. It's actually now available in terms of the public launch information.

So it just went live in Brazil with VW. Very proud of the achievement of the team there. So very good position with infotainment, and we're making a lot of progress with instrument clusters, digital instrument clusters. Now the challenge here was because we have a very broad set of customers, we have many, many programs and the implementations vary widely from OEM to OEM.

So we have put together a team, and the goal is we will launch our first platform-based cluster program. A majority of the work would be done this year. And then every successive cluster that we build will be built off of that platform, and that's going to represent a significant cost savings that we will pass on to the OEMs. So that's where we are at.

And by the way, we are taking the same strategy with DriveCore, where we are focused on Level 2+. And here, again, I think our initial views on the viability of the more advanced levels of autonomy have been proven to be more correct and focuses on 2.5. And with the goal of developing most of the technology in-house so that we can offer a very cost-competitive solution. Made a lot of progress with the vision processing algorithms, developing them in-house, also on the hardware.

And late summer, we expect to be in a position where the technology will be mature enough, where we can then take it to other customers beyond GAC, who is our lead customer that we're working with on that front. So the three main platforms, infotainment, that's ready to go. We are actually using it with the one that just got launched and some other OEMs. A lot of progress being made on clusters.

And then DriveCore is the one that is going to come third, but still this year.

Brian Johnson -- Barclays -- Analyst

OK. Great. Thank you.

Operator

The next question is from Itay Michaeli with Citi. Your line is open.

Itay Michaeli -- Citi -- Analyst

Great. Thanks. Good morning, everyone.

Sachin Lawande -- President and Chief Executive Officer

Good morning.

Itay Michaeli -- Citi -- Analyst

Just want to go back, Sachin, to the new business discussion. So was the $300 million you mentioned before just the delay in Q1? And kind of how should we think about where you see the opportunities for the remainder of the year? I mean do you think you still have an opportunity to book over $1 billion a quarter of new business? And kind of how are you kind of thinking about that?

Sachin Lawande -- President and Chief Executive Officer

Right. And it truly is a delay that we expect to be working on either in Q2 or Q3, depending upon how this delays cascade in the quarters. But fundamentally, what we're seeing is more or less a similar situation as last year, with most of the opportunities coming from the transition of clusters from analog to digital. And within that, we are seeing a lot of interest in what we call now as the mixed digital clusters.

So clusters at the lower end of the market, eight inches of display size with some other LED and other capabilities to really drive the product into the A and B segments of the market. So a lot of opportunities there. We are seeing a lot of opportunities based on the infotainment platform that I just mentioned earlier. So we've talked about this before, where we are seeing the market collapse from the three segments that we used to have in infotainment to effectively two, display audio and the high-end infotainment.

And at Visteon, we are really not focused on the high-end infotainment. We're focused on the display audio. And the platform that we have built that just got launched puts us in a great position. So we have a few opportunities based on that.

And then the third segment which is relatively new to us, but we did see that last year as well, are displays. And within displays, we have a very clear focus. We are not focusing on the commodity flat screen, eight-, ten-inches poke-through displays, but more the multi-screen products that I mentioned earlier as well. So these are multi-displays that are behind a glass cover lens.

Often, this tend to be curved. And there's, again, a great launch that happened at CES with one of our products, with the Nissan Ariya concept, it's a SUV, that's an EV product. The information is actually available online, and the display is from Visteon. And it's a beautiful curve display, and it's the kind of product that we see more opportunities off in the future.

With what has happened here, we expect to see less interest in technologies like OLED, more interest in the traditional display technologies, at the same time more of a focus on value. So our strategy of, again, vertically integrating as much of the displays as possible in our plants will also serve us well.

Itay Michaeli -- Citi -- Analyst

That's helpful, Sachin. And on that point, given your view that OLED could be delayed, are you starting to see incremental interest in the microZone product you introduced at the CES, or it is still early...

Sachin Lawande -- President and Chief Executive Officer

No, absolutely. And what it has done is it has really given Visteon the credibility that we necessarily didn't have in this segment of the market, where Visteon's business with displays prior to last year was almost exclusively focused on food, and we were not really a supplier to the other OEMs. So getting on the supplier panel, our strategy here to land first and then expand, we need always, when we do that, a technology innovation that becomes the calling card why we should be considered for that opportunity. And microZone serves that purpose extremely well.

Now we still want to position it as a premium product. It is not a replacement for the current commodity LCD technologies, and we will still continue to see more business with the traditional LCD technologies, but fewer on the microZone, but it's a product that we believe will also be interesting to those OEMs that don't want to pay for something like OLED, but want a better experience in their either cockpits.

Itay Michaeli -- Citi -- Analyst

That's helpful. And just lastly, for Jerome, kind of back to balance sheet and liquidity, I apologize if I missed this, but are you able to share where cash is expected to end the month of April? And then just how to think about cash pre and post-working capital to the extent that some of the production resumptions are delayed?

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

Yeah. So we'll not give detail regarding our cash balance for April nor we will give the amount of cash outflow we'll have for Q2. But let me help you maybe frame what we are looking at for Q2. So we talked about sales decline being pretty dramatic, IHS showing close to 50%, decremental margins in the high-20s.

So that's for EBITDA. On the cash flow side, we will be reducing our capex spend. We've announced earlier on that we would be looking at a 20% reduction for the full year. So that will apply as well to quarter two.

And then on the working capital side, we had some good performance in Q1. You can assume that DPO, DSOs will remain pretty stable in terms of working capital. And then on the inventory side, we are expecting inventory to be fairly stable. We are obviously making sure that we are ramping up with our customers and being able to supply goods.

At the same time, we'll be monitoring this very carefully. But I think an assumption of flat inventory between Q1 and Q2 is a reasonable assumption. There's probably as well a bit of cash taxes reduction. So that gives you kind of a frame to be able to think about Q2 EBITDA, as well as cash flow.

Itay Michaeli -- Citi -- Analyst

Great. It's very helpful. Thank you.

Operator

Your next question is from Emmanuel Rosner with Deutsche Bank. Your line is open.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Hi. Good morning, everybody.

Sachin Lawande -- President and Chief Executive Officer

Good morning.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Sachin, I was hoping to ask you about the competitive environment for your technology and products. At the beginning of the Q&A, I think you were talking about a consistent 35% to 40% win rate on available opportunities. So have you seen any changes in this environment recently, even sort of like before COVID? And in particular, any changes in willingness or eagerness of automakers to in-source either software or other parts of some of the things that you could supply? And I'm asking because I'm also wondering about your thoughts on the other side of COVID. Is there an opportunity from maybe as automakers are sort of a little bit more mindful of what they want to spend on.

Is there an opportunity for you to supply more than what was available?

Sachin Lawande -- President and Chief Executive Officer

Sure. So let me address that first from the pre-COVID perspective, and then we can talk about what might post-COVID environment look like competitively. So as you know, we are laser-focused on the digital cockpit. And for now, what that means is our digital clusters, displays, infotainment and as we get forward here, Level 2+ autonomous.

Now if you think about where we were at with digital clusters in addressing the top OEM customers. If you look at the top 15 OEMs, prior to about two years, three years ago, we had only two out of the top 15 as Visteon customers for digital clusters. Today, there are only two OEMs in that list that are not Visteon customers today. Now we have a lot of opportunities to grow within many of them.

So in some ways, we can say that we have landed, but there's a lot of opportunity to now expand within those OEMs for digital clusters. Now let's take a look at infotainment. When I came here, we had one customer effectively for infotainment outside of China, and that was Mazda. Today, we have five.

Now we have launched with only the second and that too happened just yesterday. But we have other customers that we are working with, and we are in that land or phase of the land-and-expand strategy on infotainment. Displays, we are in a slightly better position. We were also earlier just with one OEM customer.

We have expanded that also quite well. And so with all of these, as you can see, we are taking market share, we are growing our footprint, and we have a lot of focus on the top 15 of the largest OEMs, simply because it gives us a better ability to expand once we land. So that's the situation. Now with COVID, what is likely to happen here? There will be a tremendous focus on engineering costs, engineering spend of digital cockpit because if you look at the past four- or five-years trend, for OEMs, this has been one area of cost that has kept increasing and increasing at a pace faster than they can offset through other savings or pass on to the consumer.

Now this pace of change is not going to reduce. The amount of technology that's going to come into the cockpit will not slow down. So they have to figure out a way to offset that. In-sourcing at this point in time makes virtually no sense, absolutely, for any of the OEM.

They don't have the capability. They cannot build it fast enough, with the exception of very few. So we believe that going forward, the in-sourcing attempts will be either entirely canceled or slowed down substantially. And our focus here is not to try to do everything ourselves.

We are building platforms. We are more than happy to work with the OEMs that they can bring in what truly makes them different from the others. They don't have to reinvent everything, and it doesn't pay to reinvent everything. So our focus is the platform strategy, which, I believe, competitively, we are ahead of almost all of our competitors.

And so this should serve well, especially in an environment where there's a lot of focus on cost.

Emmanuel Rosner -- Deutsche Bank -- Analyst

OK. That's great color. Just one quick follow-up. On the financial side.

So the capex reduction, how do you manage this in the context of still a lot of the launches not really being pushed out by too much more than like two or three months. I guess what part of the capex is getting?

Sachin Lawande -- President and Chief Executive Officer

Yeah. Yeah. Let me start, and then I'll have Jerome jump in here as well. So if you think about the launches and the capex associated with them, the capex is usually spent anywhere between nine months to a year before the launches.

So a lot of the launches this year, the capex was already spent most of it last year. Now the capex that we would spend this year is in the service of the programs that will be launched, say, in '21 or '22. These are typically things that we need to install in our plants for either final assembly or testing or some special capability that a new product requires. So depending upon the level of new business wins, we would be looking at that as a way to make sure that we dial the capex into the right level.

Number two, I mentioned this earlier, we started an initiative to look at how we reduce the cost of building the equipment that's required to do this final assembly or testing and do it more efficiently and cost effectively. Now these were things that in the hustle of the daily business were not necessarily the focus of the company. We have put a lot more emphasis on it, and we believe we have a lot of opportunity to take cost out. And again, the platformization and the streamlining of our product portfolio, where you don't really need different types of testers, if you're building a lot of different digital clusters, the sizes may be different.

But fundamentally, it's the same product. So as our products converge, as our focus on cost reduction of those equipment starts to take effect, I believe, we have definitely an opportunity to save at least 20%, if not more, on the capex.

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

Yeah. So just to add a few comments. So Q1 was higher than prior year. Exactly, as Sachin said, we had anticipated in 2019 the higher launches that we would have in 2020.

So there's a lag between what we're spending and the volume. So going forward, the volumes are obviously going to be lower and that's why we'll be able to reduce a portion of our capex . If you think about it, 70%, 80% of our capex relates to new business, and we are able to adjust for that. I think another big driver as well is negotiation cost reductions that we are entering with suppliers, as well as terms negotiations.

So these are kind of the overall actions that we are taking to reduce significantly capex in the next three quarters.

Emmanuel Rosner -- Deutsche Bank -- Analyst

OK. Thank you.

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

Thank you.

Kris Doyle

Great. Thanks. And this concludes our earnings call for the first quarter of 2020. Thank you, everybody, 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.

Duration: 72 minutes

Call participants:

Kris Doyle

Sachin Lawande -- President and Chief Executive Officer

Jerome Rouquet -- Senior Vice President and Chief Financial Officer

David Leiker -- Robert W. Baird and Company -- Analyst

Dan Galves -- Wolfe Research, LLC -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Brian Johnson -- Barclays -- Analyst

Itay Michaeli -- Citi -- Analyst

Emmanuel Rosner -- Deutsche Bank -- Analyst

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