Aptiv PLC (APTV) — Q3 2018 Earnings Call Transcript

Thank you, Albert. Good morning, and thank you to everyone for joining Aptiv’s third quarter 2018 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 reconciliation between GAAP and non-GAAP measures for both our Q3 financials, as well as our outlook for the fourth quarter and full year are included at the back of the presentation and in the earnings press release. Please see slide two for disclosure on forward-looking statements, which reflects Aptiv’s current view of future financial performance, which may materially differ 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 2018 in more detail. With that, I would like to turn the call over to Kevin Clark.

I'm going to begin by providing an overview of the third quarter. I'll highlight some of the key new customer awards and cover recent developments across the business. Joe will then take you through our detailed financial results for the third quarter as well as our outlook for the fourth quarter. Our strong third quarter results reflect our ability to consistently drive sustained outperformance. We delivered 11% revenue growth. That represents a record 13 points over market; the result of double-digit growth over market in both our Advanced Safety and User Experience, and Signal and Power Solutions segments. Operating income totaled $420 million, that's up 7%, while earnings per share reached $1.24, an increase of 8% over the prior year. Operating margins declined 40 basis points, driven by unfavorable FX rates and commodity prices. Excluding the impact of FX and commodities, margins increased 30 basis points. In the face of softening global vehicle production, achieving the revenue, operating income and earnings guidance we provided back in July reflects the strong demand for our portfolio of technologies aligned to the safe, green and connected mega trends, as well as our flexible cost structure. We believe it's prudent, given both the weakening of customer schedules that began late in the third quarter and the significant change in FX rates to adjust our financial outlook for the fourth quarter to reflect a more choppy macro environment. Joe will take you through the details in a moment, but we now expect global vehicle production to be down roughly 0.5 points for the full year. Moving to the right side of the slide, we continued our record pace of new business awards totaling almost $16 billion year-to-date, and putting us solidly on track to exceed our prior year record of over $19 billion. Our recent customer awards are at the intersection of Auto 2.0 trends. As always, look to accelerate their adoption of higher levels of advanced safety, electrification and connectivity. And as a result, we're booking new business, because we have the right software, compute and integration capabilities required to help accelerate OE adoption. Lastly, our Mobility and Services Group continues to make progress on next generation automated driving software, vehicle architecture and connected services, which are gaining commercial momentum and will be on display at CES 2019. In summary, another strong quarter, further validating that our operating model, technology portfolio and business strategy can deliver continued outperformance in any environment. On Slide 4, you can see the third quarter new business bookings totaled $4.4 billion, bringing the year-to-date total to $15.6 billion. The record bookings levels are the direct result of our widening competitive mode in several advanced technologies. We booked $2.4 billion of active safety awards year-to-date, and are on track to reach over $3 billion for the full year. Year-to-date infotainment and user experience customer awards totaled $1.5 billion, already surpassing last year's levels. Our engineered components business has booked $4.7 billion of new customer awards year-to-date, including almost $750 million of high voltage connectors, contributing to the significant growth in high voltage electrification awards year-to-date. Our continued momentum in new business bookings reinforces our outlook for continued strong revenue growth, driven by our transition to a more integrated solutions provider, creating the software and hardware foundation that enables new features and functions while optimizing the total system cost for the vehicle. Turning to segment highlights in Advanced Safety and User Experience on Slide 5. Sales were up 14%, or 15 points over market, driven by 68% growth in active safety. As we highlighted on last quarter's earnings call, we're starting to lap new infotainment program launches and are gearing up for our next generation Integrated Cockpit Controller launch in 2020. As the need for more complex software development and systems integration expertise increases, our unique ability to offer highly functional yet optimized solutions has driven several of our recent new business awards, including our six highly scalable Level 2+ ADAS systems, with a major North American OEM. Each of these awards leverage our unique smart vehicle architecture approach, which dovetails very nicely with our Level 4 and Level 5 automated driving commercial pursuits, which are with both the ride-hailing companies, serving the mobility market, as well as select automotive OEs. Turning to Slide 6. Our success in developing and commercializing high-speed central compute platforms is a significant competitive advantage, enabling more automated and connected vehicle content. Our earlier wins in active safety and infotainment are now being broadened to include the body, chassis and powertrain domains. During the third quarter, we booked a high-profile compute platform with Porsche and Audi, representing another industry first for Aptiv and our third area of vehicle domain centralization with the VW Group. We're providing automotive OEs with a highly complex hardware and software architecture, including the functional safety components necessary to combine the body, chassis and powertrain controls across multiple vehicle types and powertrain configurations. In short, this new business award from Porsche and Audi validates our approach to domain centralization and the evolution to smart vehicle architecture, which is unique in the industry and is helping us win in the marketplace. Turning to Slide 7. Our Signal and Power Solutions segment is focused on next generation vehicle architecture, including high-speed data and high-power electrical distribution to enable the advanced technologies that will shape the future of mobility. This segment's strong double-digit growth over market during the third quarter was driven by several new platform launches in North America, which more than offset weakness in vehicle production schedules in China and Europe. We continue to have strong sales of engineered components and record revenue growth in high voltage electrification products. Reflecting the breadth and depth of our technology portfolio, during the third quarter, we were awarded numerous next generation component and system programs, including wireless charging for Hyundai and USB hubs for a major European OE to improve the in-cabin cockpit experience, as well as the electrical architecture for a new line of light commercial vehicles in China and the high voltage AC/DC charging inlets for a high-volume Volkswagen platform. Lastly, we closed on the acquisition of Winchester Interconnect last week, and we're confident that Winchester's talented management team will help to accelerate the growth of our $1.5 billion of adjacent end-market revenues. Diving deeper into our high-voltage electrification technology portfolio within the Signal and Power Solutions segment on Slide 8. Our strong pipeline of new business awards and year-to-date revenue growth underscore that we're at a significant inflection point in the growth of this product line. We're confident that by 2022 almost 13 million of the vehicles produced annually will include a high-voltage electrified powertrain. China's new energy vehicle initiative is driving increased powertrain electrification and the more stringent European CO2 standards mean that European OEs cannot achieve the new CO2 targets without the combination of plug-in hybrids and battery electric vehicles. On the left side of the slide is our total addressable content per vehicle for the full range of high-voltage alternatives, including traditional hybrids, plug-ins and fully electric vehicles. Our 2018 high-voltage electrification revenues are expected to total roughly $300 million. That's up over 60% year-over-year, making it one of our fastest growing and most profitable product lines. Based on the value of our new business bookings, this product line will reach over $1 billion in revenues in 2022, representing a 40% compounded growth rate. We're confident that we're well positioned to outperform the underlying market, as we continue to benefit from the increased demand for high-voltage electrification, as well as the accelerating adoption of advanced safety and connectivity solutions. So with that, I'm going to hand the call over to Joe. Joe will take us through the third quarter results and review our updated guidance for 2018.

Thanks, Kevin, and good morning, everyone. Starting with a recap of the third quarter financials on Slide 9. Revenue, income and earnings came in right in line with the guidance we gave back in July. We saw strong sales growth in the quarter. Revenue was $3.5 billion, up 11% or 13 points above vehicle production, reflecting the continued ramp of new program launches in both Advanced Safety and User Experience, and Signal and Power Solutions. EBITDA and operating income increased 10% and 7%, respectively, and adjusted for FX and commodities, EBITDA and operating income were up 15% and 13%, while funding incremental investments in future growth. Earnings per share of $1.24 increased by 8%, which included $0.11 impact from our mobility investments. Lastly, operating cash flow was $138 million, reflecting increased working capital to support the acceleration of growth. Turning to Slide 10. The continued strong launch volume we've had over the past year drove double-digit growth over market in both segments, which helped to offset a decline in vehicle production, unfavorable prices and the FX and commodities headwinds. From a regional perspective, we saw accelerated growth over market in all major regions of the world despite weakness in Europe from WLTP regulations and lower than expected volumes. North America sales were up 18 points over market, benefiting from multiple new platform launches, more than offsetting the continued weakness in passenger car volumes. Europe and China saw 9 points and 7 points of growth over market, respectively, more than offsetting lower production volumes in both regions. Slide 11 walks through our operating income performance year-over-year. Operating income of $420 million was up 7%, or 13% when adjusted for FX and commodities. Our operational performance continues to fund investments in our key growth areas, including high-voltage electrification, active safety, infotainment, and mobility. Underlying margins expanded 30 basis points, adjusted for FX and commodities, reflecting some volume conversion on strong sales growth, offsetting some operational inefficiencies tied to production variability. Strong operating performance yielded higher earnings per share in the quarter, as shown in the walk on Slide 12. Turning to the segments on the next slide. Advanced Safety and User Experience revenues grew 14% in the quarter, driven by new launch volumes and continued strong growth in active safety, which was up 68%. Operating income grew 33%, and margins expanded 180 basis points before the impact of higher mobility investments, driven by the accretive benefit of volume growth, as well as improved material and manufacturing performance. Our mobility investments totaled roughly $40 million in the quarter, an increase of $30 million year-over-year, and we continue to expect full year mobility spending of $160 million. Segment revenue growth is now expected to be approximately 17% for the full year, and is well positioned for continued strong growth and operating leverage beyond 2018. Turning to Signal and Power Solutions on the next slide. Revenues were up 10% in the quarter, driven by new product launches in North America and strong growth in engineered components and high-voltage electrification, as Kevin mentioned earlier. Operating income grew 8%, and margins, adjusted for the dilutive impact of FX and commodities, were up 90 basis points in the quarter. As we discussed last quarter, operating profit growth and margin expansion from higher volumes are being negatively impacted by certain operational inefficiencies, driven by variability in customer schedules, which we expect to continue for the balance of the year. For the year, we expect 6% adjusted revenue growth, reflecting growth over market of 7 points. Turning to Slide 15. Fourth quarter revenues are expected to be up 6% on an adjusted basis at the midpoint. Our outlook now assumes global vehicle production down approximately 2.5% in the fourth quarter, in addition to 1.15 euros and the Chinese RMB at 7. We expect the FX and commodity headwinds to operating income and margins this year to continue into the fourth quarter. Along with the operational inefficiencies mentioned earlier, operating income is now expected in the range of $410 million to $430 million. EPS is expected to be in the range of $1.18 to $1.24, down 5% at the midpoint, however, up 4% when you exclude the impact of FX and commodities. Revenues are now expected to be in the range of $14.275 billion to $14.375 billion, up 9% at the midpoint for the full year. That assumes global vehicle production to be down over 1 point versus our previous guidance, with lower expected production in every region. Adjusted EBITDA and operating income are expected to be $2.4 billion and $1.7 billion at the midpoint, respectively, up 12% and 9% versus prior year. Earnings per share are expected in the range of $5.11 to $5.17, up 11% at the midpoint. And operating cash flow is expected to be approximately $1.5 billion, with CapEx now estimated at $800 million. Turning to the next slide. We thought it'd be helpful to provide more detail on the full year outlook. Starting with our prior guidance on the left. Macro changes in the fourth quarter, including declining production volumes and unfavorable FX and commodities, equate to an $0.18 headwind versus our prior guidance. Operational inefficiencies driven by variations in customer schedules and higher launch volume, combined with the negative impact from US-China tariffs is a net $0.06 decrease. Winchester is now included in our outlook for the balance of the year, adding approximately $0.02 of EPS. Slightly lower tax expense and lower share count partially offset, yielding EPS of $5.14 at the midpoint. Looking at the walk in the right, operating income growth translates into $0.92 of earnings, excluding mobility, while the higher tax expense, net of other income, is a net $0.04 headwind. In summary, on a year-over-year basis, we expect to grow earnings 11% in a declining vehicle production environment, while funding $100 million in incremental mobility investment, and we believe our 2018 performance underscores the strength of our portfolio and flexible business model. Turning to the next slide. As we reflect on 2019, our long-term financial strategy remains unchanged. 2018 has demonstrated our ability to deliver on the strategy, despite the more challenging macro environment. And while the formula may vary modestly from year-to-year, revenue and earnings growth have surpassed our initial expectations for the year; demonstrating the value of our portfolio of relevant technologies and their ability to sustain above market growth rates, with another year of strong new business wins. Our flexible and efficient workforce, which is further complemented by our philosophy to be in-region, for-region, minimizes our exposure to cross-border trade actions. We will also continue to invest in future growth and we have the opportunity to significantly accelerate the commercialization of new platform solutions, including the next-generation software, compute, and vehicle architecture systems, enabling the future of mobility. Despite near-term concerns about slowing growth and broader trade macroeconomic policies, 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 plan for global light vehicle production to be a headwind in 2019. Based on current estimates, we expect to see an unfavorable year-over-year impact from FX and commodities. Lastly, based on all US-China tariff actions that have been implemented to date, we estimate Aptiv's unmitigated exposure to be roughly $75 million for 2019. This latest estimate includes the unmitigated impact of list three tariffs finalized in September and assumes a 25% tariff rate. We are in the process of identifying mitigation actions to offset these incremental costs, and we'll provide an update on the phasing in net impact at the time we give guidance in January.

Thanks, Joe. I'm going to wrap up on Slide 19 before opening it up for Q&A. We delivered another strong quarter with record revenue growth over market and robust new business awards, while at the same time, delivering on our commitments for revenue, operating income, and earnings per share. Despite the need to remain prudent in our planning in the current macro environment, we remain very optimistic in our outlook for continued revenue and earnings growth in 2019 and beyond. Through increased vehicle content and market share gains, in addition to the benefits of our more balanced customer, regional and end-market exposure, and our relentless focus on optimizing our cost structure, we are enabled to both increase earnings and reinvest for the future. As Joe just reviewed, we remain disciplined and balanced in our capital allocation strategy, investing in both organic and inorganic growth. Our latest acquisitions of KUM and Winchester Interconnect reflect our focus on accretive bolt-on opportunities. And we continue to leverage our strong balance sheet to take advantage of market disconnects to opportunistically buy back shares. In summary, we remain well positioned to continue to execute and outperform in what has been a more dynamic macro environment. So with that, let's open up the call for questions.

Thanks. Albert, we'll take our first question.

Hi, everyone. My first question relates to China in Q4. You mentioned a production environment assumption for a 10% decline in China during that quarter. Could you elaborate on the actual EBIT impact that you disclosed? Specifically, how much of that is attributed to China and how much to Europe, considering the ongoing WLTP issues? That’s my first question. Secondly, I am interested in a more qualitative perspective. How are you responding to this slowdown? We experienced a similar scenario in 2015, where you had to make aggressive employee reductions, followed by a rapid stimulus that caused some challenges for the next two quarters. It seems like we might be facing a similar situation now given the discussions around potential stimulus. Can you share how you are preparing operationally for this uncertain environment, where we might see a significant shift at the start of 2019?

Yes, Chris, that's a great question. We're continuously focused on making our cost structure more competitive, and that's an ongoing activity. With the slower growth in Europe and China, we're making necessary adjustments. However, we're also balancing that with significant growth in both regions. We're looking to manage this with incremental launches for the remainder of this year as we head into next year, ensuring that we don't end up in a challenging situation. I'll let Joe share more about the numbers.

Yes. Chris, if you look, it depends on what you want to walk off of, but if you want to walk off sort of the implied guide from last quarter, you're probably talking down total volume roughly $185 million, about $130 million of that - $135 million of that's going to be the volume takedown. That's split between all regions a little bit more - not evenly but more in China and Europe and in North America obviously. And it flows just given the - it's coming down relatively quickly, call that flowing in 25% to 30%. There's another 50 coming out for FX and commodities. And I think that's probably - as I mentioned in my prepared remarks, we are seeing a fairly significant impact on FX and commodities on things like margin rates. And taking the RMB to 7 obviously, is one of the key drivers there as well. Positively offsetting that on the volume line, you'll have Winchester coming in for round numbers about $50 million of revenue in Q4. So those are the big moving pieces on the volume side.

Okay, that's very helpful. So, I think we can kind of make the walk for the margin on Q4, if we were to ex out some of the extreme speed of FX and commodities. Last one from me just on this China stimulus. Can I put you guys on the spot to what you're hearing specifically in terms of the potential, the proposals maybe sort of in the works for some version of a repeat of the stimulus that we saw in 2016 and 2017?

Yes. There is a lot of discussion about it. The government has yet to formalize and approve. As you know, it is a country and a government, where, to the extent you see economic slowdown, there is an incentive to drive growth or to do things that drive growth. But as of now, a lot of discussion, nothing has been implemented. So it's something that we're watching very closely.

Great. Thanks so much.

Hey, thanks. Good morning, guys.

Good morning, Dan.

So, growth over market has been running kind of in the 9-point range through Q3, and I think you're expecting something relatively similar in Q4. It's well above the 4-point to 6-point growth over market outlook you provided late last year. Maybe talk about was 2018 above your expectations, kind of what were some of the key drivers? And is there any reason that we should expect growth over market can't stay above the 4-point to 6-point range in 2019?

Yes. We are currently going through our 2019 planning process, so providing specifics at this point is a bit premature. 2018 has been a solid year in terms of revenue, driven significantly by factors like active safety, which experienced over 60% growth, and infotainment, which grew in the mid-teens. Additionally, vehicle electrification has seen growth north of 60%. These are major contributors, along with underlying volume growth due to launch activities. Year-over-year, we have critical launches that are up approximately 50%, providing significant tailwind. We are very confident in our framework for revenue growth exceeding market growth. It’s reasonable to say we are likely towards the upper end of that range as we approach 2019. However, we will provide more clarity and guidance when we discuss our 2019 outlook early next year.

Thank you. I have one more question. While plug-in hybrids and electric vehicles have received a lot of attention, some suppliers have mentioned that traditional hybrids are experiencing an increase in the size and number of contracts available for bidding this year. Are you observing a similar trend, and could you share your perspective on your competitive position regarding high-voltage business in hybrids?

Yeah. We've definitely seen an inflection point as it relates to powertrain electrification. And listen, I think we would tell you it's really in every category, from hybrids to plug-ins to, quite frankly, battery electrics, and battery electrics specifically. Our outlook for mix of battery electrics in 2025 are probably twice what they were a year or two ago. So we've seen a tremendous ramp up in interest from our OE customers. We think we're very well positioned from a vehicle architecture standpoint, both connectors as well as wire harness, and it's been reflected in our bookings in the revenue growth that I talked about. As I mentioned, we're off a relatively small base today, roughly $300 million of revenues, that will grow to north of $1 billion in a couple of years.

Okay, great. Thanks a lot.

Thanks. Good morning, everyone.

Good morning, Joe.

Hey, Joe.

Just to circle back to China, and as we begin to think a little bit about '19, I recognize you're going to give more color later like, are you seeing anything of slower ramps or push out of programs that would deter your outgrowth? Like, you still outgrew that market high-single digits this quarter. Is that something we should still expect, even if the overall market is lower?

Yes, it's Joe. We are experiencing increased vehicle production in China. Our growth outlook is strong right now, and we anticipate an 8-point growth in China in Q4 based on current observations. The growth is quite significant and appears to be ongoing. However, this growth doesn't always occur in a straight line on a quarterly basis; it can be a bit uneven. So, I wouldn't take the 18 points of outgrowth too literally. From our perspective at Aptiv, we are mainly seeing this growth in vehicle production, especially in areas like active safety and high voltage, which continue to be robust product lines. We expect this trend to persist well into 2019.

Yes, Joe, it's Kevin. I wanted to provide some insight on vehicle production. We noticed changes in schedules related to underlying vehicle production during the last week of the third quarter, which were quite significant within a short timeframe. This trend has carried into October, with a substantial part occurring in the China market, but we are also observing similar changes in Europe and North America. This is reflected in our guidance for the fourth quarter.

Thank you. Regarding the free cash flow guidance slowing to $150 million, I understand that higher working capital is necessary to support growth and you've increased the CapEx. Joe, could you provide more details about these two areas? Specifically, within working capital, are we looking at inventory, or are there delays in payments? Also, could you explain the reason for the increased CapEx so late in the year to support that growth?

Yes. Joe, regarding working capital, we have more inventory in the system related to our revenue growth. There are no structural issues with accounts receivable or payment terms, just an increase at quarter-end compared to what we had anticipated, largely due to the volume. So, there are no fundamental changes; it's just an adjustment to volume levels. As for CapEx, we consistently work to manage that figure. I would refer to this as a bit of a pull forward from 2019, especially to bolster growth in the ASUX business. We are cautious with expenditures, given the nature of our business, but we want to be prepared for the growth we are experiencing in those product lines. This situation isn't unexpected or problematic; we are simply ensuring we are ready to advance in this area.

Okay, thank you.

Hi, good morning. This is Joe Vruwink for David.

Hey, Joe.

I just want to follow-up on the China questions, and this is more thinking about Aptiv back in 2015. So, I think it's fair that you guys called the market better than most in 2015. But when stimulus happened, it ended up kind of hand-strapping you or bottlenecking you from a margin standpoint. And I'm thinking if the stimulus this time around is successful, are you going to have trouble rehiring people, or do you feel like if China is maybe flat in Q4 and Q1 relative to down double-digits, a lot of that volume is going to flow through at very high incremental margin?

Yeah, Joe. The question was asked earlier. We've tried to be very balanced as it relates to what we do from a near-term cost reduction action in China. We have significant growth in areas like active safety, electrification, infotainment, our connector business, as well as within EVR. So we've tried to be balanced. Having said that, we're not waiting for government incentives to drive growth. So, we're very focused on managing the cost structure, doing it in a prudent way, doing it in a way that it doesn't interfere with our current very strong growth over market in each one of our businesses, and making sure that we're not in a position where we need to respond aggressively one way or another if stimulus comes into play or it doesn't.

Yeah. Joe, I'm not entirely clear on your comments. However, we experienced that impact in a single quarter, specifically in Q4 '15. It didn't affect our margins in the long term. You are correct that we had to rehire, which can create some inefficiencies when hiring quickly, but that was also contained within that quarter. These issues could be somewhat temporary and not long-term challenges. To Kevin's point, we are making efforts to apply the lessons learned from last time, aiming to maintain a balanced approach, especially with an 18% growth above market. For us, it's primarily about ensuring we meet our customers' needs right now rather than solely focusing on vehicle production.

And if I can ask one more, the acceleration in active safety growth going from 48% last quarter to 68% this quarter, is that step up a function of new platforms you're launching content on? And so we should almost think about this elevated base continuing for three more quarters?

I think Joe made a good point earlier. I wouldn’t focus on quarter-to-quarter growth rates. We've been consistently achieving about 60% growth in that product line over the past few years. In that time, we've expanded from five customers to around 18 today. This reflects both an increase in our customer base and deeper penetration within those existing customers, with significant growth potential ahead. We expect to maintain strong growth as we realize the bookings from the last couple of years, including several Level 2 plus and Level 3 minus programs we've secured in the last 12 months.

Great. Thank you very much.

Good morning, guys.

John. How are you?

Just a first question on the mobility investments. I mean, there's obviously a big step up this year. But I'm just curious as we think about 2019 and beyond, what will happen with that. Is that the kind of thing, where, as revenue comes in, this will be absorbed and you're just kind of calling it out for now, or is there may be a reason that might fade to some degree in the near term?

We understand there are many questions regarding this, so we've found it helpful to be upfront about it instead of constantly following up. We recognize it's a significant amount. You shouldn’t expect to see the same increase next year that you did this year. We’ve mentioned before the possibility of seeing it at the 180 level next year. However, it won’t be on the same scale as what occurred from '17 to '18. We will continue to be transparent about that figure. This spend specifically pertains to automated driving and mobility, and does not include expenses for active safety development or Level 2, which are part of the ASUX segment. This pertains directly to our greenfield automated driving business, and I anticipate we will continue discussing this as our commercial engagements develop.

Got it. Okay, that's helpful. Regarding North America, the 18% growth above market, what were the key programs that contributed to that? Was it primarily GM trucks, or was there something else that significantly increased that figure?

Yeah, it was a mix of programs, principally around pickups and SUVs across not only the North American OEs but some launches of some European and Asian OEs in the US market or North American market.

Okay, that's helpful. Regarding the fourth quarter, this is quite specific and may allow us to draw some broader insights. When we analyze a growth rate of 6% above the market and consider the impact of foreign exchange and commodity pressures, we still observe a slight decline in margins of 50 basis points. I realize this simplifies the situation, but I'm trying to grasp whether maintaining margins is challenging with mid-single digit growth above the market, even after excluding the effects of foreign exchange and commodities. How should we conceptualize a basic formula, such as achieving 5% growth above the market allowing for margin maintenance, while 10% growth above the market might lead to margin expansion in absolute terms? Is there a rough way to think about that?

Yes, we've previously discussed some frameworks around this. The significant factor this year is the impact of foreign exchange and commodities. To clarify, our Q4 growth of 6% is based on a market assumption that's down 2.5%, making our actual growth closer to 8.5%. In terms of decremental margin, if you consider a volume decline of 25% to 30%, that's the perspective to take. Regarding our guidance, the effects of foreign exchange and commodities in Q4 will cost us just over $10 million in operating income. Increasing to RMB7 is significant for us. We also have to account for about five different tariffs and the tariff impacts expected in Q4, along with previously mentioned operating inefficiencies totaling around $40 million in the latter half of the year, broken down into $20 million each period. For Q4 specifically, we've raised this expectation by $50 million to $35 million in inefficiencies, which is what we anticipate. We're noticing that customer volume shifts are quite unpredictable. We have a plant that will be closed for a week and another one expected to close for two weeks in November. This short-term variability makes it challenging to adjust the cost structure effectively, leading us to operate less efficiently than desired. Therefore, we've adjusted our outlook for inefficiencies upward by about $50 million for the fourth quarter.

Got it. Okay, that's incredibly helpful. And then just lastly on ROS. I mean, you're saying that there are headwinds in the near term. That's really just a question of timing. I mean, the bulk of that then is going to be reworked back up to your automaker customers. Is that correct, or is that…

Yes, the model for copper remains unchanged for us. Our purchases of steel and aluminum have decreased by less than $10 million annually. The focus is really on copper, where we are catching up on the pass-throughs, and foreign exchange factors also play a significant role, especially the RMB. When it resets, we benefit from that. In a quarter where it resets, we also account for the balance sheet remeasurement when forecasting the currency's run rate.

Right. But the copper doesn't catch-up soon in the next couple of quarters, right? I mean…

Copper typically catches up in 12 to 15 weeks.

Great. Good morning, guys.

Good morning, David.

Good morning, David.

Further into your mobility spend, I think it's been a little while since we received an update on your CSLP. I believe that was scheduled to be production-ready for 2019. How are you progressing with that and what is the commercial potential for bookings?

We are on track and having discussions with several original equipment manufacturers. We hope to be able to make an announcement soon.

But on the product itself, is it production-ready for 2019?

Yeah, it would be production-ready for late 2019. Yeah.

Okay. In the active safety booking space, we are seeing a decrease from about $1 billion in the second quarter to only about $500 million in the third quarter. Is there anything we should interpret from that?

No, David, yeah. Listen, we're very confident we'll book well over $3 billion of active safety bookings this year, which compares to roughly $3.7 billion last year. So, no, there's no trend there quarter-to-quarter.

Okay. And then lastly for me, with the close of Winchester, I believe that communication was just going to be a platform for you to really build off of. Is there a backlog or a good funnel of smaller connector businesses outside of the automotive space that you've kind of been targeted and you could see some pretty good traction and some acquisitions closing in '19, or is it more got to come underneath the Aptiv business and then you'll start to see what's out there, what can we add to this?

We are actively progressing on that, David. They actually closed a very small deal between our signing and closure. We see potential for 2019 to see several smaller deals like that. They have brought a strong pipeline with them. As we mentioned, there were other opportunities we wished to pursue, but we didn't have a way to integrate them within the broader Aptiv without the platform. Therefore, I anticipate 2019 to be quite active in that area.

Okay. And that $0.02 per quarter's money good for adding to your, call it, EPS next year with the closure, or is there any…

We previously mentioned Winchester and will provide guidance for 2019 and details in January. Initially, we viewed Winchester as somewhat neutral since we need to invest in it to develop the necessary platform. We'll share more in January, but for the fourth quarter, it contributes an additional $0.02.

Hi. Good morning, all.

Hey, Rich.

Just a couple from me. Just on the 10% for China, that includes commercial as well? Is that both commercial and like mind on the production?

Approximately 75% of our revenues in China come from multinational joint ventures, while 25% are from local sources. Furthermore, 95% of our revenues are generated by the Top 10 clients.

And my recollection is that your schedule is not using third party, right, for the current quarter?

Yeah. At this point, it schedules, yeah.

Good. Okay, good. And then just on putting a finer point on the 2019 considerations. On the global production, with the arrow down, is that actual down global production year-over-year or is that down versus where kind of industry expectations are, which has a little bit of growth factor there?

Yeah. From a planning standpoint, our outlook now would be flat to down as you look at 2019 vehicle production. That's our assumption from a planning standpoint. That's our view of the market as we sit here today.

Okay. And then real quick, just on Signal and Power at $300 million, as we think about 2019 from a margin standpoint, should that start to be contributory in terms of relative to the overall?

High voltage…

High voltage. Sorry, sorry.

The business is currently operating at or slightly above segment margins. Historically, we have mentioned that a product line breaks even at $350 million and achieves segment margins at $750 million to $1 billion. This particular business was almost reaching segment margins right from the start because it aligns closely with our core activities—using the same facilities and workforce to produce higher voltage, higher value parts for high voltage systems, as opposed to low voltage. This has been beneficial this year and is expected to continue growing.

Okay, great. Thanks. I'll pass it on.

Thanks.

Great, thank you. Good morning, everybody.

Good morning, Itay.

Just a first question, I apologize if I missed this, but just hoping we talk a little about launch costs this year and really more into next year on launch activity. Just update, Kevin, your thoughts from the Q2 call, and really just getting incremental margins broadly as we think about '19.

Yeah. Listen, I'll let Joe walk you through the numbers. I mean, the launch activity this year, critical launch activity were up 50% year-on-year. So, it's been a significant launch year, especially in the Signal and Power Solutions business. As we head into the next year, we have an increase, but it isn't close to that sort of a year-over-year increase. So I think you have some stability from a launch standpoint. I'll let Joe walk you through the numbers.

Itay, when considering the inefficiencies we mentioned, it's difficult to pinpoint their exact origins. We experience some plant shutdowns and temporary holds, while simultaneously launching new initiatives. I see these inefficiencies, which include the additional costs related to our launches, and it becomes increasingly challenging to balance these factors within a particular quarter. To emphasize Kevin's point, most of these inefficiencies currently reside in Signal and Power Solutions. If we look at the critical launches in 2016, which are programs bringing in over $50 million in revenue, we expect a 250% increase in Signal and Power Solutions in both 2018 and 2019 compared to the 2016 baseline. While things should stabilize in 2019, it will do so at a very high level. We anticipate making improvements in the latter half of 2019 as our plants adjust to the increased volumes. The growth has been quite substantial, contributing to over 7 points of growth above market levels for the year. This represents a significant business expansion, with mid- to high-single-digit growth in any given quarter. There's a lot of activity, and the volume of operations is quite impressive right now.

Appreciate the detail there. And then just secondly, going back to mobility, just two questions there. First, any update on the Vegas development and the timeline to remove the driver? And secondly, is Aptiv involved with the recent Volkswagen-Mobileye mobility-as-a-service announcement that's happening in Israel?

Yeah. So I'll start on Las Vegas and then move into your second piece. So, Vegas, we're running about 1,000 rides per week. We're at about 1 million miles. We have a route point-to-point that includes three locations, and we're expanding that. So that's going extremely well. We're collecting revenues. So that's very much a positive. In terms of getting the driver out of the vehicle, that's late 2019, early 2020, is our current time frame from pulling the driver out of those vehicles. So on our schedule, as it relates to the VW-Mobileye announcement, I guess, we have a non-exclusive relationship with them as it relates to CSLP. Since being acquired by Intel, they've been developing their own platform as well. So that's a separate program that they're doing with VW in Israel.

That's very helpful. Thanks so much.

Good morning.

Hey, Brian.

Sorry for coming back to China. Two things. One, as we consider your exposure, how exposed are you to the lower end of the local OEMs? The sub-engines in China?

Approximately 75% of our revenues in China come from multinational joint ventures, while 25% are from local sources, and 95% of our revenues are generated from the top 10 clients.

Okay. So is the way to interpret your growth over market in China in 4Q is, even though the market is down, even though your platforms are erratic, your weighted kind of customer production isn't quite as bad as it could be, just given where the weakness is?

I believe that's accurate in theory. Additionally, we are experiencing a substantial increase in growth, particularly in areas like active safety for that market, which is contributing to significant outperformance compared to the market, similar to what we're seeing with infotainment and user experience.

Second, do you have exposure, either in production or in backlog, to the battery electric vehicle, the NAV market in China? And with that up about 50% last quarter, can you have any sort of meaningful offset there?

Yes, we do. I don't have an exact measurement in terms of a meaningful offset. I believe our growth compared to the market is evident and is reflected in the numbers that Joe presented.

Could you recap the tariff impact numbers that might pressure us in 2019? What measures are you considering to address this, such as shifting production to NAFTA or engaging with customers?

Yes, it's Joe. Following the late September list 3, our unmitigated exposure is $75 million, which is a significant increase for us. List 3 included several items, primarily from the connection systems business, produced in specific global locations. We made a strategic decision to build global capacity in one place to serve the world effectively. To mitigate this exposure, we're taking a couple of approaches. One involves relocating production, which requires time and support from customers to ensure proper validation. Another strategy is adjusting costs in the supply chain, either passing them to customers or suppliers. We are also engaging with the Chinese government to explore possible offsets for tariff costs related to products made locally, with the aim of preserving jobs in China. At this stage, we are thoroughly assessing all options. We plan to mitigate some of that exposure in 2019, but I can't specify an exact amount at this time, which is why we set the worst-case scenario for 2019 at $75 million. I anticipate that some mitigation will occur, likely during 2019.

I think the industry is focused on the increasing costs and understands that this is not beneficial for original equipment manufacturers and their customers or the supply chain. There is a strong effort between suppliers and manufacturers to assess the supply chain and explore manufacturing alternatives to lessen the overall impact. However, as Joe mentioned, the main issue is the revalidation of new facilities, which is a resource-related matter. This is a priority for everyone involved, and the North American manufacturers are particularly dedicated to collaborating effectively with the supply chain.

Thank you.

Hi, Maynard.

I just have one question regarding your diversification strategy. And I'm just wondering if the pullback in market valuations opens up the opportunity for you and whether you think this could help accelerate your strategy. Just wondering if you have any color around the environment and how that changes, or doesn't change your strategy.

Are you talking about the M&A environment or…

The M&A environment.

Joe should provide more details. We're particularly focused on the engineered components sector from an M&A perspective to diversify our revenue streams. As Joe pointed out, we have a strong asset in Winchester along with a capable management team and a solid platform that enables us to pursue transactions of a size that we historically couldn't engage in. We're looking forward to it. Joe, go ahead.

Yes, as I mentioned earlier, the pipeline is strong. A bit of success tends to lead to more success, particularly in the M&A world. A year ago, we weren't recognized as a buyer of assets in the non-auto connector sector. Following Winchester, we are likely now seen that way, and we have a knowledgeable management team and a solid platform. We believe there's a real opportunity to reach our goal of 25% by 2025. If we can exceed that by making smart deals, we will, but we won’t just acquire something to hit that mark. We will focus on finding valuable assets that can help us accelerate our growth.

And Maynard, it's important to note that we have a very focused effort. Although it takes a bit longer to execute, we are working hard to take our existing product portfolio and expand into adjacent markets like commercial vehicles. Historically, there hasn't been as much focus in this area as there is now. We have a dedicated sales team and are building a dedicated engineering team to penetrate markets such as commercial vehicles.

Great, thank you.

Thanks. Good morning. Two quick questions from me. Not to beat a dead horse on the margins, but if I go back to sort of the spin-out, you talked about how, as these programs mature, there's some incremental margins to be had. So I'm kind of curious how much you're factoring in a possible double whammy as production is lower, but it's tied to some of your newer programs. And then secondly, I appreciate the color on Porsche with the new win there. I was wondering if you could maybe give us a little further detail on why you were able to win that business from a technology standpoint. Thanks.

Sure. I’ll address the first part. This is Joe, and then Kevin can discuss Porsche. I believe the margin expansion at the product line level will primarily result from growth. As long as we continue to grow these product lines by about 4% to 6% above market rates, we are confident in our earnings growth. I may sound repetitive, but I want to caution everyone that margin rate expansion is significantly affected by foreign exchange and commodity prices. For instance, in both Q3 and Q4 year-over-year, the margin rate expansion was negatively impacted by 70 basis points in each quarter, which is substantial. When we discussed profit growth and expanding margin rates last September, we did not anticipate the upcoming changes in foreign exchange rates. The profit growth equation still stands at these revenue growth levels, but the margin rate will be slightly offset by foreign exchange and commodity fluctuations if they continue. That’s my only caution. However, we remain very optimistic about profit growth as these product lines expand.

Regarding the first part of your program, we have secured approximately 10 central compute programs over the past couple of years. We believe our success stems from leveraging the full strength of Aptiv. We've discussed our brain and nervous system concept and how we utilize our capabilities in software and hardware, including signal distribution and compute power. This combination sets us apart from our competitors and has led to significant achievements in central compute. Additionally, I believe it also contributes to notable successes in active safety, particularly in advanced active safety solutions and several advanced infotainment contracts we have won.

Great. Thank you so much.

So, Kevin, that concludes our Q&A. If you would you like to just have any closing remarks.

All right. Well, listen, thank you, everybody, for your time. We really appreciate it. Have a good day.

All right. Thank you.