Aptiv PLC

Good day. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the active second 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 would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would 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, Chris. Good morning. And thank you to everyone for joining Aptiv's second 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 second quarter financials as well as our outlook for the third quarter and full year 2019 are included in the back of today's presentation and the earnings press release. Please see slide two for a disclosure on forward-looking statements, which reflect Apted'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, Apted's President and CEO, and Joe Massaro, CFO and Senior Vice President. Kevin will provide a strategic update on the business, and then Joe will cover the financial results and our outlook for 2019 in more detail. With that, I would like to turn the call over to Kevin Stark.

Thank you, Elena. Good morning, everyone. I'm going to begin by providing an overview of our second quarter highlights and then provide a perspective on the second half of the year. Joe will then take you through our second quarter financial results as well as our full year financial outlook in more detail. Second quarter was in line with the guidance we provided back in May while EBITDA, Operating income and earnings per share were all above the high end of our guidance range, reflecting very strong operating performance, even in a challenging macro environment. Revenues increased 4%, representing nine points of growth over underlying vehicle production, reflecting strong above-market growth across both segments and every geographic region. Operating income and earnings per share totaled $405 million and $1.33 respectively, driven by volume growth, overhead cost reductions, and very solid manufacturing and material performance. Our portfolio of industry-leading advanced technologies led to another strong quarter of new customer awards totaling $5.5 billion, bringing the year-to-date total to just under $10 billion. To put it simply, it was another good quarter in a tough environment, further validating our portfolio of safe, green, and connected technologies, flexible operating model, and sustainable business strategy. Moving to slide four. Given the weak macro environment, I'd like to provide a backdrop for our full year outlook, which remains unchanged. Starting on the left, we now expect global vehicle production for the year to decline 4% versus our previous forecast of 3.5%. Driven by a 5% decline in automotive light vehicle production, principally driven by further weakness in China, partially offset by a flat commercial vehicle market. Foreign exchange continues to be a headwind, as Euro and RMB exchange rates are weaker than the US-China tariffs also continue to be a headwind, although we're aggressively working to remediate the impact on our results. However, as I mentioned, our four-year outlook for revenue, EBITDA, and operating profit remains unchanged. As a result of continued strong growth over market, driven by both content per vehicle growth and market share gains, our balanced customer, regional, and end market exposure, and incremental overhead cost reductions, as well as the timing related to material and manufacturing productivity initiatives, all of which are gaining traction and translating into margin expansion in the second half of 2019. In short, our strong performance in the second quarter gives us confidence in our full-year outlook, and our ability to execute in a challenging macro environment. Turning to slide five, second quarter new business bookings totaled $5.5 billion, highlighting our portfolio alignment to the safe, green, and connected megatrends. In our advanced safety and user experience segment, our expertise in central compute platforms and sensing and perception systems are helping us deliver smarter, safer and more integrated solutions both outside the vehicle with advanced active safety systems as well as in the cabin through enhanced user experiences. In the second quarter, active safety new business bookings totaled $1.4 billion, which puts us on track to exceed $4 billion in 2019. Our signal power solution segment had new business bookings totaling $3.7 billion during the quarter, including $1.9 billion of electrical distribution and $1.8 billion of engineered components bookings. Within those numbers, we booked over $350 million in high-voltage electrification awards, bringing the year-to-date total to roughly $800 million, and we're on track to meet or exceed last year's record of $2 billion. Turning to our Advanced Safety and User Experience segment highlights on slide six. Second quarter revenues increased 8%. 13 points over market. The continued strong demand for active safety solutions drove product line revenue growth of 53%. And as expected, the roll-off of revenues tied to our displays business contributed to a decline in our user experience product line revenues. During the quarter, we were awarded the active safety system for the Jeep Grand Cherokee and Wagoneer nameplates, additions to our previously awarded satellite architecture programs with FCA. further underscoring our industry-leading position in advanced ADAS solutions. Turning to slide seven, our unique ability to leverage our capabilities in both the brain and nervous system of the vehicle has perfectly positioned us to deliver the advanced architecture necessary to support the feature-rich, electrified, and highly automated vehicles of the future. Smart vehicle architecture, or SVA, is an optimized and scalable architecture that lowers the total cost of ownership for the OEM, while also unlocking the opportunity for new business models. During our 2019 Investor Day in early June, we highlighted the two advanced development awards we received this year. And while customers are evolving their vehicle architecture roadmap at different speeds, we see many of them transitioning to more scalable systems, enabling full SBA in the future. Underscoring that point, we've won 11 different domain controller platforms, and recently were awarded the Zone Controller for a premium European OEM, effectively representing our first Power Data Center win. This award represents another step in the continued commercial validation of APTA's SVA approach, as well as our unique ability to conceive, specify, and deliver next-generation architecture solutions. Turning to slide eight, our signal and power solution segment is focused on enabling the high-speed data and power distribution technologies that are required to support the advanced safe, green, and connected applications that our customers are demanding. Revenues increased 2% during the quarter, seven points over market. High-voltage electrification revenues increased 67%, while commercial vehicle and industrial revenues were up 36%. During the quarter, we were awarded several new business wins, including the signal distribution on the new Tesla Model Y and the Model 3 launching in China. The low-voltage systems for the Fiat 500 battery electric vehicle, recall that last quarter we won the high-voltage system as well, and a new electrified large SUV platform in China with a premium OEM. These awards for both low and high voltage systems underscore our strength in optimizing electrical distribution for complex architectures, as well as our ability to serve customers globally through consistent launch execution. Turning to slide nine, all of our global customers are aggressively working to electrify their vehicle lineups. Beginning on the left side, you can see the progression of CO2 emissions in Europe. Between 2010 and 2018, CO2 emissions declined at an average rate of 2% per year. However, to meet future targets, OEMs will need to reduce CO2 emissions by a much more aggressive 7% per year through 2021, and then sustain 5% annual reductions through 2030. These are challenging targets, and OEMs have been responding by aggressively accelerating their electrification technology roadmaps. Moving to the right side of the slide, Aptiv's high-voltage new business bookings and revenue growth track the pace of deployment of our customers. Between now and 2022, OEMs are expected to launch roughly 45 new high-voltage platforms globally, spanning hundreds of nameplates, representing 13% of global vehicle production. Based on our $4.5 billion of new business bookings since 2016, High-voltage electrification is among our fastest-growing product lines, with revenues expected to be over $1 billion in 2022, a 40% compounded growth rate over the period. Turn to slide 10. Continued above-market growth in our signal and power solution segment is partially the result of our focused diversification strategy, allowing us to expand our capabilities into the commercial vehicle and industrial markets, both organically and inorganically. Our non-auto revenues are approximately 14% of total sales today. That's up from just 6% in 2015 and are expected to reach 25% by 2025. As previously highlighted, our acquisition of Winchester Interconnect provided us with a solid platform to build upon and execute our engineer components group diversification strategy. As shown on the slide, the Winchester management team has been actively adding accretive connector bolt-ons with a number of other acquisitions in the pipeline. In the last 12 months, Winchester acquired W Technology, a supplier of rotatable connectors and precision machine components, strengthening our capabilities in the oil and gas space. And more recently, Felmed, which specializes in ruggedized mission-critical cables and assemblies, further expanding our industrial revenues. Now, consistent across these businesses is the high cost of product failure and the need to meet the challenging temperature, vibration, and other design specifications. We are more confident than ever in Winchester's ability to serve as a platform for additional bolt-on opportunities in the engineer component space. Before I turn it over to Joe, I'd like to take a minute to recap our 2019 Investor Day. For those of you who participated either live or via the video webcast, I hope you came away with an even better understanding of our business strategy, our advanced portfolio of full system solutions, and rigorous execution culture. For those of you who missed the event, the video replay remains available on our website for your review. To summarize, we're focused on building a more predictable and sustainable business with robust downturn resiliency. better positioned to outperform in any macro environment. Our ownership mindset means that we remain disciplined and focused on driving the successful execution of our strategy and continue our track record of outperformance, the combination of which delivers significant value to our shareholders. So with that, I'm going to hand the call over to Joe to take us through the second quarter results and outlook for 2019.

Thanks, Kevin, and good morning, everyone. Starting with our second quarter revenue growth, on venues of $3.6 billion, we're up 4% adjusted, totaling 9% growth over market, as vehicle production declined 5% in the quarter. Excluding acquisitions, organic growth over market was 6%. As a reminder, KUM is now fully integrated and lapped itself at the end of the second quarter, while Winchester Interconnect will lap in the fourth quarter. The strong launch volume and content gains we had in 2018 continue into 2019, helping to offset price of 1.6% and a quarter and the unfavorable impact of FX and commodities. From a regional perspective, we saw strong performance in every major region of the world despite lower vehicle production year over year. North America revenues were up 1% adjusted with three points of growth over market, excluding acquisitions Organic growth over market was down 1%, driven by the previously discussed exit of the display audio product line and low passenger car volumes overall, partially offset by key launches in the quarter. Europe revenues were up 7% adjusted, with 13 points of growth over market, driven by the uptick of several active safety and electrification programs. And lastly, our China adjusted growth was negative 6%, significantly exceeding China vehicle production, resulting in growth over market of 10 points. Although China vehicle production was lower than our expectations, we continue to see strong growth across our key product lines. I will provide an update on our production outlook for the year shortly. Turning to slide 13, as Kevin indicated, second quarter EBITDA, operating income, and EPS were all above the high end of guidance we provided back in May. EBITDA and operating income of $583 million and $405 million respectively reflected the impact of lower vehicle production, FX commodity and tariff headwinds, partially offset by our cost savings and reduction actions, as well as the positive benefit of volume growth. Operating margin adjusted for FX commodities and tariffs was 12.1%. Tariffs were a $6 million headwind year over year, although favorable to guidance reflecting both lower demand levels as well as some benefit from our tariff remediation actions. Earnings per share of $1.33 was 19 cents above the midpoint of our guidance. Eight cents from higher operating income, driven in part by traction on the cost savings and reduction actions noted earlier, $0.08 better on tax expense, inclusive of increasing benefits from the changes to our structural operating model. These benefits will be sustainable going forward, as I'll cover in a moment. Net below the line items were also slightly favorable. Moving to the segments on the next slide. For the quarter, advanced safety and user experience revenues grew 8%, or 13 points over market. driven by new launch volumes and robust growth in active safety, more than offsetting the planned roll-off of our display audio product line and the infotainment launch cadence and user experience. Operating performance before the impact of higher mobility spend included higher engineering investments to support our strong backlog of new wins, particularly in active safety. As a result, we expect active safety revenues up 45% for the year, with low double-digit operating margins. Our mobility spend for the quarter totaled $48 million, and we remain on track to our target of approximately $180 million for the full year. Turning to signal and power solutions on slide 15. Revenues were up 2% adjusted, totaling 7% growth over market. Excluding acquisitions, organic growth over market was 3%, driven by strong double-digit growth in our high-voltage electrification product line. EBITDA margin adjusted for the dilutive impact of FX, commodities, and tariffs was 19.2%, up 20 basis points. Operating income margin on a comparable basis was 14.1%, down 50 basis points. Given continued weak macros, slide 16 provides an update of our global vehicle production assumptions underpinning our revenue outlook for the year. We saw vehicle production in the second quarter track our expectations overall, down 5% in total, as Europe volumes were better than expected, offset by a weaker China. However, extended macro uncertainty, regulatory constraints, and continued weak vehicle sales, particularly in China, have caused us to revise our vehicle production outlook slightly lower for the remainder of the year. At a global level, we expect vehicle production to be down 2% in the third quarter and 4% for the full year, versus our prior outlook of down 3.5%, driven by a percent decline in automotive-like vehicle production, partially offset by a flat commercial vehicle market. From a regional perspective, we expect China production to decline 15% in the third quarter and 13% 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 continue to take actions to adjust our cost structure in the region. Turning to Europe, we continue to expect vehicle production to be flat in the third quarter and down 4% for the full year, driven by lower customer demand and program launch delays. Lastly, we see North American production largely unchanged from the prior guide. Despite the challenging global market, we continue to expect our portfolio of safe, green, and connected technologies and balanced regional, customer, and industrial market mix to more than offset the automotive macros contributing to growth over market in every region. As a result, our growth above market rate for the year is slightly higher at up 9% to 10%, while our revenue outlook of $14.625 billion at the midpoint remains unchanged. Turning to slide 17. Third quarter revenue is expected in the range of $3.6 to $3.7 million, up 8% at the midpoint, or 10 points of growth over market. As I mentioned, that assumes global vehicle production down 2%, in addition to $1.12 Euro and an RMB of 6.90. Operating income and EPS are expected to be $425 million and $1.30 at the midpoint, respectively. and includes estimated tariffs of $16 million in the quarter. Moving to the full year, no change in our 2019 outlook at the midpoint for revenue, EBITDA, and operating income. Revenues are expected to be in the range of $14.525 billion to $14.725 billion, up 5% to 6%. We continue to expect adjusted EBITDA and operating income to be 2.4 billion and 1.6 billion at the midpoint, respectively. And our outlook includes over 90 million short-term impacts that should improve as we head into 2020. And given the strength of our revenue growth and bookings pipeline, we continue to invest in our key technologies and capabilities. EPS is now expected in the range of $5.05 to $5.15. 10 cents higher at the midpoint from prior guidance, reflecting our updated tax rate assumption of 12.5%. Looking forward to 2020, we expect our tax rate to, operating cash flow is expected to be 1.65 billion, with restructuring cash outflows in 2019 of 150 million, and CapEx unchanged at roughly $800 million. Turning to the next slide, We thought it would be helpful to provide more detail on the full year outlook from a first half versus second half perspective. Starting with the revenue walk on the left, second half revenue is expected in the range of $7.3 to $7.5 billion, driven by incremental volume from new program launches and ramp-ups in active safety, engineered components, and high-voltage electrification, partially offset by lower production volumes in the second half. Moving to the walk on the right, we expect $920 million of second half operating income at the midpoint. Headwinds from FX, commodities, and tariffs are offset by the benefits of volume growth and continued traction in our material and manufacturing performance initiatives that Kevin referenced earlier, as well as the added benefits from our continued cost savings and reduction actions. In summary, The strength of our revenue growth in the face of vehicle production declines underscores the strength of our product portfolio. While operational performance continues to reflect the benefits of remaining maniacal about our cost structure and our ability to self-fund investments in future growth, With that, I'd like to hand the call back to Kevin for his closing remarks.

Thanks, Joe. Let me wrap up on slide 19 before we open it up for Q&A. Our second quarter performance was further evidence of ATSA's ability to drive sustained above-market growth and deliver on our commitments despite a tough macro environment. We're maintaining our outlook for 2019, which includes roughly 5% to 6% revenue growth, representing 9 to 10 points of growth over markets. differentiates Aptiv as a company capable of capitalizing on the key global auto 2.0 megatrends. We're also building a more predictable and sustainable business with robust downturn resiliency, better position to perform in any macro environment, and continuously delivering value to our shareholders. So with that, let's open up the line for Q&A.

Thank you. At this time, I would like to remind everyone in order to ask a question, Press star then the number one on your telephone keypad. We would like to request that you limit yourself to asking one question and one follow-up question during this session. Your first question comes from the line of David Tamburino of Goldman Sachs.

Your line is open. Great. Good morning, gentlemen. Good morning. First question is really on your organic growth in the market. I think that got raised slightly. You know, what's really driving that? Is that improved take rates? Is it driven by customer pull through? Is it OEM choice? And then for the fourth quarter, can you just remind us, you know, how much in acquisitions is going to be rolled into that versus pure, you know, growth over your market forecast?

Yeah, David, let me, why don't I take the acquisition question first and then I'll start the first part of your question. Q4 will be very small. We closed on Winchester in mid-October. So if you think that business runs roughly 85 million or so a quarter, you're, you know, you're a fraction of that. As it relates to the growth over market, I think it's really in this sort of in the product lines that we're talking about, and it's really across a number of regions, right? Continue to see strong growth and active safety. I would say that's a penetration as well as new launch discussion. High voltage clearly particularly in China are really around launches and some of the new programs we have both on the, you know, both within the China locals as well as the multinationals.

Okay. And was there something different that you've seen throughout the year that gave you the confidence to raise that or was it conservatism earlier in the year? Just wondering what you're seeing, just again, because you do have your global production coming down, but that growth of the market going up, and obviously revenue basically unchanged.

Yeah, I would say that's just more of the math as it's working out. As we're pulling, you know, we're looking at customer schedules, who's up, who's down. We're seeing some pickup in that part of the business, active safety and electrification relative to what's coming down. Remember... Particularly in signal and power solutions, you know, with content on one out of every three and a half vehicles, we've got a fair amount of market in that business. So it's really sort of the market's coming down while those smart vehicle architectures, this zone controller award.

Is that a business that you're able to win as a result of the two advanced development awards that you have in place? Is that, you know, the next step from a satellite architecture that you already have in place? trying to understand where to fit that in for the story as you continue to provide solutions for some OEM partners, but just wondering if it works.

No, David, it's with a completely separate OEM. So it's the next step in the evolution of smart vehicle architecture. We think it's, again, further validation of the direction that the industry is headed in and what we're trying to drive, and we feel as though we're competitively well-positioned. And, you know, we would expect, you know, as we referenced in our comments, 11 domain controllers plus this zone controller, you'll continue to see more awards in the future.

Okay. And then this is just, is this more complicated or more complex than the satellite architecture product that you currently have out there?

Well, it's a part, you should consider it's a part of the satellite architecture. It's what enables the various domain controllers to actually operate. So it's ultimately a part of the complete SBA solution.

Understood. Thank you.

Okay.

Thank you. Your next question comes from Emmanuel Rosner of Deutsche Bank. Your line is open.

Good morning, Emmanuel.

Hi. Good morning. So the first question is around the second half walk. Obviously, very strong ramp-up of margin expected between the first half and second half. And the biggest bucket in your walk is obviously performance, 220 basis points. Could you give us a little bit more color around what actually goes in there, anything that you could sort of mention for us in terms of size of bucket? And from a high-level point of view, is it mainly a function of being able to catch up the cost to where the lower production is now as volume stabilized?

Hey, it's Joe. Let me go through a bit here. So you're right, there certainly is a ramp up. I think, you know, when we talk about performance, generally talking about manufacturing efficiencies, material savings, some of the cost savings obviously hit that line, but our cost savings also includes sort of the other overhead categories as well as SG&A. Really, the bulk of that number is material and manufacturing performance and efficiencies. A couple things to think about. If you compare H1 to H2, on its phase, you're right, it's a significant step up. If you remember from last year, we had about 65 million of inefficiencies in the back half from OE plant closures when they were sort of closing unexpectedly for a week or two. That totaled about $65 million. So if you think about our Our performance increase, H1, H2, is a little over $200 million, a little under $200 million. About 65 of that is going to be sort of lapping that performance issues. We did about 90 million of performance in the first half. So if you look at that, we're sort of running at about $40 million higher, second half to first half, which is a step up we're certainly going to have, and we have initiatives to achieve that number. We obviously got to work to accomplish it, but from our perspective, you know, $40 million of additional performance and over.

Yeah, that's helpful, Connor. And then second question would be on your, you know, wiring business. One of your smaller competitors was essentially, you know, making noises around, you know, giving some fairly substantial price reductions. And, you know, not too clear what the drivers are from, you know, from the outside. And I'm just, I was just curious from your perspective, are you seeing a different competitive environment on the wiring or harness business? And if not overall, are the actions from one of your smaller competitors, can they have an impact on you?

Yeah, listen, I think based on Joe walked you through the reconciliation and gave me an update on price down. So, you know, the we ended the quarter at roughly 1.6%. We're consistent in terms of our outlook that we'll be in the 1.5% to 2% range. We get to tell you the underlying environment really hasn't changed. I think each competitor or each supplier may have different situations affecting price. But the overall market dynamics from a price standpoint continue to be tough just as they've always been. As it relates Can a competitor affect the overall market? I guess it's possible, but at the end of the day, you have to fallacy execute and deliver on the, you know, we'll launch 2,200 programs this year. And you have to fallacy execute and deliver on those programs, and that's what tends to be the most important, that and the technology that you're bringing to bear to the customer. And, you know, we view our wins, our major wins with customers like Tesla, on a global basis to be validation of the value that we bring, the technology we're bringing in our operating institution.

The only thing I'd add, Emmanuel, is there's competitors and then there's competitors, right? Competitors for us in that SPS business on the electrical distribution side are really the Yazakis of the world. They are, you know, who we bump up against the most with Sumitomo a bit of a distant third. And that, you know, when you think about our business focused on KSK or VIN-specific builds, really large global platforms, complete electrical distribution systems. I'd like to think, I think I know who you're talking about, obviously. I'd like to think we're at a much different level than they are in terms of that type of business.

Great. Yeah, that's very helpful. Thank you.

Your next question comes from Itay Micheli of Citi. Your line is open.

Great. Thank you. Good morning, everybody. Morning. Morning. Just a first question on China. It does look like the growth over market there in Q2 was below the original guide. It does seem like you have that accelerating in the back half of the year. I was hoping you could give us a little more color about the drivers there, perhaps program timing and so forth.

Yeah, it ties Kevin and Joe can comment. It's just program timing. So if you look at the back half of the year, you'll see continued strong growth. an acceleration in growth partly due to incremental launches in the back half of the year versus the front half, but continued strong market outgrowth and absolute revenue growth in Q3 and Q4. So there's a little bit of movement there that we experienced in Q2, but have not seen any incremental retiming of programs or cancellation of programs at this point in time.

Great. That's helpful. And then a second question on slide 18. I just want to make sure I'm interpreting it correctly. So the volume bucket and the production bucket, are you effectively saying that your backlog and content is going to be more accretive than the declines and pressure you'll see on the base business? Because some suppliers talk about the backlog coming in at a lower margin than the base business. I'm just curious how you're experiencing through that in the second half and even beyond that.

No, the margin coming out of backlog each time is consistent with what we would have expected and consistent with what we've historically seen, right? We've had somewhat higher decrementals in Q1 as production was coming down quick and we were adjusting sort of capacity and cost structures. Decrementals in Q2 were very much in line with that 25% to 30% that we've always guided to. So, again, we're dealing with what I'll call sort of the – the cost structure on the capacity side.

Yeah, but just to clarify on slide 18, the difference in volume and production is, is production more kind of base business and volume ties to content and backlog, or am I not reading that correctly?

Yeah, production would be, we try to make a difference between the market in production, just the vehicle production coming out. Again, SPS has a large part of market, and then the incremental volume would be what I'll call sort of the growth over market. The content, I think of it more growth over market. Obviously, content has a role to play there.

Great. That's very helpful.

I want to just make sure I click on one comment. Your question ultimately is when you look at the financial profile of the business that we're bringing on versus the financial profile of the business we currently have, The profile of the business we're bringing on at run rate is more profitable business than our existing business. So the dynamics from a profitability standpoint in the business have not changed, just as we reviewed with you at our investor day in June.

Yeah, that's exactly what I was getting at. That's very helpful. Thanks so much.

Thanks. Your next question comes from Dan Levy of Credit Suisse. Your line is open.

Hi. Thank you. Hi. Good morning. Thank you. I wanted to actually just start with a question on your back half margins. And I know you're not giving 2020 guidance, but obviously 12.5%, give or take, is pretty high. And I believe that your three-year outlook on margin was roughly 12.4%. Why wouldn't 12.5% be a fair starting point to go into 2020? Meaning, what are the things that maybe don't repeat into 2020 that you have in the back half of the year?

Well, I think as we've talked about, you know, we've got programs in place to expand margins on an annual basis. You know, we've often talked about margin in a particular quarter can be lumpy depending on time of year. I think the other thing is Q4, you know, a lot of our material and manufacturing savings start over from a program and initiative perspective. So I think we're – remain confident in the margin expansion guidance we provided at Investor Day, but certainly wouldn't expect it to happen in one quarter and then hold for the subsequent years. There will be some fluctuations, particularly with the – with the volume changes. I think the other thing, you know, one of the things we focus on is preservation of like dollars as well, just not necessarily the margin rate. So as we look to cost savings, how can we make sure we're preserving those dollars even in a tougher market?

Understood. And then just on China, you know, obviously you're holding your margin despite a weaker market outlook and just broader choppiness or volatility there. And this is, I think, something we've seen for other suppliers where just the volatility in the launch schedule has maybe thrown off the margins. So what is it that you're able to do? And I know you talk to just being more vigilant on the cost structure in China, but what is it that you've been able to do or that you're doing that's allowing you to maintain that profit or that margin despite that continued volatility especially in China around launches and, you know, we know the importance of launches to your business and your growth.

Yeah, I think, you know, Joe will go through the numbers in detail. I think, you know, first Joe made the comment earlier with respect to our focus on absolute operating income dollars and commitments that we make. And as volume is declining in China, first and foremost, we've been way in front of it. You know, we've reduced headcount in China in line with vehicle production declines and overlaid on top of it a number of initiatives from a material and manufacturing standpoint to offset the volume decline. We're able to do that because of our 14 entities there, some of which we wholly own, some of which are joint ventures, we have complete management control. So, we drive the strategy, we drive the tactical decisions and the team in China has done an excellent job reducing our cost structure. Joe made the comment about kind of coming to terms with kind of a new baseline from a vehicle production standpoint. taking the actions necessary to reposition the business for a lower level of vehicle production than what the industry had expected just a year or two ago. They've done a tremendous job. Joe can talk about what they've been able to do from an OI and OI margin standpoint.

Yeah, I think Dan, if you look at it, I mean, right now within our forecast, we're expecting to hold effectively EBDA and a lot on it, staying on top of it. I'd also, and we've talked about this a lot, right? We try to get ahead of it as much as we can. We certainly haven't been perfect in calling China vehicle production down, but like to think we were out ahead of it. We were focused on Q4 of last year being lower than others expected. We've been trying to get ahead of it. So that, you know, our programs in China from a cost containment perspective started this time last year as we started to see the weakness in the back half. And again, we haven't called volume perfectly, but I'd like to think we're almost as close as anybody at this point in terms of the market coming down. You know, I think the other thing we talked a lot about at Investor Day was, you know, our focus going all the way back to 2016 on through cycle performance. We assumed we were going to get to this point at some, you know, this point in the cycle, you know, sooner or later and wanted to be ready for it. So, you know, some of our overhead reductions, the cost reductions that we're talking about now, the basis for those started back in 2016, 2017. So I think being ahead of it and sort of assuming at some point it's going to happen has helped us stay ahead of it or at least try to keep pace with it over the last couple of quarters as well.

If I could just toss in a quick follow-up to, you know, obviously a lot of sort of cost vigilance and focusing on maintaining the profits. To the extent you have a downturn in another region, obviously Europe is in the crosshairs, is it the same mentality there as well?

Yeah. Listen, again, as Joe said, I think roughly $200 plus million over the last couple of years. And on top of that, very focused on how we operate from a manufacturing material and SG&A standpoint. So those are things that are in flight now. To the extent we need to make more aggressive course corrections in light of, you know, more significant downturns, those are things that we will do and we're positioned to do. But the organization is already focused on driving cost out. It's a part of our DNA.

Great. Thank you very much. Thanks, Tim.

Your next question comes from Brian Johnson of Barclays. Your line is open.

Yes. Good morning. Just to follow up on the question earlier about the profit pressures in the competitor Z systems, the broader issue could very well be that there certainly are attractive growth over market categories in auto parts land, most of which you're very active in, active safety, infotainment, electrical distribution, signal processing, and so forth. That's attracting competitors who want in on that growth. So the question is, are there pockets of revenue in those categories that are less defensible in terms of the margin moats around those and that as you kind of roll out two or three or four years, you would perhaps not aggressively seek renewal of that business and think of some things that in wiring harness, for example. And so how do we think about how you balance the ability to hold the mid-teens margins versus hold growth over markets?

Yeah, listen, at the end of the day, Brian, we're bottom line focused. And I think the point you make is a good point. I would tell you today I don't think there's any area that we operate that we would consider commodity-like, whether that be in vehicle architecture or that be in areas like active safety or user experience. Those are areas that we've decided to exit, you know, including areas like displays or reception systems that we sold thermally. As it relates to specific vehicle architecture, and Joe made the point, we don't do build-to-print sort of work. We're really about full-body harnesses where we can work with OEs to optimize the full harness. A big portion of our business is KSK-related where we're actually building harnesses on a customized VIN number by VIN number basis, and that's really tough to do. And, you know, I think there are players in this space who've tried to compete in those sort of areas, who've had significant challenges competing and operating, which is translated into issues with customers, which is translated into very low profitability and cash flow. And ultimately, I think what it translates to is the ability to work with them to engineer out complexity and cost.

Yeah, Brian, the only thing I'd add to that, you know, and we often talk about the moat as it relates to active safety or the brain side of the business. There is a moat around that SPS business, and it's in part driven by capability. Global scale, capability, you know, again, we're at a Yuzaki, TE connectivity, Amphenol level from a competitive perspective. To Kevin's point, that's KSK, big part of the business, global platforms, where we're the only provider of full electrical distribution systems is a very large part of that business. You know, a lower margin, lower cash flow competitor deciding they're going to somehow attain those capabilities in a relatively short period of time is not something that we quite honestly foresee. We're very focused on competing with who we compete against. and remaining competitive. But there is a set of capabilities in that SPS space that would be hard for others to duplicate quickly.

Thanks. And sort of a separate but also forward-looking question around future business. You know, any updates on newtonomy in terms of just the pace towards robo-taxis? We've seen crews get more conservative about their timing, yet at the same time, we've seen folks like to make a major investment into Argo. I guess two sub-questions. One, pace of progress towards the RoboTax for business, and two, are you open to taking strategic partner money in that business, or is it something you want to continue to own 100% of?

Well, you know, in terms of operationally, we now have, you know, vehicles on the road, either testing or operating through dozens of vehicles. I think we're up to 60,000 rides, 1.3 million miles, and I think roughly 55 or 60 hubs that ultimately deliver to 2,200 different locations in Las Vegas. So we continue to operate. and operate very well and collect some revenue and a lot of learnings. With respect to mobility on demand and automated driving, listen, our view is we feel as though we've always been reasonably prudent and conservative in 2022, 2023 with meaningful revenues in 2025. Our current plan from a technology standpoint is to have a driver out of the car for testing purposes in 2020. So from an introduction standpoint, technology standpoint, our view hasn't changed. With respect to taking capital, listen, whatever makes the most sense from a financial return standpoint, as you know, we feel as though we have the capital today in the balance sheet to fund investment in the business. We're funding investment in the business to deliver on the timetables that we've talked about. the extent it made sense to partner with someone strategically and financially.

Hey, guys. Chris. Two questions. So the first, if we think about on a divisional basis versus plan, you discussed sort of by the quarter, but if we think about production got a little bit worse, but for SPS you didn't have to change the guy, so can we just assume that the benefit is the outgrowth? And then, obviously, the same question for ASUE. It seems like you brought the organic down by 2% to 3%. It's a little bit more than the production change. Is there a mixed component? And just maybe just a little bit of color, particularly on the change in the ASUE, where the outgrowth in the first half was actually pretty good.

Yeah, on SPS, you're right, Chris. I mean, it's the continued outgrowth coming from You know, the product line, high voltage, the connection systems business, HellermannTyton continues to have a good revenue growth year. On ASUX, it's very platform driven. There's not a, you know, it's not really even a market, a particular region. It's very specific platforms. We did have a couple of OEs that have trim production, but not take rates, not penetration. They have actually trim vehicle production. that has given us a little bit of headwind from a sort of a growth over market perspective. But I would say all of it is, you know, within what you would expect in this kind of market. There's no particular outlier. There's no product cancellations. There's no change in take rates, that type of thing. I think it's really just tweaking around production cycles and sort of launch volumes.

For 2020. But if we sort of dive in maybe to ASUE's margin, where, you know, sort of the implied, even if it's 7% plus for the full year, you're finally starting to get a little bit of the pickup here. And I think you gave the next 12, 18 months. Do we need to make another step level on mobility, or can we start to finally think about whatever the revenue growth in that end market is, that we could start to get your typical more 20%, 30% type incrementals because we finally lacked the investment in new autonomy and mobility.

Yeah, we've talked a couple of times, and certainly the significant step up, we don't foresee a significant step up in mobility spending into next year, right? Could the 180 be 190 or 200? We're obviously starting the planning process and need to look at that, but it certainly wouldn't be what you saw from sort of a 17 or 8 to 18 type So depending on sort of where you're calling the average, somewhere between 180 to 200, do we start to get consistent around that level? Yes, that's our view at the moment as we go through the planning process. On underlying ASUX margin or ASUX margin X mobility, those are the product lines, particularly active safety, are delivering where we expected them to be. It broke 10% in Q1. We're on track for what I'll call a low double digit to, sorry, high double digit to low team exit margin coming out of active safety in this year from an exit perspective. Now what we're, you know, what we're continuing to do is have opportunities in that business around pursuits, new business wins, those types of things. And as we have in the past, we'll be making decisions around investing in what we think makes sense. But certainly in a product line perspective, we are seeing that, you know, we are seeing the margin develop as we expected.

Yeah, Chris, I just want to echo Joe's comment. I think it's all about the near-term drive incremental returns to the baseline business and incremental margin expansion. But you could get caught up a bit in that timing. And as you know, a number of these advanced active safety programs that we're talking about, the scalable, margin rate and expand our competitive moat is something that we'll have to evaluate versus the near-term investment resources to launch and develop those programs.

So to be clear, I mean, essentially if ADAS continues at this extremely high rate, 40% plus, essentially the E of RD&E for ADAS will continue, so you'll get good incremental margins because you're allowing mobility, but it'll still be an investment period because the growth is there, particularly for the complex programs.

Yeah, RD&E will continue. I think the percent of revenue will vary a little bit on how much of that Growth comes within existing OEs. How much is a cross with new OEs, with new programs? Thanks, Chris.

Your next question comes from Dan Gowse of Wolf Research. Your line is open.

Good morning, guys. Thanks.

Good morning, Dan.

You guys have been real good on calling China production. And, you know, your second half production forecasts – are quite a bit below kind of other numbers that we've seen, you know, basically about as bad as the first half. Are you guys seeing something in China that, you know, looks like a, you know, kind of an incremental weakness in retail demand, you know, that would make the second half just as bad as the first even though the comps get a little bit easier?

Yeah, I think from our perspective, Dan, I mean, the perception, perspective based on, you know, the time we spend in China interacting with our management team that we're really not going to see a turnaround in the balance for the balance of the year, that the government's not pushing really hard. There isn't a lot of consumer to me of what we think the China market looks like at this point in time. Okay, go ahead. Joe, if you want to add anything to that.

No, Dan, all I'd say is, you know, we've talked before. Our fundamental philosophy tends to be run rate until proven otherwise. on some of these vehicle production numbers. And when you look at, to us, Q3 looks a lot like Q2, with some launch activity starting late Q3 into Q4 that should help a little bit. But, you know, there's just, to Kevin's point, we're not seeing a lot of reason for change at the moment.

Okay, got it. And just following up on that, you know, looking towards kind of six pretty bad quarters in a row in China, You know, can you give us an update on the health of the Tier 2 supply chain there? You know, some of the customers, are you seeing any stress in China? Or if you've noticed anything globally, you know, if you could just give us an update on the health of the Tier 2 network.

Yeah, listen, I think, you know, from a Tier 2 network standpoint, it's something we watch very often. Very, very closely. Maybe there's been some incremental pressure with some of the smaller local players, but we have at least minimal exposure. From a customer standpoint, you know, roughly 75% of our revenues are with the multinational JVs and then the balance, you know, with the top. five or ten local OEs. So, again, it's something we watch closely from an exposure standpoint, but we haven't seen any, you know, any real change from a risk profile or how people are acting. So, but it's something that we're watching very closely.

Okay. Thanks a lot. Much appreciated.

Your next question comes from Joseph Spack of RBC Capital Markets. Your line is open.

Thanks, everyone. The first question, hey, Kevin and Joe, you guys were, I think, one of the first or certainly on the earlier side to sort of talk about some of the slower ramps of launches in Europe and I think China, and we've obviously seen other companies sort of talk about that since then. Any update from what you saw sort of last quarter to this quarter as we go forward?

Yeah, nothing really meaningful at this point in time since our conversations in May, earnings call in May. Nothing meaningful at that point. A little bit of shifting on small, very small programs in China, but nothing that we would raise to your attention at this point.

Okay. And then just two, I guess, maybe sort of clarification or housekeeping, but one, you know, on the commodity FX line, I think you were sort of pointing to like $110 million hit to EBITDA, and I think that was about 80 prior. Is some of that because of copper coming down and that sort of pass-through, and is that actually helping your margins a little bit?

Yeah, Joe, copper doesn't really hit the OI. It's just really that margin rate optics because it's a pass-through. It's very minimal flow-through. So last year, as copper ran up, you get margin rate optics going one way. This year, to the extent we're passing through lower prices, you could get it the other way. The $90 million or so that we have in for the full year is really FX and resins. Copper, per se, again, is a rate optics but not a margin dollar hit.

And the impact is 110 for EVA-GA and 90 on the oil island.

Okay. And just lastly, it looks like you did maybe three-quarters of the $450 million in buybacks that your guidance suggests thus far, but your free cash flow is generally more second-half weighted. So is there a little bit more opportunity there?

We will continue to remain opportunistic as we always do.

Okay. Thank you very much.

Thank you, Chuck.

Your next question comes from John Murphy of Bank of America, Merrill Lynch. Your line is open.

Good morning, everyone. This is Aileen Smith on for John. Good morning. First question on the smart vehicle architecture. I think it's pretty clear you're seeing traction with OEM customers with the Advanced Development Awards, and then on top of that, the recent Zone Controller Awards. As you look at the competitive landscape, is it fair to say you're well ahead of your competition on this front, or are you seeing some fast following among some of your peers as you've been fairly successful in your awards?

No, listen, we think we're uniquely positioned. As we've talked about Aptiv and our product portfolio and capabilities, having capabilities both in a history and for SVA over time and that electrical architecture system

as being similar in any way?

Yeah, too. Well, listen, I think, you know, taking a step back, we think it's similar in a number of areas that ultimately lead to areas like SCA and leveraging the competitive moat in and around user experience in combination with active safety. ultimately leads to SVA. And having the capabilities in and around each one of those areas in a strong competitive position, you know, number one in active safety, obviously leading the charge on SVA puts us in a position that's probably not exactly like engineered components where you have low cost and high cost of failure. The solutions are higher value add, but high cost of failure. But we think there's a real benefit in having the first mover, being in the first mover position.

Great. That's very helpful. And second question on the macro side. If you think about U.S.-China tariffs and trade friction that may be much more structural than transitory, can you remind us how your footprint realignment actions to Korea and potentially some other countries is progressing? And Could this be sped up or pushed more aggressively in the event that trade tensions escalate?

Yeah, I think from a tariff, we continue to make progress. We saw a little bit of help from on the remediation side in Q2. We were obviously up $6 million year over year on tariffs, but below the guide by about $6 million. That's in part lower volumes. Unfortunately, that's not the best way to avoid tariffs. We just had lower, you know, the tariff impact on things moving across the board, just less of it. But we did see some traction in remediation. The Korean plant's in validation with customers. We'd expect that to be completed by the end of the third quarter for the most part. So certainly tariff remediation for 19, we're working hard to do more. but it's probably more of a 2020 as we start to work that down with, particularly with the Korean manufacturing facility. So all is tracking according to original plan. Again, we didn't, you know, we didn't wait to see if tariffs went away. We got right on it. You know, obviously we'd like to do more in 2019, but certainly feel we're positioned well to eliminate a good portion of that $44 million going into 2020. Okay. Yeah, I think it's important.

At Joe's point, and you said this before, we don't view these as transitory. We view them as they're going to be in place for quite some time. So as Joe said, we take an action as though they're permanent from a supply chain, from a sourcing, from a manufacturing standpoint, and we'll continue to do that. And I would say we're moving as fast as we can. One of the biggest issues, quite frankly, are schedules. Longer term, we operate off of discussions with customers to get a feel for what their plans are, as well as use sources like CAM in China and IHS. We feel as though we've taken a fairly conservative position and have balanced the risk and the opportunities in our current outlook. Is it possible that it could be worse? It is possible. We don't think it's likely, and we think we've taken actions to get in front of the situation in the event it is a bit worse. On the flip side, we could be overly conservative on the fourth quarter, and there could be some upside. Now, we're not planning on it. We're not operating in that way. But based on our 25 years of experience in China, we feel as though we have the appropriate amount of conservatism built into our outlook.

Yeah, Steven, I think it's a little bit of just definition of stabilization. We've got China down 15% in Q3, down 13% for the year, which is still a double-digit decline in Q4. So, again, it's relative stabilization to maybe where it was in Q2 and Q3, but we still have it down fairly significantly. On your original question around performance in the H1 versus H2, I go back to Emmanuel's question and the response. You know, obviously when you look at it optically, the performance number is a big number in the back half of the year. Round number is a little less than $200 million. You know, some of that, about $65 million, is uplapping the performance issues last year from the plant closures, the OE plant closures. If you recall, we started to get... back half of last year into a schedule changes. That was about $65 million. So if you take that out, so to take the comp, the year-over-year effect of that out, you're looking at about 130 million of performance, material manufacturing performance in the back half. We did 90 in the first half. So you're actually right, it's 40 higher. But our view, just given our initiatives tend to be back and loaded, We've been working on this for a while. You know, a $40 million increase over the next six months is not something – it's a lot of work. We've got things to do, but it isn't something that we don't know how to do. It should be manageable within the initiatives we have going on.

Great. That's very helpful. Thank you.

Your next question comes from David Kelly of Jefferies. Provide some color on the mix of that ramp. How much is level one versus level two at this point? And is there any, you know, much level two plus ramp taking place also?

Yeah, I don't have the level one versus level two right in front of us. A number of those programs, a significant number of those programs, David, are effectively scalable programs that scale can be anywhere between level one and level two, level two plus actually. So I'd say the bulk of them kind of sits within that sort of a framework. Joe can comment on assumptions related to revenue on level one versus level two or level two plus.

Yeah, I think, you know, just as you'd expect the way this technology is rolling out, right, the bulk of revenue today, tends to be the level one, level two light, level two minus type systems. It's what you see in the cars today. That's what we're producing today. To Kevin's point, if you look at the types of things we're booking, whether it's the PSA win, the Ford win, some of the others, those tend to be the scalable systems where the OEs and ourselves have, you know, have come to appreciate that the best and most cost-effective way to put this technology into vehicles is to have like-for-like systems across platforms and across levels of optionality, so you're not redesigning systems. Those tend to be what's in bookings at the moment for launches over the next couple of years.

Okay, great. Thanks. And just quickly on the same thing, looking at the engineering components, you know, bookings, which also ramped up in the quarter, anything to call out non-automotive there, or is that at this point we're still strictly mostly on the automotive side, you know, booking businesses?

No, listen, I think our CV and industrial business continues to, you know, continues to grow. We continue to book well. Our CV business is up 17% or 18% a quarter, and we continue to book to those levels. You know, our expectation is we finish 2019 at about 14% non-auto, so CV and industrial revenues. You know, it's not too long ago. If you go back a few years, that was at 5%. Go back even a couple years before that, that was less than 2%. So that progress continues.

All right, great. Thank you.

Thank you.

Our final question comes from Maynard Oum of Macquarie. Your line is open.

Hi, thank you. Good morning. You talked about an acceleration in electrification and OEMs need to meet more stringent emission standards. This might be a little bit of an obvious question, but how do you think about managing the secular transition from ICE towards electric? And I know you have visibility from your programs, but if there is a steeper acceleration towards electric, are there any meaningful changes you need to make for this?

Right. To the extent there's more powertrain electrification, it means there's more content within our signal power and solution segment at higher margins. So it's something that's a positive. And from a, you know, overall, if your question is leading capacity and capability, that's something that actually can be easily additional manufacturing facilities. But today we have a full high-voltage electrification portfolio that's, you know, very attractive, very competitive. And, you know, again, the more electrification, the better.

Yeah. From a post-to-powertrain spin, active, we actually do not have a decremental – CPV going from BEV to internal combustion to BEV. What we lose on, say, connectors on an engine itself are actually offset by the additional electrical content of full BEV. So from a content per vehicle perspective, ICE to BEV is actually neutral to a slight positive for us.

Okay, great. And then can you talk about... On the A-B side, new scenes and the sharing of A-B data, the industry looks like it's kind of following suit with your data sharing strategy. Do you think this levels the playing field on the A-B side, and does this help you reduce any R&D burdens for Aptiv?

No, listen, I think from our perspective, anything that accelerates the development of automated driving, one, makes the world safer. Two, it makes the market better. Three, you know, virtually all the automated driving players that are out there are customers in some way, shape, or form, whether it be perception systems, whether it be vehicle architecture, whether it be data. So it creates additional profit pools. So to the extent we can accelerate the development for ourselves as well as other players out there, we view it as a positive. Great. Thank you.

Ladies and gentlemen, that was our final question. I will now turn the call over to our presenters.