Aptiv PLC (APTV) — Q2 2019 Earnings Call Transcript

Thank you, Chris. Good morning. And thank you to everyone for joining Aptiv’s second quarter 2019 earnings conference call. To follow along with today’s presentation, our slides can be found at ir.aptiv.com. 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 second quarter financials and our outlook for the third quarter and full-year 2019 are included in the back of today’s presentation and the earnings press release. Please see Slide two for a disclosure on forward-looking statements, which 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. Kevin will provide a strategic update on the business, and then Joe will cover the financial results and our outlook for 2019 in more detail. With that, I would like to turn the call over to Kevin Clark.

Thank you, Elena, and good morning, everyone. I'm going to begin by providing an overview of our second quarter highlights and then provide a perspective on the second half of the year. Joe will then take you through our first quarter financial results as well as our full-year financial outlook in more detail. The second quarter was in line with the guidance we provided back in May, while EBITDA, operating income, and earnings per share were all above the high-end of our guidance range reflecting very strong operating performance even in the challenging macro environment. Revenues increased 4%, representing 9 points of growth over underlying vehicle production, reflecting strong above-market growth across both segments and every geographic region. Operating income in earnings per share totaled $405 million and $1.33 respectively, driven by volume growth, overhead cost reduction, and very solid manufacturing and material performance. Our portfolio's industry-leading advanced technologies led to another strong quarter of new customer awards totaling $5.5 billion, bringing the year-to-date total to just under $10 billion. To put it simply, it was another good quarter in a challenging environment further validating our portfolio of safe, green, connected technologies, flexible operating model, and sustainable business strategy. Moving to Slide 4, given a weak macro environment, I would like to provide a backdrop for our full-year outlook which remains unchanged. Starting on the left, we now expect global vehicle production for the year to decline 4%, versus our previous forecast of 3.5%, driven by a 5% decline in automotive light vehicle production, principally driven by further weakness in China, partially offset by a flat commercial vehicle market. Foreign exchange continues to be a headwind as euro and RMB exchange rates are weaker than the prior year. Higher commodity prices, principally specialty resins remain a headwind due to tight supply conditions globally, and lastly, U.S.-China tariffs also continue to be a headwind although we are aggressively working to remediate the impact on our results. However, as I mentioned, our full-year outlook for revenue, EBITDA, and operating profit remains unchanged as a result of continued strong growth over market driven by both content per vehicle growth and market share gains, our balanced customer, regional, and end-market exposure, and incremental overhead cost reductions, as well as the timing related to material and manufacturing productivity initiatives, all of which are gaining traction and translating into margin expansion in the second half of 2019. In short, our strong performance in the second quarter gives us confidence in our full-year outlook and our ability to execute in a challenging macro environment.

Thanks, Kevin, and good morning, everyone. Starting with our second quarter revenue growth on Slide 12, revenues of $3.6 billion were up 4% adjusted, totaling 9% growth over market as vehicle production declined 5% in the quarter. Excluding acquisitions, organic growth over market was 6%. As a reminder, KUM is now fully integrated and lapped itself at the end of the second quarter, while Winchester Interconnect will lap in the fourth quarter. The strong launch volume and content gains we had in 2018 continue into 2019, helping to offset price of 1.6% in the quarter and the unfavorable impact of FX and commodities. From a regional perspective, we saw strong performance in every major region of the world despite lower vehicle productions year-over-year. North America revenues were up 1% adjusted with 3 points of growth over market. Excluding acquisitions, organic growth over market was down 1% driven by the previously discussed exit of the display audio product line and low passenger car volumes overall, partially offset by key launches in the quarter. Europe revenues were up 7% adjusted with 13 points of growth over market driven by the uptick of several active safety and electrification programs. And lastly, our China adjusted growth was negative 6%, significantly exceeding China vehicle production resulting in growth over market of 10 points. Although China vehicle production was lower than our expectations, we continue to see strong growth across our key product lines. I will provide an update on our production outlook for the year shortly.

Thanks, Joe, let me wrap up on Slide 19 before we open it up for Q&A. Our second quarter performance was further evidence of Aptiv’s ability to drive sustained above-market growth and deliver on our commitments despite a tough macro environment. We’re maintaining our outlook for 2019 which includes roughly 5% to 6% revenue growth representing 9 to 10 points of growth over market. As Joe mentioned, our outlook for the second half of the year really reflects our balanced approach to investing in future growth while reaping the benefits of our lean cost structure and our flexible business model. Now we believe our unique formula further differentiates Aptiv as a company capable of capitalizing on the key global Auto 2.0 megatrends, while also building a more predictable and sustainable business with robust downturn resiliency, better positioned to perform in any macro environment and continuously delivering value to our shareholders.

Great, good morning, gentlemen.

Good morning.

First question is really on your organic growth of the market, I think that got raised slightly. What’s really driving that? Is it improved take rates, is it driven by customer pull-through, is it OEM choice? And then for the fourth quarter, can you just remind us how much in acquisitions is going to be rolled into that versus pure growth over your market forecast?

Yes, David, let me – why don’t I take the acquisition question first and then I’ll start the first question. Q4 will be very small, we closed on Winchester in mid-October, so you should think that business runs roughly $85 million or so a quarter, your fraction of that. As it relates to the growth over market, I think it’s really in the product lines that we’re talking about and it’s really across a number of regions where I continue to see strong growth in active safety. I would say that the penetration as well as new launch discussion, high-voltage clearly, particularly in China really around launches and some of the new programs we have both on the China locals as well as the multinationals.

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

Yes, I would say that’s just more of the math as it’s working out as we’re pulling, you know we’re looking at customer schedules, who’s up, who’s down, we’re seeing some pickup in that part of the business, active safety, and electrification relative to what's coming down. Remember, particularly Signal & Power Solutions with content on one out of every 3.5 vehicles we've got, we've got a fair amount of market in that business. So it's really sort of the market is coming down while those product lines are sort of at or slightly above expectations.

Understood. Then my follow-up is on the validation of your smart vehicle architecture. This Zone Controller award, is that a business that you were able to win as a result of the two advanced development awards that you have in place? I was just trying to understand where to fit that in for the story as you continue to provide solutions for some OEM partners, but just wondering if it was the vision that you have for a re-architected vehicle long term that allowed you to win it or if it's just the next evolution of a program you are already on.

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

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

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

Understood. Thank you.

Thank you.

Good morning, Emmanuel.

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

Yes, hey Emmanuel, it's Joe. Let me go through a bit here. So, you're right, there certainly is a ramp up. I think when we talk about performance, generally talking about manufacturing efficiencies, material savings, some of the cost savings obviously hit that line, but our cost savings also include sort of the other overhead categories as well as SG&A. So, really the bulk of that number is material in manufacturing performance and efficiencies. A couple of things to think about, if you compare H1 to H2 on its face, you're right, it's a significant step up. If you remember from last year, we had about $65 million of inefficiencies in the back half from OE plant closures when they were sort of closing unexpectedly for a week or two that totaled about $65 million. So if you think about our performance increase H1, H2 is a little over $200 million, a little under $200 million, about $65 million of that is going to be sort of lapping that performance issues. We did about $90 million of performance in the first half. So if you look at that, we're sort of running at about $40 million higher second half to first half, which is a step-up we're certainly going to have and we have initiatives to achieve that number. We've obviously got to work to accomplish it, but from our perspective, you know $40 million of additional performance and over a 6-month period is something that's within our capabilities to achieve.

Yes, Emmanuel, I think if you look historically, we tend to have more performance in the back half of the year, the second half of the year material manufacturing than in the first half, so there is also a natural cadence there.

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

Yes. Listen, I think, based on Joe walked you through the reconciliation and gave you an update on price down. So, you know and we ended the year or - we ended the quarter, I'm sorry, roughly 1.6%. We're consistent in our outlook that will be in the 1.5% to 2% range. Yes, you've, we get this question asked pretty regularly and you've heard our response with respect to the markets, we're in a challenging industry and the pricing discussion is always a tough discussion. We would tell you that the underlying environment really hasn't changed. I think, you know, each competitor or each supplier may have different situations affecting price, but the overall market dynamics from a price standpoint, continue to be tough just as they've always been. As it relates, can a competitor, can a competitor affect the overall market? I guess it's possible, but at the end of the day you have to flawlessly execute and deliver on that, we will launch 2200 programs this year and you have to flawlessly execute and deliver on those programs and that's what tends to be the most important, that and the technology that you're bringing to the customer. And we view our wins, our major wins with customers like Tesla on a global basis to be validation of the value that we bring, the technology we're bringing in our operating attention.

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

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

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

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

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

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

Yes, Itay just - I want to just make sure I put out one comment. If your question ultimately is when you look at the financial profile of the business that we're bringing on versus the financial profile of the business we currently have, the profile of the business we're bringing on at run rate is more profitable business than our existing business. So the dynamics, profitability standpoint of the business have not changed, it's just as we have reviewed with you at our Investor Day in June.

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

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

Oh I think as we've talked about, we've got programs in place to expand margins on an annual basis. We've often talked about margin in a particular quarter can be lumpy depending on the time of year. I think the other thing is, Q4, a lot of our material and manufacturing savings programs tend to be annual programs. We start with initiatives in the beginning of the year and build through them and they tend to have greater level of benefit in the back half of the year. And then we sort of start over from a program and initiative perspective. So I think we are, we remain confident in the margin expansion guidance we provided at Investor Day, but certainly wouldn't expect it to happen in one quarter than hold for the subsequent years, there will be some fluctuations, particularly with the volume changes. I think the other thing and so we may have, one of the things we focus on is preservation of OI dollars as well, just not necessarily the margin rates. So as we look to cost savings, how can we make sure we are preserving those dollars even in a tougher market.

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

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

Yes, I think, Dan if you look at, I mean right now, within our forecast, we're expecting to hold effectively EBITDA and OI dollars in 2019 consistent with flat with the dollars, not the margin rate, flat with 2018. And I think you know there's - to Kevin's comments obviously staying upon it staying on top of it. I'd also - and we've talked about this a lot right? We try to get ahead of it as much as we can. We certainly haven't been perfect in calling China vehicle production down, but I'd like to think we were out ahead of it. We were focused on Q4 of last year being lower than others expected. We've been trying to get ahead of it. So that - our programs in China from a cost containment perspective started this time last year, as we started to see the weakness in the back half. And again, we haven't called the volume perfectly, but I'd like to think we're almost closer than anybody at this point in terms of the market coming down. You know, I think the other thing we talked a lot about at Investor Day was, our focus going all the way back to 2016 on through-cycle performance. We assumed we were going to get to this point at some, you know at this point in the cycle, sooner or later, and wanted to be ready for it. So some of our overhead reductions, the cost reductions that we're talking about now, the basis for those started back in 2016, 2017. So I think being ahead of it and sort of assuming at some point it's going to happen, has helped us - help us stay ahead of it. We try to keep pace with it over the last couple of quarters as well.

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

Yes. Listen, again as Joe used the word, you've heard us use it before we're maniacal about our costs and we've reduced our corporate overhead by roughly 50%. I think roughly $200 million plus over the last couple of years. And on top of that very focused on how we operate from a manufacturing material and SG&A standpoint. So, those are things that are in flight now to the extent we need to make more aggressive course corrections in light of more significant downturns, those are things that we will do and we're positioned to do, but the organization is already focused on driving cost out. It's a part of our DNA.

Great, thank you very much.

Thanks, Dan.

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

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

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

Thanks. I have a separate forward-looking question regarding NuTonomy and the progress toward Robo Taxis. We've noticed that some companies have become more cautious about their timelines, while others, like [indiscernible], have made significant investments in Argos. So, I have two related questions: what is the current pace of progress in the Robo Taxi sector, and are you open to accepting investments from strategic partners in that area, or do you intend to maintain full ownership?

Well, in terms of operationally, we now have vehicles on the road, either testing or operating through the Lyft network only less, but operating now in Shanghai, Singapore, Germany, in Boston Pittsburgh, in Las Vegas, the fleet in Vegas is part of the Lyft network is dozens of vehicles. I think we're up to 60,000 rides 1.3 million miles. And I think roughly 55 or 60 hubs that ultimately deliver to 220 different locations in Las Vegas. So we continue to operate and operate very well and collect some revenue in a lot of learnings. With respect to mobility on demand and automated driving, listen, our view is, we feel as though we've always been reasonably prudent and conservative that you'll start to see vehicles on the road in 2022 to 2023 with meaningful revenues in 2025. Our current plan from a technology standpoint is to have a driver out in the car for testing purposes in 2020. So from an introduction standpoint, technology standpoint, our view hasn't changed. With respect to taking capital, listen, whatever makes the most sense from a financial return standpoint. As you know, we feel as though we have the capital today and the balance sheet to fund investment in the business. We're funding investment in the business to deliver on the timetables that we've talked about to the extent it made sense to partner with someone strategically and financially, that's something that we consider doing.

Thank you, very much.

All right, thanks.

Hi, thanks so much. Hey guys. Two questions, so the first, if we think about on a divisional basis versus plan you discussed sort of by the quarter, but if we think about production, got a little bit worse, but for SPS you didn't have to change the guide, so can we just assume that the benefit is the outgrowth? And then obviously the same question for you, it seems like bought the organic down by 2.3%. It's a little bit more than the production change, is there a mix component and just maybe just a little bit of color, particularly on the change in the AS&UE, the outgrowth in the first half was actually pretty good.

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

Perfect, makes sense. And then the second question, it totally makes sense the 12.4% margin in the second half, it's not an indication because of seasonality for 2020. But if we sort of dive in maybe to add to AS&UE's margin where sort of the implied even if it's 7% plus for the full year, you're finally starting to get a little bit of the pick-up here. And I think you gave the detail on the mobility spend, it's annualizing almost $200 million. We're finally lapping some of this is just pure investment, so that we can get the incremental margin from Active Safety. Could you talk about just over the next 12, 18 months, do we need to make another step level on mobility or can we start to finally think about whatever the revenue growth in that end market is that we could start to get your typical more 20%, 30% type incrementals because we finally lapped the investment in new nuTonomy and Mobility?

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

Yes Chris, I just want to echo Joe's comment. I think it's all about the near-term trade-off for margins versus the longer-term opportunities to widen the moat active safety. I think that those are the, those are the trade-offs we will have to consider obviously additional programs need to drive incremental returns to the baseline business and incremental margin expansion. But you could get caught up a bit in that timing. And as you know, a number of these advanced active safety programs that we're talking about the scalable level one, level 2 plus, level 3 minus that our global for global are complex programs, but the opportunity to be awarded those programs and to be awarded at the right sort of margin rate and expand our competitive moat, is something that we'll have to evaluate versus the near-term investment resources to launch and develop those programs.

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

Yes. RD&E will continue. I think the percentage of revenue will vary a little bit on how much of that growth comes within existing OEs, how much is a craft in with is with new OEs with new programs and obviously as a part of that process we leverage to reuse as much software as much of the systems capability as we can on each program.

Okay, much appreciate it.

Thanks, Chris.

Good morning, guys. Thanks.

Good morning.

Good morning.

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

Yes, I think from our perspective, Dan, I mean near term in China, although there can be some volatility. We're really operating off of the production schedules that we see today. And just a perception perspective based on an aisle at the time we spent in China interacting with our management team that we're really not going to see a turnaround in the balance for the balance of the year, but the government is not pushing really hard. There isn’t a lot of consumer demand that it's not really clear if the inventory shake-out is completely happened it and just facing the reality of what we think the China market looks like at this point in time.

Okay. Got it.

Joe, if you want to add anything to it.

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

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

Listen, I think from a Tier 2 network standpoint, it's something we watch very, very closely. Maybe there has been some incremental pressure with some of the smaller local players, but we have at least minimal exposure from a customer standpoint, roughly 75% of our revenues are with the multinational JVs and then the balance with the top 5 or 10 local OEs. So again, it's something we watch closely from an exposure standpoint, but we haven't seen any, any real change from a risk profile or how people are acting so - but it's something that we're watching very closely.

Okay, thanks a lot. I much appreciate it.

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

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

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

Yes. Joe, copper doesn't really hit the OI. It's just really that margin rate optics because it's a pass-through, it's very minimal flow through. So it - last year, as copper ran up, you get margin rate optics go in one way, and this year to the extent we're passing through lower prices, you could get it the other way, the 90 million or so we have him for the but it's captured in that adjustment for FX and commodities. It's all in that line.

And the impact of the $110 million for EBITDA and $90 million of OI.

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

We will continue to remain opportunistic as we always do.

Good morning, everyone. This is Alan Smith on for John. First question around the smart vehicle architecture, I think it's pretty clear, you're seeing traction with OEM customers with the advanced development awards. And then on top of that the recent don't controller awards as you look at the competitive landscape. Is it fair to say you're well ahead of your competition on this front or are you seeing some fast following among some of your peers as you've been fairly successful in year awards.

Listen, we think we're uniquely positioned as we've talked about active and our product portfolio and capabilities having capabilities both in the history. SBA over time and that electrical architecture system as being similar in anyway. Yes, to, well listen, I think it will take taking a step back. We think it's similar in a number of areas that ultimately lead to ask VA and is Joe talked about competitive made driving a competitive moat in areas like advanced ADAS systems, in our view, ultimately leads to leverage in areas like SVA and leveraging the competitive moat in and around User Experience in combination with active safety ultimately leads to ultimately leads to SVA and having the capabilities in around each of each one of those areas in a strong competitive position number one in active safety obviously leading the charge on SVA puts us in a position, it's probably not exactly like engineered components where you have low cost and high cost of failure. The solutions are higher value add but high, high cost of failure but we think there's a real benefit and having the first mover being in the first-mover position.

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

Yes, hi. From a tariff we continue to make progress. We saw a little bit of a little bit of help from on the remediation side in Q2, we were obviously up $6 million year-over-year on tariffs, but below the guide by about 6 million, so that's in part lower volumes unfortunately, it's us on the best way to avoid tariffs we just had lower so the tariff impact on things move across the border, less of it, but we did see some traction and remediation the Korean plants in validation with customers we'd expect that to be completed by the end of the third quarter for the most part. So certainly, tariff remediation for '19 we're working hard to do more, but it's probably more of a 2020 as we start to work that down with particularly with the Korean manufacturing facilities so; all is tracking according to original plan. Again we didn't, we didn't wait to see if tariffs went away got right on it, obviously, we'd like to try to do more in 2019. But certainly feel we're positioned well to eliminate a good portion of that 44 million going into 2020.

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