Visteon Corp. (NASDAQ:VC) Q2 2022 Earnings Conference Call July 28, 2022 9:00 AM ET

Company Participants

Kristopher Doyle - Director, IR and FP&A
Sachin Lawande - President, CEO & Director
Jerome Rouquet - SVP & CFO

Conference Call Participants

Itay Michaeli - Citi
Mark Delaney - Goldman Sachs
Rod Lache - Wolfe Research
James Picariello - BNP Paribas
Joseph Spak - RBC Capital
David Kelley - Jefferies

Kristopher Doyle

Good morning. I'm Kris Doyle, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the second quarter of 2022. Please note, this call is being recorded ad all lines have been placed on listen-only mode to prevent background noise.

Before we begin this morning's call, I'd like to remind you, this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled Forward-Looking Information for 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's and Jerome's remarks. Please limit your questions to one question and one follow up. Thank you for joining us. Now I’ll turn the call over to Sachin.

Sachin Lawande

Thank you, Kris. Good morning, everyone, and thank you for joining our second quarter 2022 earnings call. Page two summarizes our results for the second quarter. The company did very well in navigating semiconductor shortages and the COVID-19-related lockdowns in Shanghai that impacted the global automotive industry in the quarter.

Our second quarter sales were $848 million, an increase of 42% year-over-year when excluding the impact of currency. This is the highest quarterly sales achieved by the company since 2015. Adjusted EBITDA was $79 million or 9.3% of sales, an increase of $49 million compared to prior year due to higher production volumes and a strong commercial and operational discipline.

Adjusted free cash flow for the second quarter was a use of $62 million as disruptions in semiconductor supply drove an increase of working capital. The company delivered another quarter of higher-than-market growth for sales, continuing our performance from the past quarters. We launched 11 new products in the quarter and 27 in the first half across multiple OEMs and on high-profile vehicle models. These new product launches put us in a good position to continue our sales outperformance in the coming quarters.

We won over $2 billion of new business in the second quarter, bringing our year-to-date total to approximately $3.1 billion. This performance puts us on track for achieving our full year target of approximately $6 billion. We continue to lead the transformation of the industry to integrated cockpit domain controllers and added two new customer logos in the second quarter. We're excited for the transformation underway in the industry, and our SmartCore technology is one of the many innovations that Visteon is providing to enable the transformation. I will provide more details on our second quarter performance as well as our second half outlook on the subsequent pages before handing it over to Jerome to discuss the financials.

Turning to page three. COVID-related shutdown, followed by a sharp recovery of automotive and other industries in 2020, resulted in shortage of semiconductors at the start of 2021. Automotive industry production was impacted sharply in Q2 of 2021 as semiconductor buffer stock was exhausted by the end of the first quarter. Supply of semiconductors has remained critical ever since and for longer than anyone had anticipated. Visteon sales were expected to outperform vehicle production by double-digit percentages in 2021 based on the ramp-up of new products launched with OEMs.

We started to see this double-digit growth-over-market in Q1 as the impact of semiconductor shortages was minimal in the quarter. The growth-over-market slowed in Q2 and Q3 to mid- to high single-digit level when semiconductor shortages were diverse. However, we were very active during this time, taking several proactive measures to mitigate the impact of chip shortages. We ramped up the sourcing of parts from brokers, finding alternate drop-in components and kicking off fast redesign of products to replace highly constrained chips. These proactive actions started to pay dividend beginning in Q4 of last year and have continued into 2022. When excluding pricing, our growth-over-market has recovered to high-teen levels in the first two quarters of this year.

Pricing is normally a headwind in our business. However, pricing has been a positive contributor to our sales and growth-over-market since Q3 of last year when we started to recover the incremental costs from customers. These costs spiked sharply in Q2 of this year due to the lockdown in Shanghai, resulting in the unusually high positive pricing in the quarter. We expect the need for spot buys to reduce in the second half as semiconductor supply recovers from the impact of the lockdown in China.

The fundamental driver of our market outperformance remains the high number of new product launches and their volume ramp-up, which is more challenging in this environment than otherwise due to the semiconductor shortages. As this slide illustrates, the Visteon team has been very nimble and diligent in addressing the industry headwinds and enable the company to return to double-digit and mid-teens growth-over-market for sales. I would like to acknowledge and thank the entire Visteon team for their outstanding effort in this regard.

Turning to page four. The ongoing semiconductor shortages and the added challenges due to the lockdown of Shanghai resulted in global vehicle production registering a sequential decline in Q2 compared to Q1 and flat compared to prior year. Visteon sales were $848 million, outperforming the market with an increase of 42% year-over-year when excluding the impact of currency. The underlying industry trends impacting the cockpit resulted in strong demand from customers for digital products such as clusters, infotainment and cockpit domain controllers.

Like the first quarter, customer demand was very strong, and Q2 sales would have been closer to $1 billion if supply was not constrained. Our growth was strongest in the Americas due to the ramp-up of recently launched digital cluster and infotainment systems with our customers. Vehicle production at our customers also performed better this year as compared to the same period last year.

In Europe, our sales grew in the high teens and well above vehicle production at our customers. We were also more active in launching product redesigns in this region, which helped in mitigating the chip shortages. Vehicle production at our customers in Asia was down 11% as compared to prior year. Visteon sales, however, were up 2% based on the ramp-up of new cockpit domain controllers and multi-display systems. Our sales in China were impacted in the first half of the quarter due to the lockdown in Shanghai, but managed to make a strong recovery in June.

Overall, clusters, infotainment and SmartCore performed very well in the quarter, with strong double-digit growth year-over-year driven by the ramp-up of two product launches. Growth of displays was muted in the quarter due to reduced supply of LCD panels resulting from the COVID-related lockdown in Shanghai, which is expected to recover in the second half. I'm really pleased to see the continuing growth of our digital products despite the challenging environment. We're also performing well in all regions, outperforming vehicle production by a good margin.

Turning to page five. We launched 11 new products in the second quarter, bringing the total year-to-date count to 27. Launching a high number of new products is hard even in normal times. It's incredibly challenging in a supply-constrained environment. It says a lot about the operational discipline and execution focus of the Visteon team. These 11 new products are launching on vehicles for eight different OEMs and on some of their most important vehicle models. We have highlighted a few of these products and the respective vehicles on the left-hand side of this page.

We launched a 12-inch digital cluster on the Everest SUV and the Ranger Raptor truck, which are based on the T6 platform at Ford. This high resolution digital cluster is fully reconfigurable and supports over-the-air software updates. Digital clusters with large displays have done well in this market and expect it to be the same with these products. We launched a SmartCore-based digital cockpit system on the new electric SUV for the Smart Brand that's developed jointly by Mercedes and Geely. The SmartCore system in this vehicle drives a 9-inch digital cluster and a 12-inch center information display. The smart number one is the first model to launch and will sell in China and Europe with more models to follow.

Additionally, we launched a 10.25-inch infotainment system with Apple CarPlay and Android Auto on the new Citroen C3 for the South American market. The Citroen C3 is a subcompact crossover vehicle that's targeted for India and South America and will carry this infotainment system as standard equipment. Additional models are expected to follow the launch of this initial vehicle.

Lastly, I would like to highlight the launch of a curved multi-display module on the Maserati Grecale, the all-new flagship crossover SUV for the luxury brand, which we spotlight on the right-hand side of the page. This display has launched on the ICE version of the Grecale and will also feature in the electric version of the vehicle in the future. This curved multi-display module is a complex assembly of optically bonded displays under a single glass cover lens and demonstrates Visteon's strong expertise in display technology and manufacturing that we highlighted on the last call. This display is a good example of the transformation of the user experience within the cockpit that we believe will accelerate in the years to come. Our launches in the second quarter and the year-to-date demonstrate our expanding capabilities across the digital cockpit as well as the team's strong operational capabilities.

Turning to page six. The company won a significant amount of new business in the second quarter, putting us on track to achieve our target of $6 billion for the year and bringing us back to prepandemic levels. Sourcing activity remains strained given the supply chain disruptions. However, we were able to win over $2 billion of awards in the quarter led by two large SmartCore cockpit domain controller wins with two new customer logos. These SmartCore wins are for new electric vehicle platforms. More than 50% of our year-to-date new business wins are for electric vehicles.

On the right side of the page, we highlight a few key wins in the quarter. The first win highlighted is for a 12-inch center information display for a German luxury OEM and would launch on their high-volume platform starting in 2026. This is our first display win with this luxury carmaker with the potential to extend the product on other platforms with the OEM. The second win highlighted is an all-digital cluster for a Japanese OEM. This 12-inch all-digital cluster will launch on the OEM's B-Segment compact SUV, which is a good example of the industry trend of featuring all-digital clusters in the high-volume mass market segment. The third win highlighted on the page is for our latest generation SmartCore cockpit domain controller for a European OEM. The system will launch initially on the OEM's new electric vehicle platform before migrating to hybrid and ICE vehicles and will offer advanced features such as augmented reality for navigation, high-performance multichannel audio processing and cloud services with an integrated app store and OTA software updates.

It will also drive up to five high-resolution displays in the cockpit. This is our largest SmartCore business win to date. Visteon has led the industry in developing state-of-the-art technology for integrated system for the cockpit since the early days of this trend. I will discuss our latest generation of SmartCore technology on the next page, which we believe will continue to position Visteon as a leader in this technology domain.

Turning to page seven. Visteon was the first supplier in the industry to launch an integrated cockpit system with the launch of SmartCore with Daimler in 2018. The system integrated a digital cluster and Linux-based infotainment system into a single chip in ECU, which was a significant accomplishment at that time considering the limited computing power available to the industry. This product was the start of what has since become a significant line of business for Visteon, with SmartCore now accounting for more than 10% of our total revenue. We have launched SmartCore-based integrated digital cockpit systems with six car manufacturers in different regions of the world, with more under development.

The shift to electric vehicles is accelerating the development of new vehicle platforms based on a more advanced electrical and electronics architecture. This new architecture is based on high-performance centralized computing systems that reduce the number of ECUs in the vehicle and enable the industry's transition to software-defined vehicles. The cockpit of these future vehicles will have multiple large displays and offer advanced features, including informational ADAS, voice smart assistance, augmented reality for navigation, 360-degree surround view and cloud-based media and other services.

Visteon is in a unique position to meet these new industry demands. With over 10 million lines of code, a SmartCore platform, already offers many of the features required for these future vehicles. We have been actively advancing the capabilities of SmartCore to include augmented reality and camera-based informational ADAS features in anticipation of the industry's requirements for these technologies. While the first SmartCore system offered computing performance of about 20K DMIPS, these new features require much higher compute performance, about 10 times greater due to use of machine learning and other advanced software technologies.

We are working with silicon suppliers like Qualcomm and Samsung to run our latest SmartCore software on the latest high-performance chips. The new SmartCore win mentioned on the previous page includes many of these new capabilities. As the industry transitions to a software-oriented architecture, our SmartCore technology is well positioned to address the need for a high-performance computing platform for the cockpit.

Turning to page eight. Customer demand continues to remain very strong similar to prior quarters as carmakers offer greater digital content across the vehicle lineup. The ramp-up of new products launched in the first half and the historically low levels of dealer inventory that will need to be restocked will mean that demand from OEMs for Visteon products will remain elevated throughout the rest of the year. We expect semiconductor supply to modestly improve in the second half as compared to the first half. In Q2, semiconductor supply was negatively impacted due to the lockdowns in Shanghai as Shanghai is the logistics hub for many semiconductor suppliers. This bottleneck created additional shipment delays while also causing a spike in prices for semiconductors purchased in the open market.

The reopening of Shanghai will help alleviate this bottleneck. In addition, Visteon continues to benefit from our ability to redesign products quickly to use alternative semiconductors, which will help mitigate some of the shortages. Despite these initiatives, there are still several analog and power chips that remain in critically short supply. Although this number has come down as compared to last year, it will still impact our ability to fully meet customers' demand. We expect cost related to semiconductor shortages will remain high for the second half. We have made progress in negotiations for this cost recovery with several of our customers. And the need for sourcing parts on the open market at elevated prices should reduce in the second half with the improvement in supply. While we are on track to achieve our full year objective for cost recovery, we expect that it'll remain a significant challenge through the rest of the year. In summary, based on our performance thus far, we are pleased to report that we are on track to achieve our full year targets for sales, adjusted EBITDA and adjusted free cash flow.

Turning to page nine. In summary, the company performed very well despite the ongoing semiconductor shortages and the added challenges caused by the lockdown in Shanghai. We delivered strong sales with growth outpacing vehicle production at our customers, continuing the trend of the past several quarters. Disciplined execution of our commercial and operational plans resulted in a solid adjusted EBITDA margin of 9.3%. With the launch of 27 new products and $3.1 billion in new business wins and a product portfolio that addresses the emerging needs of the industry, our business is on a strong foundation to continue to outperform the market.

Now I will turn the presentation over to Jerome to review the financial results.

Jerome Rouquet

Thank you, Sachin, and good morning, everyone. The Visteon team has continued to navigate the near-term industry challenges with resiliency, highlighting the agility of our supply chain while continuing to focus on commercial and cost discipline. Q2 sales were $848 million, coming in higher than our original expectations at the beginning of the quarter and representing an increase both year-over-year and sequentially.

Our strong sales performance was driven by a combination of new product launches, higher customer demand and proactive actions Visteon took to mitigate the impact of semiconductor shortages. Compared to our initial expectations, sales benefited from higher semiconductor open market purchases as well as quicker-than-expected rebound in China in the month of June.

Adjusted EBITDA was $79 million, representing a margin of 9.3% for the quarter. Adjusted EBITDA benefited from higher sales volumes as well as ongoing commercial and cost discipline. We're still seeing elevated costs related to the global semiconductor and supply chain shortages and continue to partner with our customers to minimize these disruptions while also ensuring these costs are passed through the supply chain.

Adjusted free cash flow for the quarter was negative $62 million or negative $99 million through the first half of the year driven by an outflow in working capital due to higher inventory and the timing of customer recoveries. We ended the quarter with total cash of $325 million, representing a modest net debt position of $24 million. Our net leverage remained very low at 0.1 times.

Turning to page 12. Second quarter sales of $848 million represented an increase of $238 million compared to last year. This increase was primarily from higher customer production volumes, recent product launches and favorable pricing, partially offset by the impact of the COVID-19 lockdowns in Shanghai. Q2 was the 13th consecutive quarter of market outperformance driven by our strong launch cadence and robust product portfolio. Total growth-over-market was 36%. When excluding the positive impact from pricing, growth-over-market was 16%.

Pricing, which is typically a modest headwind, increased sales by 20% compared to prior year as a result of customer recoveries, which includes a combination of lower annual price downs, higher average selling prices and onetime recoveries. The largest contributor to favorable pricing in Q2 were recoveries from open market purchases. We remain very active in procuring semiconductors from brokers and distributors to support our customers. And those costs continue to increase.

In Q2 alone, we incurred an incremental $75 million of additional costs for open market purchases, nearly as much as what we incurred cumulatively since the shortages started in early 2021. The remaining pricing benefit relates primarily to Tier two supplier surcharge recoveries, including some level of catch-up from Q1 as we progress in our negotiations with customers in the second quarter. Adjusted EBITDA was $79 million, representing an increase of $49 million compared to prior year. Adjusted EBITDA increased due to higher sales and the favorable year-over-year impact from recovery of semiconductor costs.

Gross engineering and adjusted SG&A remained fairly flat year-over-year as we continue to benefit from the restructuring actions we took in 2020 as well as our ongoing cost discipline. Partially offsetting these benefits were higher freight and logistics costs in the quarter. Overall, margins were negatively impacted due to the dilution from higher semiconductor costs and the associated recoveries. For the first half of the year, adjusted EBITDA margins were 9%. For modeling purposes, the first half of the year is an appropriate starting point as it mitigates some of the quarterly volatility related to the timing of customer recoveries.

Turning to page 13. We ended the quarter with a total cash position of $325 million, resulting in a net debt position of $24 million and a net leverage ratio of 0.1 times. Despite the temporary reduction in cash due to the outflow in working capital, we continue to have one of the strongest balance sheets in the industry.

In July, we took the opportunity to extend our debt maturity profile out to 2027. As a result, we now have $400 million undrawn revolving credit facility that matures in 2027 and issued a new five year Term Loan A facility of $350 million, maturing in 2027 as well. The proceeds from the term loan were used to repay our existing term loan, which was maturing in early 2024, with the transaction having no impact on our leverage. The credit agreement has a sustainability linked KPI, aligning our capital structure with our commitment to reduce our overall environmental impact.

Adjusted free cash flow was an outflow of $62 million in the quarter, resulting in an outflow of $99 million through the first half of the year. Consistent with prior quarters, adjusted free cash flow benefited from improved profitability and optimized capital expenditure. However, the largest outflow throughout the first half of the year has been working capital. Inventory levels increased throughout the quarter, peaking in May before we started to see an unwind in the month of June to $306 million.

We anticipate inventory levels to continue to decline as the semiconductor shortages improve in the second half of the year. In addition to inventory, the timing of costs and customer recoveries related to semiconductors also drove a net outflow in the first half of the year. We have been incurring and paying for elevated semiconductor costs throughout the year but only finalized several customer negotiations late in the second quarter, with incoming cash anticipated in the third quarter. Adjusted free cash flow was also negatively impacted due to an outflow and other changes primarily related to the annual incentive compensation payment in Q1 and favorable timing of tax refunds and reduction in deferred income as well as pension-related items.

Turning to page 14. Based on our strong performance through the first half of the year and our expectations for the second half of the year, we're maintaining our guidance for the full year. For sales, we're maintaining our guidance of $3.15 billion to $3.35 billion and are tracking towards the higher end of the range. Since we initially provided guidance back in February, our strong growth-over-market has been offsetting the decline in industry production volume assumptions as well as the depreciation of the euro and Japanese yen.

The main difference since our last call are the higher open market purchases and customer recoveries for such costs. These recoveries increased sales while having a neutral impact on adjusted EBITDA as we're offsetting higher costs. As such, we're maintaining our adjusted EBITDA range of $295 million to $335 million and are tracking towards the midpoint of guidance. Full year adjusted EBITDA margins are now anticipated to be towards the low end of the range, reflecting the dilutive nature of the higher semiconductor-related costs and associated customer recoveries. When compared to the first half of the year, we expect sales to be up in the second half driven by higher customer production volumes, partially offset by lower semiconductor open market purchases and the associated recoveries.

At the midpoint of our guidance, we anticipate adjusted EBITDA will be higher than the first half of the year due to higher sales volumes and lower net semiconductor costs, partially offset by an increase in engineering spend. For the full year, we still anticipate the net negative impact from semiconductors to be approximately $20 million. We're also maintaining our adjusted free cash flow range of $85 million to $115 million, reflecting our expectation of a working capital unwind related to both inventory and the timing of customer recoveries. In addition, we continue to benefit from ongoing CapEx optimization initiatives and now expect CapEx to be approximately $100 million.

Turning to page 15. Visteon remains a compelling long-term investment opportunity. We have positioned the company well for top line growth, margin expansion and free cash flow generation, while our strong balance sheet continues to provide significant flexibility. Thank you for your time today.

I would like now to open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Itay Michaeli from Citi.

Itay Michaeli

Great thanks, good morning everyone. Just hoping we can go back and talk a bit more about what you're expecting for second half costs as well as recoveries. I just want to confirm whether you're seeing -- and I think you did mention additional increases in semiconductor pricing in Q3 and whether you have to go back to automakers to negotiate for those recoveries for the cost increase.

Jerome Rouquet

Yes. Sure. Good morning. It's Jerome. We've -- so we've had a pretty good quarter in terms of recoveries. And maybe just to step back a little bit on -- in terms of what we're recovering. We are recovering supplier cost increases that we've essentially had since the beginning of the year. And then we are recovering as well something which is more transitory, which are spot buys that we make on the open market and that we are pushing back to our customers in terms of recovery. So it's important to understand the dynamic between these two.

The first category will continue with pretty strong recoveries in the second half of the year. We are -- we've negotiated quite a lot of deals with customers, especially at the end of Q2. And we anticipate that we'll be successful in Q3 and Q4 with the remainder of the cost increases that we got to pass on with customers. As it relates to open market purchases, we had really a spike in Q2, which shows into our numbers. And we're expecting that the open market purchases will probably be lower for two reasons. The first one is that China -- the lockdowns in China were the key reasons for the spike in prices and as well the reduction in supply. So we're expecting that will improve in the second half of the year. And therefore, our recoveries will be lower as a result of that just because we'll have less cost and the open -- coming from the open market purchases.

Itay Michaeli

That's very helpful. And then just one other question. As we think about the incremental margin bridge perspective into 2023, I heard you mention that maybe first half is sort of a good starting point kind of on a go forward -- just want to clarify that comment. Is the first half, the 9% margin the way to think about kind of the bridge beyond 2022? Or should we kind of use that the full year or even in the second half? I just want to go back to that comment.

Jerome Rouquet

Yes. So that comment was more to try to neutralize some of the recoveries that we've had in Q2, which included some level of catch-ups that we had from Q1. So my comment was more related to H1 being a good proxy for our general run rate in terms of absolute performance, which is 9% when you combine Q1 and Q2 for EBITDA. And then given the elevated nature of our recoveries related to spot buys, it's probably worth as well mentioning that if you exclude recoveries from spot buys, our EBITDA would have been closer to 9.7%, 9.8%, which gives you really maybe more the true nature of our performance on a go-forward basis. And in fact, it's very similar to what we are indicating for the second half of the year in terms of EBITDA margin percentages.

Operator

Next, we have Mark Delaney with Goldman Sachs.

Mark Delaney

Good morning, thank you very much for taking my question. First one is on the revenue outlook in the second half of the year, and thanks for already talking through some of the dynamics around cost recoveries. But given that the second half is relatively flattish, I'm hoping to better understand, is any of that perhaps related to OEMs being more cautious on build plans given the macroeconomic backdrop? Or is -- are customer orders and both forecasts staying very strong?

Jerome Rouquet

Yes. So I'll take that one. So you're correct, we are expecting a modest growth in terms of sales versus H1. So H2 versus H1 close to 1%. And there are a few points that are worth mentioning. The first one is that we do expect production to improve, although, maybe to your comment, we are a little bit less optimistic than IHS, especially for Q4. They are planning on the 22 million-unit production level, and we are closer to 21 million. So that's the positive for the second half of the year.

On the negative side, as I was just mentioning, we anticipate recoveries to be lower with open market semiconductor purchases as supply will improve. So that will reduce our revenue. And we do have as well, finally, some negative impacts coming from FX. We saw that in Q2, and we are modeling a continuation of that negative impact as we go towards the end of the year. So these are kind of the high-level dynamics that we see for the second half of the year.

Mark Delaney

Got it. And I guess in terms of the 4Q production assumption being a little bit lower than IHS, I mean, is that given some of the considerations around what the supply chain can support and perhaps some of the macroeconomic challenges related to COVID policies and energy supply? Or is there anything demand related that caused that?

Sachin Lawande

Mark, this is Sachin. No, it's not demand-related. In fact, our demand remains fairly elevated and as strong as -- similar to prior quarters, but it is really driven by supply. So this is the estimate that we have at this point in time, although that can change. The supply is still pretty dynamic, and there are many factors that are driving it. At this point, we believe that we would be a little more modest in terms of our outlook for Q4 production than where IHS is at today.

Operator

Next, we have Rod Lache with Wolfe Research.

Rod Lache

Good morning everybody. First of all, wanted to ask if there was a retroactive out-of-period benefit on pricing just related to some of the settlements in the quarter. And then secondly, just -- we continue to hear about chip inventory starting to build in some areas maybe excluding power ICs and transceivers. But -- and then as you said, you won't have to buy as much from wholesalers going forward. Maybe you could just give us a little bit of color on how that affects you financially into the back half and into next year. As that starts to repair, do you see a point at which this actually starts to reverse? And how we should be thinking about the financial impact on Visteon?

Sachin Lawande

Let me take the second part of the question first, Rod, and then Jerome can talk about the recoveries and the timing. So you are correct, we are seeing the same dynamic, which is that some parts of the semiconductor industry, the supply situation is improving. Effectively anything that is 14 nanometers and lower in terms of the process node, we are starting to see supply improve and outpace the deliveries of power and analog chips, which tend to be older process node technologies.. Even in those areas, with the exception of maybe a few parts in general, we are in a better shape today than we were last year, especially in the second half of last year. So overall, there is an improvement.

But as you know, it just takes one chip to really impact production. So we still have to be concerned about that. Now as we look into 2023, we are seeing at this point early information, which we will have more time later this year to clarify with suppliers. We are seeing gradual improvements even with the analog and power chips. That should help our ability to produce more product.

In addition, and this is a very important point, we have been very active in redesigning some of our higher runner products to use fewer of those most critical power and analog chips and finding alternatives for it. That means we are effectively keeping multiple part numbers for the same product, active, to be able to switch between the different chips from different suppliers. So the combination of an improved supply and this redesign that I just mentioned, our plan is that we would be completely out of the semiconductor shortage environment for us by second half of next year. Jerome?

Jerome Rouquet

Yes. So on the first question, we do have some level of catch-ups on recoveries coming from Q1, but nothing really coming from prior year. I think the way to think about our recoveries as well, we have guided at the beginning of the year, and we're confirming this guidance. We're guiding to a net cost for the full year of $20 million. And the way to think about it as well is that most of that $20 million was incurred in the first half of the year. So that means that going forward, we're expecting pricing net of cost to be fairly neutral.

Rod Lache

Okay. Just to clarify also, Jerome, can you remind me what the net price versus cost was last year on this in addition to $20 million?

Jerome Rouquet

So last year, we had a negative $40 million, and we had guided to an improvement of $20 million, resulting in a net negative $20 million for this year. So it's an improvement versus where we were last year.

Operator

Our next question comes from James Picariello with BNP Paribas.

James Picariello

Hi, good morning guys. I think just to clarify and just provide some really helpful context on the second half ramp relative to the second quarter, what was the -- can you confirm what was the open market pass-through revenue stream that was captured in the second quarter? This way, we could parse that out from your real -- your true recovery net price. So within the $122 million, what was pass-through?

Jerome Rouquet

So $75 million came from -- strictly from open market purchases that we essentially recovered fully in the second quarter. I'll give you a little bit more color as well on Q1. Q1 open market purchases were close to $25 million. So essentially, we are talking just for the first half of the year about $100 million of open market purchases that we transferred back to our customers in terms of pricing.

Sachin Lawande

It should also be mentioned that it did not necessarily mean we've got three times the number of parts, but it was the price and the spike that caused this expense to spike up.

Jerome Rouquet

Especially in Q2.

Sachin Lawande

Correct. Yes. Thank you.

James Picariello

Right. Okay. That's super helpful. And then the expectation for the second half is that open market purchases trend close towards 0 or something close to the first quarter. How should we think about the second half open market?

Jerome Rouquet

Yes. So it will go down. We will not give a number, but it's really expected to be much lower given the improvement of supply and as well the fact that some of this spike was really caused by the China lockdown.

Sachin Lawande

It all depends really, James, on how the supply and the timing, most importantly supply, plays out in the coming weeks. The industry is recovering from the shutdown in Shanghai, but we still are expecting some level of impact of timing of supplies, and that may drive some level of open market purchases, but still much lower than Q2.

James Picariello

Got it. Okay. And then just as we start to think about next year for your contract buys related to semis, are you seeing suppliers put through any additional price increases in the second half or.

Sachin Lawande

Yes.

James Picariello

Yes, you are.

Sachin Lawande

Yes. Yes. There are a few, not many, there are a few suppliers that are coming to us with additional price requests based on inflation in some of their underlying costs. We are in negotiations with them, and we'll see how that plays out. And we expect, as a result of that, for us to also benefit in terms of higher supply. And if that's the case, then yes, we would see a price increase with the suppliers, but we should see a reduction in cost from the open market purchases, which is a trade that I think would be net favorable to us and to our customers.

James Picariello

Right. Okay. And this -- I imagine this is also inciting some redesign activity?

Sachin Lawande

Yes. Exactly. Not to necessarily move away from just the price increases, but really supply availability, right? So what we are trying to do here, first and foremost, is to solve the problem of being able to deliver to the full demand of our OEM customers, right? What we are seeing is a consistently high demand for our digital products as the OEMs are featuring more digital content in their cockpits. That's a trend that we don't believe will reverse as we go forward. And so that demand being consistently higher, we have to figure out a way to deliver to that. And we do not believe that even with the recovery of supply at least well into next year, without redesigns, we will be in a position to necessarily meet all of the demand, right?

It's a great growth story that we have if we are seeing an attach rate that's higher than we had anticipated on account of this trend, but now we have to reduce these actions that we mentioned to respond to that higher demand. And I'm really happy with the team in terms of how nimble that we have been in securing, first of all, the alternate chip suppliers, which in this environment on short lead time is extremely challenging, but we have been successful in doing so, and then introducing the redesigns with all of the testing and everything else that we have to do before it is put in vehicles. So I think we should be in a good position next year to not have the shortages as big a topic for us as it has been the last two quarters.

Operator

Our next question comes from Emmanuel Rosner with Deutsche Bank.

Emmanuel Rosner

Thank you very much. I was hoping if you could help me a little bit with the walk between first half and second half in terms of margin. I think, Jerome, you mentioned that excluding recoveries from spot buys, basically, you're guiding to the second half similar to the first half, but I would have expected maybe a little bit of operating leverage going into the back half of the year because of higher industry volume. So can you maybe talk about that? And then within that also, how much growth of the market should we expect in the second half?

Jerome Rouquet

Yes. Sure. Good morning Emmanuel. So our EBITDA for the first half was $150 million. And for the full year, we're guiding towards the midpoint at $315 million. So there is a slight improvement going into the second half. A few drivers. The first one is improved supply, and therefore, volumes will generate more EBITDA. We're expecting as well the net impact of semiconductors to be neutral after the $20 million leakage that we had in the first half. And then on the negative side, we'll have some ramp-up of engineering. We had a pretty low level of engineering cost in Q2 largely driven by the China lockdown and the fact that our activity was lower.

So that will reverse out going into Q3 and Q4. And we do have as well a continuation of investment in electrification as well as some additional costs because of the redesigns that we are pretty active to put in place. So this is kind of the dynamic, better volume, neutral net impact from semiconductors and then negative on the engineering side, although engineering will remain at a pretty -- in a pretty good place from a net engineering standpoint for the full year. We've been spending a lot of time, as you remember, in 2020, restructuring, making sure that we've got a good footprint, and the same applies as well to SG&A.

Emmanuel Rosner

In terms of growth-over-market for the rest of the year, how should we think about it?

Jerome Rouquet

So we are anticipating a -- the underlying -- what we call the underlying growth-over-market before pricing to be fairly stable compared to what we've seen in Q1 and Q2, and we were in both quarters at 16%. So no changes really on that side. I think the caveat is going to be the pricing side, which is going to be a little bit more nuanced on that one. We obviously anticipate that we'll have less open market purchases, as I mentioned. And then on a year-over-year basis, we start lapping customer recoveries from the second half of the year. You remember that we started to be pretty active late in Q2 last year and had some good successes in recovery. So that will start lapping. And we could have a Q4, which could be even neutral from a pricing standpoint year-over-year.

Emmanuel Rosner

Great. And then now is sort of -- is -- this 9.7% to 9.8%, it sounds like a pretty good base, both in terms of the underlying in the first half and then sort of what you're guiding for the second half. Does that leave you on track for your 12% target?.

Jerome Rouquet

Yes. So guiding to, in fact, 9.8%, if you do the math to the midpoint of EBITDA and to the high point of sales for the second half. Obviously, having a strong first half of the year and confident about the second gives us as well a lot of confidence going into next year. We've -- I think on the sales side, we always start with the demand, and our demand has been strong this year. We've had customer orders in excess of $1 billion per quarter. We see that still for next year. And it will be really a function of supply, which we think will improve. EBITDA, nothing has changed on that side. We are still very confident about our 12%. I don;t know, Sachin, if you.

Sachin Lawande

Yes. And if you remember, Emmanuel, we said that the 12% is predicated on achieving a sales of about $4 billion, and based on where we are today with the supply outlook for next year plus the redesigns, we see a path for us to get to that $4 billion next year, which should help us achieve our objective for EBITDA for next year.

Operator

Next question is Luke Junk with Baird.

Luke Junk

Good morning, thanks for taking my questions. First, just hoping we could expand on the practical implications of spot buys declining into the back half, especially with respect to supply chain constraints on growth. And maybe, if possible, if you could comment on what you've actually seen so far in June and July as the lockdowns have eased.

Sachin Lawande

Yes. So we certainly have seen a reduction in the need to go into the open market as much as we had to in Q2, but there are still several chips, as I mentioned earlier, that are in critically short supply. And timing of resumption of supply for those chips is causing us to going into the open market for purchases of those chips. So it's going to reduce, as Jerome also mentioned, but we cannot necessarily say exactly to what level sitting here. And what that would mean is it would also depend on how the supply of the underlying chips from our direct suppliers, how does that develop. So that's all we can say on that one, Luke, for today, but we certainly expect a reduction in the need to open market purchases.

Luke Junk

Okay. Yes. Understand there's only so much you can say on that front. And then follow-up question on modeling. Just more of a finer point here. Jerome, you helped us -- give us some help on the gross engineering costs and what the drivers are going to be into the back half of the year. What I'm wondering is on the engineering costs, specifically the engineering recoveries that were higher in the front half of the year, how should we view those? Should we view the higher recoveries as timing-related primarily? Or is there some effect here of customers compensating you for higher costs in those numbers as well?

Jerome Rouquet

It's more timing, Luke. And it's -- obviously, we've got a large set of recoveries coming from various customers. So it's really just more timing. So I wouldn't read more than that. It's been choppy. We've been trying over time to be pretty active on that side. So it's -- but it tends to be still a little bit lumpy.

Sachin Lawande

It's milestone-driven mostly. And as we accomplish those objectives that we have currently agreed with the customers, the recovery follows. So it's difficult to smooth it out as much as we try to. And so that's really where it's at.

Operator

Our next question is from Joseph Spak with RBC Capital.

Joseph Spak

Thank you. Jerome, I wanted to go back to, I guess, slide 12. You had this comment about the margin dilution on recoveries. And you even sort of alluded to, right, in the first half, if you back out the pricing and sort of the related flow-throughs, it would have been more like 10% versus 9%, which I agree with, but that's on like an annualized first half number of $3 billion, again, if you take out the pricing. And if we think about your 12% margin target on $4 billion of sales, you need sort of like a, call it, about an 18% incremental margin to get there. And in the past, you talked about a 20% to 22% embedded. So I know there's a lot of noise going on in the industry and some volatility, but like it does seem like underlying, you're tracking ahead. Is that fair? Or is there something else that I should consider?

Jerome Rouquet

Yes. I would maybe go as far as saying we're tracking ahead. I don't want to create false expectations. But we are tracking towards the 12%. And your math is absolutely correct. That's how we look at it as well. So it's -- when you remove the spot buy, yes, we're in the 20% range, which is, to your point, a little bit at the low end of the range in terms of incremental margins.

Joseph Spak

Yes. Okay. And again, I guess, just on, again, that 2023 target. I know, Sachin, good to hear you're sort of on track. But like are you -- is -- that's with an expectation that you sort of returned to sort of more normalcy on sort of pricing and recoveries?

Sachin Lawande

Yes. We would expect that. So we certainly would think that next year would look a lot more normal in terms of how things used to operate in terms of pricing and although there may still be some flow-through from this year into next year that we'll have to adjust. But supply, as we've talked about, will largely not be an issue. And therefore, the pricing would tend to go back to where it used to be.

Joseph Spak

Okay. Maybe just one quick one on the big bookings quarter. I know you mentioned some of that was sort of -- some of the sourcing was still constrained, but was there like a release of programs that were, like, tied up earlier? Or is that just, like, a lot of share gains? Or what's going on?

Sachin Lawande

Yes. Let me explain what happens. So if you look at the last, I would say, two or three quarters prior to Q2, the sourcing activity was certainly below par, okay? And so there were delays on account of all of the disruptions caused due to semiconductors. So Q2 was a little bit of a catch-up quarter in that sense. So we saw a lot of decisions finally being made. And having said that, we still had to win all of that business, right? So it wasn't a layup. But we're very pleased to see that we were able to convert some of the most important pursuits that we were going after. We talked about this display. This is the first win with an OEM that we have never had a central information display business with before, and it's very good margin. It will be a good contributor to our business going forward.

And then the SmartCore win, we factored two. We highlighted one, which is the one that is also representative of where we see the industry go. A lot of the awards are sort of timing-wise coming up now this year because the launches are happening in 2025 or '26. So they got delayed. Now they have to be finally decided, otherwise people risk Achieving their program milestones, and that's what really happened here in Q2.

Operator

Our next question comes from David Kelley with Jefferies.

David Kelley

Maybe two quick follow-ups from my end. First, the 16% ex-pricing outgrowth that you expect to sustain here, I was hoping you could talk a bit more about the impact of launches and mix and how do you see those two specifically playing out through in the year.

Sachin Lawande

Yes. So first of all, most of that outgrowth is on account of the new product launches, okay? And if you look at the last 12 months, we have launched approximately 60 new products, right? It has really been a very active launch period for us, which is kind of interesting because you would think that given the supply constraints, it would be the opposite. And so what it really points to is the fact that many of the products that we are building are key for the OEMs' products to be competitive in the marketplace, okay? So that's really what's driving it.

Now we had 27 new launches just in the first half, which will also contribute to our growth-over-market as we go forward, but it will really depend on how many chips we can get to really be able to take full advantage of it. So there's a bit of an offsetting influence there. And so we expect given the supply situation that the growth-over-market should more or less continue into second half as what we have seen in the first half. The underlying business is pretty steady. That's a term I would use. And the demand side, we are seeing pretty much stay consistent over the last couple of quarters.

David Kelley

Okay. Got it. That's helpful. And then to the earlier point of you're kind of constantly striving to deliver to customer demand, assumed these ongoing supply chain constraints have created a market share opportunity for you at least relative to some of the suppliers that haven't been as successful in sourcing components. So maybe if you could give us a sense of the conversations you've been having with customers as it relates to procuring parts relative to your competitors, that would be great.

Sachin Lawande

Yes. It's really hard to speak into what others are able to do or not do. So it's may not be appropriate to comment on that. But I'll just give you an anecdotal piece of information. So I was reviewing our Q1 and Q2 deliveries with an OEM, and this is their information. They basically said that we would -- everything that they were expecting from us in Q2, this is an European OEM, which, frankly, if you were to ask me, I was positively surprised with that performance. So -- and that was also, by the way, not just a factor of the supply improving, but also on account of the redesigns. So this kind of gives you an indication of where things are at. It won't be easy also in the second half. We are still facing the critical shortages. We'll have to fight through that. And I'm hoping as a result of this that we do gain some share, but I wouldn't be able to really comment on exactly how much or what that might translate into just yet.

Kristopher Doyle

Thanks, David, and thanks, everyone. So this concludes our earnings call for the second quarter of 2022. Thank you, everyone, for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me directly. Thank you.

Operator

This concludes Visteon second quarter 2022 results earning call. You may now disconnect.