Aptiv PLC (APTV) — Q1 2019 Earnings Call Transcript

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

Thanks Elena and good morning everyone. I'm going to begin by providing an overview of the first quarter highlights and provide some perspective on how we’re thinking about the balance of the year. Joe will then take you through our first quarter financial results as well as our updated financial outlook in greater detail. First quarter revenue, EBITDA, operating income, and earnings per share all finished above the guidance we provided back in January, reflecting our ability to drive sustained outperformance even in a more challenging macro environment. We delivered 4% revenue growth despite vehicle production declining 5%, representing nine points of growth over market. The result was strong demand for our portfolio of technologies aligned to the safe, green, and connected mega trends. Operating income and earnings per share totaled $345 million and $1.05 respectively, driven by volume growth and our industry-leading cost structure. The strength of our portfolio of advanced technologies resulted in over $4 billion of new customer awards, which combined with an expanding funnel of new business opportunities put us on track to exceed our prior year record of $22 billion. Given our win rate and new business bookings in the size and scale of our funnel of new business opportunities, we believe it's important that we continue to invest in our safe, green, and connected technologies even in this more challenging macro environment, thereby further expanding our competitive moat and better positioning Aptiv for sustained value creation. In summary, it was another strong quarter further validating our operating model, portfolio of advanced technologies, and our business strategy. Given the increasingly challenging and uncertain macro landscape, I’d like to provide some context for how we are thinking about the remainder of 2019 on slide four. Relative to our initial expectations, our first quarter financial performance benefited from stronger outgrowth in weaker end markets, the result of stronger than expected new program launches and content gains globally. In light of the weaker macro environment, we’ve implemented incremental overhead cost reductions in addition to manufacturing and supply chain initiatives to improve our cost structure and be in a position to fund our growth investments. In addition, we repurchased $226 million of our stock opportunistically, taking advantage of market discounts while maintaining a strong and flexible balance sheet. We now expect share repurchases to total $450 million for the full year. Moving to the right side of the page, we’ve seen a deterioration in key market growth underpinning our initial 2019 outlook. Joe will take you through the details in a moment, but we now expect global vehicle production to be down 3.5% for the year versus down 2.5% previously, primarily driven by weaker demand in both Europe and China. Additionally, since our outlook in January the euro has weakened relative to the dollar and commodity prices, principally related to resins, have seen recent spikes as a result of tightening supply conditions. While our teams are aggressively working to mitigate these impacts with cost reductions and productivity initiatives, the combination of weaker end markets and the changes in FX rates and increased commodity prices are enough to cause us to lower our outlook for the remainder of the year. Looking at the current implied second half ramp-up in vehicle production forecasts forecasted by many industry experts, we believe our balanced outlook represents a much more realistic perspective. Turning to Slide five, we're focused on taking actions that increase the flexibility of our business model and position the company for better true cycle performance. Despite a revised outlook for lower vehicle production resulting from the current weaker macro trends, we remain confident in our ability to continue to outperform, driven by increased vehicle content and market share gains, the benefit of a more balanced customer, regional, and market exposure, and our relentless focus on optimizing our cost structure. Our DNA is wired to constantly deliver material and manufacturing efficiencies while also reducing overhead costs. In 2018, we eliminated $50 million of overhead and stranded costs related to the powertrain spinoff. Turning to 2019, we're executing initiatives targeted to save an incremental $40 million of run-rate overhead and stranded costs, including manufacturing and engineering footprint rotation of cost countries, supplier chain initiatives to improve supplier quality while reducing our overall spend, and corporate and back-office consolidations that improve service levels while reducing costs. While we expect the benefits of these initiatives to gradually layer in over the coming quarters, we're continuing to prudently fund growth investments, including increased engineering investments to support the higher demand for advanced active safety solutions and increased investment to fund the further development of our automated driving platform, smart vehicle architecture, advanced development programs, and connected services data monetization opportunities. In summary, the constant focus on optimizing our cost structure improves our operational efficiency and frees up investment to fund future growth. Turning to slide six, first quarter new business bookings totaled $4.3 billion, further highlighting our portfolio alignment to safe, green, and connected mega trends as well as our strong competitive position in several advanced technologies. In our advanced safety and user experience segment, our expertise in central compute platforms, sensing and perception systems, and machine learning is helping to deliver a safer, smarter, and more integrated solution both outside the vehicle, with advanced active safety systems, as well as in the cabin, through enhanced user experience and interior sensing solutions. As a result, we booked $600 million and $300 million of active safety and info and user experience awards respectively during the quarter. We believe a strong start to the year in active safety bookings puts us on pace to see 2018 as a record with well over $4 billion of new awards estimated for 2019. Moving to our single Power Solutions segment, engineered components booked almost $1.7 billion in new customer awards during the quarter. We also booked over $350 million in new high voltage electrification awards on track to exceed last year's $2 billion of new business awards. Turning to segment highlights in advanced safety and user experience on Slide seven, revenues for the first quarter were up 7%, that's 12 points over market. The continued strong consumer demand for Active Safety Solutions drove product line revenue growth of 69%, and the expected roll-off of revenues tied to our displays business contributed to a modest decline in Info and User experience revenues. During the quarter, we booked an important conquest win with Porsche and Audi to supply a smart actuator charging interface controller, which manages the flow of data coming into the vehicle while it charges. Industry experts have identified this as a potential intrusion point outside the vehicle, and as such, this is an exciting growth area for our connectivity and cybersecurity product lines. Turning to slide eight, our investments in scalable vehicle architecture are seeding our next wave of growth, helping to drive the democratization of new mobility solutions globally. As a result, Aptiv is uniquely positioned to benefit from our smart vehicle architecture and automated driving investments as the demand for advanced active safety solutions increases. We booked multiple scalable level two plus customer awards leveraging the integration of our unique satellite architecture and active safety domain controller with our perception systems. Underscoring our technology leadership position, last month our ASU X team was recognized with a Pace award for our work with Audi under the automated driving satellite compute platform. This industry-first platform, developed as part of our strong partnership with Audi, has been a game changer in the industry and has since been selected by six other OEMs to help them realize and in effect democratize active safety solutions across our multiple vehicle platforms, which underscores our mission. As the complexity of technology increases, OEMs appreciate our value and contribution towards getting the architecture right today, which is critical to delivering the feature-rich vehicles they need in the future. Moving to the right of the slide, we recently announced the expansion of our autonomous driving activities to the China market. Shanghai is now the fifth city where we’ve localized autonomous driving operations, joining Singapore, Las Vegas, Boston, and Pittsburgh. Our plan is to bring autonomous driving to China by partnering with transportation network companies and others in the mobility ecosystem, bringing us one step closer to the broader adoption of automated mobility in the region. Turning to Slide nine, our single Power Solutions segment is focused on next-generation vehicle architectures, including high-speed data and high-power electrical distribution that enable the advanced technologies that will shape the future of mobility. Revenues increased 3% during the quarter, 7 points over market despite the weakening macros driven by 65% sales growth for high voltage electrification products and almost 40% growth in commercial vehicle and industrial revenues. Underscoring our industry-leading position in vehicle architecture, we were recently awarded the high voltage electrical architecture on the Fiat 500. This award validates the increasing need for optimized high voltage architecture across a full range of vehicle types. Before turning it over to Joe, I'd like to take a minute to preview our upcoming 2019 Investor Day theme and topics of discussion. You've heard us talk before about our strategic imperatives and the importance of building a strong, sustainable business that delivers long-term value to all our stakeholders through the relentless focus on having the right people, a portfolio of market-relevant advanced technologies, and a continuous improvement mindset. We believe this formula leads to a more sustainable business that is better positioned to perform through cycles. We've seen evidence of this over the last two years with record growth over market despite declining vehicle production, putting us on the path to deliver on our 2020 revenue targets in a weaker macro environment. This positions us to see the investments in future growth initiatives that will lead to new solutions and new markets, and that will allow us to achieve our vision for the company in 2025, which we believe results in a differentiated and compelling investment thesis for Aptiv. In summary, we believe Aptiv is well on its way to becoming the Tier 0 partner of choice for our customers, capable of delivering the advanced architectures and optimized solutions that are making the future of mobility real. With that, I'll hand the call over to Joe to take us through the first quarter results and review our outlook for 2019.

Thanks Kevin. And good morning, everyone. Starting with our first quarter revenue growth on Slide 11, revenues of $3.6 billion were up 4% adjusted despite a 5% decline of vehicle production in the quarter. From an organic standpoint, excluding acquisitions, we estimate revenue increased approximately 1% with organic growth over market of 6%. As a reminder, KUM is fully integrated, and will lap itself in the second quarter, while Winchester Integration continues and will lap in the fourth quarter. The strong launch volume and content gains we had in 2018 continue in 2019, helping to offset price and the unfavorable impact of FX and commodities. From a regional perspective, we saw outperformance in every major region of the world despite lower vehicle production across the board. North America revenues were up 7% adjusted, driven by multiple new platform ramp-ups and the addition of Winchester interconnect. Europe had 11 points of growth over market driven by the uptick of several new programs and our China adjusted growth was negative 12% with three points of growth over market. Although China vehicle production was lower than our original expectations, we continue to see growth in key product lines, including active safety and high voltage. I'll provide an update on our production outlook for the year shortly. Turning to Slide 12, as Kevin indicated, first quarter EBITDA operating income and EPS were all above the midpoint of the guidance we provided back in January. EBITDA and operating income of $518 million and $345 million reflected the benefits of strong volume growth in North America and Europe, which were more than offset by volume declines and FX in commodity headwinds in China and U.S.-China tariffs. Operating income margin adjusted for FX in commodities and tariffs was 10% reflecting lower production volumes while continuing to invest in future platform growth and advanced safety and user experience, as Kevin referenced earlier. While favorable to guidance, tariffs were a $6 million headwind year-over-year reflecting lower demand levels in the region and a 10% tariff rate for the full quarter. Earnings per share of $1.05 were $0.05 above the midpoint of our guidance driven by higher operating income. Net below the line items were favorable year-over-year, largely driven by a lower effective tax rate of 11.3%. However, versus guidance, this benefit was offset by other items primarily higher interest expense associated with the debt refinancing we did in the quarter, which I'll cover in more detail shortly. Moving to the segments on the next slide, for the quarter, advanced safety and user experience revenues grew 7% or 12 points over market, driven by new launch volumes and robust growth in active safety, more than offsetting the planned roll-off of our lower-end display audio product line and Info & User experience. Operating income before the impact of higher mobility investments benefited from strong active safety margin expansion despite higher planned engineering investments to support our strong backlog of new wins and pursuits. As a result, we now expect active safety revenues to be up 50% for the year with low-teens operating margins. Our mobility investments for the quarter totaled $47 million and we remain on track to target spend of $180 million. In summary, another strong quarter of revenue growth and operating leverage in the advanced safety and user experience segment. Turning to Signal & Power Solutions on Slide 14, revenues were up 3% or 7 points over market, driven by new program launches in North America, strong growth in our commercial vehicle and industrial end markets, and continued robust penetration of high voltage electrification. Operating income margin adjusted for the dilutive impact of FX, commodities, and tariffs was 11.3%, down 200 basis points due to lower production volumes primarily in China. FX and commodity headwinds were largely driven by the weaker euro and RMB, in addition a higher resin costs, as previously discussed. We expect FX and commodity headwinds to continue for the remainder of the year, and have contemplated this in our revised outlook. Given the continued challenging macro landscape, slide 15 provides a refresh of our vehicle production assumptions, underpinning our updated revenue outlook for the year. We saw deteriorating trends escalating in Q1 with global vehicle production down 5% in the quarter. Meanwhile, extended macro uncertainty, regulatory constraints, and continued weak vehicle sales particularly in Europe and China have caused us to revise our vehicle production outlook lower for Q2 and the remainder of the year. At a global level, we now expect vehicle production to be down 5% in the second quarter consistent with Q1 and 3.5% for the full year. From a regional perspective, we now expect China production to decline 12% in the second quarter and 9% for the year. While we continue to experience strong growth over market in China, driven by double-digit growth in our key product areas, we are preparing for structurally lower industry volumes going forward, and will continue to take additional actions to adjust our cost structure in the region as a result. Turning to Europe, we now expect vehicle production to decline 9% in the second quarter and 4% for the full year, driven by lower customer demand and certain program launch delays. Lastly, we see North American production largely unchanged, as OEMs launched new truck and SUV platforms to offset continued passenger car revenue declines. Despite the more challenging global market, we continue to expect our portfolio of safe, green, and connected technologies and a balanced regional customer and industrial market mix to more than offset the automotive macros, contributing to strong growth over market in every region. As a result, our adjusted revenue growth rate for the year remains unchanged at 6%. Turning to Slide 16, second quarter revenue is expected in the range of $3.6 billion to $3.7 billion up 5% at the midpoint or 9 points of growth over market. As I mentioned, that assumes global vehicle production down 5%. Additionally, to $1.12 euro and a RMB690. Operating income and EPS are expected to be $385 million and $1.14 at the midpoint respectively, and this includes estimated tariffs of $12 million in the quarter. Assuming the list three step up rate to 25% takes effect June 1st having been previously postponed. As a result, EPS is expected to be in the range of $1.11 to $1.17. Moving to the full year, revenues are now expected to be in the range of $14.425 billion to $14.825 billion up 6% at the midpoint. Adjusted EBITDA and operating income are expected to be $2.395 billion and $1.67 billion at the midpoint respectively. It's important to note our outlook includes over $130 million of FX, commodity, and tariff headwinds for the full year. In aggregate, we believe these are mostly short-term impacts that should improve in the back half of 2019 and 2020. Given the strength of our market position and bookings pipeline, we continue to make investments in active safety and high voltage to support sustained, strong revenue and income growth. U.S.-China tariffs are now estimated at $50 million for the year, down from our prior forecast of $60 million due to the delayed increase in the list three step up rate and lower China volumes. As a result, earnings per share are expected in the range of 490 to 510 and operating cash flow is now expected to be $1.65 billion reflecting higher restructuring cash for the year. No change to CapEx spend at $800 million. Turning to the next slide, we thought it would be helpful to provide more detail on the full year outlook guidance change, starting with the revenue walk on the left. You can see the first quarter outperformance is being more than offset by $170 million of unfavorable FX and commodity translation with the euro now estimated at $1.12 for the year versus our prior outlook of $1.17. Our revised vehicle production outlook results in $150 million lower sales for the year. Moving to the operating income walk on the right, our updated operating income outlook similarly reflects our first quarter volume upside, the flow through of our updated FX and commodity assumptions, and lower vehicle production volumes, partially offset by the benefit of incremental structural cost actions Kevin mentioned earlier. The annualized impact of these actions is roughly $40 million and will further improve our flexible and scalable cost structure in 2020 and beyond. In summary, the strength of our revenue growth in the face of lower vehicle production underscores our portfolio positioning while we continue to fund growth investments that are resulting in significant share gains. Turning to Slide 18. Our strong and flexible balance sheet allows us to execute our strategy for growth and create value for shareholders. In efforts to maintain our low net debt, conservative leverage profile, and improve long-term business flexibility, we refinanced $650 million of 2020 senior notes to 2029 and 2049, extending the weighted average tenor from seven years to twelve years with a significant portion of thirty-year debt. As a result, there are no significant note repayments due until 2024. This refinancing resulted in $11 million higher interest expense versus prior guidance which we will offset by our revised share repurchase outlook for the year, which now totals $450 million. At the same time, our M&A pipeline remains full. We remain focused on accretive bolt-ons similar to Titan, KUM, and Winchester, which provide attractive end market diversification as well as strategic technology equity acquisitions, where we have the opportunity to accelerate the commercialization of new technologies. Our consistent capital deployment strategy remains focused on investing in our business, both organically and inorganically, and opportunistically returning excess cash to shareholders. In summary, we believe effective capital deployment is a major differentiator for Aptiv and an important lever for shareholder value generation.

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

Thanks. Thanks for taking the question. The first one is just on and on the chart in the Slide 17 I guess where you have the change in the guidance walk. The net incremental performance is that something new that you sort of use some of your flexibility to sort of help offset some of the incremental volume pressures we've seen, so like the way to think about it is that minus 55 plus that 10 over the change in 150 which would sort of be like that 30% detrimental margin, or is that just sort of stuff that sort of already in the system that you just has been coming in better?

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

Okay.

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

Okay. I noticed you provided the slides on organic growth, but I'm curious about how you arrived at 7% in the U.S. segment. If you look at the change, I'm trying to find a slide that shows you only presented a $29 million increase on the $1.32 billion.

There is some divestiture revenue related to the wind down of some contract manufacturing in that business, Joe.

Okay, so that’s the difference, okay.

Yes, you've got it. I'm referring to the M&A net. So you have the additions from Winchester and KUM, along with the contract manufacturing that resulted from previous divestitures.

Okay. Thanks.

Thank you. I have a couple of questions. We have previously discussed the impact of copper, which I understand has mostly been a lagging effect on SPS. Now we are facing resin issues, so can you explain whether these are tied to contractual pricing mechanisms? I assume this relates to the connector side, but it may also pertain to wiring. What are your contractual provisions regarding this? Additionally, what gives you confidence in recovering those costs, or how might we cover some of those?

Brian, it's Kevin. I'll start. So it is resin and as you're right, it's resin principally related to the connector or engineered components business, and it relates tightness in the supply chain from an available capacity standpoint. It's actually some of the additives that go into some of some of the resins like PA 66 and others that are out there. We started to see a significant increase late last year for a relatively large increase into our business plan for 2019 as we exited 2018 and saw incremental tightening of supply and incremental pricing. Given growth on some of our product lines, the reality is we need to buy some of that product out on the spot market relative to our contractual provisions. Those have been at least to date at much higher rates. We're working to push those through to customers. We've had some success but in light of some of the softer volume, it's been a bit more challenging to do; something that we'll continue to work through. While we are doing that, we're also in the process of validating other resin alternatives to replace existing, for example like PA66 to replace that sort of resin with alternative products that are automotive grade and are validated by our customers.

Okay, so this is more driven by developments in the chemical industry than the impact that drives the.

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

And Brian, to clarify, this relates to the cross ECG and there are elements of this in Heller and tightness as well. Generally, through the industrial channel, we can push prices more easily than through the automotive channel. It takes some time, and historically, movements in these resins have been larger than expected, but we've managed them in the daily flow. However, this particular spike is significant and we expect it to last for the remainder of the year, which means it will take more time to address.

Okay, follow up slightly different topic. So, I just – your bookings were actually down year-over-year you’re on track. So are there big things that just in terms of timing that are – 2Q with 3Q?

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

Okay, thanks. See you at the Investor Day.

Yes, hi, good morning. A couple of questions. The first one, can we dig into the Signal & Power Solutions business? I mean, I think you probably went through in your prepared remarks unfortunately it wasn't on for that, but I think the detrimental for that business was like 120%. I'd really love to just understand the puts and takes there, if that should be continuing throughout the year and that's my first question?

Yes, David, when we discuss the impact of foreign exchange, commodities, and tariffs, the majority of that affects the Signal & Power Solutions segment. Over 90 percent of the figures we reference relate to that area. That's the main reason for the observed flow-through effects. Additionally, there's a slow decline related to our legacy business, particularly a 12% drop in China, although we do see new business from KUM and Winchester coming in at a reduced rate due to deal amortization. Typically, we wouldn't expect such a significant decline in China, so we anticipate starting to see improvements in the latter half of the year. Overall, the primary contributors to the challenges faced by the Signal & Power Solutions segment are the impacts from foreign exchange, commodities, and tariffs.

Okay, then sort of excluding all that, I mean what target detrimental’s would you think that business would achieve?

That business, yes, that business should be, I mean, we talked about detrimentals 25% to 30% of that business would be closer to the lower end of that range.

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

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

Okay. And that's not contemplated within the guide, correct?

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

Right. Thank you very much.

Thank you very much. Let's start with the production guide for Europe. In your Q2, it seems you are more cautious than the forecasters, with many believing the anticipated growth in the second half may be overly optimistic. I would like to focus on whether you have any early insights regarding RDE and if there is some level of caution incorporated due to the transition that took place at the end of Q3.

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

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

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

Yes, that is correct.

Okay, great. Thanks so much guys.

Thanks, Chris.

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

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

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

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

Yes, Dan, to elaborate, we are still maintaining a 2% price for the year. We are continuously discussing this with customers, but we haven't observed any significant changes in our pricing expectations for the year.

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

Good morning, everybody.

Hi, Emmanuel.

I wanted to focus on the volume aspect of the headwind. While I understand your comments on foreign exchange and commodities, it seems that the volume impact appears much more negative than expected, both in the first quarter and in the updated full-year guidance. For instance, in your year-over-year analysis for Signal & Power solutions on Slide 23, there's a positive volume contribution of $71 million in revenue but a significant negative impact of $59 million on operating income, not including foreign exchange and commodities. Furthermore, in your Slide 17, it looks like the additional volume hit is resulting in a detrimental margin increase of over 30%. I apologize for the lengthy question, but could you please elaborate on the volume component of the headwinds and what contributes to its notably negative influence in the quarter and the outlook?

Yes, Emanuel, you make a good point, and it applies to both Q1 and Q2. We were aware of this when we made our guidance, which we discussed at year-end regarding the Q1 outlook. When production decreases rapidly, as we've seen in China for Q1 and in Europe for Q2, we anticipate a negative impact. I estimate this negative flow to be around $50 million in each quarter. We expected this for Q1, but for Q2, it's likely to be more significant than originally anticipated due to recent reductions in Europe. The cost-saving measures will help mitigate this, but in Europe, these will take some time to realize. Additionally, I mentioned earlier that acquisitions tend to contribute less revenue initially due to amortization. This doesn’t imply a change in our mix, but revenue from acquisitions starts lower in the first four to six quarters as we implement synergies, affected by purchase accounting. We've identified a $50 million impact in both quarters—more attributable to China in Q1 and more to Europe in Q2. However, this is still within the original guidance we provided for Q1.

Okay, that’s helpful. Regarding the guidance walk, considering the $150 million additional headwind related to volume and a $55 million operating income, that represents a much more typical negative margin.

Yes. And so what we get. What we're seeing in the back half of the year is that flow starts to normalize right. We've got, we've got sort of for H2, the back half of the year. Flow returns though to more. You know we should be falling somewhere between 25% to 30% on an average quarter, some quarter is a little different. But that starts to return. So we start to make, we start to make up on that.

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

There’s certainly more challenging. What are some of these transactional items, the FX or the tariffs, but I’d answer in sort of two parts, and then coming from certainly. When we talked about margin expansion, there were certain underlying things that had to happen in the business for us to get comfortable that we could continue to expand margins. Good examples active safety that business would continue to grow as it grew, it would expand margins. That we're certainly seeing. Right, active safety is going to be over, well over a $1 billion this year with low teens operating margins. And back you know in September 2017 when we provided sort of our thoughts on margin expansion that business had just was just about to break even. So things like that, high voltage is another very similar example of that. So, so the core underlying things that needed to happen in the product lines and how we run the business have happened. We are certainly dealing with sort of some of the FX and tariffs. We don't give up on those. They're hard to deal with in a particular quarter over a particular couple of quarters depending on how significant the move is. But you know we’ll continue to remain focused on that cost structure to work to offset those. But I'd say that the underlying product line growth the underlying business developments that needed to happen for us to be able to say we're going to grow margins is certainly taking place. Kevin I don't know.

Yes. Listen, I mean, I just hear the framework is intact and remains. I think the challenge we're dealing with right now is a decline in vehicle production significant decline of production in China right. And a protracted decline in China. The impact of FX rates and then in this particular case, the resin challenge that we have on a year-over-year basis, that you know we'll find substitutes will push the price and in reality there's somewhat it fixes itself as more is more capacity comes online during 2020. So I think there's to Joe's point, there's some one-off items that can affect that model. But from our long-term standpoint, the model remains intact.

Great. Thank you.

Thanks, Emmanuel.

Good morning, this is John. My first question is about the cost-saving actions you've mentioned. I understand it's projected to be $50 million in 2018 and $40 million in 2019. Is there potential for further cost rationalization if the overall economic conditions continue to be challenging and we don't see improvement later in the year?

Yes. To clarify, the $50 million was from last year, and the $40 million is the run-rate for 2019, with $10 million of that expected to show up due to timing, particularly in regions where it's more challenging to deploy personnel. We have a cost structure that we can adjust based on how we manage the business, especially during periods of slowdown in vehicle production, which naturally affects direct and indirect labor. We have also been actively working to manage corporate overhead over the past few years and will continue to do so. In the engineering area, we have significantly increased spending year-over-year, approximately $100 million more due to mobility and engineering expenditures in our ASU acts, primarily in our ASUEX and SPS businesses. We have gained considerable market share and customer acceptance, which makes us cautious about how we approach our programs. While we strive to enhance engineering efficiency and productivity, we have generally avoided incremental reductions and restructurings. However, if we experience a prolonged slowdown or do not see a quick recovery, we will need to reassess our approach in light of our commitments to customers.

Great. That's very helpful. And looking at Slide 15 for a second and focusing in on China, in terms of the adjusted growth expectations it looks like you're expecting some more pronounced adjusted growth versus market in 2Q relative to H2. Is this just a function of product launches that are more weighted to the second quarter or could this be just some conservative in the back half?

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

Okay. And then…

One point related to your question is that Joe addressed it well. As we assess our expectations for vehicle production in the second half of the year, we don't see our outlook as overly cautious. Industries usually follow trends, and we are witnessing quicker recoveries in areas like vehicle production. While a year-over-year growth rate analysis might show a downturn, particularly reflecting on the decline in vehicle production in China during the third and fourth quarters of 2018 compared to the first half of that year, we believe it is operationally more challenging for our customers to achieve those figures.

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

No, cash will perform well. We did take 50 million out of the outlook as we have additional cost-saving actions to cover. We aimed for a balanced perspective, but now cash working capital is performing in line with expectations.

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

Thank you.