Aptiv PLC

Good day and welcome to the Aptiv third quarter 2020 earnings conference call. My name is Tracey and I'll be your conference operator today. 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. Thank you, Elena Rossman, Aptiv Vice President of Investor Relations. You may begin your conference.

Thank you, Tracy. Good morning, and thank you to everyone for joining Aptiv's third quarter 2020 earnings conference call. To follow along with today's presentation, our slides can be found at ir.aptiv.com. Today's review of our actual financials exclude restructuring and other special items and will address the continuing operations of Aptiv. The reconciliation between GAAP and non-GAAP measures for our third quarter financials are included at the back of today's presentation and the earnings press release. Turning to the next slide, you can see here a disclosure on four 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. including uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and impact on the global economy. Joining us today will be Kevin Clark, Aptiv's President and CEO, and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business, and then Joe will cover the financial results and outlook for the remainder of the year in more detail. With that, I would like to turn the call over to Kevin Clark.

Thanks, Elena. Good morning, everyone. Beginning on slide three, our strong third quarter results reflect our culture of continuous improvement, which has created a more sustainable business that thrives in any environment. Our portfolio of safe, green, and connected technologies has translated into year-to-date revenue growth, which is 10 points over underlying vehicle production. And our optimized cost structure is a competitive advantage. positioning us to withstand the 50% plus reduction in this year's second quarter volumes and remain EBITDA break-even. Our culture of flawless execution has allowed us to ramp up production to meet the rapid rebound of customer schedules while managing through the challenges related to labor availability and a tightening of the global supply chain. With zero customer disruptions in a quarter that we experienced a 60% sequential increase in vehicle production. The proactive portfolio and cost structure actions we've taken over the last few years to strengthen our business model have positioned Aptiv to outperform in any environment with more sustainable earnings and cash flows, a disciplined and proven approach to value creation, and the flexibility to accretively deploy capital. I'm proud of how well our team has performed during this challenging year, and I'm grateful for their commitment to our culture, that drives continuous improvement, ensuring Aptiv can outperform in any environment. Moving to slide four, the strong rebound in vehicle production, combined with solid operating execution, contributed to strong financial results in the third quarter. Revenues increased 3% to $3.7 billion, representing seven points of growth over vehicle production. EBITDA and operating income totaled $581 million and $389 million respectively, and adjusted earnings per share reached $1.13. Looking at each region, government fiscal policies and improved business conditions boosted vehicle production 11% in China, and OEMs in North America and Europe are aggressively restocking vehicle inventories, resulting in the strong ramp-up in vehicle production and which translated into a year-over-year decline of only 1% and 8% respectively during the quarter. The increase in COVID-19 cases during the quarter, especially in Mexico and Eastern Europe, created supply chain disruptions principally related to Tier 2 and Tier 3 electronics and component manufacturers, which resulted in volatile customer schedules, leading to some operational headwinds. We're closely monitoring the more recent spike in COVID-19 cases in both Europe and North America and the potential impact on the global supply chain and customer schedules, but have not reflected incremental disruptions in our outlook for the fourth quarter and 2021 global vehicle production. Joe will cover our fourth quarter and FOIA guidance in more detail shortly. As shown on slide five, third quarter new business bookings totaled $4.6 billion. REPRESENTING A MORE NORMALIZED RUN RATE FOR NEW BUSINESS REWARDS. YEAR-TO-DAY BOOKINGS REACHED 10.5 BILLION, BENEFITING FROM A MEANINGFUL INCREASE IN NEW BUSINESS WIN RATES, PARTIALLY OFFSET BY THE DAY-TO-DAY OPERATING CHALLENGES RELATED TO COVID-19. ADVANCED SAFETY AND USER EXPERIENCE SEGMENT NEW BUSINESS BOOKINGS TOTAL JUST OVER 2 BILLION YEAR-TO-DAY, AS A HANDFUL OF CUSTOMER REWARDS INITIALLY PLANNED FOR THIS YEAR HAVE BEEN PUSHED TO 2021. And new business bookings for our signal and power solution segment totaled more than $8 billion year-to-date, including $1 billion of high-voltage electrification awards driven by the increased demand for electrified vehicle platforms. For the full year, we now expect new business bookings in the range of $16 to $17 billion, roughly flat to 2019 levels, when adjusted for our current outlook for lower global vehicle production. The cumulative amount of our new business bookings over the last few years gives us tremendous confidence in our ability to sustain strong above-market growth across both of our business segments, validating the strength of our portfolio of market-revolving technologies aligned to the safe, green, and connected megatrends. Looking at our business segments in more detail, beginning on slide six with advanced safety and user experience, As the need for more complex software, hardware, and systems integration expertise increases, our unique ability to offer highly functional, scalable, and optimized solutions across the active safety and user experience domains has driven continued strong revenue growth over market, despite the decline in vehicle production over the last few years. And our increasing capabilities in software development and data analytics positions us well for future high growth high margin opportunities in new markets. These industry trends and our unique capabilities underpin our outlook for eight points of growth over market in our advanced safety and user experience segment this year, reaching roughly $3.5 billion of revenues. Turning to slide seven, our OEM customers continue to launch advanced safety solutions across their vehicle platforms and democratize these features across their vehicle lineups, to meet increasing consumer demand, while at the same time, Europe and China NCAP standards are accelerating the adoption of advanced AP solutions. Several OEMs have decided to make automatic emergency braking, as well as other ADAS features, standard equipment in the US by 2022, all of which translates with significant demand from OEMs for level two and two plus ADAS solutions, seeding the next big wave of market penetration even if the industry experiences lower vehicle production volumes due to COVID-19. Our unique first-in-industry approach to compute centralization and scalable satellite architecture has strengthened our competitive position and sustained our strong revenue growth and is validated by the fact that we now provide OAN customers with more than 6 million radars annually, compared to only 1 million just five years ago. And our satellite architecture solution will be deployed across 10 million vehicles over the next five years. As such, we're confident that we will continue to grow our active safety revenues at a compounded rate of 25% per year over the next few years, reaching over $2 billion by 2022. Importantly, our Gen 2 ADAS platform will further increase our competitive moat with the deployment of next-generation perception systems and a higher level of software abstraction that will deliver even more consumer value while enabling new business models for Aptiv and reduce investment for OEM customers. Turning to our signal and power solution segment on slide eight, we're leveraging our industry-leading position in vehicle architecture to become the partner of choice for both our traditional and new emerging OEM customers. By integrating our broad portfolio of low high voltage solutions, including the conductor, connectors, electrical centers, and cable management systems, we're able to reduce the weight and physical size of the electrical distribution system by up to 40%, thereby reducing costs for OEM customers. We're also leveraging our expertise in harsh environment electronics to penetrate adjacent markets, such as the commercial vehicle, data telecom, and industrial sectors. Our momentum in our signal and power solution segment gives us confidence in delivering revenue growth of nine points over vehicle production this year, reaching $9 billion of revenues. Moving to slide nine, we continue to see an acceleration of powertrain electrification driven by both more stringent CO2 regulations, principally in Europe and China, and increasing consumer demand globally. Our complementary high-voltage distribution and connection systems as well as cable management solutions, leverage our low-voltage core competencies that include vehicle architecture optimization, system-level expertise, and global manufacturing and supply chain management to enable the acceleration of powertrain electrification by significantly reducing the weight and mass of the vehicle architecture through smarter, more efficient design, perfectly positioning assets to benefit from the two-fold increase in addressable content on a high-voltage electric vehicle. Our unique, holistic approach to designing, developing, and manufacturing system-level solutions for electrified vehicles makes Aptiv the partner of choice for OEM customers and has contributed to continued strong new business awards with both traditional high-volume OEMs, where we've recently been awarded new business on a series of conquest pursuits including with a leading major European OEM for innovative, long-range electrical vehicles that will begin launching in 2022. And with non-traditional battery electric vehicles focused OEM customers, where we've increased our share of wallet with an industry leader who's been expanding both their vehicle offerings and their global reach. As a result, high-voltage electrification continues to be our fastest-growing product line, with revenues increasing at a 40% compounded rate for the next few years, reaching roughly $1 billion by 2022. Turning to slide 10, NEVR's Aptiv's mission of enabling a safer, greener, more connected world had more meaning than it does today. The COVID-19 pandemic has led to a much broader perspective on how the global community views safety, both inside and outside of the vehicle. We've all become more sensitive to our environment and have had a glimpse of a greener world with fewer cars on the road and planes in the sky. And every day, we're all reminded of just how connected the world is and how much more it could be as more of us work remotely. We are proud of the progress we've made this year on our enterprise-wide commitment to corporate social responsibility, which can be explored in our 2020 sustainability report that was published in September It includes our sustainability framework, new 2025 commitments for each of our foundational pillars, which include people, product, planet, and platform, and newly adopted GRI and SASB reporting standards, which supplement our adherence to the United Nations Sustainable Development Goals. Our ability to meet these commitments on sustainability is built on a cultural foundation of always doing the right thing the right way. We believe that our long-term success and ability to create value for all our stakeholders are directly linked to building a more sustainable business and a directly related positive impact we have on our people, our portfolio, and our planet. I'll now hand it over to Joe Massaro for an overview of our financial results.

Thanks, Kevin, and good morning, everyone. After a challenging second quarter, global automotive manufacturing has continued its recovery in the third quarter, against the backdrop of improving customer schedules and increasing launch activity, resulting in the strong financial results shown on slide 11. Revenues of $3.7 billion were up 3% over last year, as vehicle production declined 4%. Due to the benefits of our flexible operating model, adjusted EBTA was $581 million, roughly flat compared to the prior year. reflecting robust sequential improvement in production volumes, strong cost management and cost reduction activities, partially offset by the ongoing operating costs associated with COVID. In light of the stronger recovery and need to ramp capacity quickly in the third quarter, we concluded our short-term austerity measures implemented earlier in the year, resulting in less than $5 million of benefit in Q3. Earnings per share in the quarter were $1.13 and reflected lower operating income, the emotional JV results, and increased share count as a result of the June equity issuance, partially offset by favorable tax expense. Operating cash flow was strong at $559 million, reflecting working capital management and cash conservation efforts partially offset by higher cash restructuring costs. Lastly, capital expenditures were $117 million, reflecting a year-over-year decrease of roughly $50 million. Looking at the third quarter revenue in more detail on slide 12, globally we benefited from both stronger vehicle production as well as increased demand for active safety systems and electrical architecture. North American revenues declined 3% primarily due to year-over-year program launch timing. We continue to see demand for core SUV and truck platforms and expect to return to strong growth and growth over market in the fourth quarter. In Europe, the trend of strong double-digit market outgrowth continued as the production rebound benefited from active safety and high-voltage electrification programs. And lastly, China growth outpaced the market and our expectations as a sharper recovery in sales led to production upside with our major customers. Moving to the segments on the next slide, advanced safety and user experience revenues increased 3 percent in the quarter, reflecting seven points of growth over market with all product lines contributing. AS and UX EBITDA declined 24 percent, driven by the costs associated with new launches and the inefficiencies associated with lower vehicle production volumes, as well as price declines in the quarter. As a reminder, for comparability purposes, the automated driving spend that is now part of Motional, the active Hyundai joint venture, is excluded from the prior year results. Turning to signal and power solutions, revenues were up 2%, reflecting six points of growth over market. Strong growth across the segment, particularly in Europe and China, was driven by new launches, increased electrification, and industrial and market recovery. EBITDA in the segment declined 2%, which included the additional COVID operating costs, as well as costs associated with launches and production ramp. Turning to the next slide and the outlook for the rest of the year. Looking at the fourth quarter specifically, we expect continued variability in customer schedules and operational inefficiencies related to volume absorption similar to what we saw in the third quarter. This is reflected in our outlook for vehicle production in the fourth quarter of down approximately 3% year over year, and does not assume any meaningful extended COVID-related disruptions or shutdowns. North America and Europe are both expected to be down low to mid single digits as inventory rebuilds and improved levels of demand support current production rates. And in China, we expect the pace of underlying demand to continue. with modest production growth in the quarter. As a result, we now expect 2020 global vehicle production to be around 76 million units. But despite improved visibility in customer schedules, the threat of plant closures and potential customer supply chain disruptions remain. Turning to slide 15, based on these improved customer schedules, we are reintroducing and providing guidance for the full year and fourth quarter. Starting with the fourth quarter on the left, we expect revenues up 3% on an adjusted basis at the midpoint, similar to what we saw in the third quarter. EBITDA in the range of $575 to $625 million, reflecting a 16% EBITDA margin at the midpoint. Operating income of $385 to $435 million is expected to yield a 10.9% operating margin at the midpoint, and EPS in the range of $0.85 to $1. Moving to the full year, that translates into revenues in the range of $12.5 to $12.7 billion, down approximately 11%, reflecting the shutdowns in the first half and nine points of growth over market with equally strong contributions from both segments. EBITDA in the range of $1.52 to $1.57 billion, reflecting a 12.2% EBITDA margin rate at the midpoint. This includes over $100 million in COVID-related operating costs and approximately $150 million in austerity saving measures, which help to mitigate the impact of lower first half volumes. Operating income in the range of $775 to $825 million, and EPS is expected to be $1.65 to $1.80. reflecting a 10% to 11% effective tax rate for the full year. Operating cash flow is now expected to be almost $1.1 billion and includes approximately $200 million of restructuring cash as we continue to rationalize our fixed costs in light of the lower production environment. And CapEx is $600 million, consistent with our post-COVID revised estimate for the year. Turning to the next slide, looking ahead to 2021, our sustained focus on shareholder value ensures we continue to execute our long-term strategy consistent with the financial framework we have previously communicated. Despite the very challenging first half and lower production environment overall, we have demonstrated our ability to deliver on this framework. Our industry-leading growth portfolio has sustained strong above-market growth. while the work we have done the last several years to optimize our cost structure and improve efficiency has positioned us to mitigate the effects of lower industry volumes and grow earnings going forward, while effectively deploying capital and enabling further growth in the recovery. While it is still early in the planning process for 2021, we are confident in our ability to outgrow the market, which as of today, we assume the market will be up approximately 10% in 2021, taking global vehicle production to 83 to 84 million units. To put this in a perspective, this is roughly 10 million units less than what we saw in 2019 and reflects an eight-year low at levels last seen in 2012. However, the long-term secular growth drivers remain intact, which will once again contribute to growth over market, in the range of 6% to 8%. As a result, we would expect to return to double-digit operating margins in the range of 10% to 11%, driven by higher volumes year over year and the assumed absence of COVID-related shutdowns, and our relentless focus on optimizing our cost structure to adjust to lower industry volumes while balancing our overall capacity utilization as the recovery unfolds. In addition, we will continue to effectively deploy capital with a focus on value-enhancing M&A and investments to add scale and leverage to key product lines and further position the company for accelerated growth and margin expansion. The consistent execution of our strategy is a major differentiator for Aptiv and an important lever for shareholder value generation going forward. We will give our official 2021 guidance when we report fourth quarter 2020 results. With that, I'd like to hand the call back to Kevin for his closing remarks.

Thanks, Joe. I'll now wrap up on slide 17 before opening it up for Q&A. Despite the challenges we faced in 2020, we remain laser focused on further enhancing our track record of outperformance in long-term value creation. as we execute our strategy and deliver on our vision of the company, leveraging our unique position at the intersection of the safe, green, and connected megatrends that are transforming our industry. The sequential strong increase in third quarter revenue, earnings, and cash flow reflects the flexibility of our business model and the execution capabilities of our team. As we look ahead, our ongoing efforts to provide technology solutions that solve our customers' toughest challenges IMPROVE OUR REVENUE DIVERSIFICATION TO HAVE A MORE PREDICTABLE REVENUE GROWTH PROFILE, FURTHER OPTIMIZE OUR COST STRUCTURE TO INCREASE THE FLEXIBILITY OF OUR BUSINESS MODEL, EXPAND OUR PROFIT MARGINS TO GENERATE MORE EARNINGS WHICH CAN BE EFFICIENTLY CONVERTED INTO INCREASED CASH FLOW, AND MAINTAIN A STRONG BALANCE AND SMARTLY DEPLOY CAPITAL, CREATES A MORE SUSTAINABLE BUSINESS AND DELIVERS MEANINGFUL SHAREHOLDER RETURNS AS THE RECOVERY CONTINUES TO UNFOLD. Our confidence is underpinned by the dedication and commitment of our employees, our greatest asset. I'm grateful we have an organization that is focused on flawlessly serving our customers while creating value for all of our stakeholders. With that, let's open up the line for Q&A.

Thanks, Kevin. Tracy, we will now take our first question.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will now take our first question from Rod Lash from Wolf Research. Please go ahead.

Good morning, everybody. Good morning, Rod. Thanks for that commentary on directionally the 2021 margins. That is really helpful. I had a couple questions on that. You know, in the past, at least in active safety, you've made the judgment that it made sense to add a bit more R&D spending in the short run because there was a payback in the longer term. I was wondering if you can give us some comment on how you see that progressing as you look out to next year, and do you see kind of a similar dynamic with the electrification pipeline growing? Does that require... additional R&D spending in advance of the big ramp that you see in the years ahead.

Yeah, Rod, it's Kevin. So we feel as though, as we've said, we continue to feel and actually feel even more strongly now that we have very, very strong competitive positions in areas like ADAPs, in areas like smart vehicle architecture, and even more recently, increasingly on the high-voltage electrification space. And those are areas that we're going to continue to invest into further widen our competitive mode. Those investments are reflected in the outlook that Joe's given both for the fourth quarter as well as next year. We think if we continue to invest, we're uniquely positioned based on our capabilities, software perception systems, as well as you know, connectors, cable management, and wire harness capabilities on the vehicle architecture side to really, you know, one, significantly accelerate revenue growth, and then two, expand margins. So that's something that we will continue to do. But again, that incremental investment reflected in the outlook that Joe's provided.

Okay, so there is some incremental spending, but it's something that you're managing here with the growth that you've got.

Yeah, there's incremental spending, but I think it's balanced. I think it's relatively balanced, and again, it's reflected in our outlook.

Okay, and just secondly, I noticed that pricing looked like it ticked up to just a hair above 2%, which is... think the upper bound of what we've seen um in the past couple years um correct me if that's incorrect but um you know any comments or color on and what actually is driving that and and how you're you're thinking about that going forward yeah rod and show that that's a fair observation and i i would attribute that to a little bit of just some of the lumpiness we saw in the commercial side of the business over the course of the last couple quarters just uh

you know, it's similar to bookings, you know, just when things got signed, when deals got done. So, you know, not a long-term change to our view that we're right around 2%, but did run a little bit hotter in the quarter just as, you know, a bit of a backlog of agreements got completed.

Yeah, I think if you look, Joe, correct me if I'm wrong, first half of the year, pricing was significantly below our typical sort of pricing range. So, i think we'd say rod it's a bit more of just a normalization for a full year yep that's correct great thank you thank you we will now take our next question from adam jonas from morgan stanley please go ahead hey everybody just first uh good morning good morning joe just a quick one for you the 150 million austerity measures

As I'm thinking 20 to 21, how much of that you think is sustainable? I know a lot of companies made these very, very aggressive, you know, nobody travels, cut everything, cut everything, you know, discretionary. And some of that maybe isn't repeated. I didn't know if you could give some color on that delta as we run numbers of the 100 million COVID, maybe, God willing, not repeated. How much of the austerity continues on the other side? Do you follow?

Yeah, no, I got it, Adam. Thanks. Yeah, listen, you know, what we were able to do, you know, for the most part, the big pieces of austerity, the furloughs, the TLOs, obviously we brought those costs back in as we started to ramp. We really had to. Those were the vast majority of the, you know, sort of north of $100 million of those austerity measures. You know, we do have things like travel and others, which you would expect at some point in 2021 to come back, but I would frame those types of costs more in that sort of $30 million to $40 million range. You know, the other thing we're starting to see, and, you know, Kevin's mentioned it, I mentioned it, you know, there are some inefficiencies, obviously, just working with customer schedules, working with this environment in addition to the COVID costs. So... Um, we're working through those, but, but to Kevin's comment on engineering, those are, you know, our best estimates of those are in that margin outlook for, for Q4 and, and, and for next year. Um, but at this point I'd expect sort of the, you know, the, the turn back on type costs in that 30 to $40 million range.

Adam, it's one thing I think just to underscore, I think it's important, um, Just to reiterate, over the last couple of years, we've reduced overhead costs in this business by close to $400 million. And so we've been aggressively attacking the cost structure over the last several years. I think one of the questions we wrestle with right now is, given where vehicle production is and given where capacity sits, how we think about... kind of fixed cost structure, you know, facilities, as an example, in light of an 84 million unit global vehicle production estimate today. Balancing that, though, with, you know, if you look at our outlook for next year, call it mid-teens revenue growth. So although vehicle production's at a significant low relative to where it's been in 2018, 2019, you look at our revenue growth rate, you know, knock on wood and assuming COVID stays under control, you know, you should see fairly significant revenue growth and kind of, you know, working into capacity that was put in place when we had a more robust outlook for global vehicle production pre-COVID.

Thanks, Kevin. Just a next one, please. There's an argument that as suppliers roll off ICE legacy and then bring on new EV, that it's a zero-sum game at best, maybe less than zero-sum game. Are you at a point where, as you see that transition from some ICE rolling off and being at the margin replaced by higher voltage, that that is margin accretive or balanced? And then if you give some color...

It is margin accretive to our SPS segment. So it's from a content per vehicle standpoint, it's over two times content per vehicle opportunity relative to ICE, and it's margin accretive.

Even at this level of scale? Even though scale is still pretty darn low? Yeah.

Yeah, no, it is today, Adam. Part of it is just You know, if you think of the nature of our high voltage portfolio, it's so complementary to the low voltage. So there's a lot of leverage of the existing infrastructure within SPS. I mean, we've historically said our product lines break even between 350 to 500 million of revenue, which was the case with active safety and sort of get to segment margins by 750 to a billion. Our high-voltage portfolio basically was sort of at segment margins, out of the gates. And as we march towards sort of this billion dollars of volume by 2022 to 2023, we believe it becomes more accretive. Okay. And, again, it's really just leveraging that very strong low-voltage business, the same engineers, the same equipment, that type of thing.

That's a helpful dynamic. If I could squeeze one more in on mobility and services. I know it's small. but what is the year-on-year growth for that business, for example, in the quarter? It's getting a lot of investor attention, even though I know you've said it's well below $100 million kind of revenue right now. But remind us, where is this revenue coming from? Who's paying it? My understanding, Joe and Kevin, is that it has the potential to be regular and recurring revenue coming off the data derived from your fleet customers and but perhaps right now it's more one-off service revenue. I don't know if you could just give a little color on the growth and then where it's coming from.

That's it.

Well, maybe we'll – I'll talk about it, and Joe can comment on growth. So today it's regular recurring revenue. It's below $100 million. It's regular recurring revenue. Revenues were certainly impacted this year – based on the impact, I'd say more of COVID, quite frankly, than vehicle production. Most of our revenues today sit with global OEMs. On a pre-production basis, we have some business that's post-production, and we have a significant focus on growing our position not only within automotive, but have made progress outside of automotive in the commercial vehicle and fleet markets.

Yeah, it's, again, lower dollars. I'd call it flattish, Adam, this year. And part of that is because a good percent of that business is pre-production. So they're using the technology in the plants. So obviously the shutdown, the global shutdowns, had a significant impact on that business. They just weren't using necessarily that tech while they were shut down for that eight to nine weeks. So... To Kevin's point, it is sort of disproportionately impacted by the shutdowns versus vehicle production. Appreciate it, Joe. Thanks. Thanks, Kevin.

Thank you.

We will now take our next question from Joseph Speck from RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Good morning. I wanted to follow back on some of the high voltage business. I mean, now that there are more programs launching and certainly more programs being quoted. Do you have a sense of whether your win share on those programs is higher than maybe on low voltage? And the reason I ask is it seems like the larger players like yourself that are able to sort of really have been able to invest in that business are probably better positioned than maybe some of the fringe players that exist on the low voltage side.

Yeah. So Joe, that's a great question. So we should start from a high voltage strategy. We're very focused from a pursuit standpoint. So we very much focused on OEMs who have a strong market position, strong global position, and a reputation for technology and a real commitment to building out a high voltage portfolio. And that's both on the traditional OEM side, as well as on kind of the newer battery electric-focused OEMs. So we've made sure that we're positioned to carve a nice position with those OEMs, grow as they grow their product lines, and as they expand geographically. So make sure that we can grow with them. When you look at opportunities quoted, call it roughly 15 just a couple years ago. This year we'll quote on probably close to 40 opportunities, and we have a win rate north of 70%. Now, some of that, again, I think is attributed to we're very focused in terms of where we're allocating and dedicating those resources and making sure that we're positioned with those OEMs who we really feel are going to drive volume in the future.

That's very helpful. Joe, maybe just one on the fourth quarter guide. So at the midpoints, it looks like 410 of operating income on sales of a little bit over 3.7 billion. I mean, if we adjust last year for the GM strike and the movement of the JV, the sales are at about that level, but it looks like operating income was about 100 million higher. And I get that You know, there's COVID costs on a year-over-year basis of $30 million, DNA is higher, maybe $15, and there's some higher R&D as well. You haven't given that number, but I don't know, maybe it's $20 million, $25 million. It still leaves a hole, and I was wondering if you could help us understand, you know, what some of that other delta might be.

Yeah, Joe, listen, I think you're, you know, it's that engineering investment, although we are starting to lap that to some extent. Remember, we started putting those costs in in Q4 last year. It's really around COVID, and it's around some of these launch costs. We're seeing a significant uptick in launches in the fourth quarter. You know, we had sort of a bit of a trough here in Q3 of launches. You can kind of see that in the North American numbers. And, you know, getting ready for sort of Q4 and Q1 launches next year. And then as both Kevin and I mentioned, You know, these schedules are choppy, so there is some, you know, inefficiencies around the customer schedules, whether you want to call them customer schedule inefficiencies or COVID inefficiencies, they're sort of all intertwined at this point. But I would say we're doing a very good job of operating, but it's, you know, it's probably not as efficient as it was in a prior, you know, and call it a year ago outside of the strike. So you've got some of that dynamic as well. BUT AGAIN, PRETTY HAPPY WITH WHERE WE ARE IN TERMS OF COMING BACK TO STRONG INCREMENTALS AND WHERE THE BUSINESS IS PERFORMING, GIVING THE CHALLENGES WE HAVE.

YEAH, JOE, IF I COULD ADD, JUST TO UNDERSCORE JOE'S POINT ON OPERATING WITH COVID, AT THE SAME POINT IN TIME, AND WE MADE THE DECISION TO MAKE SURE THAT WE ALLOCATED ACCESS RESOURCES We're in the midst of launching T1XX, F-150, S-Class for Dymor, Bronco early next year. So those are launches that we don't want to be in a position where we impact the customer based on things we control. So to underscore Joe's point, balancing what's going on from a supply chain standpoint today, plus the importance of those platforms for those OEMs and a successful launch, we've made the decision we're going to allocate incremental resources to make sure that we deliver on. Thank you.

We will now take our next question from Chris McNally from Evercore. Please go ahead.

Thanks so much, Tim. Two questions. One just on the short term and one for medium term. On the short term and orders, I think you mentioned some of the shortfall for the full year. If you adjusted for production, you would be roughly flat. Can I just get a clarification? When you're booking those orders, are you making forward production assumptions of a return to normal? Because I imagine on the lifetime value you would use you know, some more normalized forward production assumptions.

Yeah, Chris, we basically, and we're sticking to the methodology just to make sure we have sort of, you know, apples for apples over multiple years. So we use IHS basically when we strike the deal, and we don't adjust prior bookings. Kevin, you know, Kevin talked about sort of if you did look at 2019 bookings, what the impact would be, but obviously haven't sort of restated any bookings. So we use IHS at the time. It's an outside service. It allows us to make sure both internally and externally we have some consistency and can sort of explain changes going forward. And we've continued to do that.

Okay, that's great. And then I can even look at second half where, you know, the run rate depending on Q3 or Q4 is back into that sort of 20 to 24 billion as obviously IHS has come up. Okay, so that's super helpful. The second question, you know, thanks so much for the 2140 mark. So much seems like it'll be based on the rate of positive change at ASUE's margin, you know, which is still obviously you know, well below your sort of adjusted targets of 10% plus. Could you just give an idea in that 10 to 11% for next year, should we make a pretty big jump on the ASUE margin year over year? Or is it going to take longer, you know, because of the investments?

No, listen, I think it's, you know, I obviously don't want to get into too much detail. That was certainly a framework, not guide. But, you know, I'll go back to sort of my comments. You know, we continue to be on, you know, the longer-term trajectories we talked about. Kevin mentioned the $2 billion of ASUX revenue you get in 2022. You know, we did put additional investment into engineering this year in ASUX, but as I mentioned, we're starting to lap that. Some of that started to go in the back half of this year. So, you know, we haven't – have not revised long-term margin expectations for that business. Again, I'm going to be hesitant to sort of provide specifics until we work through. And there's a lot going on. To Kevin's point, some of those launches where we're staffed up are on the active safety side. So there's, you know, there's still a lot of moving pieces for 2021, but certainly comfortable with the framework we talked about.

Okay, thank you.

We will now take our next question from Emmanuel Osner from Deutsche Bank. Please go ahead.

Hi, good morning. Morning. To start with, I was hoping to take your brains on LiDAR. Obviously, quite a bit of noise around it with a few of the leading startups there coming to market. From your perspective and in your conversation with the automakers around sort of like level two plus and higher levels of autonomy, how prominent, how important is, how often is LiDAR part of the solution that you're invited to supply and how are you essentially dealing with it? I know you had struck multiple agreements with different LiDAR companies in the past. And as part of this all, what was the thinking around working with others rather than sort of like developing some of it yourself?

Yeah, from a LIDAR standpoint, where you begin to see the need for LIDAR, and we believe it's necessary from a technology standpoint, are on level three solutions and higher, Emmanuel. We have not seen any as it relates to level two plus, level three minus, level two. So a solid place in level three and above. Having said that, as a radar technology company, we're working very hard to advance our radar technology, pushing to see if we can advance the technology to the point where you minimize the need for LIDAR technology on level three solutions. So advancing that technology forward, WHAT'S DRIVING THAT IS QUITE FRANKLY THE DESIRE FROM AN OEM STANDPOINT TO BRING DOWN COSTS OF THAT TECHNOLOGY OR OF THAT SOLUTION, PROVIDING THAT LEVEL THREE SOLUTION. WHY WE DECIDED NOT TO INVEST IN LIDAR, WE HAVE STRONG CAPABILITIES IN RADAR. WE'D NOT PREVIOUSLY WORKED ON DEVELOPING LIDAR SOLUTIONS. THERE WERE OTHERS OUT THERE WHO WERE FURTHER ALONG So from a capital standpoint, we made the decision to partner with those who are already in the business and have the capability.

Okay. That's a very good color. And then second question, a follow-up on 2021 margin outlook. How should we think within that about incremental margins as volume recover? Obviously, you're assuming about 10% recovery in global auto production, you know, if you were to think more like 14% or 15% like IHS, and what would that do to your margin outlook for next year?

Yeah, Emmanuel, as I mentioned to Chris, we're not going to go into too much more detail on 2021. I think that framework's, you know, we've got a lot of work to do. I think that framework hopefully is helpful to folks. You know, I do think as you look through incrementals in the back half of the year, I think those are certainly indicative to what we think the business is capable of doing. But again, I'm not going to get too much more specific on 2021. We've got lots of work to do to finalize those numbers.

And that's understandable. Thank you.

Thank you.

We will now take our next question from Etai Micheli from Citi. Please go ahead.

Great. Thanks. Good morning, everyone. Just one more on incrementals. I know in the past you've talked about sort of a low 20s long-term incremental margin. Joey, any changes to your thinking around kind of that long-term incremental?

No.

No. Not at all. No. I mean, listen, you've got to work through when you really clear all of the collective COVID noise. But as we've said a couple of times, the longer – you know, we've seen nothing at this point other than the, you know, There's this short midterm disruption, nothing that's changed our longer-term thinking about things like growth over market or the long-term profitability of the business.

Yeah, one thing we're sensitive to, I think we want to just make sure that everyone understands, we're dealing with a lot of COVID noise. The supply chain is tight as it relates to managing through COVID. And that has an impact on cost. And our focus, our priority is keeping our employees safe and serving our customers. So that does add incremental costs to the system. And that needs to be factored in when you think about incremental margins, incremental and decremental margins.

Absolutely. Just to follow up on active safety, Do you quantify the market share gains discussed on slide seven, maybe talk about your win rates? And then, Kevin, I think you alluded also earlier in your prepared remarks to kind of new business models with inactive safety. I'm wondering if you can expand on that as well.

Sure. Win rates on active safety for us are running at north of 70% on active safety, both solutions as well as components. We're developing our second generation ADAS platform, so the advancement of the satellite architecture program, where you'll have further domain centralization. You'll have more compute, more advanced perception systems, so the ability to scale the number of radars that are used in the system. and the ability to extract software from hardware. So in a position where we can provide the full platform, we can provide a portion of it, which could be anywhere between the perception system or the hardware or just the software solutions, whether it's the underlying centrifusion, the underlying software, or a portion of the features, all or some of the features. So it's providing our OEM customers with a lower cost solution with more flexibility for them as well as more flexibility for us.

Great. That's very helpful. Thank you.

We will now take our next question from Brian Johnson from Barclays. Please go ahead.

Hi, Brian. A couple questions. So first, semi-housekeeping, semi-strategic is, what are your thoughts on capital allocation going into 21 and 22, and specifically on what you might do in terms of recommending to the board around the dividends?

So I'll start joking specifics. I mean, we continue – we've done a great job from a cash flow – management standpoint this year, so obviously continued focus on increasing cash flow. Our priorities continue to be first organic investment in our business, whether that's high voltage, whether it's the Gen 2 ADAS platform that I talked about, advancing our perception system capabilities, certainly smart vehicle architecture. As we talked about back in June, We have a very deep funnel of M&A opportunities in and around the engineered component areas, both within automotive as well as outside of automotive. That certainly is a priority. I think as it relates to dividend and share repurchase, we'd like to let the dust settle a little bit more on COVID. before we finalize our recommendation and bring it forward to the board.

I'd agree with that, Brian. Again, like many things we've talked about, our long-term strategy remains intact. That included a very deliberate capital allocation policy. We would expect at some point to get back to that, but it's really a matter of timing. And when we really feel comfortable, we've You know, we've cleared the trees here from a broader COVID and impact perspective.

Okay, thanks. Second question, a little bit more strategic. You had a blog post earlier, a week or two ago, around new cybersecurity standards. You're now breaking out connectivity and security as one of the parts of your pie. But similar to the LIDAR question, at least I'm not aware of a cybersecurity unit within Is this something that either A, you're happy with a bunch of solutions on the market and you're bringing it to OEMs as an integrator, or B, you have some internal capabilities and we haven't heard a lot of them, or C, in terms of adjacencies, this is an area you might be looking at?

Yeah. So cybersecurity, obviously given, and I don't need to tell you this, Brian, just given connectivity in the vehicle and in the various systems, cybersecurity is a bigger area of focus for OEM customers. To support our product development capabilities, we have, I don't know, 25 or 30 cybersecurity engineers focused on product, focused on our product and focused on the integration of, you know, what we develop as well as what we integrate into our solutions from other providers. We view cybersecurity, quite frankly, as table stakes. We don't view that as a commercial business. So we tend to do work internally as well as use outside parties that more often than not are directed by the OEM.

So I hope that answers your question. So that's not a capability you think about making an acquisition for?

No, it's a capability we have. We don't view that really as a viable commercial business for a player like ourselves. We view it as a necessary requirement, and it's included. It's a part of the solutions we provide our customers.

Okay. Okay, thanks.

We will now take our next question from John Murphy from Bank of America. Please go ahead.

Good morning, guys. I'm going to beat the dead horse on margins here. You know, I appreciate the 2021 framework, but, I mean, is there anything shifting in the business as far as investment or mix that would lead you to believe that you couldn't get back to 12%, you know, plus, you know, operating margin and maybe even expand from there? No. Okay.

No. There you go. No.

That's great. Okay.

Yeah, again, I think it's important. You know, Joe highlighted this. You know, we're dealing with, you know, round numbers, $30 million of COVID-related costs per quarter, right? And at the same time, dealing with supply chain choppiness or disruptions related to Tier 2, Tier 3 electronics and component suppliers who probably are dealing with labor availability challenges and other issues. And our focus is on making sure that we deliver for our customers. So that's something that as we deal with COVID, we're wrestling through.

Makes all the sense in the world. Thanks. Just a second question. When you think about diversification, I'm just curious if you could talk about the non-auto business in the quarter because the other verticals, you know, particularly on the commercial vehicle side, are not quite as strong as what we're seeing on the light vehicle side, you know, in the short term. And then over time, just kind of remind us where you're trying to go with that and what that potentially can mean for margin, you know, one to five years out.

Yeah, no, those businesses continue to be, you know, again, relatively small. We'll finish the year with about 15% of non-auto, non-light vehicle revenues, so commercial vehicle and industrial. Those businesses continue to perform well. They're accretive to both the growth over market and the margin, and we expect them to continue to be. There's a couple of areas within... what I'll call sort of that non-auto business around telecom, where we've seen really strong growth, both through the addition of Gabacom, but also on an organic basis, you know, and well above market. The military business on the interconnect side continues to be very strong. You know, we tend to be more heavily weighted towards mill aero versus commercial aerospace, so that's been helpful overall. But again, as you think about that engineered components business, Winchester, HellermannTyton, continue to be accretive to growth rate and margin and would expect them to continue to be so. That's certainly where we're focusing those investments, both organically and inorganically.

Gotcha. And then just lastly, any election game planning around what could happen here on November 3rd or after November 3rd?

Yeah, we watch it. We're watching it closely, John. Obviously, it sounds like one administration would be more focused on clean energy here in the United States. That could have an impact on our sale of high voltage solutions. We feel like we're well positioned and could benefit from that. Obviously, a lot of the growth that we're experiencing is in Europe and China. With those OEMs and under either a scenario that either, you know, a party were to win, our view is you'll still have a certain amount of regionalization of the supply chain due to, you know, views on tariffs and trade.

Great.

Thank you very much. Some impact, not a huge impact.

Yeah, yeah. Not like 16. Thank you very much. Yep.

We will now take our next question from David Kelly from Jefferies. Please go ahead.

Hey, good morning, Kevin, Joe, and Elena. I appreciate you squeezing me in here to do them well. A couple questions. I really appreciate the active safety slide. Just curious if you could talk about semi-autonomous, maybe what you're seeing there, you know, customer interest in the space, you know, things like on the highway, autonomous driving would be great.

Yeah. Yep. So L2, L2 plus is today the fastest growing area from an ADAS standpoint. We've actually seen, I'd say, a bit of a pause on L3 given cost and given the reset on volumes due to COVID. So I wouldn't say... cancellations but delay of programs with those OEMs who were allocating resources against it. But the fastest growing area from an ADAS standpoint, again, tends to be that L2 plus, L2 plus plus sort of area. Active safety helps OEM customers sell. When you watch advertising for vehicles today, now it tends to be about active safety solutions. Consumers are demanding it. OEM customers make money off of it. So it continues to be a major area of focus for OEM customers.

Okay, got it. Thank you. And maybe just to follow up on that point, Kevin, is L2 Plus, should we see driver monitoring solutions and that sort of solution set? And is that something you're doing in-house as well?

Yeah, so we've won a number of driver monitoring programs as part of our active safety solution set. Obviously, it gets more advanced when you head to level three solutions where you need to re-engage the driver, and certainly even more enhanced when you think about L4, L5. But it's a product area we've been in for roughly five years and have a number of programs with. All right, perfect. Thank you. Thank you.

We will now take our last question from Dan Levy from Credit Suisse. Please go ahead.

Good morning, Dan. Hey, guys. Thanks for squeezing me in. First, just to maybe provide an update on Motional. It's been live for a couple of quarters now. Where's the progress? Do you just get a sense of the progress? And I think when you announced the deal, you were talking about plans for commercialization or to have your platform ready by 2022. Is that intact? And what's the update on customer discussions on uptake of that?

Yeah, it's going extremely well. So our Gen 1 platform is IS LAUNCHING THIS YEAR. GEN 2 IS ON TRACK TO BE LAUNCHED IN 2022. THE INTEGRATION OR, YOU KNOW, THE INTEGRATION OF THE JOINT VENTURE, SO BRINGING TOGETHER THE HUNDAI ORGANIZATION AND THE FORMER APTIV ORGANIZATION IS GOING EXTREMELY WELL. WE'VE OPENED AN OFFICE IN SEOUL. WE'RE EXPANDING OUR TECHNOLOGY CENTER IN SINGAPORE. WE'VE MOVED INTO A NEW FACILITY IN PITTSBURGH. A SIGNIFICANT AMOUNT OF HIRING HAS TAKEN PLACE OVER THE LAST NINE MONTHS. AND, YOU KNOW, MOST IMPORTANTLY FROM A TECHNOLOGY DEVELOPMENT STANDPOINT, EVERYTHING'S ON TRACK. WE'VE, AFTER COVID HIT, WE STOPPED OUR, YOU KNOW, LAS VEGAS PILOT WITH LIFT. THAT'S BEEN RESTARTED. WE ANNOUNCED A PARTNERSHIP WITH VIA, A CITY TO BE DETERMINED, BUT THAT WILL HAPPEN OVER THE NEXT SIX MONTHS OR SO. WE'LL PICK A CITY AND ACTUALLY BE PROVIDING RIDES WITH THEM THAT ARE INTEGRATED INTO THE PUBLIC TRANSIT SYSTEM IN A PARTICULAR CITY. And then continue to have commercial discussions with several different ride-hailing companies and would expect to be able to announce something in the not-too-distant future. So all on track.

Great. Thank you. And then just a follow-up on the broader concept of just restructuring. I think when COVID started, you mentioned the potential to take some deeper restructuring and Obviously, what we've seen since then is a much better recovery on the end markets than what most of us would have anticipated. So maybe probably less footprint reduction required than what would have initially been anticipated. So the question is, where do you stand on, I guess, post-COVID restructuring? And one of the issues in the past, I think, was challenges on being maybe too proactive on responding to end markets with taking staffing out and not having enough staffing in place for a volume snapback. Is that inefficiency at all a risk, or do you have ample sort of staffing personnel in place for a volume snapback?

Yeah, Dan, it's Joe. Let me take that. So we certainly, as I mentioned, we sort of ended the austerity programs as people came back to, and we needed people to come back to work in Q3. We have started to look at the people side of things. think the overhead functions and such, and have taken some incremental restructuring, you know, that benefit will flow into the back half of the year. Call that sort of a $45 million number sort of on a full year basis, maybe a little bit more. Those plans are in place. And as, you know, as I talked about in my prepared comments, Kevin's mentioned, I mean, really the, you know, what we're looking at now for 2021 is, is how best to balance some of those footprint decisions and take longer-term, do you take longer-term restructuring actions versus where do you think you're going to need capacity? And for us, that's an effort over the next couple of months, really based on where we see very strong continued outgrowth at that 6% to 8%, plus 10% vehicle production. How quickly do we get back to sort of where we were capacitized to pre-COVID. And I think, you know, those actions will, you know, will be directly related to how, you know, how fast we view ourselves as getting back. So that's in process. But, you know, I think we did a good job in the first half of the year with the austerity where, you know, looking at opportunities for additional savings going into next year on the people side as appropriate. And then a longer term, what I'll call sort of infrastructure type decisions will really be based around where we see capacity. And I would just remember, and I'm trying not to be sensitive to this, but we didn't need COVID to tell us how to run our business more efficiently. As Kevin mentioned, we've really spent the last three, four years very aggressively going at overhead costs and how to improve the overall profitability of the business and how to fund some of the initiatives. So I think we've done a really good job over the last few years and You know, that muscle is very well exercised in the company and we'll continue to apply it as needed. Great. Thank you. Thanks.

Thank you for your participation today.

That concludes today's question and answer session. I would now like to turn the conference back to the host for any additional or closing remarks.

Thanks, Tracy. As always, we'll be available today and the latter part of this week and into next week for any follow-up questions, and I'll just turn it to Kevin if you have any final comments.

No, thank you, everyone, for your time. We appreciate you participating in our phone call. Please stay safe. Thank you.

This concludes today's call. Thank you for your participation, ladies and gentlemen.

You may now disconnect.