Aptiv PLC (APTV) — Q2 2020 Earnings Call Transcript

Thank you, Shelby. Good morning. And thank you to everyone for joining Aptiv’s second quarter 2020 earnings conference call. To follow along with today’s presentation, our slides can be found at ir.aptiv.com. Today’s review of our actual financials excludes restructuring and other special items and will address the continuing operations of Aptiv. The reconciliation between GAAP and non-GAAP measures for our Q2 financials 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 reflect Aptiv’s current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and impact on the global economy. Joining us today will be Kevin Clark, Aptiv’s President and CEO; and Joe Massaro, Senior Vice President and CFO. Kevin will provide a strategic update on the business and then Joe will cover the financial results in more detail. With that, I would like to turn the call over to Kevin Clark.

Thank you, Elena. Good morning, everyone. Beginning on slide three, I’d like to spend a minute providing an update on how Aptiv is responding and contributing to the fight against COVID-19. We’ve concentrated our efforts on ensuring the health and safety of our people, the communities where they live and where we operate, as well as the safe and efficient restart of our operations, so that we can flawlessly serve our customers around the world. At the same time, we’ve taken incremental actions to preserve our financial strength and enhance our competitive position as we emerge from this crisis. We’re proud to be one of the global giving partners that support hospitals and clinics treating COVID patients around the world. Our Aptiv team members have gone the extra mile, delivering urgent health care supplies and volunteering their time and personal resources to help stop the spread of the coronavirus in their local communities. Our Safe Start protocols, the additional safety measures that we put in place at the very start of the pandemic and have been shared with customers, suppliers, and government agencies across the globe have allowed for the safe and successful restart of each of our facilities worldwide, allowing us to effectively ramp up operations. I’m proud of how well we performed in these challenging times, and I’m grateful for our team’s passion and sense of urgency, ensuring our efforts are making a real difference. Moving to slide four, as expected, the second quarter proved to be challenging with COVID-related shutdowns driving unprecedented declines in vehicle production in both North America and Europe. Despite the depth of declines in April and the slow phasing of restart operations beginning in May, a rebound of vehicle production in China, combined with solid operating execution, contributed to better-than-expected financial results. Global vehicle production declined 54%, while our revenues declined 43% to almost $2 billion, 11 points favorable to the underlying vehicle production market. EBITDA and operating income losses totaled $49 million and $229 million, respectively, and earnings per share was a loss of $1.10. Looking at each geographic region, the economy in China continued to improve, resulting in better-than-expected bounce back in vehicle production, which was up 6%. Vehicle production declined 68% in North America and 62% in Europe, reflecting the complete shutdown in both regions during the month of April and the slow restart of operations beginning in May. While retail demand in North America and Europe has improved, production schedules remained somewhat volatile, primarily the result of periodic supply chain disruptions, principally in Mexico due to COVID-19. And visibility into the pace of recovery in the second half of the year remains low, which is reflected in our outlook for vehicle production to be down 10% to 15% versus the same period of the prior year. The deliberate actions we’ve taken to strengthen our business model over the last few years, including portfolio changes and cost structure initiatives have positioned us to respond and adapt in this much more challenging environment. Turning to slide five. Despite the challenging macro environment, the proactive steps we’ve taken to protect our employees, to deliver for our customers, and enhance our financial strength have put us in a strong position to continue executing our strategy. As it stands today, we’re fully operational with each of our 126 major manufacturing sites up and running, all employing our standardized safety protocols, allowing us to operate across our global network at roughly 85% of our normalized capacity and even higher at some of our manufacturing locations. As our facilities prepare to restart operations, we have the resources in place to safely ramp up production once we receive the necessary government approvals in alignment with customer production schedules, which were, as I mentioned, very volatile during the quarter. I’m happy to say that as a result of the strong coordination and collaboration with our supply chain partners, we had zero customer disruptions during our restart of operations. With the learnings from the successful restart of production, we’ve gained meaningful experience in operating safely with COVID-19, which is critical. We believe that the residual impacts will remain with us for some time, resulting in lower production volumes and continued operational inefficiencies. And as such, we’re not expecting a rapid recovery and continue to be cautious as we plan for 2021. However, the demand for our industry-leading portfolio of advanced technology solutions aligned to the safe, green, and connected megatrends remains as strong as ever, as evidenced by the increase in program launch volumes year-to-date. As a result, we continue to make the necessary investment to support the strong pipeline of new business pursuits and new program launches in 2020 and beyond. Since the COVID-19 outbreak earlier this year, our teams have been working collaboratively, focusing on the health and well-being of our employees and identifying unique value-added solutions for our customers. To do so, we have leveraged technology to do more with digital tools. By upgrading our data center hardware and network connectivity, we are able to significantly enhance the scale and the quality of our employee conferencing and collaboration capabilities, keeping our workforce connected and operating more efficiently, allowing for the uninterrupted execution of our strategic imperatives. In summary, we continue to build on our strong track record of execution and innovation and remain focused on delivering for our customers while making Aptiv even more resilient. Turning to slide six, new business bookings totaled $5.9 billion year-to-date, reflecting the impact of challenges related to operating with COVID-19 over the last six months. As the situation stabilizes, we expect a more normalized run rate of new business awards to occur during the second half of this year. Our Advanced Safety & User Experience segment booked approximately $1 billion in the first half of the year, as a handful of customer awards have been pushed to the second half of the year. Additionally, our Signal & Power solutions segment had new business bookings totaling roughly $5 billion year-to-date, including $700 million of high-voltage electrification awards driven by the rapidly increasing demand for electrified vehicle platforms, the result of more stringent CO2 regulations and increasing consumer demand. In summary, our new business bookings over the last several years reinforce our ability to sustain strong above-market growth well into the future, underscoring the strength of our portfolio of market-relevant technologies aligned to the safe, green, and connected megatrends. Turning to slide seven, our competitive mode is expanding just as the total addressable market in both our core automotive and new and adjacent markets continues to grow. Our core markets are expected to increase over 50% in the next five years, reaching $120 billion, with the most significant portion of that growth coming from Aptiv’s safety and high-voltage electrification, two markets where we have a very strong competitive position. In addition, our traditional strengths in areas such as central compute, engineered components, and vehicle architecture enable us to unlock incremental opportunities in adjacent markets. Our capabilities in software development and data analytics position us well for opportunities in new markets, including connected services and autonomous driving, which brings new business models with recurring higher-margin revenue streams. The opportunities in our core new and adjacent markets position us for more profitable and sustainable growth in 2025 and well beyond. Turning to slide eight, our strong track record of new business bookings and revenue growth over market are proof points that our portfolio strategy is well-aligned to the areas of growth within our industry. As a result, we continue to fully fund investments in several strategic growth initiatives, including advanced ADAS systems, high-voltage electrification, and vehicle connectivity, all markets that are poised for continued robust growth in the years ahead. Highlighting a few examples, in Advanced Safety & User Experience, our unique approach to compute centralization and satellite sensors has been a game changer for the industry, with five OEMs launching our first in industry scalable ADAS platform over the next 18 months. We secured $8 billion of lifetime bookings on the satellite architecture platform to date, which will be deployed across 10 million vehicles over the next five years. More importantly, our Gen 2 platform will increase our lead with the deployment of next-generation perception systems, the extensive use of AI, and a higher level of software abstraction that will deliver even more consumer value while enabling new business models for Aptiv. In our Signal & Power Solutions segment, we’re leveraging our industry-leading position in vehicle architecture to become the partner of choice for both our traditional OEM and emerging customers planning to launch electrified platforms. By incorporating our portfolio of high-voltage electrification solutions, including conductors, connectors, electrical sensors, and cable management systems, we’re able to dramatically reduce the weight and physical size of the electrical distribution system by up to 40%, thereby reducing costs. Lastly, our customers are looking for more intelligent, connected, and integrated solutions to detect and address warranty issues faster and resolve them much more efficiently. We're currently working with one global OEM to meet its goal of connecting 100% of all new vehicles with our connected edge hardware and software application, enabling a much higher level of customer satisfaction and significantly reduced warranty expenses. Turning to slide nine, our ability to leverage our unique full-stack systems capabilities is helping our customers realize their future technology roadmaps. They understand the changes in vehicle architecture are critical to delivering the feature-rich, highly automated vehicles they need in the future. As a result, our customers are converging around new architectures to deliver the higher, more contented, and safer connected vehicles of the future, where we know how to provide value. Thanks to our unique position as the only provider of both the brain and the nervous system of the vehicle, we serve as a strong collaboration partner for increasingly complex architectures on the path to SVA, with industry-leading capabilities in power data, compute, perception systems, software, and sensor fusion. Our customers recognize Aptiv as a technology partner capable of both the design and manufacturing of advanced hardware fully integrated into the most complex vehicle systems, which combined with our differentiated and modularized software capabilities creates value for our customers at every level of the stack, accelerating their development of the safe, green, and connected features consumers want with the proven automotive-grade systems that they can trust. Smart Vehicle Architecture is a scalable architecture solution that lowers the total cost of ownership for the OEM while also unlocking the opportunity for Aptiv to capture more value in the vehicle. I'll wrap up on slide 10 before I hand the call over to Joe. Despite the challenges we faced in the last six months, we remain laser-focused on continuing our track record of outperformance and long-term value creation as we execute our strategy and deliver on our vision for the company. The vision is the logical extension of our business strategy, leveraging our unique position at the intersection of the safe, green, and connected megatrends that are transforming our industry, allowing us to outperform in any environment. Through the rigorous execution of our strategy, we’ve been creating a more sustainable business defined by improved revenue diversification across regions, customers, vehicle platforms, and end markets, accelerated and more predictable growth profile, increased profitability and cash flow, growing sales faster than costs and converting more income to cash with significant upside from disciplined capital deployment, all of which results in meaningful shareholder returns. With that, I’ll hand the call over to Joe to take us through the second quarter results in more detail.

Thanks, Kevin. And good morning, everyone. Starting with a recap of the second quarter financials on slide 11. As Kevin highlighted earlier, it was another difficult quarter for Aptiv in the industry. At the time of our last earnings call, China was starting to come back online, and customers had shut down operations in Europe and North America, which lasted well into May. Despite the extent of the shutdown, we had strong execution across our businesses as we learned to operate safely in a COVID-19 environment. Revenues of $2 billion were down 43% as vehicle production declined 54%. Despite the sudden and severe COVID-related declines, we worked hard to achieve near breakeven levels in the second quarter. As a result, adjusted EBITDA was a loss of $49 million, better than we planned, attributed to strong cost management with austerity measures of approximately $135 million and better manufacturing performance as we restarted our operations, as well as slightly higher volumes. Adjusted earnings per share in the quarter was negative $1.10 and assumes the convertible preferred shares issued last month were treated as if they were outstanding in the weighted average share count. Lastly, operating cash flow was negative $106 million, including working capital usage of only $107 million, a testament to our team’s ability to efficiently manage working capital as production ramped up in June. Looking at second quarter revenues in more detail on slide 12, adjusted growth was down 43%, reflecting 11 points of growth over the market. Despite volumes declining by $1.5 billion, we saw strong growth over the market in every region. Price reductions were approximately 1.5% and unfavorable foreign exchange in commodities totaled approximately $80 million. Our regional performance reflects the timing and pace of restart activities around the world. Starting with North America, vehicle production declined 68% in the quarter. Our operations resumed later in May, about two weeks after Europe, and we saw a favorable platform mix as OEMs prioritized higher contented vehicles as they began rebuilding inventory. In Europe, we continued the trend of strong double-digit market outgrowth, driven by continued interest in active safety and high-voltage electrification platforms. Lastly, in China, our revenues increased 14%, outpacing the market by 8 points, driven by a significant increase in new launches, which we expect to stabilize in the back half of the year. Moving to the segments on the next slide. Advanced Safety & User Experience revenues declined 47% in the quarter, reflecting 7 points of growth over market without growth across all product lines. AS and UX EBITDA declined 129%, driven primarily by lower volumes. For compatibility purposes, the automated driving spend that is now part of the active Hyundai joint venture is excluded from the prior year results. As Kevin mentioned, we are seeing some COVID-19 effects and OEM launch schedules with certain launches pushed into late 2020 or early 2021. Turning to Signal & Power Solutions, revenues were down 42%, reflecting 12 points of growth over market, driven by the unfavorable impact of customer shutdowns in the quarter, partially offset by market outperformance in our high-voltage electrification and engineered components product lines, as well as better performance in our industrial end markets, some of which continued to operate as essential businesses during the shutdown. EBITDA in the segment declined approximately 100%, primarily driven by lower volumes and inefficiencies associated with the shutdown and subsequent restart. Turning to the next slide, I’ll provide some further perspective on how Aptiv's flexible operating model is allowing us to manage through the current environment. Starting with more diversified revenue growth. Our disciplined growth strategy has allowed us to shift more of our revenues to faster-growing areas within automotive, such as higher contented trucks and SUVs and active safety and high-voltage electrification solutions where penetration is driving significant growth. While we continue to expand our capabilities and reach in commercial vehicles and diversified end markets, all of which has allowed us to sustain strong secular growth over the market. We also remain laser-focused on optimizing our cost structure and redeploying those savings into higher return investments for growth. As previously discussed, over the last several years, we’ve worked hard to lower our overall costs, improve efficiency, and lower our breakeven levels, as evidenced by our second quarter performance, which includes the additional costs associated with operating with COVID-19. We will continue to rationalize our fixed costs in light of the lower production environment as we head into 2021 and focus our productivity initiatives in areas that structurally lower our costs, improve service levels, and enhance the flexibility of our business model to position the company for better through-cycle performance. Our financial framework includes reinvestment in our businesses, both organically and inorganically, and further positions the portfolio for accelerated growth and margin expansion, allowing us to deliver flawlessly for customers while enhancing our through-cycle resiliency. Our continued focus on long-term shareholder value ensures we make the appropriate trade-off between short-term goals and executing our long-term strategy. As we navigate the second half of the year, we will continue to utilize our safety protocols to ensure we protect our employees and deliver for our customers. We invest in our growth businesses with high ROI capital expenditure investments, largely to support new customer wins and expansion of key product lines. We will be disciplined acquirers by increasing scale and leverage in our Engineered Components businesses and enhancing our auto tech capabilities in software, artificial intelligence, machine learning, and systems engineering. The consistent execution of our strategy, even in the face of today’s unprecedented challenges, is a major differentiator for Aptiv and an important lever for shareholder value generation going forward. Turning to the next slide and the outlook for vehicle production in the second half, while operations have resumed, customer schedules remain very fluid. We have tightened our outlook for vehicle production this year to a decline of approximately 25%, assuming a slow ramp-up and vehicle production declines in every region in the second half. Starting with North America. In the second quarter, we safely returned 55,000 employees, representing 85% of our labor force with minimal incidence of infections since reopening. That’s a testament to the outstanding job our team has done, putting the right measures in place to safely restart operations and safeguard employees. However, the threat of plant closures and potential customer supply chain disruptions is something we continue to watch closely, as new hotspots arise across the US and Mexico. In Europe, we saw similar progress. Recovery has been more gradual as stimulus initiatives have helped stabilize demand and accelerate the penetration of electrified vehicles. And while China production levels have increased, inventories remain elevated, and customers are adjusting schedules accordingly. The second half outlook is highly variable as the impact on near-term consumer demand and the risk of additional COVID-related disruptions is reflected in the third and fourth quarter schedules we are seeing from our customers. As a result, we expect 2020 vehicle production to be around 70 million units globally. If we had to snap the chalk line today, we would expect modest end market growth in 2021, effectively adjusting for the shutdowns in the first half of 2020 taking global vehicle production to approximately 77 million to 78 million units in 2021. However, despite the near-term end market weakness, the long-term secular growth drivers remain intact. While growth over market can be choppy on a quarterly basis, we expect full-year outgrowth in 2020 in the range of six to eight points, as previously communicated. In summary, our ability to optimize how we operate in a weak macro environment will allow us to continue to outperform in 2020 and beyond. Turning to slide 16. Beginning in Q1, as we saw the impact of COVID-19 shutdowns on our operations, we took decisive actions to enhance our financial flexibility. The austerity measures we implemented in the first quarter totaled over $600 million in annualized cash savings, which helped preserve our liquidity and enhance our financial health during the unprecedented volume declines in the first half of the year. In June, our $2.3 billion equity offering helped to reinforce our financial flexibility against any further business disruptions during the recovery, while allowing us to continue to invest for growth and take advantage of additional organic and inorganic investment opportunities, and we subsequently paid down our revolver in full. As a result, we ended the quarter with $1.9 billion in cash on hand and $4.1 billion of total liquidity. This, coupled with the actions we have taken in the last few years to strengthen our capital structure, has allowed us to keep a well-laddered debt maturity profile and extend the weighted average tenor on our debt. In summary, the proactive steps we have taken to protect our employees, deliver for our customers, reduce expenses, conserve capital, and preserve optionality have put us on an even stronger footing as we emerge from the current crisis. With that, I’d like to hand the call back to Kevin for his closing remarks.

Thank you, Joe. Let me wrap up on slide 17 before opening it up for Q&A. As I mentioned earlier, the second quarter proved very challenging as the industry met unprecedented declines in vehicle production in both North America and in Europe. With the successful restart of operations, we believe our robust business model and the solid execution of our strategy have validated our through-cycle resiliency and have differentiated Aptiv, such that even in the most difficult of times, we’re capable of capitalizing on the safe, green, and connected megatrends that are driving increased vehicle content and translating that capability into market share gains. While the near-term outlook for underlying market trends and overall end market demand for new vehicles remains uncertain, the actions we’ve taken to enhance our financial flexibility during the crisis will drive continued financial outperformance. We’re confident that our disciplined approach to capital allocation will lead to additional value creation opportunities for Aptiv and drive increased shareholder returns. Our confidence in our ability to deliver sustainable value creation is underpinned by the dedication and commitment of our people, which is our greatest asset. I’d like to reiterate how proud I am of our 160,000 team members, who through all the recent challenges have made significant personal sacrifices while continuing to think and act like owners so that Aptiv could operate safely and deliver for our customers and for our shareholders. Looking ahead, we’re confident we will emerge from this crisis more unified in our mission in a stronger competitive position and financially even more resilient. With that, let’s open up the line for Q&A.

Hi. Good morning, everybody.

Morning.

Can you talk a little bit about the austerity measures and the COVID cost, I think, about net $100 million savings in Q2? How much of that is sustained into the second half? And if you could give us any sense of what we should be modeling in terms of incremental margins on the revenue recovery from the second quarter?

Yeah, Dan. It's Joe. You’re right. It’s about net $100. So COVID was about, call it round numbers, a little more than 30 in the quarter. And that’s the direct costs. So the cost of PPE and the like, I think it’s fair to assume those continue for a period of time in theory, as we brought back more employees. We’re currently roughly at 85%. That would go up. That’s obviously variable. There’s an element of that that's variable to the employee number. The austerity measures, Q2 was a fairly significant effort from an austerity perspective. That $135 million with a lot of people out on furlough and TLO obviously, that’s harder to sustain or not sustainable once you get up to 85% production. So those costs have started coming back into the business. The way I would think about decrementals at this point, I’d expect the back half of the year to look more like Q1, maybe a little more favorable to Q1 because Q1 had a couple of points in there as related to the China shutdown. But I’d be thinking more of sort of a Q1 decremental than a Q2, maybe a couple of points better, if we don’t experience shutdowns.

Okay. Great. And just longer term, we are seeing EV and plug-in hybrid adoption ramp-up in 2020. How does that make you feel about your high-voltage targets going out a couple of years?

Yeah, Dan, I’ll make a comment on that. Listen, we feel like we’re extremely well-positioned from a portfolio standpoint. Principally in that SPS segment to benefit from the drive towards more high voltage, whether it be battery electric vehicle or plug-in hybrid. When you look at industry projections as it relates to high-voltage electrification out to 2025, let's call it 25% of vehicle production and well beyond that in 2030. We feel as though we’re extremely well-positioned, both based on the strength of our existing high-voltage product portfolio, as well as our competitive position in the low voltage market, quite frankly, right. We’re on roughly one of every three to four vehicles globally. So we’re dealing with those customers, those traditional OEMs today and have significant opportunities with the emerging OEMs in the future.

Thanks. Good morning, everyone.

Good morning.

Hey, Joe.

Maybe just a follow-up on the austerity measures, as you sort of evaluate how you do business, and Kevin, you gave a whole bunch of examples like is - do you see an opportunity overtime for some of those to stick or is there an opportunity for you to maybe take additional action to make some of those temporary costs more permanent as you, sort of, re-evaluate what the global environment looks like over the next couple of years?

Yeah, maybe I’ll start, Joe, and then Joe can certainly chime in. I think we should start with over the last several years, as you all know, we’ve been very focused on optimizing our cost structure. So over the past three or four years, we’ve taken out $350 million to $400 million of overhead costs out of our cost structure. So in reality, as you look at how we’ve operated historically, there wasn’t a whole lot of extra cost left to reduce. Having said that, given the lower volume outlook for the current year and as we look at 2021 relative to our perspective a year or so ago, there’s opportunity from a footprint and resourcing standpoint. Obviously, we’re evaluating our overall manufacturing and engineering footprint. How we operate it. So there is some opportunity there. Having said that, at least for the foreseeable future there’s going to be incremental costs related to keeping our employees safe and operating with the safety protocols. So there’s - again, there's some opportunity to operate more efficiently. I’m not sure we would tell you that we learned anything new going through this process. I would say, we recognize that vehicle production is going to be operating at a lower level. Therefore, there are actions we need to take to reduce our overall cost structure. Joe, is there anything...

I think that's well said, Joe. The only thing I’d add is, I think the discipline and I’ll sort of call the muscle within the organization to manage costs, that – that’s the same discipline of muscle we used to take the 350. It’s the same discipline we use to manage Q2 and the austerity measures. We’ll obviously continue to apply that to a lower volume scenario. They won’t necessarily be the same cost, but I’m confident the organization is very good at executing these types of things I think as Q2 shows.

Yes. I think the put - the comment Joe made about how well we operated in the second quarter, just to put it in perspective and provide you with a little bit more context. Through Q2, roughly 95% of our salaried workforce was working from home and when you look at it on average - on average, roughly 64% of our global hourly workforce was on TLO. So in periods of time where that was well north of 80%. And so the ability to ramp down production and then ramp back up production to be operating, as we talked about, at roughly 85% of manufacturing normalized capacity, to do that manage the supply chain and have zero customer interruptions is really a testament to how strong the team managed and operated during the quarter.

Yes. Very impressive. Kevin, maybe just one more. During the quarter, I guess, really in the past month or so, we saw another high-profile automaker, make a big announcement about domain compute and new architecture. And it seems like most of the luxury players are now there and recognizing that is the future. It's clearly something you've talked about in the past. Are those conversations now starting to migrate down to some of the mass volume brands? Is cost still an issue and how scalable is it? Do you really think from sort of the high end to the low end and how do you see that market evolving?

Yes. No. I think, Joe, to your point, there's a lot of momentum, really recognition that vehicle architecture needs to be reevaluated and the approach to how vehicles are architected and engineered needs to be changed. I guess, as we've communicated before, we're in discussions with, I don't know, 10 to 12 OEMs regarding smart vehicle architecture, our initiative programs they're working. You're right, there's more - or has been more momentum with the luxury OEMs, I think more recently you are seeing more momentum with those who also operate in the mass market. We feel as though we have the solution that scales from what we can consider more traditional mass market vehicles up to the luxury segment. As we've disclosed previously, we have two advanced development programs or two programs, two advanced development programs with OEMs. There are actually three total programs that we believe learning’s from our perspective and from the OEM perspective. You'll see more adoption of the SVA approach across a broader mix of OEMs. And quite frankly, it's that whole - it's that trend of domain centralization that you're seeing in ADAS, that you're seeing in integrated cockpit controllers that you're really seeing across the entire vehicle. And our second generation ADAS solution, you'll see a significant step function move forward as it relates to how that system is architected, extraction of software from hardware and scalability of the system. So a lot of momentum.

Thank you. Just drill into some of the drivers over growth in market, in particular, the interplay between new product launches and then mix impacts. So should we kind of think forward, first of all, the 10% growth over market in this quarter, then kind of roll forward to the 80-ish percent for the next couple of years. A few questions. Kind of one, to the extent that OEMs defer programs, how does that factor in? Second, if the programs when they launched are smaller than when you put together your revenue forecast how much of a headwind could that be? And then slide under the more positive side, what is the impact of the option mix and take rates on your organic growth number? And are you seeing any evidence, certainly, when we talk to other suppliers, we'll hear things like big screens ADAS penetrating into all, but the most stripped-down version of mass market cars. So is that a tailwind?

Yes, Brian, it's Joe. I'll begin, and then Kevin can add his thoughts. To start, we have previously mentioned that production growth may be uneven over the next few quarters due to shutdowns and restarts. However, we remain confident in our long-term growth projection of 6% to 8%. Looking at this quarter, various factors contributed to our positive performance. In North America, we prioritized the reintroduction of higher-content trucks and SUVs, which beneficially affected our production mix. I anticipate this will normalize, but we will continue to have strong content on those platforms. In Europe, we experienced consistent strength in active safety and high-voltage electrification, similar to Q1. China benefited from strong launch activities this quarter, although we expect that to taper off in the latter half of the year, especially given the strong launch activities from last year. Regarding lower vehicle production, we've repeatedly been asked about it over the past two years, yet we have not observed significant elasticity in our growth compared to vehicle production. We have largely stayed within our forecast range and occasionally performed better. We do not see any changes to this trend, even with reduced vehicle production. While customer delays and lower launch volumes could affect total revenue, we have not seen that kind of elasticity so far. Additionally, we agree that active safety technologies are increasingly being integrated into lower-end models.

I’d like to add a few points. While we haven't noticed any significant issues, there have been discussions about delays in active safety, particularly in the Level 3 category, with revenues anticipated for 2025 and later. Active safety products help manufacturers sell, especially with the supportive trend of NCAP standards in Europe and the AEB commitment in North America, which is increasing consumer demand for these features. Regarding high-voltage systems, despite the industry's cost pressures, we’ve observed a stronger commitment to high-voltage solutions and growing demand from manufacturers and consumers as they focus on reducing costs, improving battery prices, and enhancing vehicle performance. Lastly, in terms of vehicle connectivity, the industry is incurring $50 billion annually on warranty costs, and one of the main solutions to this issue is through over-the-air updates and enhanced connectivity, which can significantly lower those costs. We’ve seen substantial progress in this area from manufacturers recently and expect that trend to continue.

Yes, Brian, also it's Joe. I'll start with the recent markets, the non-auto and CV. Again, small numbers, relatively speaking, but has actually held up quite well. As I mentioned in my prepared remarks, a number of those operations were designated essential businesses and remained open and have so therefore, didn't necessarily need to reopen or come back and have maintained themselves pretty well. I think you're – that part of the business, we're looking to – so to be flattish to prior year to down low single digits, depending on the market, depending on the product. So holding up on a relative basis quite well. I think as it relates to the ongoing or sort of the more software-like revenue streams, obviously, that's something we're continuing to develop and to work on. There's nothing sort of significant of that nature in the actual results today.

Yes, good morning. Thanks very much for taking the question.

Good morning, Mark.

I was hoping to better understand your comment about potential production in 2021 and I think you talked about 77 million to 78 million units as a current planning assumption. Can you provide more context about how Aptiv is coming with that number? Is that primarily based on what your customers are telling you in terms of their forecast or is that more based on Aptiv's own assessments of the market and the third-party estimates and more things? Thank you.

It's really - it's a mix of both, right? It is July, right? So there is a fair amount of time between now and the beginning of 2021. But just based on what we're seeing today in front of us based on dialogue with customers, looking at kind of the macro picture in a view that we're going to be dealing with COVID for some period of time, that you're going to have some flare-ups of COVID in North America as well as Europe, that you look at GDP growth and unemployment, as we head into the back half of the year. A portion of the strength in Q2, and – early Q3 production is about rebuilding inventory levels that – all that's factored into our outlook, our early outlook for 2021 vehicle production.

Okay. That's helpful. And then the company mentioned in the prepared comments that part of the use of capital from the recent equity raise could involve inorganic opportunities, so wanted to better understand how Aptiv’s M&A landscape maybe and what areas Aptiv may be looking for inorganic investments? Thank you.

Yeah, it's Joe. I think this is very consistent with where we left off in 2019. The bulk of the activity within SPS is always about being close to the ground for opportunities within ASUX, but given the nature of that space and how we’ve advanced in product development, there are fewer opportunities. Most of SPS activity is around the Engineered Components businesses, including the HellermannTyton connection system and bolt-ons for Winchester and the non-auto interconnect business. As expected, we've seen some processes start back up, typically domestic and smaller ones at this point. This is partly due to travel restrictions. We do have a few processes that resumed during the quarter. As I mentioned during the equity raise, several management presentations were cancelled around February and March, and we expected those to restart. Many deals in engineered components are often owned by private equity, so they will be for sale at some point. There are opportunities depending on end markets, and if we can gain enough information and visibility around price discovery, we anticipate seeing some of those deals return in the latter half of the year.

Great. Good morning. Thank you for taking my question.

Good morning.

Just wanted to dive in a bit into the growth over market for signal and power. As we think about it going forward, in New York City, at least, the skies have never been clearer for as long as I've lived here. And it's hard to imagine that we go backwards here. So - and then also, there's a proposal in California to accelerate EV adoption amongst Lyft and Uber. Lyft has promised to go electric by 2030. How do you think about the upside potential here for Signal & Power as we move forward? Have you seen any pickup? Or is it a bit muted just given that we're in a COVID environment and everyone's just trying to get through first before pushing ahead with such initiatives?

Day to day, right? I think the industry we think the industry is trying to push really and get back on track. But starting, quite frankly, starting last year - or quite frankly, the last couple of years, incremental focus on high-voltage electrification as a propulsion solution, most of that coming out of Europe and out of Asia Pacific. The one item that maybe COVID has helped accelerate is the cost pressure associated with developing solutions, Ice solutions as well as electrified solutions. And it appears to be more OEMs seem to be just given capital constraint, more committed on how do we, focus on the development of technology in one area versus two areas. From a cost-effective - from a cost management or capital management standpoint which we believe will ultimately translate into continued acceleration of high-voltage adoption. When you look at what's being talked about, at least as it relates to the election here in the US and the platforms of some of the candidates clearly more support of electrified vehicles whether that's funding of technology or incentives for consumers to buy electrified vehicles. And then we tell you the last tailwind related to high-voltage is, quite frankly, consumer demand. I mean, we did a survey recently. Survey respondents over half said they would entertain buying a high-voltage vehicle and 25% of the respondents said that they would buy a high-voltage or battery electric vehicle as their next vehicle purchase. So as you can imagine, that's quite a switch from three years ago. So our view is high-voltage is a real strong tailwind for our SPS segment. And as Joe has taken you through the numbers in the past, content in a high-voltage vehicle is quite that on a traditional internal combustion engine vehicle. So it's unit and content opportunity.

Okay. And just maybe a follow-up. What would have to happen for S&PS to grow, not mid-single digits, but high single-digits, say, next year? What are some of the pieces that would really have to fall into place or is that a bit of a stretch?

Yes. I would say that we are not going to discuss 2021 at this time. However, we are confident in the growth trajectory we have established for S&PS. As Kevin pointed out, there is definitely potential for growth in the high-voltage business. Our Connection Systems business is performing well in both the automotive and non-automotive sectors, as is HellermannTyton. To reach our goals, we need to consistently perform at a high level, and we never take that for granted. We are very comfortable with our growth expectations, as it is a strong business that is doing well both in revenue and operational performance. We expect this trend to continue, even in a challenging environment in 2021.

Yes. I think one of the points that Joe and I have tried to articulate in our prepared comments is, clearly, 2020 is challenged given COVID. Clearly, the industry is improving, but our view is it's a slow-paced recovery that impacts 2021. But as it relates to our technology and how we're positioned and the tailwinds related to the industry and where we sit from a product portfolio standpoint, where we sit from a global footprint standpoint, we're perfectly positioned, and that all comes together, certainly in the out years. And we hope it comes back quite frankly sooner. But when you think about overall vehicle mix, high-voltage Level 2+, Level 3 adoption of things like Aptiv safety, all vehicles having OTA that we can have more vehicle connectivity, that's a couple of years out.

Hi.

Hi, Dan.

Good morning. Thank you. I wanted to inquire about the outgrowth in relation to the launch schedule. You mentioned there may be some delays, but is the launch schedule still primarily focused on China? If China is performing relatively well globally, why not provide a more optimistic outgrowth outlook? Is it simply a matter of being cautious?

Our launch activity is fairly balanced globally. We are introducing several active safety and high-voltage products in Europe and are currently focused on the T1XX SUV launch in North America. Historically, our launch activity prior to COVID was somewhat uneven, with major launches leading to a more stable pattern over time on both a sequential and year-over-year basis. This trend is continuing now, and our activity level is consistent. While our regions may not be perfectly divided into thirds, they are moving in that direction, and bookings reflect that as well. Launch activity can fluctuate as major programs commence in different locations, but it generally maintains a steady pace, cycling through various regions. We have numerous launches planned in China for Q2, following a busy second half last year. You can expect some stabilization sequentially and some year-over-year comparisons. As we've mentioned, while growth in the market is important as an overall metric, it doesn’t always move in a straight line each quarter. Given the production disruptions over the last five months and the challenges related to shutdowns in China, it’s tough to expect consistent performance every quarter, and I anticipate that will continue for the next few quarters.

Okay. Thank you. That's helpful. Just wanted to follow-up with a question about active safety. Just more broadly, the market dynamic here. On one hand, obviously, you've seen a lot of momentum, and you seem to be winning the awards, and it's reflected in the bookings. But if we look at the announcement by Ford a week ago or a couple of weeks ago in which seems to be that they're doing more work directly with Mobileye, Mobileye doing the Sensor Fusion, which is typically something that would have been done by the Tier 1. It seems like the typical relationship where Tier 2 supplies in the Tier 1, Tier 1 packages everything and then gives it plug-and-play to the OEM that relationship isn't holding anymore. So maybe you could help us reconcile these two data points. On one hand, you seem to be getting a lot of momentum at the same time, the typical relationship of the Tier 2 to the Tier 1 is shifting a bit. And can you just also comment on your margin trajectory in active safety, if that's still at corporate average?

Sure. So it's Kevin. Why don't I - so I don't know all the specifics about the Mobile announcement. There's clearly a trend from an industry standpoint to head towards platforms towards scalable platforms. Based on what we're aware of, the relationship between various providers of perception systems really hasn't changed. Sometimes that kind of tracking goes to the Tier 1, sometimes it goes directly to the OEM. I can tell you with respect to the platforms that we're on, we do all the sensor fusion, right. So it's our radar solution. It's our camera. There's a vision solution from a provider. And as you know, we have a great relationship with Mobileye, and they're our vision provider. We do all the sensor fusion in our compute platform we provide the ADAS controller. So from our perspective in the particular, for example, you're talking about based on what we know, and we feel like we know it pretty well, there's really no change. And you'll see periodic situations where the OEM, for probably, quite frankly, for purchasing leverage, decides that they want to contract directly with the provider and the Tier 1 continues to do the integration. Some Tier 1s will bring additional capabilities, whether it's feature development, perception system development, do that integration, do that center fusion so that the entire ADAS system operates. And that's clearly how we operate and no change in the model that we're selling to customers and that we're operating under.

Yes. And Dan, real quickly just the margin question, from our perspective, no longer-term changes in our margin expectations for active safety or the ASUX segment. Clearly, 2020 is a very disruptive year. When you think of the segment being down 129% on EBITDA in the quarter, obviously, that goes all the way down to the product lines, right? That's where those costs are. So, but that high single-digit, low double-digit EBIT profitability we were talking about in prior years and expecting in 2020, the long-term view of that has not changed.

Good morning, everyone. I wanted to clarify something regarding the 85% cap number you're discussing. Is that related to staffing? Can you confirm if it was accurate at the end of the quarter? Additionally, when considering the market numbers you're mentioning, which are projected to increase by about 10% next year, it appears that you might not need to incur significant additional costs since most of the incoming revenue will come from variable purchases of raw materials or processed parts. This could result in significantly higher incrementals moving forward. I just want to ensure I fully understand what the 85% refers to.

Yes, John, it's Joe. I think it's about labor capacity and the number of people we brought back in. I mentioned that 55,000 individuals have returned to Mexico. We're being very cautious at this stage and not providing thoughts on 2021 incrementals, as there are many moving parts. Having those individuals back does come with some inefficiencies related to restarting operations and managing the COVID environment. That said, I believe the restart is progressing well, considering everything. The decision to add or reduce costs heading into 2021 will depend on schedules and customers by region. You could think that if you're operating at 85%, expecting only a 10% increase seems potentially manageable. However, determining where we stand with specific product lines and customers is necessary before we can balance everything out. There is clearly a lot of work ahead for us, and we will navigate through the next four to five months to identify where those moving pieces will come from.

Thank you, team. I have a question regarding margins and another about growth in the second half. Regarding margins, Joe, I appreciate your comments on incremental margins for the second half. However, I would like to approached this from a different angle. Production is only down by 10%, and with significant growth in content per vehicle, the loss in revenue could be relatively minor. You've mentioned inefficiencies; could you provide an estimate of the additional costs incurred each quarter, particularly in the next two quarters, due to these lower efficiencies? This would help us to better analyze a more normalized scenario of a 20% decremental impact and add that figure for lost productivity.

Yes, Chris, it's still a bit early for that. We have only been operational for about 3.5 to 4 weeks in June with this level of activity, so it’s a little premature to assess. My expectation is that we should be positioned better by Q1, likely with a few points of improvement in Q1 decrementals, assuming we don’t experience any shutdowns. We were shut down for a while in China during Q1, which significantly impacted the decremental costs. Furthermore, we anticipate direct costs of approximately $30 million to $35 million per quarter. We need to navigate out of those Q1 decrementals, potentially aided by not having shutdowns. There's much to work through, and we require consistent operations and scheduled normalization to address this. We are committed to refining our cost structure and have a proven track record of improvement over the past couple of years. Q2 reflects some of that progress, and we are focused on making strides as we move into 2021.

Okay. That makes sense. And then the second question is around the outgrowth in the second half. You talked about the 6% to 8% corridor being reiterated. I think first half it's something like 12%. So it kind of implies a lower second half. Should we just take that as your normal sort of conservatism? Maybe we don't have the visibility on all the pushouts or is there anything about it's a very tough calculation to do outgrowth given the weighted average. Any just detail around why second half maybe a little bit less strong than first half?

I believe we're experiencing some typical variations in launch cycles, which is quite normal. As I've mentioned previously, the timing of production recovery across different platforms will cause some fluctuations in our calculations. However, based on our observations, we've had significant launch activity in the latter half of last year and continued good launches in China during Q2. That said, some of these will start to stabilize and the lapping effect is a key factor driving this. This impact is partly due to COVID, but it also reflects our historical trends over the years. Overall, it's important to note that this isn't an exact calculation every quarter.

Yeah, thanks for squeezing me in. Good morning.

Good morning.

Could you provide an update on the growth opportunities in the second half, particularly regarding the capital raise? One of the objectives was to attract business from competitors, especially from automakers. How has that been progressing? Do you anticipate that this will impact second half bookings, or is it more likely to occur later?

Hi Emmanuel, it’s Kevin. The opportunity definitely remains. Considering the challenges in the supply chain, particularly in logistics and costs, OEMs are increasingly focused on strong global capabilities and scalability. We are currently engaged in several discussions regarding these opportunities. However, these are not situations where revenue will materialize quickly, such as within a quarter or two. Typically, we are looking at a timeframe of a year or even a couple of years for revenue opportunities to develop.

Okay. And for the bookings as well?

The booking opportunity is near-term. The revenue – I thought you were talking about revenue. The revenue opportunity is, in reality, a couple of years out, even if it's an existing program that's under production. Because the reality is activity needs to be transitioned. Manufacturing needs to be transitioned. Supply chain needs to be changed. And obviously, OEMs are very sensitive to any risk of disruption. So that takes some amount of time. But certainly, the bookings opportunities are there. First half bookings, just given COVID-19, when you look at the level of opportunities, at least since I've been around here, probably the lowest that we've seen, the booking opportunity to the extent they don't shift out of the back half of the year are at much higher levels than what they've been previously. I think it's fair to assume, though, just given dealing with COVID that remains in the environment. There's some inefficiencies. So there will be some slight shifting. We've talked about it in the past being anywhere between a couple of months to a quarter, maybe two. But the opportunities there are real.

Okay. That's helpful. And then just on the incrementals. I know you haven't commented in much detail, but 2021, yes. I think short conferences during the quarter, you sort of suggest that as sales and volume recover, the incrementals could be towards sort of like the just normal level and not higher? Is that still the – is that still the thinking?

Yes, Emmanuel, listen, I think the general takeaway from my perspective at least, is the focus on our - keeping our financial framework intact. And I know we've commented on that 20% to 22%. That's historically what we've seen. We do believe we'll see that go forward. And then there's a number of other things that are happening in the world, right, around PPE and shutdowns if COVID comes back and again, I think it’s just very early days to be speculating on those types of things. So I think as you saw with Q2 and hitting that basically breakeven when you think about 35 million of PPE and a negative $49 million EBITDA number. And we've talked for two or three years now about getting our breakeven EBITDA down to a 40% decline in revenue. And I think we're – that was part of our framework we’re effectively there, so we'll work hard to offset what can be offset. But I think that's – I tend to stick to the framework when I think about the business.

Well, thank you, everyone, for your participation on today's call. I do want to – now I turn it over to Kevin Clark for his closing remarks.

Great. Thank you, everyone. We – I appreciate you attending our call. We hope everyone stays safe, okay? Take care.

Thank you.