Q3 2019 Earnings Call
Good day My name is Chris and I will be your conference operator today.
At this time I would like to welcome everyone to the uptick third quarter 2019 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be your question answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad, if he would like to withdraw your question press the pound.
We would like to request that you limit yourself to asking one question and one follow up question. During the culinary session. Thank you Billy and Rushmore Vice President of Investor Relations you May begin your conference.
Thank you Frank Good morning, and thank you everyone for joining opt in third quarter 2019 earnings conference call.
To follow along with today's presentation, our slides can be found.
Our thought after dotcom.
Consistent with prior calls today's review of our actual and forecasted financials exclude restructuring and other special item and will address the continuing operations objective.
The reconciliations between GAAP and non-GAAP measures for both our Q3 financial 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 two for disclosure on forward looking statements, which reflect opt in current view of future financial performance, which may be materially different from our actual performance for reasons that we sites in our Form 10-K , and other SEC filings.
Joining us today will be Kevin Clark Apt is president and CEO , and Joe Massaro, CFO and senior Vice President.
Evan 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 a Kevin Clark Thankfully not good morning, everyone.
Let me begin today's earnings call by providing an overview of our third quarter highlights in our updated outlook for the remainder of the year.
I will then take you through our third quarter financial result is walls, our fourth quarter financial outlook is much more detail.
Third quarter revenues sustained strong above market growth despite declining vehicle production.
Revenues increased 6% representing eight points of growth underlying vehicle production.
Operating income and earnings per share totaled 410 million in $1.27 respectively.
My follow through on volume growth.
She knew traction on our overhead cost reduction immaterial and manufacturing performance initiatives.
Partially offset by the headwind from the GM labor strike.
Which totaled 70 million of revenue.
He milling of operating income and 10 cents of yes during the quarter.
Moving to the right side.
In September , we announced or autonomous driving joint venture with Honda, which we're confident we'll advanced <unk> commercialization of level for M. level, five self driving technology.
And further strengthen our industry, leading capabilities and the development of advanced driver assistance systems.
Nickel connectivity solutions and smart vehicle architecture.
We believe it's critical that we continue to invest in our state screening connected technology.
Further expand our competitive moat and better position after for long term sustainable growth.
Through organic investments in our engineering capabilities minority investments in technology companies and.
And the acquisition of companies such as Gavin Com bolt on to home and tighten the 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 four let me provide some color on the input 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.
Operating income in Egypt, Yes 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 continued to execute our strategy with the announcements of autonomous driving joint venture with on die.
And the acquisition of gap.
Both of which I'll cover in more detail shortly.
Moving to the Rightside, although our operating performance during the quarter was stronger than forecasted the GM strike has a significant impact on our financial results not third quarter.
And we'll continue to be a headwind in the fourth quarter as geoworks back up to full production schedule during the month of November .
Joe will take you through the details in a moment for the full year, we took a headwind of 250 million in revenue 135 million in operating income and 45 cents an E P us related to the strike.
Well, our operating teams in North America 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 a euro in RMB exchange rates are weaker and global vehicle production for the year is now expected to decline, 5% versus our previous forecast down 4%.
Partially driven by the GM strike in North America.
Our updated outlook reflects stronger year to date operating performance offsetting the increase headwind from foreign exchange and lower volumes, but the effects of the G.M. strike is an incremental headwind to our prior full year outlook.
Turning to slide five.
Third quarter, new business bookings totaled 4.2 billion, highlighting our portfolio alignment to the safe Green and connected Mega trends.
We now believe that we're on track to achieve over 20 billion a 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 asked you Act segment book booked under just under 1 billion of New customer awards in the quarter.
Our expertise in central compute platforms and sensing a perception systems is helping us deliver smarter safer more integrated solutions, both outside the vehicle with advanced active safety systems as well as in the cabin through enhanced 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 2022.
And underscore our relevant portfolio aligned to keep secular growth trends.
Turning to our advanced safety and user experience segment on slide six.
Third quarter revenues increased 9% 11 points over market.
The continued strong demand for active safety solutions.
Good morning revenue growth of 29%.
Lapping prior record role of 68% during the quarter and as expected the roll off from revenues tied or discontinued displace business is the headwind and our user experience product line revenues.
Our customers are increasingly looking parse important developing solutions that include more compute power and I'd be connectivity positioning us to leverage our systems design and validation knowledge.
Further expanding our competitive mode.
Recently industry recognition of our unique capabilities includes our selection as a 2020 pace award finalist for Android infotainment compute platform.
This revolution Revolutionary system will launch first on the Pollstar and then on almost popular exceed 40 model powering the first Android infotainment system with Needham Google Automotive services in real time, Oh Gee.
Enabling a best in class in cabin experience and underscoring aftons, 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 in vehicle safety.
According to data recently released by the National highly traffic safety administration physicality rates per 100 million miles driven in United States are declining as active safety penetration increases from initial levels euro application to level, one applications and beyond.
Our investments and skill more approaches to advanced safety solutions are not only seating or next wave of growth, but they're also helping to drive the democratization of advanced safety system globally.
Apt is flexible satellite architectural approach has been a game changer in the industry has been selected by multiple Oems health and democratize active safety solutions across their multiple vehicle platforms.
Turning to slide eight.
Our recently announced 50 50 joint venture with Honda not only brings us closer to enabling tomorrow self driving vehicles. It also helps accelerate the development of today's advanced active safety solutions for our existing OEM customers.
Hi, guys, a bill would you advanced the development of production ready autonomous driving systems, both cost effectively and at scale.
Along with it shared vision and timeline for applications in the robot taxi market validate them as the right OEM partner for the commercial deployment of level for system, beginning in 2022 and beyond.
Captive is contributing its autonomous driving technology intellectual property and roughly 700 employees focused on the development of skill level for system for the role would taxi market.
Hi, guys contributing $1.6 billion in cash at close.
400 million, a vehicle engineering, and R&D services and access to intellectual property.
And I will be holds technical partner strengthening after his existing foundation in automated driving solutions, while as I mentioned also enhancing after its competitive position in Ada Es vehicle connectivity and smart vehicle architecture.
After we'll continue to provide commercial solutions, including compute platforms perception systems empowering due to distribution solutions to the joint venture just as it does the other OEM customers, while maintaining access to the joint ventures automated driving technology.
We expect the transaction to close in the second quarter 2020, and be accretive to both S.U.S. and captive margin cash flow.
In summary, apt is working to realize our mission of making the world more safe Green and connected while also delivering outside your outside shareholder returns.
Turning to slide nine or 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 application that our customers are demanding and they're driving sustained growth in this segment.
Revenues increased 4% during the quarter six points over market, including the impact of the GM stride.
Putting the impact revenues would have increased eight points over market.
The strong launch volumes, particularly in Europe in in China.
I will take 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 rig in truck and FCB electric vehicle platforms, and the high voltage charging inlet for Porsche and Audi.
These customer awards underscore our strengthen optimizing power needed distribution for complex people architectures.
As well as our ability to flawless, we serve customers through a focus strategy in quality and 'cause and consistent launch execution.
Turning to capital deployment on slide 10.
As I previously highlighted our acquisition of GABAA com, which specializes in highly engineered high quality cable management protection solutions expands our engineered components portfolio.
Yeah, but times product portfolio is highly complimentary to own and tight.
And builds upon our existing telecom product offering strengthening our capability 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 yeah, but time will enhance our cable management portfolio.
And accelerate revenue and earnings growth in our engineered components product line.
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 volume and content gains globally were partially offset by 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 many PS were above the high end of the guidance. We provided back in July when excluding the impact of the GM strike.
EBITDA in 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 Harman when you adjust where the headwinds I just mentioned margins would've expanded 10 basis points to 12.2%.
Earnings per share of dollar 27 was up 2% reported or 14% excluding those items.
Moving to the segments on the next slide.
For the quarter advanced safety and 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 plan roll off of our audio display product line and the launch cadence and 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're tracking to a range of $180 million to $190 million for the year.
Turning to signal on power solutions on slide 14.
Revenues were up 4% adjusted representing 6% growth over market.
Excluding acquisitions organic growth was 2% or four points over market.
Salting from strong growth electrical distribution systems, particularly in Europe , and China, driven by new platform launches and increased electrification.
Double digit growth in our CV and industrial product lines.
Partially offset by the unfavorable impact of the GM strike.
EBITDA margin was 818.7% 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 the 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.
Had a global level, we now expect vehicle production to be down 7% in the fourth quarter and 5% for the full year.
Since 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 and a lot, including a strike impact revenues are expected to be flat on an adjusted basis at the midpoint, which reflects 180 million dollar headwind from the strike in the fourth quarter.
Fourth quarter operating income is expected to be in the range of $365 billion to $385 billion and includes a 105 million dollar headwind related to the GM strike, including certain inefficiencies related to ramping up production to full run rate levels in early November .
S is now expected to be in the range of 97 cents to a dollar three.
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 45 cents headwind from the GM strike.
Operating cash flow is now expected to be $1.54 billion, reflecting lower EBIT da 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'd be helpful to walk 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 in material productivity initiatives that ramp over the course of the year and further traction on our cost savings and reduction actions.
FX and come up FX commodities and tariffs had been ahead have been a headwind throughout the year and well price has been stable 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 to 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 flood.
As we assessed 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 the platform solutions, including next generation software compute and vehicle architecture systems.
Despite near term concerns about challenging macro environment, we're confident in our ability to continue to outgrow the market.
And while it's 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 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 us this sustain above market growth.
We see further benefits of our productivity initiatives reflected in our financial performance as commodity entire headwind stabilize.
And we will continue to affected the we 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.
With that I'd like to hand, the call back to Kevin for his closing remarks. Thanks, Joe Let me wrap up on slide 18 before opening it up for Q1 and our third quarter performance is further evidence of after his 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 growth over market.
Look 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 active as a company capable of capitalizing on key global auto 2.0 Mega trends.
Securing significant customer awards in the fastest growing spaces in the automotive market.
While continuing to develop more competitive business model.
Both of which translates into a much more predictable and sustainable business better positioned to perform in any macro environment in combined with the management team that things in acts like owners Millers outsize value to our shareholders. So with that let's open up the line for QNX.
Thank you actually we'll take our first question.
Thank you and at this time of we'd like to remind everyone in order to ask the question Star one.
First question comes from line of Emmanuel Rosner from Deutsche Bank. Your line is open.
Good morning, everybody.
Morning.
We're looking for additional color on the the strike impact most in the quarter and assuming for the.
For the full year, Oh seats, so very large flow through of.
Margin impacts on the.
On the revenue can you just maybe talk just a little bit about you know the what drives that towards the inefficiencies are.
And how to think about it as we've now moved past the strike and if there's any sort of cost or changes associated with that on the margin side.
No annual it's Joe I would I would say the strike impact to sort of most akin to and we had some of this last year right sort of the abrupt point plant closures that always so.
During the strike, we obviously held our workforce, we had over 21000 impacted employees a seven dedicated facilities.
GM were impacted there was another 22 facilities that were partially supporting GM. So you wind up with a fair amount of costs. Obviously the revenue comes out fairly quickly.
Sort of staggered down in September as we're able to continue to support the Canadian and Mexican plant by the time, you've got to October you really had all of that sitting idle.
We worked hard to maintain the workforce so pay the workforce during the strike.
That is 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 there are down for the full month of October for most part.
From a production perspective, we started shipping this week out of a couple of locations I would say shipments.
Last couple of days, a better between sort of 10 and 15% of normal volume.
We expect that to ramp the 25% to 40% of normal volume over the next week and then our current assumption is where effective we back up and running.
Normalized production and deliveries to GM after November eight and Thats. So those are the assumptions that are in the forecast.
Okay and the understood. That's a very helpful. Second question raised on the on the pricing side. So you highlighted in the full year walk that's maybe pricing is playing out a little bit better than expected, but you also flag. It on slide 13, a 2.7% pricey kind specifically in the event safety and user experience segment.
Which.
I guess I don't have point of comparison from before but it's not always there on the slight getting maybe maybe just talk a little bit more about what's going on on the pricing side.
Yeah, I would say there is too I would go back to what we've always said, which is pricing pricing lumpy. So long term, we're very comfortable about 2% number and I think I've I've said, even on these calls you know there will be quarters, where it's a little less.
Doesnt necessarily mean anything this quarter's words, a little more doesn't necessarily mean anything we're really focused around 2%, but it is and has a lumpy number at quarter end quarter route.
But I do think the second point I'd make this year in particular.
No I think prices favorable overall as volumes has come down and we do have certain clauses within our contracts that.
Require volume be Matt at certain levels to continue to provide price downs and we have seen some benefit from that.
But again longer term from a financial framework perspective, I continue to think of that 2% is the right number yes, and Emmanuel it's Kevin as you X traditionally as higher price downs relative to our our other segment our Sps segments. So it's it's not unusual to have to Joe's point.
Towns in that range arrangement.
Joe discussed.
Okay. Thank you very much.
Your next question comes from Joseph Spak of RBC capital markets.
Line is open.
Thanks for taking the question.
Sure I think you mentioned.
Tariff impact was a little bit.
Better than you expected is that related to the GM strike into some lower volume. So maybe you bought some some less components or or is there something else going on with with.
Yeah, I would say less to Q3, the strike happen a little bit lay that's obviously on the waterfront bet. So less strike related overall, there's two things I think overall volume.
Little lower on some of those parts so that helps.
But our remediation process as you know we are heading those those milestones from radiation perspective, the Korean operations up and running it's been approved by two are the three customers that utilize that we've started shipping out of that.
So I'd say we're on track.
From a full year basis, I'm aware, we thought we'd be you might see a little better we do have a little bit of an uptick in tariffs in Q4 related to pulling some of the GM stuff.
And but.
That's a quarter thing, it's not going to impact the full our full year view.
And remediation is on track.
Okay, and then just just to understand.
The.
The strike impact third quarter, the fourth quarter, where you know the strong or high decrementals in both quarters higher in the fourth Gordon I think you mentioned some of those.
Restart cost, but then and the answer to manuals question I thought you said you sort of kept everyone going so I just want to better understand why why the decrementals are strong yet any sort of everybody going kept they weren't in the plants, obviously paying them on temporary temporary layoff yellow temporary layoffs.
But there are some ramp cost to just getting them back to work, there's got to be some overtime and theres got to be some inefficiencies people have been out for 40 plus days. So there is a there is an assumption as we ramp in the first half November we don't run.
As well as we were running you know in August in early September right. It does take a little bit to turn the system back on.
But again I think manageable within certainly manageable within the quarter end very specific to.
To the GM strike as you can see in the third quarter and.
Our our sort of overall performance initiatives around manufacturing material are.
Coming in where we expect Joe if I can just augments, Joe just taking a step back to put in perspective within our.
Our SBS business, we have seven dedicated plans to serving general Motors in North America, right that went through a period to Joe's point that.
We're an operating and then there's an additional 21 or 22 that that serve general motors in North America. So you can imagine as production declined significantly, especially in the dedicated plans.
And to a lesser extent in the partial or shared plans it's almost.
In the going through a relaunch of program again, so it so you're not going to operate launch at the same sort of efficiency as you do when a plant normally runs so it's a significant part of the overall supply chain.
You know that needs to be kick started again and re launched and that has an impact on productivity and efficiency.
Okay. Thanks, 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.
Hey, Das and autonomous vehicles is that yes.
With a license back from the JV or does this have to be sort of new independent work adaptive develops so.
So two to two aspects.
To that one it's a nonexclusive joint venture one.
To that we have the flexibility from a commercial standpoint by technology from the joint venture, but we also have the ability if it were to make sense to develop technology on our own discipline customers.
So whatever would be remote optimal.
Animal financial.
Solution.
Perfect. Thanks.
Thanks.
Your next question comes from Roth Flash of Wolfe Research. Your line is open.
Good morning, everybody.
Had a couple of questions one is.
And your your bridge for Q4, there's an acceleration performance is that engineering recoveries and is there anything we can extrapolate.
From that into 2020.
Well engineer recovers generally heavier in the fourth quarter, that's consistent this year.
I think from a again I'd go back from a from a framework perspective.
You know where we continue to.
On a net basis look to that sort of seven 8% invested an engineering across the business I'm, obviously not going to get the specifics on 2020.
Kevin talked before and mentioned today, we're obviously continuing to invest in that active safety business, just given the opportunities at hand and not in the bookings but.
Again I'll get into specifics on 2020 wouldn't expect that's a change over the long term, yes, right and again, if you go back through history manufacturing material and engineering performance is consistently for us been strongest.
In the fourth quarter.
And I think it's the nature of the initiatives that we put in place and our plan I think it's the nature of the incremental initiatives that we put in place throughout the year.
Okay, great and on Europe , It looks like you're doing 15% or 15% growth over market. So obviously that business could withstand a lot, but I was hoping you could maybe just take a step back in and speak broadly to what you're seeing in that market as we approach some of the the regulatory changes.
That kick in and in January .
You know are there any preliminary signs on how production is being altered.
To account for that and or are you seeing a significant acceleration in signal empowered there associated with electrification.
We're seeing.
We're seeing strong growth in our signal on power solutions segment, principally both as it relates to are the result of new program launches.
Rod as.
As you know we've had a number of wins on a from a high voltage standpoint high voltage is growing very strong, but it's off on a relative basis for us I would 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 of continued its not increased weakening in that market from a vehicle production standpoint.
So I'd say, it's a little bit room too early to call, but as we sit and we plan for 2020 worst we're certainly forecasting production in Europe , or we'd expect production Europe to be down on a year over year basis.
Okay. That's it makes sense and just one data point, if you could share at within the user experience business could you remind us how big that that headwind is from the roll off of displays.
When does that sort of cycle through and.
Is that you've previously talked about a six to eight point growth over market through 2022. So that's accelerating is that one of the bigger factors that would lead to that acceleration.
So Ron the displays business for us is about $200 million it will be down about $100 million in total for 2019 Lisa.
800 million displays revenue left that we'll continue to cycle through over the next one to two here.
Okay.
Great. Thank you.
Thank you thanks, Rob.
Your next question comes from Chris Mcnally of Evercore.
Yes.
Hi, good morning, guys.
I wanted to.
Maybe go through this idea of over 2020 walk and I. Appreciate that you know it's early in the year and you guys are taking your first stab at.
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 the base X GM strike or is that maybe a little bit too aggressive because it's unclear.
To sum of Joe's point about how we'll we'll get that lost a EBIT EBIT back. So I guess, that's my first question can we use sort of the you know the 166 plus and in terms of EBIT as the base for 2020 walk.
Yes, Chris I think listen I think the XTRAC number certainly we're comfortable with it was very well as our guidance from July so from a 2019 perspective.
You know ex right, that's where the business Lance 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 a long 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 I as Kevin mentioned, it's a little bit early to start call. A number is but you know as we sit and look at things now.
You know vehicle production down 5% this year I'm not sure it's 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 we take out costs and got as we've consistently said where do we want to keep investing in the business, particularly from an engineering perspective on Kevin Yes, No and I think it's important that as it relates to the fourth quarter at least the first half the next year.
The concept that youre going to have a big rebound.
Or catch up in vehicle production from General Motors based on the schedules, we see in what they already had built built in from a launch timing standpoint. It would it would it's tough to assume you'd get any at least near term benefit.
Okay, and I before the fourth quarter over the full year. So.
And then if I could just if you will follow up on on the production for for next fixed look we clearly share your concerns around Europe , So obviously Europe being down.
Again, it's early but you know 1% to 3% that makes sense, but to get to a global number of down three I mean, I guess, we we'd also need core China down again, and then and then you asked.
Down core X. sort of a GM. So maybe could you just help us because I think Europe , everyone sort of understand China. No. One has really big expectations that we would maybe sort of start to pencil enough a flatter or an up number can you just flesh out some of those thoughts where you're seeing on a potential global weakness even going into.
Next year.
Yes, Chris we're still working through plan and we're not we're going I kind of go through market by market at this point in time, but what we look at it from the up opposite perspective play out a scenario, where you actually see growth in vehicle production and and in which markets.
And as we sit here today, we see more headwinds to vehicle production that we see tailwinds and.
Maybe a part of that is we want to make sure that we have operating plans to execute any to execute against any downward pressure on volumes. That's that's probably.
Probably a certain overlay, but we also just want to be very realistic and.
Rational about where where we sit economically and where we are in the cycle.
So I know that Joe's point Joes point, maybe it's not down five but we can come up with a number reasons, where and how it gets to down three.
Okay, Great I appreciate it if I could just to the one last follow on us in that sort of environment of weak production is there anything that we should think about calling out in terms of we talked about the audio display rolling off is there anything else in terms of thats not sort of inline with the the content per vehicle trend that you've been seeing.
In a das and particularly electrification next year or is that at least the content per vehicle I'm sort of should continue in this trend that we've we've seen over the last several quarters.
Yes, we would expect the outgrowth in the and the content per vehicle to be consistent we haven't seen anything.
Well we are.
Well get into maybe some launch lapping some launches on a given quarter those types of things but.
While waiting for the next launch to ramp up we've had some big launches. This year as you can see particularly in the as you go through North America in Europe .
In China the back half the are launching strikes you may have some of that but from a broader strategic take rate.
Overall content per vehicle trend not not seeing any any changes.
Much appreciate it.
Thanks, Chris.
Your next question comes from Brian Johnson of Barclays. Your line is open.
All right, yes, two are more strategic questions around recent quarters.
And what they mean going forward.
First is around just the decrementals on downside and a volume.
Certainly if I understand the impact of the GM strike, but if there is a future recession or you're not going to have EPS adjusted for that so what do you know roughly 40% to 50% Decrementals for the GM strike given all that stuff.
Apply for Decrementals in the U.S. downturn and secondly, what have you learned about.
Kind of similar to summer 2015, managing those southern volume decreases.
Yes, I think you've got an separated jochen can walk through and give give give gives a specific numbers, but Brian I think is important Joe mentioned, we worked very closely with general motors to be in a position.
Sure when they did resolve the labor issue, we could ramp up production as quickly as possible.
So there was a fair amount of of of labor that we labor cost that we maintained that we kept in place so.
So that we didn't have to be in a situation, where we had two in addition to launching.
Relaunching production have to train a bunch of new workers. So we kept them in place versus a normal scenario, where we you would see vehicle production declining declining for more protracted period of time, we would have let them go yeah, I think Brian a good and we've been consistent I think decrementals are in that 25% to 35% range little.
On a regional mix.
And that's what we'd work against but it did.
If you take a plan if you take plants down for a month, that's that's going to be higher decremental. If we get a forecast for 2020 vehicle production data down a few points. That's something we start to address from a from a cost structure perspective, right. There's less shifts there is less people in the plants.
And so I would think.
The Decrementals, we think about working through when vehicle production comes down as we tend to figure out how to deal with that 25% to 35% to kevins point when you get hit with a very important customers going through difficult time, and we agree to sort of worked through it to make sure. We're there to catch when they ramp back up and I do think as I mentioned I think we'll be ramp back up here.
Sort of pull scrape and call it 10 days or less.
Less than two weeks that you know that cost some money, but we do think it with the right thing to do.
Okay Second Street to question as was it maybe its coincidence that capital kind was announced shortly after that and die.
Deal right.
The joint venture, but can you maybe talk about how the wind ideal affects your cash flow and hence capital allocation availability for bolt ons share buybacks et cetera going forward.
Yes, well for the answer to your first question or comment was just pure coincidence.
As you know we've been very focused on on growing our engineering engineered components business.
And the GABAA GABAA Com business was a great addition to the Heller element Titan.
Product portfolio on business portfolio and expands in a product line that they're already in.
In a fast growing.
Fast growing telecom space and it was an asset that our operating team in hellermann tight new very very well.
So high confidence in our ability to execute as it relates to.
The joint venture in how it affects our capital allocation strategy wasn't we have a strong balance sheet we generate.
A lot of a lot of free cash flow.
You know we focus on how do we grow grow the business organically as well as acquisition related clearly the structure of the joint venture frees up a couple of hundred billion dollars of additional cash flow.
On an annual basis, and it gives us more flexibility, but but Brian and will drive any any different behavior than the behavior that we have.
Now, which is a disciplined approach to either invest in our business pursue acquisitions or return the cash shareholders.
So I wouldn't but in terms of availability of cash. It does does this mean that you don't the.
The R&D investments losses, if you will add new time to me at all those are no longer coming from we'll get through the counting it's been a follow up but conceptually or those being funded by the cash contribution can you guys might bring up that Ken yes, so the joint venture itself right.
Hi, guys Hyundai is contributing 1 billion since the 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 we need to fund or spend on the development of the technology related automated driving therefore, the net result is we have more cash flow.
Okay.
Thanks.
Your next question comes from Dan Levy of Credit Suisse.
Line is open.
Hi, good morning, guys there.
Okay.
First I hate to a.
Nit pick on growth numbers for your high growth products that are actually still super above that.
We did see when you look at active safety and high voltage electrification, we saw that the growth pace and I apologize if this.
Trust earlier, we did see the growth pace.
Sort of down sequentially, so active safety up 29 versus the plus 50% clip we saw in the first half you're cutting your growth expectations slightly going from plus 45 to plus 40 same with high voltage electrification eager plus 30 in the third quarter versus the plus 65 pace, we saw in first half what.
What happened there is that just program delays and then I assume are lately. We also saw your comments on on China that although you raised your industry outlook for China for the back half of the year your growth is slightly more so.
Any color on.
Related to that I'll take China real quick and then we can go back to the first one I think from from that perspective, obviously, so great outgrowth in Q3, I expect that to continue there there are.
A couple of customer specific.
The way our customer specific delays in Q4.
Well a couple of our top customers that are they're continuing to launch they're launching on time, but their launch volumes have come down a bit versus versus the original forecast. So I again, where they are launching on time with which to US is more important they have adjusted their forecasts, but more specific to those customers I think.
Then that's sort of a broader market broader market indication.
Well as it relates to the product line growth rates, there obviously to your point still very good I believe industry leading.
You know you'll get some lumpiness right, we talk about launch cadence I mentioned that earlier, you'll have some launches lab, we'll get some lumpiness in the quarter, but obviously no change to.
Through our longer term growth projections over the next couple of years those product lines.
One other comment I don't mean to be.
But there is of the law of large numbers right. So we have an active safety business.
It is 1 billion three in revenues versus under $600 million in revenues just two years ago.
So continuing to grow at north of 60% becomes increasingly challenging just given the nature of the number.
I don't need to be defensive but I I think it's fair to assume to Joe's point theres going to be some volatility based on launch, but as we get in larger numbers were not going to maintain the same group growth rates on those product lines and assets thinking I want to add Kevin has forecasted growth rates between 20% to 25%.
So that 2020 <unk> that that growth rate through 2022 is still intact versus what you.
But I realize you're not in the business of changing your 2022 guidance every quarter, but.
Yes, Thats still intact, yes, I'm sure you will sign up for plus 30% growth everyday.
[laughter].
Okay.
Great. Thank you and then just second wanted to follow up on Honda Hyundai.
And you basically got a cash infusion of 1 billion six but I think you know you were spending call. It 200 million a year, but this 1 billion six covers you for call. It a few years, which would imply a fairly significant acceleration in in spend so.
Where did you just feel like you needed to commercialize.
Faster or was there something that that wasn't happening.
You know quickly enough that you felt like you effectively needed to double or.
Significantly increase the spend just some color on how to think of I, just didn't grow well listen I and I apologize I didn't mean to imply that we need double spender.
Or.
We will ramp up spend will as we work with the joint venture partner and we finalize will develop our final plant listen the the remainder of the joint venture with with Honda is we ended up with a perfect partner.
And we had you can imagine a number of.
Of discussions with a number of potential partners over the last over the last few years.
And our perspective with respect to.
What they bring from a vehicle standpoint from a vehicle platform standpoint, a perfect alignment on strategy as it relates to timing of introduction or product.
Initial approach to the.
Roebel taxi market in 2022.
And then applications for a broader base of Oems. The fact that it's not exclusive we have the ability to work with other OEM partners Thats, what we saw elect to do either with technology out of the joint venture.
Or a separate development of technology. The fact that will continue to sell technology to the joint venture and have access to it.
From our perspective, it was just the perfect partner in the right joint venture structure.
And the fact that we have a partner thats willing to contribute a billion a six in cash at close with no strings attached.
Right no gates from a technology standpoint, no gates from a monetization standpoint.
You know, we just view them as a perfect perfect partner in a perfect opportunity to actually enhance.
The strength of our automated driving capabilities and quite frankly take that technology and probably accelerate the development of our he asked vehicle connectivity and smart vehicle architecture activities, just given the structure of the the joint venture.
Oh, I guess, let me, let me ask a little differently were you and I know you're aim odd revenue outlook. That's that's it that's still intact, but did you internally have one goal on commercialization and then when you came to sort of forming this JV you then modify.
That goal in terms of timing of commercialization no absolutely not no absolutely not no. We were listen we've been working on a with a number of folks with respect to vehicle partnerships right.
I guess this.
Further enhances that vehicle partnership and makes it up.
A joint venture partnership, but no nothing changed.
Got it thank you very much appreciate it.
Your next question comes from Steven Fox with Cross Research Your line is open.
Thank you <unk> excuse me. Thank you good morning, I didn't understand we don't want to get too much into next year, but I was wondering if you could maybe just go back and had a little color around the comment you made.
The portfolio aligning more to key secular trends so in other words.
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 quicksilver market or margins or anything like that thanks.
I'm not sure anything changing.
In the ramp right I think our.
If I, if I think I understand your question.
We operate in areas where content per vehicle is growing much faster than vehicle production.
And that's that's broadly speaking for both of our sub segments.
Asked you Alex as well as Sps.
And we'll continue to bet benefit from some of the larger met macro trends towards electrification towards active safety towards vehicle connectivity.
And that will translate to technologies.
Like our multi domain controllers are smart vehicle architecture, our high voltage.
Connectors and cables solutions. So we feel as though we continue to be perfectly perfectly positioned I think.
Talking about guess what I was.
Sorry, sorry to interrupt, but I guess, what I was getting it is like specific the specific technologies that are ramping next year that maybe aren't in the portfolio right now because you have a huge backlog of business on a lot of its based on a lot of next generation.
Technology and techniques that are needed to produce some isn't some is in some isn't right. So high voltage as an example, we have an existing product portfolio in the wire harness and connector size is just a matter of customer adoption right and and program launches as it relates to active safety.
As I mentioned, we have about 1 billion three of active safety revenue today.
Most of that tends to be in around sensor fusion radar solution things like that I guess there are areas that we're launching like ours, our satellite radar 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 it'll be launching over the next few years as well.
But but I would view that as a pension of existing technology versus brand new technology that needs to be introduced.
Great. That's the detail I was trying to get that I appreciate that and then just as a follow up it doesn't sound like this is an issue, but just wondering if you could address any.
We expect second that you're seeing going on in China with or if you're not seeing anything at all relative to incentivizing car sales.
No not we're not seeing anything from a from an overall industry standpoint, we had a customer customer shift out some launches, but that's the not de stocking. So we've not seen anything today.
Great. Thank you very much.
Your next question comes from John Murphy of Bank of America.
Line is open.
Good good morning, guys and overnight set up follow up on 100 gig JV.
Sounds like there's $200 million roughly at a cost that comes out and gets put into the JV theres no associated revenue.
Is that is that correct.
Okay.
Good.
Got it okay.
Yeah.
And when do you think about what you guys did with Deltatech and in the spin and then 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 a another structure for that may be advantageous to value to the total covering.
No.
John It's Kevin and Josh nothing at this point nothing at this point in time, how however, as you know, we're we're always focused on evaluating our portfolio and.
And identifying ways, where we can better serve our customers and optimize shareholder value.
Nothing at this point in time.
Okay and then just lastly on slide six you talked about the Android infotainment system, but you also mentioned OTI updates on some of the Volvo and Pollstar vehicles I'm, just curious when you're talking about OTI. A 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 it how plug and play is that or is that something it's very integrated into electrical architecture in the time.
That's one that is integrated into the infotainment system only but we're actively working on a number of.
Of potential programs with OEM as Oems as a part of our Sta initiative.
To make OTI a.
Available and integrated to the broader vehicle. So you can do a better job of you know more opportunity for lifecycle management across.
On the.
All the controllers in the car.
Okay, great. Thank you very much.
Your next question comes from Ryan Brinkman of JP Morgan. Your line is open I think thanks for taking my question, which is also on the recently announced a joint venture with Hyundai a course of mentioned the transaction brings myriad financial benefits to margin cash flow et cetera, I was wondering.
Though if the transaction is in any way reflection of how quickly you see level four level five rolling out relative to your earlier expectation is there any potential for delay.
Fully autonomous vehicles relative to you know what the kind of your Investor Day, and then similarly, you know what did your latest thinking in terms of penetration of of lower levels.
How many two and three et cetera is that looking any faster and then finally, along these lines what impact if any do you think a sharper industry downturn could have on autonomous penetration rate.
So so your first your first question no our view on the introduction of autonomy hasn't hasn't changed so the.
Introduction of Industrialize platform in 2022 were rolled taxi.
Use it is directly in line with what our plan has always been so so no change.
From that standpoint.
As it relates to acceleration.
In more advanced systems absolutely.
We see relative to what we saw a year ago.
Increasing demands for more advance level two level, two plus level three minus level three advance active safety systems across Oems.
Literally in every region.
So that's an area of we view of opportunity and we feel as though we're perfectly positioned to benefit from.
As it relates to vehicle slowdown in vehicle production or markets, what's the impact.
As it relates to.
Active safety active safety cells right rebuy rates on active safety I believe our north of 95%.
So that's an area, where we would it's we would not expect to see de contenting or a slowdown in penetration. If you were to see a slowdown in vehicle production no I guess theres at certain points if its severe that you could see some impact.
But just given the discussions with our customers I think that rate would have to be significant and any normal normal sort of slowdown it'd be highly unlikely yeah. I think I think Brian compounding that for for some other always would be sort of Toyota.
And one other OEM out there that sort of.
Voluntarily mandating that active safety throughout their throughout their portfolio. So at this point, we're actually seeing adoption and lower end models, probably faster than we would've assumed that I think you'd be.
There are no way even in a more suited mere downturns de content active safety given the rebuy rates and the fact that you have others out there with comparable models that have that technology.
Okay, that's very held on the high.
Hi voltage side, Youve got Europe , and China, they've got to hit government mandates. So we wouldn't expect.
The content thing there either.
That's great color, thanks on commodities, I see or slightly raising the full year headwind for FX and commodities.
Then on FX as some of the metals I really continue to fall off copper I know it hasn't phone as much as steel or aluminum and a lot of the savings the pass on the customers, but how does the trend in the direction of commodities. This here you know what does that imply for next year could you'd be looking at actually a pretty decent tailwind.
I'm certainly a reduced headwind at this point I think we're watching what happens with resin resin prices have stabilized so.
What I'd be on a commodity side wouldn't necessarily be anticipating big headwinds and a little too early to call a tailwind.
Obviously, FX will have an FX, even if the FX rate settled today and didn't change for next year, we'd have some catch up in the first couple of quarters. So.
That's what we're implying from the from the sort of headwind on the FX that.
Okay got it thank you.
Your final question comes from are meant to sink of interest.
Morgan Stanley Your line is open.
Great. Thank you for taking the question.
Just looking at the revenue guidance here ex the GM strike it it's a bit lower if you could help bridge that are where that's coming from that would be helpful.
Yes, Hi, rentals, it's Joe you've got about half of its FX and commodity flowing through.
The other half as we mentioned earlier, just a little bit of customer specific items in China, but you're talking round numbers 40 to 50 million in total it's about half and half.
Okay.
And then you know we haven't had many questions here on the call around the smart vehicle architecture. You know if you could provide us with an update you know how your conversations are going that'd be great as well.
Yes conversations.
Again continued dialogue with that doesn't Oems, we have the advanced development programs that weve.
We've we've talked about I would say from an industry standpoint, the industry recognizes the fact that our vehicle architecture needs to change.
So.
Some Oems principally the Oems in Europe are working more aggressively on on on driving that change.
But it's it's an area of opportunity.
For after than there is there's a high level of interest.
Okay, and my last one year fourth quarter versus third quarter. The guidance that you provided ex GM suggest you feel pretty good about the the pickup here. So the sequential pickup I can can you remind me you know some of the puts and takes here to bridges from third quarter to fourth quarter.
On March Yeah, you've got to come.
Yeah listen you've got a couple of things right you have again ex strike.
If I remember last year, we had about a $35 million performance hit in Q4 problem.
So some temporary plant closures at a couple of always that hit us almost similar situation to the stride short term plant closures, where we.
Got to hold the workforce in place that's about 35 million and then what you're seeing.
As the ramps and performance, though we expect them to the back half of your Q3, obviously.
We saw that come through.
No we talked last quarter about there being a little bit of a step up from H ones age too, but we felt confident and getting that performance and we are seeing that come through and again, it's a little bit of we referenced it really sort of our material and manufacturing savings plans tend to run sort of.
Build throughout the year their annual plans and that it's just a little bit of the function of setting setting a sort of a calendar business plan, but we continue to see those.
Develop throw in the cost saving actions, we took in the first half of year are effectively in place at this point from head count reduction and such.
Okay.
Great. Thank you for taking the questions.
Thank you. Thank you.
That was our final question I will now turn the call to our presenters.
Thank you everybody. We appreciate your time have a great day.
This concludes todays conference call you may now disconnect.