Aptiv PLC (APTV) — Q3 2019 Earnings Call Transcript

Thank you, Chris. Good morning and thank you to everyone for joining Aptiv's third quarter 2019 earnings conference call. To follow along with today's presentation, our slides can be found at ir.aptiv.com. Consistent with prior calls, today's review of our actual and forecasted financials excludes restructuring and other special items and will address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for both our Q3 financials as well as our outlook for the fourth quarter and full year 2019 are included in the back of the presentation and in the earnings press release. Please see slide 2 for 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 the rest of 2019. With that, I'd like to turn the call over to Kevin Clark.

Thanks, Elena. Good morning everyone. I'm going to begin today's earnings call by providing an overview of our third quarter highlights and our updated outlook for the remainder of the year. Joe will then take you through our third quarter financial results as well as our fourth quarter financial outlook in much more detail. Third quarter revenue sustained strong above-market growth despite declining vehicle production. Revenues increased 6%, representing eight points of growth over underlying vehicle production. Operating income and earnings per share totaled $410 million and $1.27 respectively driven by flow-through on volume growth in continued traction on our overhead cost reduction and material and manufacturing performance initiatives, partially offset by the headwind from the GM labor strike, which totaled $70 million of revenue, $30 million of operating income, and $0.10 of EPS during the quarter. Moving to the right side. In September, we announced our autonomous driving joint venture with Hyundai, which we're confident will advance commercialization of Level 4 and Level 5 self-driving technologies and further strengthen our industry-leading capability from the development of advanced driver assistance systems, vehicle connectivity solutions, and Smart Vehicle Architecture. We believe it's critical that we continue to invest in our safe, green, and connected technologies to further expand our competitive moat and better position Aptiv for long-term sustainable growth through organic investments in our engineering capabilities, minority investments in technology companies, and the acquisition of companies such as gabocom, a bolt-on to HellermannTyton that broadens our existing cable management capabilities. In summary, it was another strong quarter in a challenging environment further validating that our business strategy, our operating model, and our technology portfolio can deliver sustainable strong performance in any environment. Moving to slide 4, let me provide some color on the inputs to the update of our full year outlook. Starting on the left side of the slide, our third quarter financial performance benefited from solid revenue growth, and operating income and EPS were above the top end of our guidance range when you exclude the impact of the GM strike. In addition to delivering strong financial results during the quarter, we also continue to execute our strategy with the announcements of our autonomous driving joint venture with Hyundai, and the acquisition of gabocom, both of which I'll cover in more detail shortly. Moving to the right side although our operating performance during the quarter was stronger than forecasted, the GM strike had a significant impact on our financial results in the third quarter and will continue to be a headwind in the fourth quarter as GM works back up to full production schedules during November. Joe will take you through the details in a moment, but for the full year we expect a headwind of $250 million in revenue, $135 million in operating income, and $0.45 of EPS related to the strike. While our operating teams in North America are aggressively working to mitigate these headwinds, we've included the estimated impact in our fourth quarter outlook. In addition, foreign exchange continues to be a headwind in 2019 as the euro and RMB exchange rates are weaker. Global vehicle production for the year is now expected to decline 5% versus our previous forecast of down 4%, largely driven by the GM strike in North America. Our updated outlook reflects stronger year-to-date operating performance offsetting the increased headwinds from foreign exchange and lower volumes, but the effects of the GM strike is an incremental headwind to our prior full year outlook. Turning to slide 5. Third quarter new business bookings totaled $4.2 billion, highlighting our portfolio alignment to the safe, green, and connected megatrends. We now believe that we're on track to achieve over $20 billion of full year bookings, reflecting a few large program awards shifting to early 2020. Our updated outlook for 2019 actually represents an increase versus the prior year, when you factor in the current outlook for lower global vehicle production. Our ASUEX segment booked just under $1 billion of new customer awards in the quarter. Our expertise in central compute platforms and sensing and perception systems is helping us deliver smarter, safer, and more integrated solutions, both outside the vehicle with advanced active safety systems, as well as in the cabin to enhance user experiences. Through the third quarter, active safety, new business bookings totaled $2.5 billion and are expected to reach approximately $4 billion for the full year. And year-to-date user experience customer awards totaled just under $1 billion. Our SPS segment had new business bookings totaling $3.3 billion during the quarter, including over $500 million high-voltage awards, bringing our high-voltage electrification bookings to $1.2 billion year-to-date, on track to meet or exceed last year's record of $2 billion. Our recent customer awards reinforce our revenue outlook for 2022 and underscore our relevant portfolio aligned to key secular growth trends. Turning to our Advanced Safety and User Experience segment on slide 6. Third quarter revenues increased 9%, 11 points over market. The continued strong demand for active safety solutions drove product line revenue growth of 29%, lapping prior year record growth of 68% during the quarter. And as expected, the roll-off of revenues tied to our discontinued Displays business is a headwind in our user experience product line revenues. Our customers are increasingly looking for our support in developing solutions that include more compute power and high-speed connectivity, positioning us to leverage our systems design and validation knowledge, further expanding our competitive moat. Recent industry recognition of our unique capabilities includes our selection as a 2020 PACE Award finalist for Android infotainment compute platform. This revolutionary system will launch first on the Polestar and then on Volvo's popular XC40 model, powering the first Android infotainment system with native Google automotive services and real-time OTA, enabling a best-in-class in-cabin experience and underscoring Aptiv's leading agile solutions development capabilities and role as a partner of choice, serving as the best bridge between the automotive and tech industries. Turning to slide seven and vehicle safety. According to data recently released by the National Highway Traffic Safety Administration, fatality rates per 100 million miles driven in the United States are declining as active safety penetration increases from initial Level zero applications to Level one applications and beyond. Our investments in scalable approaches to advance safety solutions are not only seeding our next wave of growth, but they're also helping to drive the democratization of advanced safety systems globally. Aptiv's flexible satellite architecture approach has been a game-changer in the industry and has been selected by multiple OEMs to help them democratize active safety solutions across their multiple vehicle platforms. Turning to slide 8. Our recently announced 50-50 joint venture with Hyundai not only brings us closer to enabling tomorrow's self-driving vehicles, it also helps accelerate the development of today's advanced active safety solutions for our existing OEM customers. Hyundai's ability to advance the development of production-ready autonomous driving systems, both cost-effectively and at scale, along with its shared vision and timeline for application in the robo-taxi market, validate them as the right OEM partner for the commercial deployment of Level four systems beginning in 2022 and beyond. Aptiv is contributing its autonomous driving technology, intellectual property, and roughly 700 employees focused on the development of scalable Level four systems to the robo-taxi market. Hyundai is contributing $1.6 billion in cash at close, $400 million in vehicle engineering and R&D services, and access to intellectual property. Hyundai will be a close technical partner, strengthening Aptiv's existing foundation in automated driving solutions, while as I mentioned also enhancing Aptiv's competitive position in ADAS, Vehicle Connectivity, and Smart Vehicle Architecture. Aptiv will continue to provide commercial solutions, including compute platforms, perception systems, and power and data distribution solutions to the joint venture just as it does to other OEM customers while maintaining access to the joint venture's automated driving technology. We expect the transaction to close in the second quarter of 2020 and be accretive to both ASUX and Aptiv margins and cash flow. In summary, Aptiv's working to realize our mission of making the world most safe, green, and connected while also delivering outsized shareholder returns. Turning to slide nine. Our Signal & Power Solutions segment is focused on enabling the high-speed data and power distribution technologies that are required to support the advanced safe, green, and connected applications that our customers are demanding and are driving sustained growth in this segment. Revenues increased 4% during the quarter, 6 points over market, including the impact of the GM strike. Excluding the impact, revenues would have increased 8 points over market due to strong launch volumes, particularly in Europe and in China. High-voltage electrification revenues increased 30% in the quarter while non-auto revenues were up 34%. During the quarter, we were awarded several new business bookings, including the low-voltage distribution system on the new Rivian truck and SUV electric vehicle platforms and the high-voltage charging inlet for Porsche and Audi. These customer awards underscore our strengths in optimizing power and data distribution for complex vehicle architectures, as well as our ability to flawlessly serve customers through a focused strategy on quality and consistent launch execution. Turning to capital deployment on slide 10. As I previously highlighted, our acquisition of gabocom, which specializes in highly engineered high-quality cable management and protection solutions, expands our Engineered Components portfolio. Gabocom's product portfolio is highly complementary to HellermannTyton's and builds upon our existing telecom product offering, strengthening our capabilities in the most attractive areas of the telecom market and further diversifying our industrial end market revenues. With our track record of successfully integrating accretive bolt-on acquisitions, we're confident gabocom will enhance our cable management portfolio and accelerate revenue and earnings growth in our Engineered Components product line. So with that, I'll hand the call over to Joe to take us through the third quarter results and outlook for 2019.

Thanks, Kevin, and good morning, everyone. Starting with our third quarter revenue growth on slide 11. Revenues of $3.6 billion were up 6% adjusted in the quarter, totaling 8% growth over market, as vehicle production declined 2% in the quarter, as expected. Excluding acquisitions, organic growth was 4% or 6% growth over market. And as a reminder, the Winchester Interconnect acquisition closed in October 2018. Strong launch volumes and content gains globally were partially offset by the price of 1.7% in the quarter, the unfavorable impact of FX and commodities, and lower North American volume related to the GM strike, which Kevin mentioned earlier. From a regional perspective, North American revenues were flat on an adjusted basis, however up 5% in the quarter when excluding the GM strike. Europe revenues were up 14% adjusted, with 15 points of growth over market, driven by the uptick of several active safety and electrification programs. And lastly, our China adjusted growth was 6%, slightly ahead of expectations for our customers and significantly outpacing China vehicle production, down 7% in the quarter, resulting in 13 points of growth over market, driven by launch volume across the portfolio. Turning to slide 12. As Kevin indicated, third quarter operating income and EPS were above the high end of the guidance we provided back in July when excluding the impact of the GM strike. EBITDA and operating income of $587 million and $410 million respectively reflected volume growth in both segments and better-than-expected operating performance, offset by FX, commodity, and tariff headwinds, which on a combined basis were slightly better than expected, and the impact of the GM strike, which totaled $30 million in the quarter. Adjusted operating income margin was 11.5% in the quarter. However, when you adjust for the headwinds I just mentioned, margins would have expanded 10 basis points to 12.2%. Earnings per share of $1.27 was up 2% reported or 14% excluding those items. Moving to the segments on the next slide. For the quarter Advanced Safety & User Experience revenues grew 9%, or 11 points over market, driven by launches and robust growth in active safety, more than offsetting the impact of the GM strike, the planned roll-off of our audio display product line, and the launch cadence in user experience. Operating income performance before the impact of higher mobility investments included unfavorable price declines and higher engineering investments to support launch activity. Our mobility spend for the quarter totaled $47 million and we are tracking to a range of $180 million to $190 million for the year. Turning to Signal & Power Solutions on slide 14. Revenues were up 4% adjusted, representing 6% growth over market. Excluding acquisitions, organic growth was 2% or 4 points over market, resulting from strong growth in electrical distribution systems, particularly in Europe and China, driven by new platform launches and increased electrification, and double-digit growth in our CV and industrial product lines, partially offset by the unfavorable impact of the GM strike. EBITDA margin was 18.7%, up 20 basis points year-over-year and operating income margin was 13.5%, down 10 basis points reflecting benefits of volume growth and traction on our material manufacturing productivity and cost-reduction initiatives, partially offset by higher depreciation and amortization. Turning to slide 15, highlighting our fourth quarter and revised full year guidance, the volume disruption at GM has caused us to revise our vehicle production outlook lower for the remainder of the year. A detailed update on our production outlook by quarter is included in the appendix of today's presentation. At a global level, we now expect vehicle production to be down 7% in the fourth quarter and 5% for the full year, versus our prior outlook of down 5% and 4% respectively. As a result, we have reflected our outlook both with and without the impact from the GM strike. Starting with the fourth quarter on the left, including the strike impact, revenues are expected to be flat on an adjusted basis at the midpoint, which reflects a $180 million headwind from the strike in the fourth quarter. Fourth quarter operating income is expected to be in the range of $365 million to $385 million and includes a $105 million headwind related to the GM strike, including certain inefficiencies related to ramping up production to full run rate levels in early November. EPS is now expected to be in the range of $0.97 to $1.03. Moving to the full year, revenues are now expected to be in the range of $14.255 billion to $14.355 billion, up 3% at the midpoint. EBITDA and operating income are expected to be $2.252 billion and $1.53 billion at the midpoint respectively. And earnings per share are expected to be $4.65 at the midpoint, reflecting a $0.45 headwind from the GM strike. Operating cash flow is now expected to be $1.54 billion, reflecting lower EBITDA related to the strike. As a reminder, excluding the GM strike impact, the midpoint of our outlook remains unchanged from our prior guidance. Turning to the next slide. We thought it would be helpful to walk through the operating income year-over-year for the fourth quarter and full year 2019. In both cases, you see the contribution from volume growth, in addition to performance benefits derived from our annual manufacturing and material productivity initiatives that ramp over the course of the year, and further traction on our cost savings and reduction actions. FX, commodities, and tariffs have been a headwind throughout the year. And while price has been stable, there has been less of a headwind than expected, tracking below 2% for the full year. Again, excluding the strike, operating income for the year of $1.67 billion at the midpoint remains unchanged versus prior guidance. While our teams are aggressively working to mitigate the impact of the GM headwinds included in our fourth quarter outlook, we have reflected the probable downside in our revised fourth quarter and full year guidance. Turning to the next slide, as we assess 2020, our long-term financial strategy remains unchanged as we continue to position the company for better through cycle performance. 2019 year-to-date has demonstrated our ability to deliver on the strategy despite the challenging macro environment. Our ability to sustain strong revenue growth, even in a down production environment, demonstrates the work we've done to improve our through cycle resiliency, underscoring the value of our portfolio of relevant technologies, which more than offset the combination of lower vehicle production, unfavorable FX, and commodities. Additionally, our maniacal focus on ensuring our cost structure remains efficient positions us to grow earnings while investing in future growth, where we have the opportunity to significantly accelerate the commercialization of new platform solutions, including next-generation software, compute, and vehicle architecture systems. Despite near-term concerns about the challenging macro environment, we are confident in our ability to continue to outgrow the market. And while it is still early in the planning process, we think it's prudent to continue to plan for global light vehicle production to be a headwind in 2020. Based on current estimates, we expect to see an unfavorable year-over-year impact from foreign exchange, and we remain laser-focused on mitigating risk from global trade disputes and regulatory constraints. That said, there are a number of tailwinds as we head into 2020, including our portfolio alignment with key secular trends, enabling us to sustain above-market growth. We see further benefits of our productivity initiatives reflected in our financial performance, as commodity and tariff headwinds stabilize. And we will continue to effectively deploy capital in alignment with our strategy, with contributions coming from our recent portfolio enhancing transactions to benefit 2020. We will provide further insights on the year ahead over the coming months and give official 2020 guidance in late January when we report fourth quarter results.

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

Thank you. Chris, we’ll take our first question please.

Good morning everybody.

Good morning.

Hi, Emmanuel.

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

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

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

I would say there are two points to make. First, pricing can be inconsistent. Long-term, we're quite confident in the 2% figure. There will be quarters where it may be slightly lower or slightly higher, but that doesn't really signify anything significant. We are focused on maintaining that 2%, even though it can vary from quarter to quarter. Secondly, this year in particular, I believe pricing is generally favorable as volumes have decreased. We have specific clauses in our contracts requiring volumes to meet certain thresholds to continue receiving price reductions, and we've seen some advantages from that. Nonetheless, from a financial perspective, I still view the 2% as the appropriate target.

And Emmanuel, it's Kevin. ASUEX traditionally has higher price downs relative to our other segment, our SPS segment. So it's not unusual to have to Joe's point price downs in that range.

Okay. Thank you very much.

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

I would say that last Q3, the strike occurred a bit late, which had some impact, but overall volume on certain parts was a bit lower, which helped. We are making progress on our remediation process and meeting the milestones set. Our Korean operation is up and running and has received approval from two of the three customers that use it. We have started shipping from there, so we are on track for the year as expected. You may notice a slight increase in tariffs in Q4 due to some GM-related adjustments, but that is just for this quarter and won't affect our overall annual outlook. The remediation process is proceeding as planned.

Okay. I just want to clarify the impact of the strike from the third quarter to the fourth quarter, particularly why the decrementals are higher in the fourth quarter. You mentioned some restart costs, but I recall you saying that you kept operations running, so I'm trying to understand the reason behind the strong decrementals.

Yes. We didn't retain everyone as part of the plan, so we continued to pay those on temporary layoff. However, there are some costs associated with ramping them back to work, which includes overtime and some inefficiencies, especially since they have been out for over 40 days. Therefore, as we ramp up in the first half of November, our operations won't be as efficient as they were in August and early September. It takes some time to fully restart the system. However, I believe this is manageable within the quarter and is specifically related to the GM strike, as highlighted in the third quarter. Our overall performance initiatives in manufacturing and materials are on track with our expectations.

If I may add, taking a step back to provide some perspective, in our SPS business, we operate seven dedicated plants specifically for General Motors in North America. There was a period when those plants weren't operational. Additionally, there are about 21 or 22 other plants also serving General Motors in that region. Therefore, as production decreases significantly—particularly in the dedicated plants, and to some extent in the partial or shared plants—it feels like we are going through a relaunch of the program. You can't expect to operate and launch at the same efficiency as when a plant is normally running. This situation is a crucial part of the overall supply chain that needs to be revitalized and relaunched, which affects productivity and efficiency.

Okay. And Kevin, just maybe a quick clarification on the Hyundai JV. Like in the press release, you talked about how you can still work with OEMs for ADAS and autonomous vehicles. Is that...

Yes.

Is that with the license back from the JV? Or does this have to be sort of neo-independent work that Aptiv develops?

There are two main points to consider. First, it is a nonexclusive joint venture. Second, we have the commercial flexibility to purchase technology from the joint venture, and we also have the option to develop our own technology to sell to customers if that makes more financial sense.

Perfect. Thanks.

Thanks, Joe.

Good morning everybody.

Hey, Rod.

Hey, Rod.

Had a couple of questions. One is in your bridge for Q4 there's an acceleration in performance. Is that engineering recoveries? And is there anything we can extrapolate from that into 2020?

Engineering recoveries typically peak in the fourth quarter, and this trend holds true this year. From a broad perspective, we aim for net engineering growth of around 7% to 8% across the business. While I won't provide specifics about 2020, we've discussed our ongoing investments in the active safety sector due to promising booking opportunities. However, without detailing 2020, I don't anticipate any long-term changes in this regard.

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

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

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

Okay, that makes sense. Could you share how significant the headwind is from the roll-off of Displays in the user experience business? When is this expected to cycle through? You've mentioned a six to eight point growth over the market for 2022, indicating acceleration. Is this one of the main factors contributing to that acceleration?

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

Okay. Great. Thank you.

Thanks, Rod.

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

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

Yes. I believe it's important to mention that regarding the fourth quarter and at least the first half of next year, the expectation for a significant rebound or catch-up in vehicle production from General Motors, based on their schedules and previous launch timelines, makes it difficult to anticipate any near-term benefits, either in the fourth quarter or for the full year.

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

Yes, Chris, we are still working through our plans. At this stage, we won't go into specifics market-by-market, but we are considering the situation from a different angle. Let's imagine a scenario where we see growth in vehicle production and identify the markets involved. Currently, we perceive more challenges to vehicle production than opportunities. This may partly stem from our desire to ensure we have operational plans in place to manage any downward pressure on volumes. While that is one aspect, we also want to remain realistic and sensible about our economic position and where we are in the cycle. So, to Joe's point, while it might not be a 5% decline, we can come up with several reasons for a potential 3% decrease.

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

Yes, we expect the growth and content per vehicle to remain consistent. We haven't observed any significant changes. While there may be some variations related to upcoming product launches in certain quarters, we are waiting for the next launch to begin its ramp-up. This year, we’ve had several major launches, particularly in North America and Europe, and with strong launches planned for China in the latter half of the year. While there might be some fluctuations, overall, we are not seeing any changes in the broader strategic take rate or trends in content per vehicle.

Much appreciate it.

Thanks, Chris.

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

Yes. I think it's important to distinguish the details, and Joe can provide the specific numbers. Brian, we collaborated closely with General Motors to ensure that when they resolved the labor issue, we could quickly increase production. We retained a significant amount of labor costs to avoid the need for extensive training of new workers while relaunching production. This approach differed from the typical scenario where we would have seen a decline in vehicle production for a longer duration, which would have led us to let those workers go.

Yes. I think, Brian, we have been consistent. I believe decrementals are in the 25% to 35% range with some influence from regional mix, which we have worked against. However, if we take plants offline for months, the decremental impact will be greater. If we receive a forecast indicating a decline in 2020 vehicle production, that's something we need to address from a cost structure perspective. This means fewer shifts and fewer employees in the plants. So, when vehicle production decreases, we need to consider how to manage that 25% to 35% decremental impact. To Kevin's point, when an important customer is facing challenges, we are willing to work with them to ensure we are prepared for when they ramp back up. I believe we can return to full strength in about 10 days or less than two weeks. While this incurs some costs, we believe it was the right decision.

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

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

But in terms of cash availability, does this mean that the R&D investment losses have had no impact at all? Those are no longer coming from our current resources, or we'll clarify the accounting later, but conceptually are those expenses being covered by the cash contribution Hyundai has made, which is allowing us to free up cash?

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

Okay. Thanks.

Hi, good morning guys.

Hey Dan.

Hey. First, I don't mean to focus too much on the growth numbers for your high-growth products, which are still quite strong, but I noticed that for active safety and high-voltage electrification, the growth rate appears to have declined sequentially. Active safety grew by 29% compared to over 50% in the first half. You're slightly lowering your growth expectations from over 45% to around 40%. Similarly, high-voltage electrification saw a growth of 30% in the third quarter, down from 65% in the first half. Can you explain what contributed to that? Is it simply program delays? Additionally, I noticed your comments on China; while you've raised your industry outlook for the second half of the year, your growth there seems to be a bit lower. Could you provide some insight regarding that?

I will briefly address China and then return to the initial topic. As you noted, we experienced significant growth in Q3, and we expect that trend to continue. However, there are a few customer-specific delays in Q4 involving some of our top clients. While they are still launching on schedule, their launch volumes have decreased slightly compared to the original forecast. The fact that they are launching on time is what matters most to us. These changes in their forecasts are more reflective of their individual situations rather than indicating a broader market trend. Regarding the growth rates of our product lines, they remain strong and I would argue they are industry-leading. We may experience some fluctuations due to launch timings, which I've mentioned before. Consequently, there will be some variability in the quarter, but our long-term growth projections over the next couple of years, following product launches, remain unchanged.

Yes, I would like to make another comment. There is the law of large numbers. We have an active safety business that has $1.3 billion in revenues compared to under $600 million just two years ago. Continuing to grow at over 60% becomes increasingly challenging due to the nature of the numbers. I believe it's reasonable to assume, as Joe pointed out, that there will be some volatility based on launches. However, as we reach larger figures, we will not maintain the same growth rates on those product lines.

And the active safety, I want to add, Kevin, has a forecasting growth rate for 2022 of 25%.

Yes.

Yes.

I'm sure you'll welcome a growth of over 30% every day. Thank you. I also wanted to follow up on the Hyundai situation. You received a cash infusion of $1.6 billion, but you've been spending around $200 million each year. This $1.6 billion should sustain you for several years, which suggests a notable increase in spending. Did you feel an urgent need to accelerate commercialization? Was there an aspect that wasn't progressing quickly enough that prompted you to significantly boost your spending? I'd appreciate some insight on this.

I apologize for any misunderstanding. I did not mean to suggest that we needed to double our spending or that we would increase it significantly. As we collaborate with our joint venture partner and finalize our plans, we will develop a more detailed strategy. The joint venture with Hyundai provides us with an ideal partner. Over the past few years, we explored discussions with numerous potential partners, but we believe Hyundai aligns perfectly with our vehicle and platform strategy. Their approach to the timing of product introduction, particularly in the robo-taxi market in 2022 and for broader OEM applications, fits our vision without exclusivity. We maintain the flexibility to collaborate with other OEM partners using technology from the joint venture or through separate development. We can continue to sell technology to the joint venture while having access to it ourselves. Overall, we see Hyundai as the perfect partner and the joint venture structure as well-suited for enhancing our automated driving capabilities. Additionally, their commitment of $1.6 billion in cash at closing, without any constraints on technology or monetization, presents us with an exceptional opportunity to advance our ADAS vehicle connectivity and Smart Vehicle Architecture initiatives more rapidly due to the joint venture's structure.

Let me rephrase my question. Did you have a specific goal for commercialization internally, and when you were establishing this joint venture, did you adjust that timeline for commercialization?

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

Got it. Thank you very much. Appreciate it.

Thank you. Excuse me, thank you. Good morning.

Good morning.

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

I'm not sure anything is changing in the ramp. If I understand your question, we operate in areas where content per vehicle is growing much faster than vehicle production, which applies to both of our segments ASUEX and SPS. We will continue to benefit from larger macro trends towards electrification, active safety, and vehicle connectivity, which will translate to technologies like our multi-domain controllers, Smart Vehicle Architecture, high-voltage connectors, and cable solutions. We feel that we remain well positioned.

I'm sorry to interrupt, but I was trying to find out about the specific technologies that will be increasing next year that may not currently be in the portfolio. You have a significant backlog of business, much of which relies on next-generation technology and techniques needed for production. I'm trying to understand what's coming up.

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

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

No, we're not seeing anything from an overall industry standpoint. We had a couple of customers shift some launches, but that's not de-specking. So we haven't seen anything to date.

Great. Thank you very much.

Good morning guys. And believe it or not I just had a follow-up on the Hyundai JV. And so it sounds like there's $200 million roughly of costs that comes out and gets put into the JV. There's no associated revenue. Is that correct? Right?

Yes.

Got it. Okay. And when you think about what you guys did with Delphi Tech in the spin and in this structure, you seem to be sort of masters of portfolio management. Is there anything else that you can think of in your business that is maybe in the works or that you would think of creating another structure for that may be advantageous to value to the total company?

No. John, it's Kevin. And just nothing at this point. Nothing at this point in time. However, as you know we're always focused on evaluating our portfolio and identifying ways where we can better serve our customers and optimize shareholder value, but nothing at this point in time.

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

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

Okay, great. And thank you very much.

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