Aptiv PLC

Good day. My name is Jack, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Aptiv first quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. We would like to request that you limit yourself to asking one question and one follow-up question during the Q&A session. Thank you. Elena Rossman, Vice President of Investor Relations, you may begin your conference.

Thank you, Jack. Good morning, and thank you to everyone for joining Aptiv's first quarter 2019 earnings conference call. To follow along with today's presentation, our slides can be found at ir.aptiv.com. And consistent with prior calls, today's review of our actual and forecasted financials exclude restructuring and other special items, and will address the continuing operations of Aptiv. The reconciliation between GAAP and non-GAAP measures for both our Q1 financials as well as our outlook for the remainder of the year are included at the back of today's presentation along with other supplemental tables. Please see slide two for a disclosure on forward-looking statements which reflect Aptiv's current view of future financial performance which may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Kevin Clark, AAPTA's President and CEO, and Joe Massaro, CFO and Senior Vice President. With that, I'd like to turn the call over to Kevin Clark.

Thanks, Elena. Good morning, everyone. I'm going to begin by providing an overview of our first quarter highlights and provide some perspective on how we're thinking about the balance of the year. Joe will then take you through our first quarter financial results, as well as our updated financial outlook in greater detail. First quarter revenue, EBITDA, operating income, and earnings for share all finished above the guidance we provided back in January, reflecting our ability to drive sustained outperformance even in a more challenging macro environment. We delivered 4% revenue growth, despite vehicle production declining 5%, representing nine points of growth over market. The result of strong demand for our portfolio of technologies aligned to the safe, green, and connected megatrends. And operating income and earnings per share totaled $345 million and $1.05 respectively, driven by volume growth and our industry-leading cost structure. The strength of our portfolio of advanced technologies resulted in over $4 billion of new customer awards, which combined with an expanding funnel of new business opportunities puts us on track to exceed our prior year record of $22 billion. Given our win rate on new business bookings and the size and scale of our funnel of new business opportunities, we believe it's important that we continue to invest in our safe, green, and connected technologies, even in this more challenging macro environment. thereby further expanding our competitive moat and better positioning Aptiv for sustained value creation. In summary, it was another strong quarter, further validating our operating model, portfolio of advanced technologies, and our business strategy. Given the increasingly challenging and uncertain macro landscape, I'd like to provide some context for how we're thinking about the remainder of 2019 on slide four. Relative to our initial expectations, our first quarter financial performance benefited from stronger outgrowth in weaker end markets. The result of stronger than expected new program launches and content gains globally. In light of the weaker macro environment, we've implemented incremental overhead cost reductions in addition to manufacturing and supply chain initiatives to improve our cost structure and be in a position to fund our growth investments. In addition, we repurchased $226 million of our stock, opportunistically taking advantage of market discounts while maintaining a strong and flexible balance sheet. And we now expect share repurchases to total $450 million for the full year. Moving to the right side of the page, we've seen a deterioration in key macros underpinning our initial 2019 outlook. Joe will take you through the details in a moment, but we now expect global vehicle production to be down 3.5% for the year versus down 2.5% previously, primarily driven by weaker demand in both Europe and China. In addition, since our outlook in January, the euro is weakened relative to the dollar, and commodity prices, principally related to resins, have seen recent spikes as a result of tightening supply conditions. While our teams are aggressively working to mitigate these impacts with cost reductions and productivity initiatives, the combination of weaker end markets and the changes in FX rates and increased commodity prices are enough to cause us to lower our outlook for the remainder of the year. And as we look at the current implied second half ramp up in vehicle production, forecasted by many industry experts, we believe our balanced outlook represents a much more realistic perspective. Turning to slide five, we're focused on taking actions that increase the flexibility of our business model and position the company for better through-cycle performance. Despite our revised outlook for lower vehicle production resulting from the current weaker macro trends, we remain confident in our ability to continue to outperform. Driven by increased vehicle content and market share gains, the benefit of our more balanced customer, regional, and end market exposure, and our relentless focus on optimizing our cost structure. Our DNA is wired to constantly deliver material and manufacturing efficiencies while also reducing overhead costs. In 2018, we eliminated 50 million of overhead and stranded costs related to the powertrain spinoff. Turning to 2019, we're executing initiatives targeted to save an incremental 40 million of run rate overhead and stranded costs, including manufacturing and engineering footprint rotation to best cost countries, supply chain initiatives to improve supplier quality while reducing our overall spend, and corporate and back office consolidations that improve service levels while reducing costs. While we expect the benefits of these initiatives to gradually layer in over the coming quarters, we're continuing to prudently fund growth investments, including increased engineering investments to support the higher demand for advanced active safety solutions and increase investment to fund the further development of our automated driving platform, smart vehicle architecture, advanced development programs, and connected services data monetization opportunities. In summary, the constant focus on optimizing our cost structure improves our operational efficiency and frees up investment to fund future growth. Turning to slide six. First quarter new business bookings totaled $4.3 billion, further highlighting our portfolio alignment to the safe, green, and connected megatrends, as well as our strong competitive position in several advanced technologies. In our advanced safety and user experience segment, our expertise in central compute platforms, sensing and perception systems, and machine learning is helping to deliver a safer, smarter, and more integrated solution both outside the vehicle with advanced active safety systems as well as in the cabin through enhanced user experience and interior sensing solution. And as a result, we booked 600 million and 300 million of active safety and info and user experience awards respectively during the quarter. We believe a strong start to the year in active safety bookings puts us on pace to exceed 2018's record with well over 4 billion of new awards estimated for 2019. Moving to our signal and power solution segment, Engineer Components booked almost $1.7 billion in new customer awards during the quarter. And we also booked over $350 million in new high-voltage electrification awards and are on track to exceed last year's $2 billion of new business awards. Turning to segment highlights and advanced safety and user experience on slide 7, Revenues for the first quarter were up 7%. That's 12 points over market. The continued strong consumer demand for active safety solutions drove product line revenue growth of 69%. And as expected, the roll-off of revenues tied to our displays business contributed to a modest decline in info and user experience revenues. During the quarter, we booked an important conquest win with Porsche and Audi, to supply a smart actuator charging interface controller, which manages the flow of data coming into the vehicle while it charges. Industry experts have identified this as a potential intrusion point on the vehicle, and as such, this is an exciting growth area for our connectivity and cybersecurity product lines. Turning to slide eight, our investments in scalable vehicle architecture are seeding our next wave of growth. helping to drive the democratization of new mobility solutions globally. As a result, Aptiv is uniquely positioned to benefit today from our smart vehicle architecture and automated driving investments as the demand for advanced active safety solutions increases. We've booked multiple scalable level two plus customer awards, leveraging the integration of our unique satellite architecture and active safety domain controller with our perception systems. Underscoring our technology leadership position, last month our ASUX team was recognized with a PACE award for our work with Audi on our automated driving satellite compute platform. This industry-first platform, developed as part of our strong partnership with Audi, has been a game-changer in the industry and has since been selected by six other OEMs to help them realize and, in effect, democratize active safety solutions across their multiple vehicle platforms. which underscores our mission. As the complexity of technology increases, OEMs appreciate our value and contribution towards getting the architecture right today, which is critical to delivering the feature-rich, highly automated vehicles they need in the future. Moving to the right of the slide, we recently announced the expansion of our autonomous driving activities to the China market. Shanghai is now the fifth city where we've localized autonomous driving operations, joining Singapore, Las Vegas, Boston, and Pittsburgh. Our plans to bring autonomous driving to China by partnering with a transportation network company and others in the mobility ecosystem brings us one step closer to the broader adoption of automated mobility in the region. Turning to slide nine, our signal and power solution segment is focused on next-generation vehicle architecture. including high-speed data and high-power electrical distribution that enable the advanced technologies that will shape the future of mobility. Revenues increased 3% during the quarter, seven points over market, despite the weakening macros, driven by 65% sales growth for our high-voltage electrification products and almost 40% growth in commercial vehicle and industrial revenues. Underscoring our industry-leading position in vehicle architecture, we were recently awarded the High Voltage Electrical Architecture on the Fiat 500. This award validates the increasing need for optimized high-voltage architecture across a full range of vehicle types. Before turning it over to Joe, I'd like to take a minute to preview our upcoming 2019 Investor Day theme and topics of discussion. You've heard us talk before about our strategic imperatives and the importance of building a strong, sustainable business that delivers long-term value to all our stakeholders through the relentless focus on having the right people, a portfolio of market-relevant advanced technologies, and a continuous improvement mindset. We believe this formula leads to a more sustainable business that's better positioned to perform through cycle, And we've seen evidence of this the last two years with record growth over market despite declining vehicle production, putting us on the path to deliver on our 2022 revenue targets in a weaker macro environment, positioning us to see the investments in future growth initiatives that will lead to new solutions and new markets, and that will allow us to achieve our vision for the company in 2025, which we believe results in a differentiated and compelling investment thesis for Aptiv. In summary, we believe Aptiv is well on its way to becoming the tier zero partner of choice for our customers, capable of delivering the advanced architectures and optimized solutions that are making the future of mobility real. With that, I'll hand the call over to Joe to take us through the first quarter results and review our outlook for 2019.

Thanks, Kevin, and good morning, everyone. Starting with our first quarter revenue growth on slide 11, Revenues of $3.6 billion were up 4% adjusted, despite a 5% decline in vehicle production in the quarter. From an organic standpoint, excluding acquisitions, we estimate revenue increased to approximately 1%, with organic growth over market of 6%. As a reminder, KUM is fully integrated and will lap itself in the second quarter, while Winchester integration continues and will lap in the fourth quarter. The strong launch volume and content gains we had in 2018 continue in 2019, helping to offset price and the unfavorable impact of FX and commodities. From a regional perspective, we saw outperformance in every major region of the world, despite lower vehicle production across the board. North America revenues were up 7% adjusted, driven by multiple new platform ramp-ups and the addition of Winchester Interconnect. Europe had 11 points of growth over market, driven by the uptick of several new programs. And our China adjusted growth was negative 12%, with three points of growth over market. Although China vehicle production was lower than our original expectations, we continue to see growth in key product lines, including active safety and high voltage. I'll provide an update on our production outlook for the year shortly. Turning to slide 12, As Kevin indicated, first quarter EBITDA operating income and EPS were all above the midpoint of the guidance we provided back in January. EBITDA and operating income of $518 million and $345 million reflected the benefits of strong volume growth in North America and Europe, which were more than offset by volume declines in FX and commodity headwinds and U.S.-China tariffs. Operating income margin adjusted for FX and commodities and tariffs was 10%, reflecting lower production volumes while continuing to invest in future platform growth and advanced safety and user experience, as Kevin referenced earlier. While favorable to guidance, tariffs were a $6 million headwind year over year, reflecting lower demand levels in the region and a 10% tariff rate for the full quarter. Earnings per share of $1.05 were 5 cents above the midpoint of our guidance, driven by higher operating income. Net below-the-line items were favorable year over year, largely driven by a lower effective tax rate of 11.3%. However, versus guidance, this benefit was offset by other items, primarily higher interest expense associated with the debt refinancing we did in the quarter, which I'll cover in more detail shortly. Moving to the segments on the next slide. For the quarter, advanced safety and user experience revenues grew 7% or 12 points over market, driven by new launch volumes and robust growth in active safety, more than offsetting the planned roll off of our lower end display audio product line and info and user experience. Operating income before the impact of higher mobility investments benefited from strong active safety margin expansion despite higher planned engineering investments to support our strong backlog of new wins and pursuits. As a result, we now expect active safety revenues up 50% for the year, with low teams operating margins. Our mobility investments for the quarter total $47 million, and we remain on track to target spend of $180 million. In summary, another strong quarter of revenue growth and operating leverage in the advanced safety and user experience segments. Turning to signal and power solutions on slide 14, revenues were up 3 percent or 7 points over market, driven by new program launches in North America, strong growth in our CB and industrial end markets, and continued robust penetration of high voltage electrification. Operating income margin adjusted for the dilutive impact of FX commodities and tariffs was 11.3 percent, down 200 basis points due to lower production volumes, primarily in China. FX and commodity headwinds were largely driven by the weaker Euro and RMB, in addition to higher resin costs, as previously discussed. We expect FX and commodity headwinds to continue for the remainder of the year and have contemplated this in our revised outlook. Given the continued challenging macro landscape, slide 15 provides a refresh of our vehicle production assumptions, underpinning our updated revenue outlook for the year. We saw deteriorating trends escalating in Q1, with global vehicle production down 5% in the quarter. Meanwhile, extended macro uncertainty, regulatory constraints, and continued weak vehicle sales, particularly in Europe and China, have caused us to revise our vehicle production outlook lower for Q2 and the remainder of the year. At a global level, we now expect vehicle production to be down 5% in the second quarter, consistent with Q1, and 3.5% for the full year. From a regional perspective, we now expect China production to decline 12% in the second quarter and 9% for the year. And while we continue to experience strong growth over market in China, driven by double-digit growth in our key product areas, we are preparing for structurally lower industry volumes going forward and will continue to take additional actions to adjust our cost structure in the region as a result. Turning to Europe, we now expect vehicle production to decline 9% in the second quarter and 4% for the full year, driven by lower customer demand and certain program launch delays. Lastly, we see North American production largely unchanged as OEMs launch new truck and SUV platforms to offset continued passenger car revenue declines. Despite the more challenging global market, we continue to expect our portfolio of safe, green, and connected technologies and balance regional customer and industrial market mix to more than offset the automotive macros, contributing to strong growth over market in every region. As a result, our adjusted revenue growth rate for the year remains unchanged at 6 percent. Turning to slide 16, second quarter revenue is expected in the range of $3.6 to $3.7 billion, up 5 percent at the midpoint, or nine points of growth over market. As I mentioned, that assumes global vehicle production down 5 percent. In addition to $1.12 Euro and a 690 Chinese RMB, operating income and EPS are expected to be 385 million and $1.14 at the midpoint respectively, and includes estimated tariffs of $12 million in the quarter. assuming the List 3 step-up rate to 25% takes effect June 1st, having been previously postponed. As a result, EPS is expected to be in the range of $1.11 to $1.17. Moving to the full year, revenues are now expected to be in the range of $14.425 to $14.825 billion, up 6% at the midpoint. Adjusted EBITDA and operating income are expected to be $2.395 billion and $1.67 billion at the midpoint respectively. It's important to note our outlook includes over $130 million of FX commodity and tariff headwinds for the full year. In aggregate, we believe these are mostly short-term impacts that should improve in the back half of 2019 and 2020. And given the strength of our market position and bookings pipeline, we continue to make the investments in active safety and high voltage to support sustained strong revenue and income growth. U.S.-China tariffs are now estimated at $50 million for the year, down from our prior forecast of $60 million due to the delayed increase in the List 3 step-up rate and lower China volumes. As a result, earnings per share are expected in the range of 490 to 510, And operating cash flow is now expected to be $1.65 billion, reflecting higher restructuring cash for the year. No change to CapEx spend at $800 million. Turning to the next slide, we thought it would be helpful to provide more detail on the full year outlook guidance change, starting with the revenue walk on the left. You can see the first quarter outperformance is being more than offset by $170 million of unfavorable FX and commodity translation with the Euro now estimated at $1.12 for the year versus our prior outlook of $1.17. And our revised vehicle production outlook results in $150 million lower sales for the year. Moving to the operating income walk on the right, our updated operating income outlook similarly reflects our first quarter volume upside, the flow through of our updated FX and commodity assumptions lower vehicle production volumes, partially offset by the benefit of incremental structural cost actions Kevin mentioned earlier. The annualized impact of these actions are roughly $40 million and will further improve our flexible and scalable cost structure in 2020 and beyond. In summary, the strength of our revenue growth in the face of lower vehicle production underscores our portfolio positioning, while we continue to fund growth investments that are resulting in significant share gains. Turning to slide 18, our strong and flexible balance sheet allows us to execute our strategy for growth and create value for shareholders. In efforts to maintain our low net debt conservative leverage profile and improve long-term business flexibility, we refinanced $650 million of 2020 senior notes to 2029 and 2049, extending the weighted average tenor from seven to 12 years with a significant portion of 30-year debt. As a result, there are no significant note repayments due until 2024. This refinancing resulted in $11 million higher interest expense versus prior guidance, which we will offset by our revised share repurchase outlook for the year, which now totals $450 million. At the same time, our M&A pipeline remains full. We remain focused on accretive bolt-ons, similar to HellermannTyton, KUN, and Winchester, which provide attractive end market diversification, as well as strategic technology acquisitions, where we have the opportunity to accelerate the commercialization of new technologies. As a result, our consistent capital deployment strategy remains focused on investing in our business, both organically and inorganically, and opportunistically returning excess cash to shareholders. In summary, we believe effective capital deployment is a major differentiator for Aptiv, and an important lever for shareholder value generation. With that, I'd now like to hand the call back to Kevin for his closing remarks.

Thanks, Joe. Let me wrap up on slide 19 before opening it up for Q&A. Our first quarter performance was further evidence of APTA's ability to drive sustained above-market growth. While our updated 2019 outlook contemplates a more challenging macro environment than we expected coming into the year, our teams are focused on executing our strategy And we believe it's critical that we balance continued investment in our promising future with a relentless focus on increasing the flexibility of our cost structure, thereby creating more operating leverage when macro concerns abate. We believe our unique formula further differentiates Aptiv as a company capable of capitalizing on the key global auto 2.0 megatrends, driving increased vehicle content and market share gains, while also building more predictable and sustainable business with robust downturn resiliency, better positioned to perform in any macro environment. Lastly, we remain focused on delivering value to our shareholders, building upon our strong track record of operational execution and value-enhancing capital deployment. With that, let's open up the line for Q&A, Operator.

Certainly. As a reminder, please limit yourself to asking one question and one follow-up question during the Q&A session. To ask a question, press star 1. To withdraw your question, press the pound key. Joseph Spack with RBC Capital Markets. Your line is open.

Thanks for taking the question. The first one is just on the slide 17, I guess, where you have the change in the guidance walk. The net incremental performance, is that – Is that something that knew that you sort of used some of your flexibility to sort of help offset some of the incremental volume pressures we've seen? So like the way to think about it is, you know, that minus 55 plus that 10 over the change in 150, which would sort of be like that 30% incremental margin? Or was that just sort of, you know, stuff that's sort of already in the system that you just has been coming in better?

No, it's incremental, Joe. The first way to think about it is the right way.

Okay.

So as we're looking at these production volumes coming down and, you know, again, assuming lower level of production going forward in some of these markets, we are taking another look at the cost structure and working that through. So that would be incremental to what we've talked about in the past.

Okay. And then maybe just on the – I noticed you provided the slides on sort of organic growth. This is a little bit of housekeeping, but how are you getting to 7% in UX segment? Because if you look at the change, I'm just trying to, sorry, quickly find the slide. You only show like a $29 million positive on the Billion32.

So within ASNUX, there's some divestiture revenue related to the wind down of some contract manufacturing in that business, Joe.

Okay. So that's the difference. Okay.

Yeah, you have it. That's why I refer to the M&A as net. So you've got the ads from Winchester and KUM and the contract manufacturing coming down from prior divestitures.

Okay. Thanks.

Brian Johnson with Barclays. Your line is open.

Thank you. A couple of questions. So we've seen in the past the impact of copper, which is mostly, my understanding, passed through the lag over in SPS. Now we're seeing resin. So can you talk about whether these are contractual pricing mechanisms? I assume this is on the connector side, although maybe it's the insulation for the wiring. Kind of what is it? what are your contractual provisions around it, and then what gives you some confidence in recovery of those, or will there be recovery of some of those?

Yeah, Brian, it's Kevin. I'll start. So it's resident, and you're right, it's resident principally related to the connector or engineer components business, and it relates to tightness in the supply chain from an available capacity standpoint. It's actually some of the additives that go into into some of the residents like PA66 and others that are out there. We started to see a significant increase late last year, a relatively large increase into our business plan for 2019 as we exited 2018 and saw incremental tightening of supply and incremental pricing. Given growth on some of our product lines, the reality is we need to buy some of that product out on the spot market relative to our contractual provisions. And those have been, at least to date, at much higher rates. We're working to push those through to customers. We've had some success, but in light of some of the softer volume, it's been a bit more challenging. It's something that we'll continue to work through. While we're doing that, we're also in the process of validating other resin alternatives to replace the existing, for example, like PA66, to replace that sort of resin with alternative products that are automotive grade and are validated by our customers.

Okay, so this is more driven by developments in the chemical industry than

Yeah, it's more driven by, quite frankly, a limited supply on one of the components or additives into a product like PA66, where we've actually seen some temporary facility shutdowns, significant price increases as a result of the shortage of supply, and again, demand for select products where we need to go out on the spot market and actually buy the resin. And as I said, we forecasted or we had in our plan a significant increase on a year-over-year basis, but we've actually seen much higher prices than what we originally anticipated.

Yeah, and Brian, just to echo Tim's point, so this would be – this is across ECG, so there's some of this in HellermannTyton as well. We've typically, through the industrial channel, we're able to push price easier than the automotive channel. It just takes a little bit of time, and I would say moves in these residents historically have been of a size where we've been able to sort of manage them in the daily flow of sort of back and forth. This is a particularly high spike that we see lasting through the balance of the year. It's going to take a little more time to work through.

Okay. Follow-up, slightly different topic. So, just your bookings were actually down year over year, yet you're on track. So, are there big things that just in terms of timing that are like 3.2 or 3.2?

Yeah, listen, Brian, as we said, bookings are lumpy, so I wouldn't read into quarter to quarter, year over year, kind of quarter to quarter comparison. So when we look at the funnel of opportunities, especially in areas like ADAS, vehicle electrification or high voltage, the funnel is actually larger this year than it was last year at this point in time. So we have a high level of confidence that bookings for the year will be over $23 billion. And on the active safety side, over $4 billion. So I wouldn't read into a single quarter.

Okay, thanks. See you at the investor day.

Yep. Your next question comes from the line of David Tamburino with Goldman Sachs. Your line is open.

Yeah, hi, good morning. A couple of questions.

The first one, can we dig into the signal and power solutions business? I mean, I think you probably went through in your prepared remarks. Unfortunately, I wasn't on for that. But I think the decrementals for that business was like 120%. I'd really love to just understand the puts and takes there, if that should be continuing throughout the year. And that's my first question.

Yeah, David, I think the way to think about that – you know, when we talk about the FX commodity impact, those, and the majority of tariffs, those all hit an SPS, right? So it's, you know, 90 plus percent of the numbers, those numbers that we talk about at an Apto level actually hit that segment. So that's the majority of what you're seeing there from a flow-through perspective. You know, I think the other thing that's impacting that, again, at a flow level, and it's, you know, we've known it, and it's one of the reasons, you know, it was sort of in the Q1 guide. At the OI level, you've got the legacy business, you know, down 12% in China, for example. You've got new business from KUM and Winchester coming in, but obviously at a lower OI rate given the deal amortization. So you've got a little bit of that going on. where in a typical situation, you wouldn't have China coming down so much, so you wouldn't necessarily see that negative flow. And we'd expect to start to lap that in the back half of the year. But the primary reason, when you think about SPS, is the FX, the commodity, the tariff hit that segment.

Okay. So then excluding all that, I mean, what target decrementals would you think that business would achieve? That business –

Yeah, that business should be, I mean, we talk about decrementals 25% to 30%. That business would be close to the lower end of that range.

Okay. And then for my second question, you know, a lot of new headwinds that you're calling out for the remainder of the year. What opportunities do you have to mitigate some of them? Are you going to be able to pass through some of those price increases? What type of lag time could we be looking at?

Yeah, I'll start. Listen, I mean, the first action, Joe, Joe answered the first question with respect to cost structure activities. As a result of the slowdown, we've pulled forward a number of initiatives that relates to footprint consolidation into this year that we're planning for next year, as well as have taken incremental actions in light of the significant slowdown in China. When you look at China for outlook for the year and back half of last year, the reality is we're forecasting six straight quarters of vehicle production decline. And in light of that, it's important that we continue to reduce our cost structure. We implemented an initiative in the fourth quarter of last year from a footprint and headcount standpoint we're going to take further action in that region. As I said, we're going to pull forward some of the plans that we had in the rest of the globe as a result of the lower vehicle production. As it relates to things like resin and FX resin, we're pushing real hard from a customer standpoint, from a pricing standpoint. As Joe says, we can't flip the switch overnight, but I think we feel comfortable that those are things that over the balance of the year, we should be able to abate. So as we head into 2020, we're in a net neutral position. That'll be a mix of price increases as well as replacement product for things like PA66. So that's something that we think we can meter in for the balance of the year. And then there's several areas that we're looking at from an overhead and corporate standpoint in terms of streamlining and tightening our belts. The one area that we've spent a lot of time looking at and thinking about is the advanced engineering and the pursuit engineering areas. We, at this point in time, feel strongly that that's not an area we should touch. We've had tremendous success as it relates to smart vehicle architecture. We now have won our second advanced engineering program. significant success in our ADAS or active safety business. And there are several other areas that we feel like we're getting a lot of traction. We're gaining tremendous market share. Joe talked about the margin growth on a year-over-year basis in some of these areas. And our view is we should just continue to invest so that we can be dominant in those particular areas and widen the competitive moat. but that's an area that if we continue to see significant softening, that's an area that we continually evaluate.

Okay, and none of that's contemplated within the guide, correct?

No, none of that's contemplated in the guide.

All right, thank you very much.

Chris McNally with Evercore, your line is open.

Thanks so much. Maybe if we could start on the production guide for Europe. You know, looking at your Q2 in the second half, you're definitely more conservative than the forecasters, which I think, you know, many people are saying, you know, the hockey stick in second half looks a little bit too aggressive. But I wanted to just hone in on, you know, are you getting any early indications around RDE? And is there some bit of conservatism baked in? you know, for the changeovers that happen at the end of Q3?

Yeah, Chris, I would say over the course of March, you know, we saw European customer schedules come down significantly in Q2, right? So we've got Europe down 9% in Q2. You know, so there's a bit of when you talk through it with customers, you know, this Brexit uncertainty is still out there. I think that can't have been kicked until October. You have RDE. There may be a little bit of China contagion as well on some of the higher-end models, which in our European business, we are on the bigger platforms that are, in some cases, exported out. So I would say it's that combination of things. As you look, the other – and Kevin mentioned in his comments, the one thing we've tried to do is be very prudent on just how big that back half ramp gets. And when you look at China down 15 points, not 11 in Q1, down again in Q2, a little bit more than we were forecasting, half a point to a point. And now with Europe, you know, we just wanted to make sure we were thinking properly about the business, planning accordingly, taking the actions, and not just assuming this big snapback. And that's really what you've seen us work through Q2 in the back half of the year.

Yeah, Chris, I would say – The second quarter was the first time we've seen actually shifting out of program launches, vehicle program launches. So not penetration of our product, but actually delay in vehicle launches from OEs in Europe, which isn't good. And then to Joe's point, it's from a credibility standpoint, it's tough to sit and say, you know, China's down, you know, double digits the first half of the year and is going to rebound and have growth, significant growth in the back half of the year. And from our perspective, we think it's prudent to assume there is some back half improvement, but it's much more muted.

Okay. That makes sense. And then the second on the FX and commodity I think the $60 million drain on the $170 million sales, should we think about, as you talk about the resin, if I just run, you know, if I think about like a decremental margin, the resin $40 million hit is just straight to the bottom line. And then the other 20 should be the FX translating at slightly above company average margins?

Yes, that is correct.

Okay, great. Thanks so much, guys.

Thanks, Chris. Dan Gals with Wolf Research. Your line is open.

Hey, good morning, everybody. Good morning. I just had a couple of questions. Just to clarify, when you say you'll be back at kind of a neutral position on resins, you know, what do you mean by that? I guess I'm just trying to see if there's an opportunity to kind of reduce some of this 40 million headwind over the course of the year. Is that something that you're looking to do? get back to neutral heading into 2020, at which point you'd have kind of a positive year over year?

Yeah, listen, our objective would be to get it back to neutral as soon as we can. I think there's a reality in terms of validating new materials with our OE customers that needs to be taken into consideration from a timing standpoint. Increased price, that's something that obviously needs to be negotiated and pushed through. That's a little bit tougher in a weaker environment, quite frankly, than it is in a harder environment. But we think between the two, we'll be able to offset it. Dan, we'll work real hard to pull that forward and get it done as quickly as we can. But probably the prudent thing is to assume it's not a net neutral or we're not at that point until year end. And then for next year, it means it's not a headwind. You don't have the same headwind from a year-over-year standpoint.

Got it. Okay. Thanks a lot. The other question is, you know, somewhat kind of dovetailing to what you said about a tougher environment to get relief from the customers. The program launches that you're talking about in Europe, do you think that that's related to, you know, emissions programs, the regulations that are coming in next year, fines? It seems like there's a lot of uncertainty there. And kind of what are you hearing in terms of you know, desire of OEMs to try to offset some of the kind of regulatory costs they're facing in Europe through kind of broad actions into the supply chain?

Yeah, listen, I think the environment with the supply chain, again, and not to give you the same answer all the time, it continues to be challenging just as it always has been. So I wouldn't say – that there's necessarily incremental pricing pressure. I think it continues as it historically has. I think with respect to shifting vehicle production, it's tough for us to get precise visibility to what drives that. I'm sure some of that's regulatory, some of that's cost, some of that's funding investment. This particular product line is one that the OE will certainly introduce, so it's not a cancellation. It's just a shifting or delay that has a revenue impact on us. But I think it's a bit of all of the above, right? The regulatory environment cost as well as capital constraints.

Dan, just to follow up, we're still at 2% price for the year, so we're not – Again, to Kevin's point, we're sort of always working through that with customers but haven't had any significant changes on our expectations on price for the year.

That's really helpful. Thanks a lot, Joe and Kevin. Thank you.

Your next question comes from the line of Emanuel Rosner with Deutsche Bank. Your line is open.

Good morning, everybody. Good morning, Emanuel. Good morning. I was hoping to zoom in on the volume piece of the headwind, because I believe I understand some of the things you said on FX and commodities. But whether I look at the first quarter specifically or the updated full-year guidance, it just feels like the volume impact is just dramatically more negative than generally maybe expected. So I'm looking, for example, at your year-over-year work within, you know, signal and power solution on slide 23. You have sort of like a positive volume, you know, on the revenue side from $71 million, but like deeply negative impact, you know, from operating income of negative 59. And that excludes, obviously, FX and commodities on the following line. And then on the full year basis, obviously, in your slide, you know, you know, 17, obviously the extra volume hit, you know, seems to be carrying 30 plus, 35 percent type of decremental margin on this. So can you just, you know, long question, I apologize, but can you just zero in on the volume piece of the headwinds and what is it that makes it so, you know, deeply negative both, I guess, in the quarter and then on the outlook?

Yeah, no, Emmanuel, you're right. It's a good question, and it applies to both Q1 and Q2. Obviously, we We knew it and effectively had it in the guide. I think we touched on it during year end as it related to the Q1 guide. You know, we do have, when production comes down that quickly, whether it was China in Q1, we're seeing some of it in Europe, Q2, you know, we will have negative flow from a decremental perspective. And I would say in each quarter, I'd call sort of the negative flow about $50 million that we're working through. Again, for Q1, we had expected it. Q2, it's going to be a little bit more than we originally expected, just given the recent takedown in Europe. The cost actions will come in to help offset that, but particularly in Europe, those take a little bit of time before they hit. So you've got that. And then I think you've got the added of, and I mentioned it earlier, when the acquisitions come in, they come in at a lower ROI rate because of the delamorization. So I wouldn't call it mix. I'm not implying that, but you just You know, the revenue that's in there is flowing a little bit lower in the first, you know, four, six quarters after an acquisition because we're working up synergies but have the purchase accounting in there sort of out of the box. So that's really what you're seeing, and we've quantified it at about $50 million in each of the two quarters. More China-related in Q1, more Europe-related in Q2. But again, within our original guide, certainly for Q1.

Okay, that's helpful. And so, you know, the second part of that question, for the guidance walk, when you have sort of like 150 million extra headwind on the volume side and 55 million operating income, that's a much more normalized type of decremental margin?

Yeah. And so what we get, you know, what we're seeing in the back half of the year is that flow starts to, to normalize, right? We've got sort of, for H2, the back half of the year, flow returns to a more, you know, we should be flowing somewhere between, call it 25 to 30% on an average quarter. Some quarters a little different. But that starts to return, so we start to make up on that.

Great. And then I wanted to follow up on my question, you know, from last quarter around the longer-term margin outlook. So essentially, you know, you've had a framework of, consistent margin expansion and I think we fully understand the sort of environment that we're in and a lot of the headwinds, some of them expected, some of them that have surfaced more recently. When you sort of look beyond that, are you still comfortable with the idea that you should be able to consistently keep growing margins or has the environment fundamentally become more challenging?

Well, there's certainly more challenging, what I'll call some of these transactional items, the FX or the tariffs. But, you know, I'd answer that in sort of two parts, and then Kevin can certainly weigh in. You know, when we talked about margin expansion, there were certain underlying things that had to happen in the business for us to get comfortable that we could continue to expand margins. Good example is active safety. That business would continue to grow. As it grew, it would expand margins. That we're certainly seeing, right? Active safety is going to be well over a billion dollars this year with low teen operating margins. And back, you know, in September 17 when we provided sort of our thoughts on margin expansion, that business was just about to break even. So things like that, high voltage is another very similar example of that. So the core underlying things that needed to happen in the product lines and how we run the business have happened. We are certainly dealing with sort of some of the effects and tariffs. You know, we don't give up on those. They're hard to deal with in a particular quarter over a particular couple of quarters, depending on how significant the move is. But, you know, we'll continue to remain focused on that cost structure to work to offset those. But I'd say the underlying product line growth, the underlying business developments that needed to happen for us to be able to say we were going to grow margins, is certainly taking place.

Kevin, I don't know. Yeah, listen, I just think the framework is intact and remains. I think the challenge we're dealing with right now is a decline in vehicle production, significant decline in vehicle production in China, right, and a protracted decline in China. The impact of FX rates, and then in this particular case, the resin challenge that we have on a year-over-year basis that, you know, we'll find substitutes, we'll push the price. And in reality, there's somewhat, it fixes itself as more capacity comes online during 2020. So I think there's, to Joe's point, there's some one-off items that can affect that model. But from a long-term standpoint, the model remains intact. Great. Thank you.

Thanks. Thanks, Ben. John Murphy with Bank of America. Merrill Lynch, your line is open.

Good morning. This is Aileen Smith on for John. First question on the morning, the cost saving actions that you're pursuing. I believe you cited 50 million in 2018 and 40 million in 2019. Is there more room to go and rationalize costs if the broader macro environment remains tough and we don't get this inflection in the back half of the year?

Yeah, listen, the 50 was last year. The 40s run rate, just to be clear, the 40s run rate for 2019, 10 million of which will show up just given timing, a portion of which relates to regions where you can't as quickly get people out. Yeah, I mean, we have a cost structure and we have the ability to adjust that cost structure in response to... one, how we manage the business, but two, especially at times when you have a slowdown in vehicle production, some of that naturally happens, like direct labor, when you take people out of the factory, indirect labor, things like that. There are other areas like corporate overhead that we've been working on on a regular basis over the last several years and will continue to work on. And then that last area is the engineering area. And as we talked about earlier, that's an area that You know, spending is up significantly on a year-over-year basis. I think we're up roughly $100 million between mobility spend and engineering spend in our ASUX, principally our ASUX and our EDS business. But we've gained tremendous traction from a market share and customer acceptance standpoint. So we've been reticent, you know, given the number of programs we've won, given how we're positioned. you know, to go after that out of any ordinary course way. Obviously, we're always focused on how do we make the engineering factory more efficient, more productive. But incremental reductions, restructuring, those are things that we shied away from. To the extent you had a protracted slowdown or you didn't see the snapback, that's something that we'd have to evaluate in light of our customer commitments.

Great. That's very helpful. And looking at slide 15 for a second and focusing in on China in terms of the adjusted growth expectations, it looks like you're expecting some more pronounced adjusted growth versus market and QQ relative to H2. Is this just a function of product launches that are more weighted to the second quarter, or could this be just some conservative in the back half?

No, there's a lot of launch activity. So our China launches are up almost 70% year over year in the second half of the year. and launching over a broad swath of our customer base. So there's just a lot of new products coming to market in the back half of the year.

One item implied in your question, and I think Joe answered the question really well. I think as we look at our outlook for vehicle production in the back half of the year, we don't view it as overly conservative. And You know, industries tend to run in trends, and seeing rapid snapbacks in things like vehicle production, that's not something, although mathematically when you look at things year over year from a growth rate standpoint, so for example, the decline in vehicle production in China in Q3 2018 and Q4 2018 relative to the first half of the year, you can mathematically arrive there. We think from an operational standpoint, it's tougher in reality for our customer base to do that.

Okay, and one last housekeeping question, if I may. The slight decline in your operating cash flow outlook relative to the one you provided earlier this year, is that purely just a function of higher restructuring costs, as you note on slide 16, or is it a combination of that with a slightly lower profit outlook?

No, I mean, cash – we'll perform well on cash. We did take $50 million out of the outlook just to – you know, we've got these additional – cost-saving actions, so we're going to have to pay for those. So we wanted to have a balanced perspective there. But, no, cash, working capital, we're performing in line with expectations.

Great. That's it for me. Thank you very much.

Thank you. Maynard Noom with Macquarie. Your line is open.

Hi. Thanks. You spoke last quarter of moving production out of China and into Korea. Are you still sticking with those plans? I guess where are you? within that process with customer validation and then what's embedded into your guidance? Then I have a follow-up.

Yeah, no, the move's still there. As we said, we were assuming tariffs. We're going to operate as if tariffs don't go away. We had an advantage in that the acquisition KUM had a similar product line on these media modules to what we needed to move out of China. So that process has begun. The production line stood up in Korea. We're in the process of – we're still manufacturing out of China, but we're in the process of ramping and manufacturing samples for customer validation, and customers start to go into the plants to validate and approve the lines end of May, June. So we'll be tracking as originally expected, and that's what's in the gut.

Okay, thanks. There's been a lot of news in the market around autonomous and robo-taxis, and given that you have commercially deployed autonomous vehicles, can you maybe just talk about your expectations for when full autonomous service is feasible? And addressing that question, I guess, from two perspectives, one from a technology perspective, when will technology be ready, versus a regulatory perspective. Thanks.

Yeah, listen, we've publicly stated in the past we expect to have driver out of the car, first half 2020, and actually vehicles out from a commercial standpoint in 2022 with 2025 revenues of $500 million tied to automated driving for mobility services. So So our view of the technology, the maturity of the technology and the role of the technology, quite frankly, has not changed. You know, we think it's something that, you know, there'll be great demand for. The most significant application early on will be with mobility players or fleet owners. And then later in 2020s, you know, probably around 2030, you're going to see stepped up consumer demand just given the maturity of the technology and, you know, getting the technology to a commercial rate or commercial cost that consumers are willing to pay for it. So, you know, our outlook, quite frankly, has not changed. I guess the one area where, you know, maybe it's changed a bit is with respect to level two plus, level three systems where, you know, we're now in the last, 12 months seeing significant demand from several OE customers with respect to that technology. We won roughly seven programs last year in that area. So advanced ADAS is growing much faster than what we would have anticipated over a year ago, and the AD market is right where we thought it would be.

Great. Thank you.

David Liker with Baird. Your line is open.

Good morning, David. Good morning. There's been a lot of discussion this earnings season by other suppliers about how the heavy launch cadence across the industry, front-loaded engineering requirements for new launches is diluting profitability. You've talked a lot about your profitability, but it doesn't sound like it's at all related to your backlog or your outgrowth. Is that fair? Are the new programs you're launching in line with your expectation in terms of their levels of return?

Yeah, yeah. There's significant investment related to launching those new programs, but it's in line with what our expectations were, quite frankly, when we bid on the programs, when we won the programs, and what we have had in our forecast and outlook. So no change at all from our standpoint.

Yeah, I'd say the one thing that – We certainly focus on ensuring the business does, and this is to Kevin's comments about expanding mode or growing share. You know, the more you do of these, the better you get. And you've got resources, capabilities in the organization you can start to leverage as well. Again, I think as we continue to do these, we're starting to see that. I mentioned earlier, you know, that active safety OI margin for the year is going to be in the mid-teens. That's burdened with its engineering expense. You know, we run the P&L sort of every tub on its own bottom. So that's in those numbers.

Okay, great. And then a follow-up. You know, I think the end market forecasts and the view into the second half are prudent and At the same time, some of your technology partners at the Tier 2 levels, so electronics or semis, have actually started talking about sequential order improvement for their business. So it seems like the trends maybe they're seeing or the requests they're getting are perhaps a bit better than the views you're outlining. Do you think that, you know, both can coexist, or are you maybe just a little more, you know, prudent in how you're planning on a go-forward basis?

I think it's – I understand the question around triangulation. So if I had to answer that, I'd say what they're seeing is our outgrowth, right? They're seeing increases in the content, and particularly if you're on some of the higher-end semi guys, the GPU folks – You know, that's what we're seeing. I mean, our active safety business is growing 50% this year. So that is how I would think it's triangulated. I haven't done that. I haven't walked it all through, but just off the top of my head, that's how I would think you should triangulate those logically.

Okay, great. Thank you. David Kelly with Jefferies. Your line is open.

Good morning. Thanks for taking my questions. And a quick follow-up on the active safety discussion. A competitor referenced some active safety headwinds tied to unfavorable mix, I believe, within the premium market. Are you seeing anything in any subset of the market that would suggest any active safety headwinds are either taking place now or might be on the horizon, whether it be delayed product adoption or customer decontenting?

No, listen, our active safety business is going to grow north of 50% this year. And, in fact, we'd say we've seen an accelerated demand from our customer base. Now, I think for us, when you look at the absolute numbers, you know, at some point you'll see slowing growth rate, but it'll be law of large numbers versus customer demand or market penetration. And I think it's important, you know, when you put it in perspective globally, ActiveSafety, I believe, is roughly 15% penetrated globally, and it's a technology that, one, helps OEs sell cars, two, they make a lot of money selling it, and three, once consumers have been in a car with an ActiveSafety solution, the likelihood of them purchasing a car or a replacement car without it are slim and none. So, you know, we see tremendous growth opportunities going forward and have not seen any delay, cancellation. It's actually been the contrary.

David Chambers- Okay, great. Thanks. And just quickly switching to slide nine here, the commercial vehicle and industrial growth. I guess, could you discuss the impact of Winchester on the quarterly growth rate? And similarly, how should we think about organic full-year growth and maybe high-level where you're gaining traction in the commercial and industrial markets?

Hey, David, this is Elena. The organic CV in industrial and market growth in signal and power solutions is mid-teens, and that's consistent for our outlook for the remainder of the year.

So that would be the difference between the organic and the adjusted. You know, where we're seeing end markets, we're seeing growth. CV is off to a really good start this year for us. We expect that to continue. You know, looking at about 18% adjusted CV growth for the year. That's in both the ASUX business where things like the infotainment user experience, active safety start to take hold. And then SPS also has been increasing their product offering in the CV space. You know, so we view that as a potential. And that's a good sort of growth over market story for us, too. You know, we have that market growing sort of 2% to 3% for the year, so strong outgrowth. As it relates to Winchester, Mill Aero continue to be strong. Other industrials are in line with our expectations. So continue to see, you know, sort of that play out according to plan as we work through diversification. I think our, you know, our non-auto revenue this year will be close to 13% of total. If you go back a couple of years, it was mid-single digits. So we have, you know, we are moving the needle from a revenue diversification, which, again, as you're probably aware, is part of our you know, plan as we think through cycle performance and how to make the business more resilient through, certainly through the auto cycle and getting some revenue diversity.

Great. Thank you.

Colin Roosh from Oppenheimer, your line is open.

Thanks so much for getting us in. Could you talk a little bit about the mix in China in terms of new startups and existing OEMs as you look at this year? I'd love to really understand how much you're helping those folks get their business up and going.

Yeah, the bulk, roughly 75% of our revenues are with the multinational JVs, and then 25% with what you would consider to be the locals. When you look at that, 25% that's with the locals, literally 80% or 90% of it is with the top 10 or the largest OEs that are in China. So I would say we have very little, if any, business with the China startup space at this point in time.

Okay, that's super helpful. And then just to turn to ADAS and the hardware evolution, Obviously, one of the advantages of your system is your ability to integrate some of these newer hardware pieces, but we're seeing significant investments in terms of the sensing technology. As you look forward in some of your projections, you've obviously made some commitments around LIDAR, and there's a big debate with some of the other systems out there in terms of whether a camera-based system will ultimately prevail here. But as you look forward and look at future-proofing the system, what are you looking at in terms of really meaningful evolution in terms of that sensing technology over the next couple of years that's reaching critical points in development? And what should we be looking for in terms of how you think about this system evolving over the next two to three years?

Yeah. Well, listen, I think it's probably, well, two to three years is probably a little bit longer than that. But the reality is our view is now and has historically been that you need modalities to have, you know, you're going to have a tremendous amount of consolidation of compute power and, quite frankly, software and capability in the compute platform. So... A fair amount will come out of the perception system. It will be centralized. It will result in a much more powerful, much more effective, much more efficient, and much lower cost solution for the OE. It's one of the models we've used, quite frankly.

Ladies and gentlemen, currently we are experiencing technical issues. Please stand by. This concludes the active first quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.