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 third 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 third quarter 2019 earnings conference call. To follow along with today's presentation, our slides can be found at ir.aptiv.com. Consistent with prior calls, today's review of our actual and forecasted financials excludes restructuring and other special items and will address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for both our Q3 financials as well as our outlook for the fourth quarter and full year 2019 are included in the back of the presentation and in the earnings press release. Please see slide two for 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, Aptiv'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 the rest of 2019. With that, I'd like to turn the call over to Kevin Clark.

Thanks, Elena. Good morning, everyone. I'm going to begin today's earnings call by providing an overview of our third quarter highlights and our updated outlook for the remainder of the year. Joe will then take you through our third quarter financial results, as well as our fourth quarter financial outlook in much more detail. Third quarter revenues sustained strong above-market growth despite declining vehicle production. Revenues increased 6%, representing eight points of growth over underlying vehicle production. Operating income and earnings per share totaled $410 million and $1.27 respectively, driven by flow-through and volume growth and continued traction on our overhead cost reduction and material and manufacturing performance initiatives, partially offset by the headwind from the GM labor strike, which totaled $70 million of revenue, $30 million of operating income, and 10 cents of EPS during the quarter. Moving to the right side, in September, we announced our autonomous driving joint venture with Hyundai, which we're confident will advance the commercialization of level four and level five self-driving technologies and further strengthen our industry-leading capabilities in the development of advanced driver assistance systems, vehicle connectivity solutions, and smart vehicle architecture. We believe it's critical that we continue to invest in our safe, green, and connected technologies to further expand our competitive moat and better position Aptiv for long-term sustainable growth through organic investments in our engineering capabilities, minority investments in technology companies, and the acquisition of companies such as Gabicom, a bolt-on to HellermannTyton that broadens our existing cable management capabilities. In summary, it was another strong quarter in a challenging environment, further validating that our business strategy, our operating model, and our technology portfolio can deliver sustainable, strong performance in any environment. Moving to slide four, let me provide some color on the inputs to the update of our full-year outlook. Starting on the left side of the slide, our third quarter financial performance benefited from solid revenue growth. and operating income and EPS were above the top end of our guidance range when you exclude the impact of the GM strike. In addition to delivering strong financial results during the quarter, we also continued to execute our strategy with the announcements of our autonomous driving joint venture with Hyundai and the acquisition of Gabacon, both of which I'll cover in more detail shortly. Moving to the right side, Although our operating performance during the quarter was stronger than forecasted, the GM strike had a significant impact on our financial results in the third quarter and will continue to be a headwind in the fourth quarter as GM works back up the full production schedules during the month of November. Joe will take you through the details in a moment, but for the full year, we expect a headwind of $250 million in revenue, $135 million in operating income, and $0.45 of EPS related to the strike. While our operating teams in North America are aggressively working to mitigate these headwinds, we've included the estimated impact in our fourth quarter outlook. In addition, foreign exchange continues to be a headwind in 2019, as the Euro and RMB exchange rates are weaker, and global vehicle production for the year is now expected to decline 5% versus our previous forecast of down 4%, largely driven by the GM strike in North America. Our updated outlook reflects stronger year-to-date operating performance, offsetting the increased headwind from foreign exchange and lower volumes, but the effect of the GM strike is an incremental headwind to our prior full-year outlook. Turning to slide five, third quarter new business bookings totaled $4.2 billion, highlighting our portfolio alignment to the safe, green, and connected megatrends. We now believe that we're on track to achieve over $20 billion of full-year bookings, reflecting a few large program awards shifting to early 2020. Our updated outlook for 2019 actually represents an increase versus the prior year when you factor in the current outlook for lower global vehicle production. Our ASUX segment booked just under $1 billion of new customer awards in the quarter. Our expertise in central compute systems is helping us deliver smarter, safer, and more integrated solutions both outside the vehicle with advanced active safety systems as well as in the cabin to enhance user experiences. Through the third quarter, active safety new business bookings totaled $2.5 billion and are expected to reach approximately $4 billion for the full year. And year-to-date user experience customer awards total just under $1 billion. Our SPS segment had new business bookings totaling $3.3 billion during this quarter, including over $500 million in high-voltage awards, bringing our high-voltage electrification bookings to $1.2 billion year-to-date, on track to meet or exceed last year's record of $2 billion. Our recent customer awards reinforce our revenue outlook for 2022 and underscore our relevant portfolio aligned to key secular growth trends. Turning to our advanced safety and user experience segment on slide six. Third quarter revenues increased 9%, 11 points over market. The continued strong demand for active safety solutions drove product line revenue growth of 29%, lapping prior year record growth of 68% during the quarter. And as expected, the roll-off of revenues tied to our discontinued displays business is a headwind in our user experience product line revenues. Our customers are increasingly looking for our support in developing solutions that include more compute power and high-speed connectivity, positioning us to leverage our system's design and validation knowledge, further expanding our competitive moat. Recent industry recognition of our unique capabilities includes our selection as a 2020 PACE Award finalist for Android Infotainment Compute Platform. This revolutionary system will launch first on the Polestar and then on Volvo's popular XC40 model, powering the first Android infotainment system with native Google automotive services and real-time OTA, enabling a best-in-class in-cabin experience. And underscoring Afta's leading agile solutions development capabilities and role as a partner of choice, serving as the best bridge between the automotive industry and tech industries. Turning to slide seven in vehicle safety, according to data recently released by the National Highway Traffic Safety Administration, fatality rates per 100 million miles driven in the United States are declining as active safety penetration increases from initial level zero applications to level one applications and beyond. Our investments in scalable approaches to advanced safety solutions are not only seeding our next wave of growth, but they're also helping to drive the democratization of advanced safety systems globally. APTA's flexible satellite architecture approach has been a game changer in the industry and has been selected by multiple OEMs to help them democratize active safety solutions across their multiple vehicle platforms. Turning to slide eight, our recently announced 50-50 joint venture with Hyundai not only brings us closer to enabling tomorrow's self-driving vehicles, it also helps accelerate the development of today's advanced active safety solutions for our existing OEM customers. Hyundai's ability to advance the development of production-ready autonomous driving systems, both cost-effectively and at scale, along with its shared vision and timeline for applications in the robot taxi market, validate them as the right OEM partner for the commercial deployment of Level 4 systems beginning in 2022 and beyond. Aptiv is contributing its autonomous driving technology, intellectual property, and roughly 700 employees focused on the development of scalable Level 4 systems for the robo-taxi market. Hyundai is contributing $1.6 billion in cash at close, $400 million in vehicle engineering and R&D services, and access to intellectual property. Hyundai will be a close technical partner, strengthening APTA's existing foundation in automated driving solutions, while, as I mentioned, also enhancing APTA's competitive position in ADAS, vehicle connectivity, and smart vehicle architecture. APTA will continue to provide commercial solutions, including compute platforms, perception systems, and power and data distribution solutions to the joint venture. just as it does to other OEM customers, while maintaining access to the joint venture's automated driving technology. We expect the transaction to close in the second quarter of 2020 and be accretive to both ASUX and Aptiv margins and cash flow. In summary, Aptiv is working to realize our mission of making the world more safe, green, and connected, while also delivering outside shareholder returns. Turning to slide nine, 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 and are driving sustained growth in this segment. Revenues increased 4% during the quarter, 6 points over market, including the impact of the GM strike. Excluding the impact, revenues would have increased 8 points over market due to strong launch volumes particularly in Europe and in China. High-voltage electrification revenues increased 30% in the quarter, while non-auto revenues were up 34%. During the quarter, we rewarded several new business bookings, including the low-voltage distribution system on the new Rivian truck and SUV electric vehicle platforms and the high-voltage charging inlet for Porsche and Audi. These customer awards underscore our strength in optimizing power and data distribution for complex vehicle architectures, as well as our ability to flawlessly serve customers through a focused strategy on quality and consistent launch execution. Turning to capital deployment on slide 10, as I previously highlighted, our acquisition of Gabacom, which specializes in highly engineered, high-quality cable management and protection solutions, expands our engineered components portfolio. Gabacon's product portfolio is highly complimentary to HellermannTyton and builds upon our existing telecom product offering, strengthening our capabilities in the most attractive areas of the telecom market and further diversifying our industrial and market revenues. With our track record of successfully integrating accretive bolt-on acquisitions, we're confident Gabacon will enhance our cable management portfolio, and accelerate revenue and earnings growth in our engineered components product line. So with that, I'll hand the call over to Joe to take us through the third quarter results and outlook for 2019.

Thanks, Kevin, and good morning, everyone. Starting with our third quarter revenue growth on slide 11, revenues of $3.6 billion were up 6% adjusted in the quarter, totaling 8% growth over market as vehicle production declined 2% in the quarter, as expected. Excluding acquisitions, organic growth was 4% or 6% growth over market. And as a reminder, the Winchester Interconnect acquisition closed in October of 2018. Strong launch volume and content gains globally were partially offset by price of 1.7% in the quarter, the unfavorable impact of FX and commodities, and lower North American volume related to the GM strike, which Kevin mentioned earlier. From a regional perspective, North American revenues were flat on an adjusted basis, however, up 5% in the quarter when excluding the GM strike. Europe revenues were up 14% adjusted, with 15 points of growth over market, driven by the uptick of several active safety and electrification programs. And lastly, our China adjusted growth was 6%, slightly ahead of expectations for our customers and significantly outpacing China vehicle production, down 7% in the quarter, resulting in 13 points of growth over market driven by launch volume across the portfolio. Turning to slide 12, as Kevin indicated, third quarter operating income and EPS were above the high end of the guidance we provided back in July when excluding the impact of the GM strike. EBITDA and operating income of $587 million and $410 million respectively reflected volume growth in both segments and better-than-expected operating performance, offset by FX, commodity, and tariff headwinds, which on a combined basis were slightly better than expected, and the impact of the GM strike, which totaled $30 million in the quarter. Adjusted operating income margin was 11.5% in the quarter. However, when you adjust for the headwinds I just mentioned, margins would have expanded 10 basis points to 12.2%. Earnings per share of $1.27 was up 2% reported, or 14% excluding those items. Moving to the segments on the next slide. For the quarter, advanced safety and user experience revenues grew 9%, or 11 points over market, driven by launches and robust growth in active safety, more than offsetting the impact of the GM strike, the planned roll-off of our audio display product line, and the launch cadence in user experience. Operating income performance before the impact of higher mobility investments included unfavorable price declines and higher engineering investments to support launch activity. Our mobility spend for the quarter totaled $47 million, and we are tracking to a range of $180 to $190 million for the year. Turning to signal and power solutions on slide 14. Revenues were up 4% adjusted, representing 6% growth over market. Excluding acquisitions, organic growth was 2%, or four points over market, resulting from strong growth in electrical distribution systems, particularly in Europe and China, driven by new platform launches and increased electrification, and double-digit growth in our CV and industrial product lines, partially offset by the unfavorable impact of the GM strike. EBITDA margin was 18.7%, up 20 basis points year over year, And operating income margin was 13.5%, down 10 basis points, reflecting benefits of volume growth and traction on our material manufacturing productivity and cost reduction initiatives, partially offset by higher depreciation and amortization. Turning to slide 15, highlighting our fourth quarter and revised full-year guidance. The volume disruption at GM has caused us to revise our vehicle production outlook lower for the remainder of the year. A detailed update on our production outlook by quarter is included in the appendix of today's presentation. At a global level, we now expect vehicle production to be down 7% in the fourth quarter and 5% for the full year, versus our prior outlook of down 5% and 4%, respectively. As a result, we have reflected our outlook both with and without the impact from the GM strike. Starting with the fourth quarter on the left, including the strike impact, Revenues are expected to be flat on an adjusted basis at the midpoint, which reflects a $180 million headwind from the strike in the fourth quarter. Fourth quarter operating income is expected to be in the range of $365 to $385 million and includes a $105 million headwind related to the GM strike, including certain inefficiencies related to ramping up production to full run rate levels in early November. EPS is now expected to be in the range of $0.97 to $1.03. Moving to the full year, revenues are now expected to be in the range of $14.255 to $14.355 billion, up 3% at the midpoint. EBITDA and operating income are expected to be $2.252 billion and $1.53 billion at the midpoint, respectively. And earnings per share are expected to be $4.65 at the midpoint, reflecting a 45% headwind from the GM strike. Operating cash flow is now expected to be $1.54 billion, reflecting lower EBITDA related to the strike. As a reminder, excluding the GM strike impact, the midpoint of our outlook remains unchanged from our prior guidance. Turning to the next slide, we thought it would be helpful to watch the operating income year over year for the fourth quarter and full year 2019. In both cases, you see the contribution from volume growth. In addition to performance benefits derived from our annual manufacturing and material productivity initiatives that ramp over the course of the year, and further traction on our cost savings and reduction actions. FX commodities and tariffs have been a headwind throughout the year, and while price has been stable, it has been less of a headwind than expected, tracking below 2% for the full year. Again, excluding the strike, operating income for the year of $1.67 billion at the midpoint remains unchanged versus prior guidance. While our teams are aggressively working to mitigate the impact of the GM headwinds included in our fourth quarter outlook, we have reflected the probable downside in our revised fourth quarter and full-year guidance. Turning to the next slide. As we assess 2020, our long-term financial strategy remains unchanged as we continue to position a company for better through-cycle performance. 2019 year-to-date has demonstrated our ability to deliver on this strategy despite the challenging macro environment. Our ability to sustain strong revenue growth, even in a down-production environment, demonstrates the work we've done to improve our through-cycle resiliency. Underscoring the value of our portfolio of relevant technologies, which more than offset the combination of lower vehicle production, unfavorable FX, and commodities. Additionally, our maniacal focus on ensuring our cost structure remains efficient positions us to grow earnings while investing in future growth, where we have the opportunity to significantly accelerate the commercialization of new platform solutions, including next-generation software, compute, and vehicle architecture systems. Despite near-term concerns about the challenging macro environment, we are confident in our ability to continue to outgrow the market. And while it is still early in the planning process, we think it's prudent to continue to plan for global light vehicle production to be a headwind in 2020. Based on current estimates, we expect to see unfavorable year-over-year impact from foreign exchange, and we remain laser-focused on mitigating risk from global trade disputes and regulatory constraints. That said, there are a number of tailwinds as we head into 2020, including our portfolio alignment with key secular trends enabling us to sustain above-market growth. We see further benefits of our productivity initiatives reflected in our financial performance as commodity and tariff headwinds stabilize. And we will continue to effectively deploy capital in alignment with our strategy with contributions coming from our recent portfolio enhancing transactions to benefit 2020. We will provide further insights on the year ahead over the coming months and give official 2020 guidance in late January when we report fourth quarter results. With that, I'd like to hand the call back to Kevin for his closing remarks.

Thanks, Joe. Let me wrap up on slide 18 before opening it up for Q&A. Our third quarter performance is further evidence of Aptiv's ability to drive sustained growth and strong operating performance, despite a challenging macro environment. We're confident in our outlook for 2019, which includes roughly 3% revenue growth, representing eight points of growth over market. Our outlook for the fourth quarter reflects our balanced approach to forecasting industry volumes in a more uncertain environment. While investing in future growth initiatives, and reaping the benefits of our lean cost structure and our flexible business model. We believe our unique formula further differentiates Aptiv as a company capable of capitalizing on the key global auto 2.0 megatrends, securing significant customer rewards in the fastest growing spaces in the automotive market, while continuing to develop a more competitive business model, both of which translate into a much more predictable and sustainable business that are positioned to perform in any macro environment, and combined with a management team that thinks and acts like owners, delivers outsized value to our shareholders. So with that, let's open up the line for Q&A.

Thank you, Chris. We'll take our first question, please.

Thank you. And at this time, I would like to remind everyone, in order to ask a question, press star 1. Your first question comes from the line of Emmanuel Rosner from Deutsche Bank. Your line is open.

Good morning, everybody.

Good morning.

I was looking for additional color on the strike impact, both in the quarter and assume for the full year. Obviously, it's a very large flow-through of margin impact on the revenue. Can you just maybe talk to us a little bit about what drives that, what inefficiencies are, and how do you think about it as we've now moved past the strike and if there is any sort of like cost or opportunities associated with that on the margin side?

Yeah, Emmanuel, it's Joe. I would say the strike impact is sort of most akin to, and we had some of this last year, right, sort of the abrupt plant closures at OEs. So, you know, during the strike, we obviously held our workforce. We had over 21,000 impacted employees, seven dedicated facilities. to GM were impacted. There was another 22 facilities that were partially supporting GM. So you wind up with a fair amount of costs. Obviously, the revenue comes out fairly quickly, sort of staggered down in September as we were able to continue to support the Canadian and Mexican plants. But by the time you got to October, you really had all of that sitting idle. We worked hard to maintain the workforce. So pay the workforce during the strike. You know, that is really an effort to make sure we get back up and running very quickly, just given the number of employees that we had. And basically what we've assumed, obviously we were down for the full month of October for the most part. From a production perspective, we started shipping this week out of a couple of locations. I would say shipments over the last couple days have been in between sort of 10 and 15% of normal volume. We expect that to ramp to 25% to 40% of normal volume over the next week. And then our current assumption is we're effectively back up and running normalized production and deliveries to GM after November 8. And those are the assumptions that are in the forecast.

OK, understood. That's very helpful. Second question is on the pricing side. So you highlighted in the full year walk that maybe pricing is playing out a little bit better than expected. But you also flagged on slide 13 a 2.7% price decline specifically in the advanced safety and user experience segment, which I guess I don't have a point of comparison from before, but, you know, it's not always there on the slide. Can you maybe just talk a little bit more about what's going on on the pricing side?

Yeah, I would say there's two. I would go back to what we've always said, which is pricing is lumpy. Long term, we're very comfortable with that 2% number, and I think I've said even on these calls, you know, there will be quarters where it's a little less. It doesn't necessarily mean anything. There's quarters where it's a little more. It doesn't necessarily mean anything. We're really focused around 2%, but it is a lumpy number quarter in, quarter out. Listen, I do think the second point I'd make this year in particular, you know, I think price is favorable overall as volumes have come down. and we do have certain clauses within our contracts that require volume be met at certain levels to continue to provide price downs, and we have seen some benefit from that. But again, longer term from a financial framework perspective, I'd continue to think of that 2% as the right number.

Yeah, and Emmanuel, it's Kevin. ASUX traditionally has higher price downs relative to our other segment, our SPS segment, so it's not unusual to have, to Joe's point. price downs in that range, the range that Joe discussed. Okay.

Thank you very much.

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

Thanks for taking the question. Joe, I think you mentioned the tariff impact was a little bit better than you expected. Is that related to the GM strike and just some lower volume? So maybe you bought some less components or is there something else going on with that?

Yeah, I would say less. Q3, the strike happened a little bit late. That's obviously on the water for a bit. So less strike related. Overall, there's two things. I think overall volume, a little lower on some of those parts. So that helps. But our remediation process is, You know, we are hitting those milestones from a radiation perspective. The Korean operation's up and running. It's been approved by two of the three customers that utilize it. We've started shipping out of that. So I'd say we're on track from a full-year basis of where we thought we'd be. You might see a little bit, or we do have a little bit of an uptick in tariffs in Q4 related to pulling some of the GM stuff in, but that's a core thing. It's not going to impact our full-year view. And remediations on track.

Okay. And then just to understand the strike impact, third quarter to fourth quarter, where, you know, the strong or high documentals in both quarters, higher in the fourth quarter. And I think you mentioned some of those, you know, restart costs. But then in the answer to Emmanuel's question, I thought you said you sort of kept everyone going. So I just want to better understand why the documentals are –

Yeah, it didn't keep everybody going. They weren't in the plants. Obviously, kept paying them on temporary, you know, temporary layoff, TLO, temporary layoffs. But there are some ramp costs, too. You know, just getting them back to work, there's going to be some overtime. There's going to be some inefficiencies. People have been out for 40-plus days. So, you know, there is an assumption as we ramp in the first half of November, we don't run – as well as we were running, you know, in August and early September, right? It does take a little bit to turn the system back on. But, again, I think manageable within – certainly manageable within the quarter and very specific to the GM strike, as you can see in the third quarter. And, you know, our sort of overall performance initiatives around manufacturing material are – coming in where we expected them.

Joe, if I can just augment Joe, just taking a step back, just to put it in perspective, within our SPS business, we have seven dedicated plants to serving General Motors in North America, right, that went through a period, to Joe's point, that weren't operating. And then there's an additional 21 or 22 that serve General Motors in North America. So you can imagine, as production declines significantly, especially in those dedicated plants, and to a lesser extent in the partial or shared plants, it's almost akin to going through a relaunch of a program again. So you're not going to operate and launch at the same sort of efficiency as you do when a plant normally runs. So it's a significant part of the overall supply chain that, you know, that needs to be kick-started again and relaunched, and that has an impact on productivity and efficiency.

Okay, thanks. Kevin, just maybe a quick clarification on Hyundai JV. Like in the press release, you talked about how you can still work with OEMs for ADAS and autonomous vehicles. Is that with a license back from the JV, or does this have to be sort of new independent work that Aptiv develops?

So two aspects to that. One, it's a non-exclusive joint venture, one. Two, that we have the flexibility from a commercial standpoint to buy technology from the joint venture, but we also have the ability, if it were to make sense, to develop technology on our own to sell to customers. So whatever would be the most optimal financial solution. Perfect. Thanks. Thanks, Joe.

Our next question comes from Rod Lash of Wolf Research. Your line is open.

Good morning, everybody.

Hey, Rod.

I had a couple questions. One is in your bridge for Q4, there's an acceleration in performance. Is that engineering recoveries, and is there anything we can extrapolate from that into 2020? Okay.

Well, engineering recovery is generally heavier in the fourth quarter. That's consistent this year. I think from a, again, I'd go back from a framework perspective. You know, we continue to, on a net basis, look to that sort of 7% to 8% vested in engineering across the business. I'm obviously not going to get into specifics on 2020. I, you know, Kevin's talked before and mentioned today, we're obviously continuing to invest in that active safety business, just given the opportunities at hand and the bookings. But I, you know, again, without getting into specifics on 2020, I wouldn't expect that to change over the long term.

Yeah, Rod, again, if you go back through history, manufacturing, material, and engineering performance has consistently for us been strongest. in the fourth quarter. And I think it's the nature of the initiatives that we put in place in our plan. I think it's the nature of the incremental initiatives that we put in place throughout the year.

Okay, great. And on Europe, it looks like you're doing 15% or you did 15% growth over markets, so obviously that business could withstand a lot. But I was hoping – you could maybe just take a step back and speak broadly to what you're seeing in that market as we approach some of the regulatory changes that kick in in January. Are there any preliminary signs on how production is being altered to account for that? And are you seeing a significant acceleration of signal and power there associated with electrification?

Yeah, we're seeing strong... growth in our signal and power solution segment, principally as it relates to or the result of new program launches. Rod, as you know, we've had a number of wins from a high voltage standpoint. High voltage is growing very strong, but it's off on a relative basis for us. I'd call it a smaller number, so not a huge revenue impact. As we head into to 2020 from 2019. Like all of you, I think we have some concern about the robustness of the European market and the likelihood of continued, if not increased, weakening in that market from a vehicle production standpoint. So I'd say it's a little bit too early to call, but as we sit and we plan for 2020, we're certainly forecasting production in Europe or would expect production in Europe to be down on a year-over-year basis.

Okay, that makes sense. And just one data point, if you could share it. Within the user experience business, could you remind us how big that headwind is from the roll-off of displays? You know, when does that sort of cycle through? And is that a – you've previously talked about a six- to eight-point growth over market through 2022, so that's accelerating. Is that one of the bigger – factors that would lead to that acceleration.

So, Rob, the displays business for us is about $200 million. It'll be down about $100 million in total for 2019, so it leaves another roughly $100 million of displays revenue left that will continue to cycle through over the next one to two years.

Okay. Great. Thank you. Thank you.

Thanks, Rob. Your next question comes from Chris McNally of Evercore. Your line is open.

Hi. Good morning, guys. Good morning. I wanted to maybe go through this idea of a 2020 walk, and I appreciate that it's early in the year and you guys are taking your first stab. But as we start to sort of put numbers to those, the positives and the negatives, Do you think it's fair to say that we should use the base XGM strike, or is that maybe a little bit too aggressive because it's unclear to some of Joe's points about how we'll get that lost EBIT back? So I guess that's my first question. Can we use sort of the 166 plus in terms of EBIT as the base for a 2020 walk?

Yeah, Chris, I think, listen, I think the X strike number – is certainly we're comfortable with it was very, it was our guidance from July. So from a 2019 perspective, you know, x right, that's, that's where the business lands, I think, from our perspective, what we're looking at is really what happens with vehicle production next year. And, you know, as you know, we manage the business to a framework over a long over the long term, certainly try to get that framework in each year. But some of that's going to be dependent on vehicle production. And again, as Kevin mentioned, it's a little bit early to start calling numbers, but as we sit and look at things now, vehicle production down 5% this year. I'm not sure it's down 5% next year, but it's probably somewhere between 3% to 5% down next year as we start to add things up. And then we'll go through our exercise of, which we always do, where can we get additional performance out of the business, where can we take out costs, and Again, as we've consistently said, where do we want to keep investing in the business, particularly from an engineering perspective?

Yeah, no, and I think it's important to add as it relates to the fourth quarter and at least the first half of next year, the concept that you're going to have a big rebound or catch-up in vehicle production from General Motors, based on the schedules we see and what they already had built in from a launch timing standpoint, it would it's tough to assume you'd get any at least near-term benefit. Okay. Either the fourth quarter or the full year.

And then if I could just, you know, follow up on the production for next year, because, look, we clearly share your concerns around Europe. So, obviously, Europe being down, again, it's early, but, you know, 1%, 2%, 3%, that makes sense. But to get to a global number of down three, I mean, I guess we would also need core China down again, and then U.S. down core X sort of a GM. So maybe could you just help us? Because I think Europe, everyone sort of understands. China, no one has really big expectations, but we would maybe sort of start to pencil in a flat or an up number. Can you just flesh out some of those thoughts where you're seeing a potential global weakness even going into next year?

Yeah, Chris, we're still working through plan, and we're not going to go through market by market at this point in time. But we look at it from the opposite perspective. Play out a scenario where you actually see growth in vehicle production and in which markets. And as we sit here today, you know, we see more headwinds to vehicle production than we see tailwinds. You know, maybe a part of that is we want to make sure that we have operating plans to execute against any downward pressure on volumes. That's probably a certain overlay. But we also just want to be very realistic and rational about where we sit economically and where we are in the cycle. So to Joe's point, you know, maybe it's not down five, but we can come up with a number of reasons where and how it gets to down three.

Okay, great. I appreciate that. If I could just do the one last follow-on. In that sort of environment of weak production, is there anything that we should think about calling out in terms of we talked about the audio display rolling off. Is there anything else in terms of that's not sort of, in line with the content per vehicle trend that you've been seeing in ADAS and particularly electrification next year? Or is that at least the content per vehicle sort of should continue in this trend that we've seen over the last, you know, several quarters?

Yeah, no, we would expect the outgrowth and the content per vehicle to be consistent. We haven't seen anything. You know, we all have, you know, We'll get into maybe some launch, lapping some launches on a given quarter, those types of things, but waiting for the next launch to ramp up. We've had some big launches this year, as you can see, particularly as you go through North America and Europe and China in the back half of the year, launching strong. So you may have some of that, but from a broader strategic take rate, overall content for vehicle trends, not seeing any changes.

Much appreciated.

Thanks, Chris. Your next question comes from Ryan Johnson of Barclays. Your line is open.

Yes, two more strategic questions around recent quarters and what they mean going forward. The first is around the decrementals on downside in a volume. Certainly we understand the impact of a GM strike, but if there's a future recession, you're not going to have EPS adjusted for that. So what do the, you know, roughly 40% to 50% decrementals for the GM strike, given all that stuff, imply for decrementals in a U.S. downturn? And secondly, what have you learned about kind of similar to summer 2015, managing those sudden volume decreases?

Yeah, I think you've got to separate it, and Joe can walk through and give the specific numbers. But, Brian, I think it's important Joe mentioned We worked very closely with General Motors to be in a position where when they did resolve the labor issue, we could ramp up production as quickly as possible. So there was a fair amount of labor that we – labor costs that we maintained that we kept in place so that we didn't have to be in a situation where we had to, in addition to launching – relaunching production, have to train a bunch of new workers. So we kept them in place versus a normal scenario where we would see vehicle production declining for a more protracted period of time. We would have let them go.

Yeah, I think, Brian, a good – and we've been consistent. I think decrementals are in that 25% to 35% range, a little bit of regional mix. And that's what we'd work against. But, you know, if you take a plant – if you take plants down for a month, That's going to be a higher decremental. If we get a forecast for 2020 vehicle production down a few points, that's something we start to address from a cost structure perspective, right? There's less shifts. There's less people in the plants. And so I would think of, you know, the decrementals we think about working through when vehicle production comes down is we tend to figure out how to deal with that 25% to 35%. To Kevin's point, when you get hit with a A very important customer is going through a difficult time, and we agree to sort of work through it to make sure we're there to catch when they ramp back up. And I do think, as I mentioned, I think we'll be ramped back up here to sort of full strength and call it 10 days or less than two weeks. That, you know, that costs some money, but we do think it was the right thing to do.

Okay. Second strategic question is, was it – maybe it's coincidence that Gavicon was announced shortly after the Hyundai – deal, great to join venture, but can you maybe talk about how the Hyundai deal affects your cash flow and hence capital allocation and availability for bolt-ons, tier buybacks, et cetera, going forward?

Yeah, well, the answer to your first question or comment was just pure coincidence. As you know, we've been very focused on growing our engineered components business And the Gabacon business was a great addition to the HellermannTyton product portfolio and business portfolio. It expands in a product line that they're already in, in the fast-growing telecom space. And it was an asset that our operating team at HellermannTyton knew very, very well. So high confidence in our ability to execute. As it relates to... the joint venture and how it affects our capital allocation strategy. Listen, we have a strong balance sheet. We generate a lot of free cash flow. You know, we focus on how do we grow the business organically as well as acquisition related. Clearly, the structure of the joint venture frees up, you know, a couple hundred million dollars of additional cash flow. on an annual basis, and it gives us more flexibility, but, Brian, it won't drive any different behavior than the behavior that we have now, which is a disciplined approach to either invest in our business, pursue acquisitions, or return the cash to shareholders.

So I wouldn't... But in terms of availability of cash, does this mean that you don't... the R&D investments, the losses, if you will, at Neutonomy at all, those are no longer coming from our – we'll get through the accounting and the follow-up, but conceptually, are those being funded by the cash contribution Hyundai's made, bringing up that cash?

Yeah, so the joint venture itself, right, Hyundai is contributing $1.6 billion to cash at closed. The joint venture for a number of years will be funded by that contribution. Okay. and therefore would reduce the amount of cash that we need to fund or spend on the development of the technology related to automated driving. Therefore, the net result is we have more cash flow.

Okay.

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

Hi. Good morning, guys. Hey, Dan. First, I hate to nitpick on growth numbers for your high-growth products that are actually still super robust, but we did see when you look at active safety and high-voltage electrification, we saw that the growth pace, and I apologize if this was addressed earlier, we did see the growth pace sort of down sequentially, so active safety up 29 versus the plus 50% clip you saw in the first half. you're cutting your growth expectations slightly going from plus 45 to plus 40. Same with high voltage electrification. You were plus 30 in the third quarter versus the plus 65 pace we saw in the first half. What happened there? Is that just program delays? And then I assume relatedly, we also saw your comments on China that although you raised your industry outlook for China for the back half of the year, your growth is slightly worse. So

Dan, I'll take China real quick, and then we can go back to the first one. I think from that perspective, obviously, some great outgrowth in Q3. I expect that to continue. There are a couple of customer-specific delays in Q4, a couple of our top customers that are They're continuing to launch. They're launching on time, but their launch volumes have come down a bit versus the original forecast. So, again, they're launching on time, which to us is more important. They have adjusted their forecast, but more specific to those customers, I think, than sort of a broader market indication. As it relates to the product line growth rates, they're obviously, to your point, still very good. I've got to believe industry leading. you know, you'll get some lumpiness, right? We talk about launch cadence. I mentioned that earlier. You'll have some launches left. We'll get some lumpiness in the quarter, but obviously no change to our longer-term growth projections over the next couple of years for those product lines.

Guy, if I could add one other comment, and I don't mean to be, but there is the law of large numbers, right? So we have an active safety business that is a billion three in revenues versus under $600 million in revenues just two years ago. So continuing to grow at north of 60% becomes increasingly challenging, just given the nature of the numbers. I don't mean to be defensive, but I think it's fair to assume, to Joe's point, there's going to be some volatility based on launch, but as we get into larger numbers, we're not going to maintain the same growth rates on those product lines.

And active safety, I want to add, Kevin, has a forecasted growth rate through 2022 of 25%. Yep.

So that growth rate through 2022 is still intact versus what you – but I realize you're not in the business of changing your 2022 guidance every quarter, but that's still intact. Yes. I'm sure you'll sign up for plus 30% growth every day. Okay. Great. Thank you. And then just a second, I wanted to follow up on the Hyundai – And you basically got a cash infusion of $1.6 billion. But I think, you know, you were spending, call it $200 million a year, but this $1.6 billion covers you for, call it a few years, which would imply a fairly significant acceleration in spend. So did you just feel like you needed to commercialize faster? Was there something that wasn't happening quickly enough that you felt like you effectively needed to double or significantly increase the spend? Just some color on how to think of... Well, listen, I apologize.

I didn't mean to imply that we need to double spend or... We will ramp up spend. As we work with the joint venture partner and we finalize, we'll develop our final plan. Listen, the The reason it was a joint venture with Hyundai is we ended up with the perfect partner. And we had, as you can imagine, a number of discussions with a number of potential partners over the last few years. And our perspective with respect to what they bring from a vehicle standpoint, from a vehicle platform standpoint, a perfect alignment on strategy as it relates to timing of introduction of product, initial approach to the robo-taxi market in 2022, and then applications for a broader base of OEMs. The fact that it's not exclusive, we have the ability to work with other OEM partners if that's what we so elect to do, either with technology out of the joint venture or separate development of technology. The fact that we'll continue to sell technology to the joint venture and have access to it From our perspective, it was just the perfect partner in the right joint venture structure. And the fact that we have a partner that's willing to contribute a billion and six in cash at close with no strings attached, right, no gates from a technology standpoint, no gates from a monetization standpoint, you know, we just viewed them as a perfect partner and a perfect opportunity to actually enhance the strength of our automated driving capabilities, and quite frankly, take that technology and probably accelerate the development of our ADAS vehicle connectivity and smart vehicle architecture activities, just given the structure of the joint venture.

Well, I guess let me ask it a little differently. Were you, and I know your AMOD revenue outlook, that's still intact, but did you internally have one goal on commercialization, and then when you came to sort of forming this JV, you then modified that goal in terms of timing of commercialization?

No, absolutely not. No, absolutely not. No, we were – listen, we've been working on with a number of folks with respect to vehicle partnerships, right? I guess this further enhances that vehicle partnership and makes it a, you know, a joint venture partnership. But no, nothing changed.

Got it. Thank you very much. Appreciate it.

Your next question comes from Steven Fox of Cross Research. Your line is open.

Thank you. Excuse me. Thank you. Good morning. I understand we don't want to get too much into next year, but I was wondering if you could maybe just go back and add a little color around the comment you made about the portfolio aligning more to key secular trends. So in other words, What is changing in the ramp that maybe would be different from the mix this year and maybe give us a sense for how it could impact global market or margins or anything like that?

Thanks. I'm not sure anything's changing in the ramp, right? I think I understand your question. We operate in areas where content per vehicle is growing much faster than vehicle production. And that's broadly speaking for both of our segments, ASUX as well as SPS. And we'll continue to benefit from some of the larger macro trends towards electrification, towards active safety, towards vehicle connectivity. And that will translate to technologies like our multi-domain controllers, our smart vehicle architecture, our high-voltage connectors and cable solutions. So we feel as though we continue to be perfectly, perfectly positioned.

I think... So I'm sorry to interrupt, but I guess what I was... Sorry to interrupt, but I guess what I was getting at is, like, the specific technologies that are ramping next year that maybe aren't in the portfolio right now, because you have a huge backlog of business on... A lot of it's based on a lot of next generation... technology and techniques that are needed to produce it.

Well, some is and some isn't, right? So high voltage, as an example, we have an existing product portfolio on the wire harness and connector side that is just a matter of customer adoption, right, and program launches. As it relates to active safety, as I mentioned, we have about $1.3 billion of active safety revenue today. most of that tends to be in and around sensor fusion, radar solution, things like that. I guess there are areas that we're launching like our satellite radar, satellite architecture approach to active safety, which will be rolling out across a number of OEMs over the next couple of years. And then there's a number of multi-domain controllers that will be launching over the next few years as well. But I would view that as exciting. extension of existing technology versus brand new technology that needs to be introduced.

Great. That's the detail I was trying to get at. I appreciate that. And then, just as a follow-up, it doesn't sound like this is an issue, but I'm just wondering if you could address any despecking that you're seeing going on in China, or if you're not seeing anything at all relative to incentivizing car sales.

No, we're not seeing anything from an overall industry standpoint. We had a customer A couple customers shipped out some launches, but that's not despecking. So we've not seen anything to date.

Great. Thank you very much.

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

Good morning, guys. And I believe I just had a follow-up on the Hyundai JV. So it sounds like there's $200 million roughly of cost that comes out and gets put into the JV. There's no associated revenue. Is that correct? Got it. Got it. Okay. And when you think about what you guys did with Delphi Tech and the spin and then this structure, you seem to be sort of masters of portfolio management. Is there anything else that you can think of in your business that is maybe in the works or that you would think of creating a another structure for it that may be advantageous to, you know, value to the total company?

John, it's Kevin and Josh. Nothing at this point. Nothing at this point in time. However, as you know, we're always focused on evaluating our portfolio and identifying ways where we can better serve our customers and, you know, optimize shareholder value. But nothing at this point in time.

Okay. And then just lastly, on Flight 6, you talked about the Android infotainment system, but you also mentioned OTA updates on some of the Volvo and Polestar vehicles. I'm just curious, when you're talking about OTA there, is that on the infotainment system itself or is that on the complete vehicle? And as you think about sort of integrating that into other customers' portfolios, you know, how plug-and-play is that or is that something that's very integrated into electrical architecture and have a lot of lead time?

That is integrated into the infotainment system only, but we're actively working on a number of potential programs with OEMs as a part of our SVA initiative to make OTA available and integrated to the broader vehicle so you can do a better job of, you know, more opportunity for lifecycle management across all the controllers in the car.

Okay, great. Thank you very much.

Your next question comes from Ryan Brinkman of J.P. Morgan. Your line is open.

Hi. Thanks for taking my question, which is also on the recently announced joint venture with Hyundai. Of course, I've mentioned that the transaction brings myriad financial benefits, margin, cash flow, et cetera. I was wondering, though, if the transaction is in any way a reflection of how quickly you see level four and level five rolling out relative to your earlier expectation? Is there any potential for delay of fully autonomous vehicles relative to, you know, at the time of your investor day? And then similarly, you know, what is your latest thinking in terms of penetration of lower levels of autonomy, two and three, et cetera? Is that looking any faster? And then finally along these lines, you know, what impact, if any, do you think a sharper industry downturn could have on autonomous penetration rates?

So your first question, no, our view on the introduction of autonomy hasn't changed. So the introduction of an industrialized platform in 2022 for robo-taxi use is directly in line with what our plan has always been. So no change from that standpoint. As it relates to acceleration in more advanced ADAS systems? Absolutely. We see, you know, relative to what we saw a year ago, increasing demands for more advanced level two, level two plus, level three minus, level three advanced active safety systems across OEMs literally in every region. So that's an area of we view of opportunity and we feel as though we're perfectly positioned to benefit from. As it relates to vehicle slowdown in vehicle production or markets, what's the impact? As it relates to active safety, active safety sells, right? Rebuy rates on active safety, I believe are north of 95 percent. So that's an area where we would We would not expect to see decontenting or a slowdown in penetration if you were to see a slowdown in vehicle production. Now, I guess there's at certain points, if it's severe, that you could see some impact. But just given the discussions with our customers, I think that rate would have to be significant. And in any normal sort of slowdown, it would be highly unlikely.

Yeah, I think, Ryan, compounding that for some other OEs would be sort of Toyota and, you know, one other OE out there that's sort of, you know, voluntarily mandating that act of safety throughout their portfolio. So at this point, we're actually seeing adoption in lower-end models probably faster than we would have assumed. But I think you'd be – even in a more severe downturn to decontent active safety given the rebuy rates and the fact that you have others out there with comparable models that have that technology.

Okay, that's very helpful.

And on the high voltage side, you've got, you know, Europe and China, they've got to hit government mandates, so we wouldn't expect decontenting there either.

That's great color. Thanks. You know, on commodities, I see you're slightly raising the full year headwind for FX and commodities. I'm guessing on FX that some of the metals really continue to fall off. Copper, I know it hasn't fallen as much as steel or aluminum in a lot of the savings we've passed on to customers, but how does the trend in the direction of commodities this year, what does it imply for next year? Could you be looking at actually a pretty decent tailwind?

Certainly a reduced headwind at this point. I think we're watching what happens with resin. Resin prices have stabilized, so Wouldn't be on the commodity side, wouldn't necessarily be anticipating big headwinds. I think a little too early to call it tailwind. Obviously, FX, we'll have an FX. Even if the FX rate settled today and didn't change for next year, we'd have some catch-up in the first couple of quarters. So that's what we're implying from the sort of headwind on the FX side. Okay, got it. Thank you.

Your final question comes from Armentis Sinkovicius. of Morgan Stanley. Your line is open.

Great. Thank you for taking the question. Just looking at the revenue guidance here, X, the GM strike, it's a bit lower. If you could help bridge that or where that's coming from, that would be helpful.

Yeah. Hi, everyone. This is Joe. You've got about half of its FX and commodity flowing through The other half, as we mentioned earlier, just a little bit of customer-specific items in China. But you're talking round numbers, $40 million to $50 million in total. It's about half and half.

Okay. And then, you know, we haven't had many questions here on the call around the smart vehicle architecture. You know, if you could provide us with an update, you know, how your conversations are going, that would be great as well.

Yeah, conversations, again, continuing dialogue with a dozen OEMs. We have the advanced development programs that we've We've talked about, I would say from an industry standpoint, the industry recognizes the fact that vehicle architecture needs to change. So some OEMs, principally the OEMs in Europe, are working more aggressively on driving that change. But it's an area of opportunity for Aptiv, and there's a high level of interest.

Okay. And my last one here, you know, fourth quarter versus third quarter, the guidance that you provided, XGM, suggests you feel pretty good about the pickup here, the sequential pickup. Can you remind me, you know, some of the puts and takes here to bridges from third quarter to fourth quarter on margin?

Yeah, you've got a couple of things, right? You have, again, X strike, right? If you remember last year, we had about a $35 million performance hit in Q4 from some temporary plant closures at a couple of OEs that hit us, you know, almost similar situation to the strike, short-term plant closures where we had to hold the workforce in place. That's about $35 million. And then what you're seeing is the ramps in performance that we expected in the back half of the year. Q3, obviously, we saw that come through. I know we talked last quarter about there being a little bit of a step up from H1 to H2, but we felt confident in getting that performance, and we are seeing that come through. And again, it's a little bit that we referenced that really sort of our material and manufacturing savings plans tend to run sort of, you know, build throughout the year. They're annual plans, and it's just a little bit of a function of, you know, setting a sort of a calendar business plan. But we continue to see those happen. developed through the cost-saving actions we took in the first half of the year are effectively in place at this point from a headcount reduction and such.

Okay. Great. Thank you for taking the questions.

Thank you. Thank you. That was our final question. I will now return the call to our presenters.

Thank you, everybody. We appreciate your time. Have a great day.

This concludes today's conference call. You may now disconnect.