Q4 2019 Earnings Call
I would like to welcome everyone to the active fourth 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 a question and 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 you'd like to withdraw your question press the pound key.
We'd like to request that you limit yourself to asking one question and one follow up question during Q and they session. Thank you Linda Rosman, Vice President Investor Relations you May begin your conference.
Thank you Matthew good morning. Thank you everyone for joining after fourth quarter 2019 earnings conference call.
Following along with today's presentation, our slides can be found an IR sought after dot com.
Consistent with prior call today's review of our actual and forecasted financial exclude restructuring and other special items and will address the continuing operation adaptive.
A reconciliation between GAAP and non-GAAP measures for both our Q4 financial as well as our outlook for the first quarter and full year 2020 are included in the back of today's presentation and to the earnings press release.
Please see slide two for disclosure on forward looking statements, which reflect <unk> current view of future financial performance, which may be materially different from our actual performance for reasons that beside and our Form 10-K , and other I think the filing.
Joining us today will be cabin Clark, Opeids, President and CEO and Joe Massaro CFO at senior Vice President with that I'd like to turn the call over to Kevin Clark Canceling a good morning, everyone I'm only going to begin today's earnings call, but riding an overview of our 2019 fourth quarter and full year strategic and financial.
Right.
Joe will then take you through our fourth quarter and full year results in more detail as well provide her financial outlook for 2020.
Starting with the fourth quarter revenues increased 2% to 3.6 billion.
But in some percent reduction in global vehicle production, representing nine points of growth over the underlying markup.
Operating income and earnings per share totaled 388 million and $1.15, respectively above the top end of our previous guidance range.
All through on higher volume growth and a lower than originally forecasted headwind from the GM labor strike during the quarter.
Partially offset by weaker exchange rates for the Euro and Reminbi.
For the full year revenues totaled 14.4 billion, representing nine points of growth over the airline vehicle production, reflecting the strength of our product portfolio.
Aligned to the safe Green and connected Mega trends.
Despite declining industry volumes, we had our eighth straight year of record new business bookings, reaching 22.1 billion exceeding 20 teams record of 22 billion.
Our 2020 out what further validates the strength of our stress our business strategy and the continuing wine is widening more competitive mode.
Based on near term customer production schedules as well as the mid term macro and geopolitical environment.
We expect global vehicle production declined 3% during the year.
Despite the anticipated production decline, we're forecasting 4% revenue growth seven point over the underlying market.
Highlighting the fact that our business is built to outperform in any environment.
In summary, we continue to build on her strong track record of execution and innovation and remain focused on delivering the integrated solutions that are making vehicle safer greener and more connected.
Turning to slide four.
2019 performance reflects the efforts we've made to further strengthen our through cycle resiliency.
Ensuring that we can outperform in a challenging environment.
Including any more balanced mix of customer regional and market revenues.
No one customer now represent more than 10% of our annual revenue we've nearly doubled the percentage of revenues not tied to light vehicle production from 8% in 2017 to almost 15% in 2019.
During the past two years of declining give reduction we've also increased the engineering investment necessary to ensure that we have the software compute Nick architecture and systems integration capabilities required to help our customers solve their biggest challenges.
To help fund or increase investment and the development of these advanced technologies, we continued to reduce our overhead costs further enhancing the flexibility competitiveness of our business model.
And we also announced a 50 50 joint venture with Hyundai, which manages the development, which advances the development of production ready autonomous driving system, both cost effectively and at scale, which we now expect to close at the end of the first quarter.
Our more sustainable business model is able to convert more income to cash.
In 2019, we generated 1.6 billion in cash from operations.
An increase our free cash flow conversion of net income to 85%.
Positioning us to continue our track record of value enhancing capital deployment, both investing in acquisitions and returning almost 650 million of cash to shareholders through share repurchases and dividends.
In summary, our ownership mindset reinforces the teens attitude that were never done and you can expect more of the same in 2020.
Turning to slide five fourth quarter, new business bookings totaled a record 8.1 billion.
Bringing the 2019 total to 22.1 billion.
Fourth quarter bookings, reflecting both increased customer sourcing activities and a strong after when right.
But the pace of our new business bookings and perspective since 2017, the forecast for global vehicle production has actually declined 10%.
During the same period, our new business bookings increased 15%, reflecting our strengthening competitive position across several advanced technologies.
Our advanced safety and user experience segment booked 3.2 billion of new customer awards in the quarter and 7.6 billion for the full year.
Our industry, leading capabilities in central compute platforms, and sensing and perception systems allows us to deliver smarter safer and more integrated solutions, both outside the vehicle with active safety as well in the vehicle through enhanced in cabin safety and user experience systems.
Our signal and power solution segment had new business bookings totaling 4.9 billion during the quarter.
And 14.5 billion for the full year, including a second straight year with over 2 billion of high voltage electrification awards.
A long track record of increased new business bookings each year validates our ability to leverage unique brain and nervous system for software and how hardware foundation that enables new features and functions, while optimizing the total system cost of the vehicle.
And reinforces our ability to sustain strong above market growth underscoring our roles in portfolio logic key secular growth trends.
Turning to turning to highlights in our advanced safety and user experience segment on slide six.
Sales for the fourth quarter were up 4% 11 points over market.
Continued strong consumer demand for active safety and user experience solutions drove revenue growth of 23% and 3% respectively.
As a need for more complex software development and systems integration expertise increases our unique ability to offer highly functional optimized solutions is driven several over 2019 strategic highlights, including further penetration of existing customers, who deployed our scalable satellite architecture platform, helping them democracy.
As active safety solutions across their vehicle lineups.
We're also introducing advanced technologies for use in a nascent feel of interior sensing, which is expected to grow at a 50% compounded growth rate your 2025, albeit off a relatively low base.
During 2019 were awarded three new programs focused on assessing driver availability and engagement to meet Encap regulation is well support partially automated functionality such as highway pilot and traffic Jam assessed.
During the year, a premium OEM customer awarded us our first don't control or program, representing another step in building the technical and commercial foundation for Aptus SCS approach.
And lastly, we also launched the first Android infotainment solution with old car.
Powered by need of Google automotive services in real time on T.J., enabling a best in class in cabin experience in underscoring apt is leading agile solution development capabilities and wells a partner of choice serving as the best bridge between the automotive and the Tech industries.
Turning to slide seven.
Active safety penetration in the United States has reached the point, we're beginning to see fatality rates decline is Oems move from initial leveled zero applications to level, one in more advanced level to ADF applications.
Consumers are demanding safer vehicles in Oems are responding accelerating the penetration of more advanced Adas systems across her vehicle lineups from the premium to the value segments.
Underpinning our continued strong growth in new business bookings radar system has been our ability to provide Oems are highly reliable scalable platforms, which allow them to deploy advanced yes. It was more quickly and a more and at a more competitive price level.
As Oems increasingly look to leverage their investments for level to level, two plus and even level three SNS systems.
The growth in our pipeline of new business pursuits is actually accelerating.
Even while underlying the production schedule declined.
Our scalable solution is unique in the industry and has been very successful in the marketplace positioning us to enhance our market position in the future.
Active safety bookings increased to a record 4.2 billion in 2019, and we're on track to reach over 5 billion in 2020.
And we expect our active safety revenues to almost double from 1.3 billion in 2019 to more than 2.5 billion in 2022 significantly outpacing the underlying growth of the active safety market as reflected on the chart.
As we've discussed previously the accelerated growth in our commercial pipeline for advanced EHF program has led us to decide to increase our investment in the advanced engineering customer pursuit and program launched resources necessarily necessary to take the opportunity to widen our competitive moat and ensure we possess.
Good afternoon to be the leading player in the active safety market.
Sure I'll provide more detail on this investment later in our presentation.
Turning to slide eight our signal power solutions segment is focused on next generation vehicle architectures, including the data and high power electrical distribution, enabling the advanced technologies that will shape the future of mobility.
In the fourth quarter sales increased 1% eight points above market. Despite the impact of the GM strike.
My new launches across our electric electrical distribution and connector product lines.
Hi, voltage electrification revenue increased 20% in the quarter, while non auto revenues were up 26%.
Our leadership position and optimize vehicle architectures has positioned us to be the partner of choice for both traditional and new mobility customers.
As evidenced by a recent high voltage award with Tesla in the model why in the expansion of our low voltage business on the model lie in model three in China.
Also during 2019, our connection systems business launch an expanded line of automated modular Ethernet connectors Emmett connectors.
Capable of handling up to one gigabyte of data per second with several global OEM customers.
This family of interconnect enables the evolution of modern vehicle architectures, which is necessary to democratize high levels of safety automation with fast and reliable data transfers.
Together these new business bookings underscore our strengthened optimizing powered signal distribution for kind of whats architectures as was our ability to serve customers globally through consistent engineering and launch execution.
Diving deeper into our high voltage electrification product line on slide nine.
Our strong pipeline of new business Awards reinforces the fact that we're at a significant inflection point in the growth of high voltage electrification.
Despite the slowdown in 2019 Chinese New energy vehicle initiative is driving increased powertrain electrification and European Oems cannot achieve the new more stringent two targets without the combination of plug in hybrids and battery electric vehicles.
As a result of these factors were confident that by 2022, well over 20%. The vehicles produced annually will include in electrified powertrain.
And as we've mentioned several times before our total addressable content per vehicle for the full range of high voltage alternatives include including traditional hybrids plug ins and fully electric vehicles is in the range of 1.5 to two times that have a traditional low voltage vehicle.
Our 2019 high voltage electrification revenues totaled approximately 350 million, that's up almost 40% year over year, making it one of our fastest growing product lines.
Between now and 2022 Oems are expected to launch roughly 40, new high voltage platforms globally spanning hundreds nameplates.
Based on the value and program launch timing of our new business bookings product line revenues are expected increased more than threefold to over a billion dollars in 2022, representing a 40% compounded growth rate over that time.
So in summary, we're perfectly positioned to continue to increase revenue significantly above underlying didnt production as we leverage our increasingly differentiated competitive position and continue to benefit from the increased demand for advanced safety solutions vehicle connectivity and high voltage electrification.
Before I turn it over to Joe on Slide 10, I'd like to touch on our recent activities at CES in Las Vegas.
As we've done in the past, we hosted a number of customers partners and investors in our pavilion, featuring our smart Nucor architecture, which lowers the total cost of ownership, while enabling software defined feature rich vehicles consumers want.
In total we had nearly 1000 stakeholder visits and hosted a number of senior executives from our customers, which underscore the increasingly strategic role active plays in delivering next gen vehicle technologies for customers.
During our many meetings customers validated the need to streamline and simplify vehicle architectures to both reduce cost and enables unnecessary advancements in high voltage electrification.
And vehicle autonomy.
RSV a centerpiece display highlighted the benefits of apt is unique brand in nervous system technology portfolio with prototypes of new and existing electrical and electronic solutions that allow us to effectively manage and take advantage of the up integration of the vehicles compute domains.
Our capabilities around the brain in nervous system on the vehicle positions us to serve as a natural consolidator in integrator.
Additionally, offering the most advanced hardware and software solutions.
Customer feedback validated the significant progress we made in 2019, developing the technology stack and future roadmap for continued FC a development.
With that I'll hand, the call to Joe to take us through the fourth quarter and full year results and review our outlook for 2020.
Thanks, Kevin and good morning, everyone as discussed at the beginning of the presentation, our financial framework aligns with our mission to build a more sustainable business with the ability to outperform in any environment.
We remain focused on improving our through cycle performance by enhancing our industry, leading growth portfolio and flexible cost structure, while investing for future growth and executing on our capital deployment strategy, which I'll cover in more detail in a moment.
Starting with our fourth quarter revenue growth on slide 11.
Revenues of $3.6 billion were up 2% adjusted in the quarter totaling 9% growth over market as vehicle production declined 7% in the quarter as expected.
Excluding acquisitions organic growth was 1% or 8% growth over market and as a reminder, the Winchester interconnect acquisition closed early in the fourth quarter of 2018.
Strong launch volume and content gains globally were partially offset by price down from 1.5% in the quarter.
The unfavorable impact of FX, and commodities and lower North American volume related to the GM strike.
From a regional perspective, North America revenues were down 9% on an adjusted basis and approximately flat excluding the GM strike.
European revenues were up 8% adjusted with 14 points of growth over market driven by the uptick of several active safety electrification programs.
And lastly, our China adjusted growth was 11% or 12 points of growth over market driven by strong launch volume across the portfolio.
Turning to slide 12.
As Kevin indicated fourth quarter operating income and EPS were above the high end of the guidance we provided back in October .
EBITDA and operating income of 566 million and 388 million respectable perspective, we reflected better than expected volume growth in both segments.
Offset by FX and commodity headwinds and the impact of the GM strike, which totaled approximately $80 million on the quarter.
Adjusted operating income margin was 10.8% in the quarter.
Earnings per share of $1.15 was down 14% reported.
Up approximately 7% excluding the GM strike.
Moving to the segments on the next slide.
For the quarter advanced safety and user experience revenues grew 4% or 11 points over market driven by launches and robust growth in active safety more than offsetting the impact of the plan roll off of our display audio product line.
Operating income margin was 12.2% before the impact of mobility investments driven by the accretive benefit of volume growth offset by continued growth related investments in the business.
Our mobility spend for the quarter totaled $42 million and 184 million for the year, which was inline with expectations.
In summary, another strong year revenue growth and operating leverage while investing for future growth and the advanced safety and user experience segment.
Turning to signal and power solutions on slide 14.
For the fourth quarter revenues were up 1% adjusted representing 8% growth over market.
Excluding acquisitions organic growth was flat or seven points over market, resulting from strong growth in our electrical distribution systems, and CV and industrial product lines.
Actually offset by the unfavorable impact of GM strike.
EBITDA margin was 17.2% down 90 basis points year over year, and operating income margin was 11.8% dot 130 basis points.
However, both EBITDA and operating income were up approximately 80 basis points, excluding the impact of GM strike.
Okay.
Given the continued challenging macro landscape heading into 2020.
We expect to see continued softening of vehicle production around the world as shown on slide 15.
At a global level, we expect vehicle production to be down 3% for the full year with 4% adjusted revenue growth or seven points of growth over market.
From a regional perspective, let me start with China.
We expect vehicle production declined 3% for the full year.
With production down 15% in the first quarter, including the extended new year's shutdown announced earlier this week.
We expect to see stronger growth over market in the first half China as we lap the heavy launch cadence we had in the back half of 2019.
Turning to North America, we expect vehicle production to declined 1% for the full year.
As a modest recovery and GM volumes are offset by continued declines in passenger car units.
And the runoff of our display audio business.
Turning to Europe , we expect full year production declined 4%.
However, our pace of double digit growth over market continues driven by new program launches and our active safety in high voltage product lines as Kevin referenced earlier.
Consistent with the last two years, our portfolio of safe Green and connected technologies and balanced regional customer and platform mix will more than offset the negative industry macros again in 2020.
Turning to the next slide for our 2020 guidance.
For the year, we expect revenue to be in the range of 14.5 to 14.9 billion.
Up 4% at the midpoint, despite global vehicle production down, 3%, resulting in growth over market of 7%.
Operating income as expected to be $1.72 billion at the midpoint with operating margins, increasing 100 basis points, when adjusting for FX and commodities.
As Kevin mentioned, we expect the automated driving JV to close at the end of Q1.
We expect earnings per share in the range of $4.75 to $5.05 per share up 2% at the mid point, where share count flat year over year.
10% increase before the impact of the equity income losses from the JV.
Operating cash flow a $1.75 billion is up 8% year over year.
Looking at the first quarter revenue is expected in the range of three to 3.47 to 3.57 billion up 1% at the midpoint was six points of growth over market.
Given our outlook for global vehicle production down 5% in the quarter.
EBITDA and operating income are expected to be 495 million and 350 million at the midpoint, respectively and earnings per share are expected to be 90 cents at the midpoint.
As a reminder, our first quarter outlook reflects the estimated impact of the extended shutdowns in China vehicle production.
Despite 2020, representing a third consecutive year of declining vehicle production.
Our outlook for the year demonstrates the track demonstrates the traction we have made improving our through cycle resiliency with.
With a relevant portfolio of technologies that grow faster than the underlying market and a competitive cost structure, allowing us to grow earnings and cash flow.
Continuing to invest in future growth.
Turning to the next slide we thought it'd be helpful to walk revenue EBITDA and operating income year over year for the segments, starting with advanced safety and user experience.
For revenue, we expect growth over market of seven points translating into approximately 4.2 billion of revenue in 2020.
As growth in active safety revenue more than offsets price downs, FX and the role of art and the roll off of our displays and displays and contract manufacturing revenues.
EBITDA and operating margins excluding mobility.
In both years is expected to be down approximately 200 basis points.
Consistent with our prior communications the outlook for assay wax includes the necessary investments to support the development of advanced technologies, the pipeline of new business pursuits, and the volume of new program launches in 2020.
Demonstrating the benefits of our competitive position and enhancing the opportunity to maximize returns on our investment in the coming years with continued strong volume growth.
Turning to signal on power solutions.
We expect growth over market of six points translating into approximately $10.5 billion of revenue in 2020.
Our electrical distribution systems product line continues to be a market leader and is seeing sustainable growth over market from higher content.
Penetration of auto 2.0 Mega trends.
Our connector and cable management product lines, which include auto and industrial Interconnects is expected to grow mid single digit above market again in 2020.
And high voltage electrification, including both electrical distribution and connectors is accretive to both the growth and profitability of Sps with 50% growth expected in 2020.
Operating margin expansions and expect is expected to be approximately 80 basis points more than offsetting the unfavorable impact of FX and commodities.
Turning to the next slide adaptive overall, you will see the year over year walks for revenue and operating income for the full year 2020.
For revenue you see the benefits of our more secular portfolio driving volume growth.
And more than offsetting price FX and commodity headwinds.
For operating income you see the benefits of volume growth, partially offset by unfavorable foreign exchange and commodities, primarily the euro in RMB.
And the benefits of our performance initiatives derived from our annual manufacturing material sourcing actions that ramp over the course of the year. In addition to the benefits of the JV consolidation.
Partially offset by our investments for growth, which I noted earlier.
Well industry volume started the decline in 2018 active has continued to execute its capital deployment strategy, creating meaningful value for shareholders as reflected on slide 20.
We have continued investing in the business organically to support our strong bookings growth in faster growing product lines, such as active safety electrification.
Inorganically, where we have invested $1.5 billion and acquisitions like can you.
Winchester and GABAA costs.
Which have expanded the geographic and end market diversification of our signal and power solutions business.
Lastly, we have returned approximately 1.4 billion to shareholders through share repurchases and dividends over this timeframe.
Bringing our total cash returned to shareholders to approximately $7 billion since our IPO in 2011.
Looking forward, we will continue to maintain a consistent and well balanced approach to capital allocation aligned to our strategic framework.
Focusing on reinvesting in our businesses and paying a competitive dividend.
Our M&A strategy focuses on transactions that enhance our scalability.
Accelerate speed to market and also provide access to new markets.
And to the extent that we can take advantage of market disconnects, we will continue to be opportunistic and our share buyback and returning cash to shareholders.
In summary, we believe effective capital deployment as a major differentiator for active and an important lever for shareholder value generation.
With that I'd like to hand, the call back to Kevin first closing remarks, thanks, Joe I'll wrap up on slide 21 before opening it up for Q1, a 20 Nike was another great year BRAP, despite an even more challenging macro environment.
Leading performance validated the progress we've made strengthening our through cycle resiliency and having the right portfolio of advanced technologies, enabling the safe Green and connected solutions are come our customers are increasingly demanding the rate cost structure, allowing us to continue to invest in future capabilities, while driving earnings and cash flow growth.
And the right people and processes to deliver the innovation and execution that's inherent in our strategy.
Looking ahead the team has never been more confident in our competitive position and our ability to outperform through cycle.
We believe captives is perfectly positioned to continue capitalizing on the key global auto 2.0, Mega trends to drive market share gains, while continuing to improve our cost structure, which gives us tremendous confidence in our outlook for 2020 and beyond.
We remain laser focused on both delivering value to our shareholders today, while also strengthening our competitive position in the future building upon our strong track record, a flawless operational execution and value enhancing capital deployments.
As a result, we build a much more predictable and sustainable business with robust downturn resiliency, that's better positioned to perform in any macro environment.
So with that let's open up the line for Q in it.
At this time international ask your question.
Certainly if you'd like to ask a question. Please press star one on your telephone keypad.
Your first question comes from the line of Brian Johnson with Barclays. Your line is open.
Yes.
Yes, a couple of things.
First.
But.
Display.
That's right.
But especially in light of all the people selling displays and all the assets that see us.
Could you do you think strategically just one remind us of when and why.
Exit that business too.
When you are still doing user experience, where does that mean, you're really focused as it hypervisors software is that just the same advanced systems, but outsourcing the screens.
Yeah. So it got Brian I'll start and then.
Joe certainly can add to the to the comment on the display side or that portion of the split business that we decided we're going to exited it's really on the directed by aspect that aspect. That's a commodity so the software behind the display Hypervisor also all of that sort of value add as well as the domain controller that.
The activity that we're focusing.
Our efforts on.
And I still get those without the display part of that yes. The display part is more often than not certainly increasingly its pass through or directed by from.
From the customer so that's the aspect of the display business that we decided that we're going to exit.
Okay, and if you look in that segment are there other mature products.
Wanting wound down.
Going after them that just as we think about the revenue walk with all the positive trends would need to keep in mind longer yes, no no I think from up from an overall portfolio standpoint, we believe the balance of.
What we call user experience, which is principally for us infotainment.
Software the Hypervisor again, the domain controller as it relates to.
The controls and those sorts of things so very attractive business for us.
We have a very strong competitive position.
Okay and Brian .
Brian a leg down in 2020 is about 75 million of display revenue round numbers.
Okay.
And does that flow through 20 122.
It's it's really small numbers after that we finished 2019, a little under 100 million.
Okay second around that.
Transition apart from that.
I guess, 3%. So production what are you seeing in terms of production mix between electrified non electrified mix b, how would that change over the year and then see.
So we are fairly fungible between regular wiring regular way.
Hi, both its for hybrid.
Hi, Bill.
How are you thinking about managing what could be are you expecting production schedule.
Category volatility are you prepared for that.
No.
At least based on what we see today right. We've been a path for electrification for for for some period of time it doesn't mean.
At the OE level that we could that you'd potentially could potentially see I.
Disconnect.
But from from our perspective, what we're seeing from a customer schedules standpoint.
Especially in Europe .
Again, Joe talked about our outlook for revenue growth next year on high voltage, which is north of 50% is extremely strong.
Ken that growth rate validate that could be.
Kenneth.
Jump around quarter to quarter that'll depend upon launch volume or launch activity and where were annualizing. So it's possible that you see some fluctuation quarter to quarter, it's quite likely that's not OEM generated or schedule generate is more more likely launch generated.
And then the third portion of your question with respect to.
Hi voltage.
Again, both on the connectors side is walls on the wire harness side, we think we're well positioned in each region.
To meet demand and it's as we said in the past its an attractive product portfolio for us and as you look at our underlying margin structure for the SBS business the margin on that product lines actually higher than the margin on or more traditional product.
Now turning to ask I'm just trying to.
We've talked about same plant same engineers same supply chain. So.
Managing sort of volume managing volumes will not be overly challenging for that product line.
Yes, so I'd like diesel versus gas injectors encompassing used its not a major reallocation from plant. The plan. It's just different staffing in parts of the planned for yes yep.
Ramp up hybrids more than even as or vice versa. Okay, great. They've got lots of questions to follow up later thanks.
Thanks.
Your next question comes from the line of Chris Mcnally with Evercore. Your line is open.
Thank you much team hey, how's it going.
Good I guess the first question I mean people are going to ask about Q1. The weakness. We've we've definitely are starting to hear this from multiple.
Suppliers that you call out China, very specifically could you could you just maybe talk about how much you're building in some of that.
Stream current weakness from things like the virus or is this some of the spillover from excess.
Inventory that we had at the end of of of 2019.
Yeah, Chris I'd say, it's more of what we're hearing from delayed startups. Following the new year. I mean are our schedules are fairly locked in sort of by the end of December had accounted for any production shifts between Q4 Q1 from our perspective. So this is really we've got customers now that I'd say on general are talking about coming.
Back sort of no sooner than February 9th or 10th.
Which is depending on business is anywhere from a week to almost two weeks of delayed production from what we would normally have seen the yield SBS business tends to go back a little bit earlier and the new year break. So it's really just adjusting to delayed start up so that's up.
Barely fluid situation as you might imagine.
The dislocation of I, it's going to be really the dislocation of labor that went home.
For the holidays at how quickly they could I'll come back.
Either from a practical perspective or from a permit.
Mandate perspective, but that's that's primarily yet.
Thats call that if you will look sort of walk Q1 year over year ally.
Called China. This the way production, maybe 15 or 20 million right now we're expecting that make that up in Q2. So we don't view this as a full year issue at the moment and then we do have some FX and we've talked about before you know as we catch up in the first and second quarter two the weaker RMB in euro that happened in the second half of last year.
We've got about another 20 in Q1 of FX and commodity impacting the ROI line. So those those two items are really.
Everything that's in Q1.
Chris if I can add one thing Joe I think one item to make sure. We're clear that it does not include is if theres a global disruption as result of the issues supply chain issues in China.
You know it has anything meaningful that's not incorporated into our outlook for the first quarter. So to Joe's point, it's really focused on the impact in China as relates to China production.
Okay, guys Thats very very clear and then just a quick second question on.
And for for for growth in the in the EBIT walk and obviously that the investment in eight us where the bookings there are quite quite strong could you just give us a little bit of of color to how much. This 50 basis points, let's call. It 70 million I think on slide four you give the 8% of sales going to to engineering.
How much of that is sort of staff engineering hires that occur in 2020, so that you get some leverage on that 21 2022.
We have to think about this drag going on.
While you are eight outgrowth is is good so how much is a step up for this year first we have to think about this is a continual.
Drag in the walk going forward.
Yes, well I can start Chris and again Jochen can make comments listen I think it's kind of two things its run rate related to the back half of last year quite frankly in terms of we talked about our I made the comment my my.
Prepared comments with respect to an acceleration of customer opportunities clearly those are things that we've been working out for some period of time so.
It relates to resources associated with the development of technologies, some of which we featured at CES like.
Advancing our radar technology and advancing our algorithm capability advancing our sensor fusion.
Mobility is well is advancing our are at this point time, Adas controller capability resources associated with the development of that technology in integrating.
Integrating or operating with the customer and then lastly, as Joe said some of it is executional launch activity.
Thanks, some portion of it is into the baseline tailwind at 29 2019, then some step up into 2020, and then we Wouldnt expect an incremental step up like this we based on the opportunities that we see in front of us today in 2021.
Yes, I agree with that Chris This is leverageable spend as you get into the out years.
Okay, great much appreciate I'll follow up you guys have to thanks, so much.
Thanks, Chris.
Your next question comes on line of Dan Gallagher with Wolfe Research. Your line is open.
Hey, good morning.
Thank you. So it's hey, just just wanted to ask about.
The China growth over market.
Kind of jumped out at me only a couple of hundred basis points in 2020 like when this has been running like pretty high kinda into the double digits.
Most of 2019.
Can you just talk about some of the reasons behind that.
And is you don't want to eat Alere, the other day really kind of called out.
Some of the U.S. automaker underperformance in 2020 as a reason for them kind of having a lower growth rate than the market just wanted to kind of ask about what's happening there.
Yeah, I'll I'll take the first come in Jochen go through all the details I listen to it as it relates to OEM mix, we have exposure to some of those customers.
That have had a lower or weaker revenue growth from the China market for the last year or two some quite frankly when you look at 2020, I don't think that story or we don't think that story is is any different in in 2019. As you know we had very strong growth over market.
And I'd characterize it is just the impact or timing associated with program launches.
And in any given quarter any given year, you see growth relative to market.
You can see swings or adjustments as you head into 2021, we'd expect that growth over market to return to more more normalized levels for us which tend to be high single low double digit growth over market.
Yes, I agree that fourth quarter was very strong for us is a lot of launch activity. So as we've.
Looked out on 2020, it's really we just assume we lap those launches in Q4 at this point, we don't see launch activity in the back half a year that would bring us up Dan so.
We see it coming back on 2021, but from a from what you all we'd expect the business do as Kevin mentioned high voltage continues to be very strong in China.
Some of the lap launches are on active safety, but for us it's that growth over market doesn't sort of shoot straight every quarter and I think thats. That's all we're seeing its very specific too. So what we've launched its not sort of a broader.
Customer or macro question for us, it's very specific to our launch cadence.
Got it and just just one other one as I think about the business a little bit longer term.
Can you talk about the timing of the launches of some of these higher value scalable active safety L. Two L. Two plus awards.
Are you seeing launch activity.
In the back half a 20, yet or are we waiting till you know mostly 2021.
No you'll you'll you'll begin to see in 2020, and then each year following that Dan So a significant amount of launch activity, which really it reflects that growth rate, we talked about right.
The 1 billion three to 2.5 billion over the next couple of years.
And as I mentioned in our comments or were mentioned in her comments, we see an opportunity to actually accelerate that growth in the out years and thats what support fee in the invest the incremental investment we're talking about this year.
Great. Thanks, Thanks, a lot guys.
Your next question comes from the line of Joe Spak with RBC capital markets. Your line is open.
Thanks, Good morning, everyone.
And then thanks for all the a helpful color on on the walks I guess on slide.
19.
If I try to.
Like you normalize 2019 margins or pro forma I guess for let's say three quarters no mobility. It seems like youre guiding margins pretty flat year over year, despite the growth and I get the 60 basis points or investment you talked about that I think that's that's understandable, but it also then.
Flies that.
Even though you're getting productivity it might not be fully offsetting some of the price and I know you've taken a lot of actions and there's been some tariff mitigation. So.
Is there something else, we need to consider that sort of.
Plugs that algorithm.
Hi, Joe we're close I mean, if you look adjusted for FX exclude the JV were at about 10 basis points of margin expansion for the year, our target as we talked about Investor day last year was closer to 20 in a flattish market.
So we're at 10 and.
Down three markets. So obviously we are.
Okay type of folks I always want to see more but.
There is an element there is down vehicle production, we do have to absorb that theres a lot of other offsets occurring right a lot of other product project so from a from a.
10 basis point, it down 3% production is.
Where we feel like we need the business to be just given out just given the overall investments and again when we talked about sort of up 20, and a year that was that was much more in a flattish production environment.
Okay. Thanks.
And then just on an asset new acts that we have always talk a lot. We always talk a lot about eight asking zone controllers.
Kevin I heard you mentioned I think threed driver monitoring wins, it's not something I've heard you talk a lot about in the past, but it's clearly an important feature going forward, especially since I think it's required for euro encapso like how big is that business, how fast can it grow within active safety. It seems like it's maybe underpenetrated versus the rest of aid us in.
What's the margin profile that versus yet no no. So so dollars today are extremely small.
Market growth rate in our growth rate extremely fast so we think over the next.
Handful years market size can get up to $2 billion. Joe We think we can get so roughly somewhere between 20 and 40%.
Market share.
In that market it dovetails perfectly with what we're doing from an eight asked platform or system standpoint.
It's necessary to your point for Euro Encap, just as important though it's necessary really to optimize when you think about traffic Jam assist highway assist highway pilot.
Those sorts of activity you need that technology in the car.
So it's an area that we have a significant amount of focus within the traditionally as much business and when you think about mobility on demand, it's an area where the up the folks in our 80 business are very focused as they look in additional services that they can provide their ride sharing customers. So we're excited about it but it.
It's a very small revenue amount revenue after that.
So then as that grows.
Presumably that that scale similarly to sort of how you talked about other other aspects of aid us in the past as well to from a margin perspective.
Yes, Thats margin rate that is in line with what we've talked about eight gas when you'd ask us to up to full scale.
Okay. Thank you very much.
Thank you.
Your next question comes from the line from Emmanuel Rosner with Deutsche Bank. Your line is open.
Good morning, everybody.
Good morning.
So I wanted to come back to the engineering investments.
Yes, and Uxc sure if I understood if I understand your message.
You know that as these large step up but it's not sort of that you've done expected to keep stepping up this way.
Sort of 2020.
Can you just maybe go over.
How should we think but then the margin profile the normalized margin profiles of that business is that Kinga addition, step back ex mobility investment this year.
Obviously, you have a longer term framework from various investor days for pretty decent amount of margin expansion. So it's really just a function of that beyond this year's investment we serve that go back through these sort of you a 50 bips of annual margin expansion or are there any other considerations.
Hey, this is just.
No.
Yes.
I think I think as we will a couple of comments I mean first just to put into context and listen we focused on every penny we spend.
Our guidance is roughly 2.5 billion of EBITDA in 2020, and and our view is given the number of opportunities that are in front of us given our competitive position.
And given the chance to what we've you know we believe really expand our competitive moat investing an additional 70 70 plus million dollar is a smart thing to do near term and long term.
So I want to start with that second our active safety business today has margin had double digit operating margins right.
So it's a profitable business as we scale and I think Joe made the comment that that you should view. This investment is scalable investments as we continue to scale given the nature of this business given how we structured scalable platforms.
Yes product line is a product line that ought to have margins.
Well in excess of our traditional kind enough, we're running and now low double digit operating margins right. We should get strong software. So you should see something you know from an 80 standpoint, including both hardware software that's in the high teens, so with some very very attractive space for us to play.
Okay. That's a that's helpful and then I.
I guess on the.
In in Snps on the or that obviously extremely strong.
Operating leverage and incremental margins and a strong outlook on margin improvement for this year kit can you maybe just walk over some of.
The drivers of these high incremental margins I mean, I assume electrification being part of the existing footprint. This is obviously helpful and the thing that's sort of our out of doing Larry or can we sort of assume these issues.
Yes, I know I think I think we're on the trajectory are expected to be out of that business. The teams done a really nice job across all the product lines and I think you hit on the head of I know, it's important to high voltage growth that's up that's a business that.
We've talked about was even a relatively small product line that sort of hit segment margins very quickly because of the nature of the business. The same we really can run that business on the sand cost structure is the low voltage.
And then we were getting benefits of the scale in that business.
You know again, we got content on one out of every three to have vehicles manufactured globally. So even if it's not our active safety system or are given our high voltage system you tend to see more electrical content going into vehicles globally. So you've got a.
Healthy tailwind at the back of that business, helping helping with the leverage so that's that's playing out as expected in.
You know again, when we looked at you know when we looked at all the opportunities and I asked us to invest.
The performance and the active safety product line itself as Kevin mentioned, and where we were with.
Sps margin expansion, that's really what gave us the confidence that continue to invest in any active safety business, Yeah, I would add I'd break it down to three big buckets.
Sure share gains in our connection systems business, So strong growth as Joe highlighted right at the as you know that's a attractive margin profile.
Product line execution, so we talked about high voltage and growth of that that.
Particular product area across both our EDI us and see us product lines.
And then thirdly I just.
Execution, especially in the us business our management team there.
He has done an excellent job, especially in 2019 in terms of just blocking and tackling unit in operational improvements I think the Best example, there quite frankly is China, where you know what vehicle production. The decline of vehicle production last year that China team was was was able to basically achieved.
Their business plan forecast at much lower volumes.
So the ability to execute on him what is a complex manufacturing supply chain business is translated into the margin.
Speaking about the team there did an outstanding job.
Yes definitely many thanks.
Your next question comes from the line of John Murphy with Bank of America. Your line is open.
Hi, good morning, guys.
Just first question.
Just the first question a.
Follow up on the incremental 70 million being spent.
The active safety side.
I mean, I would imagine if this was sort of longer term R&D. It would be in the JV. So it's pretty safe to assume that this as real near term implications for product in in this year and probably the next two to three years is that kind of a fair statement.
And as it is job what are you a little better I remember that the JV is really focused on that level four or five robo taxi space so anything that.
Level, two plus plus level three.
Early stage level for for a consumer fleets for that for our normal traditional customers that's that stayed with us so.
Youre right. This has got investment across sort of that what I'd say is really the sort of the two plus plus three type spectrum and it's.
Yes.
Look at some of the advanced developments Kevin's talked about that's to make sure. We can secure the 5 billion of bookings plus the Kevin mentioned for for 2020 continue to grow the business.
Yes, and May and support the launches of what we're doing currently so that's fair Yeah, I think as John as we've talked before the demand for level two level two plus.
And even level three with some Oems were seeing that activity over the last 12 18 months, we've seen that activity significantly increase so the investment is in response to pursuing those opportunities.
Okay. So if we can also dovetail that or sort of put the JV.
Next to that I mean is there any need to step up spending there that you're seeing just is that technology is advancing in might be longer dated as opposed to realization how much sort of financial control do you have on sort of that decision, making process and if you could just remind us how the the cash flow either works or doesn't work between.
I mean, you in that and that JV.
Well the JV the separate legal entity.
Our partner is three board members, we have three board members. So we still have a significant amount of.
Control and visibility as it relates to the joint ventures strategy in the direction, it's going in.
The management team running the joint venture entity is the existing management team.
From our automated driving business headed by Carl Unum and his team.
We haven't finalized numbers at this point in time, but I think given the opportunity and given some of the vehicle capabilities that the that our partner brings that you should expect a ramp up in spending as it relates to vehicle validation and vehicle integration.
It's a 50 50 joint venture obviously.
Half of that from a PML impact flows through our PNM oil as it relates to cash Mondays, putting a billion six of cash in at close. So our view is that's enough money or enough cash to fund the development and commercialization of the technology over the next several years.
So yeah, we've talked before about being sort of enough to fund four to five years and.
Kevins point is as the JV comes together and we start to look at the vehicle capabilities of.
Had a commercialization opportunities of hot die it's possible the business spent the JV spends more than 21 in 2022, but we're certainly would come from.
The funding from Monday.
No cash flow from you at all at this point.
No. Unfortunately on required a couple of years then yes, then just lastly real quickly on Astoria. You mean is there anything that is in the backlog or we're still in sort of RF by stage for that.
Also as we think about what you're talking about growth above market I mean is ever going to be a period, where the ziegel empower actually might have higher outgrowth, then active safety and user experience or is it going to be facilitator for growth on that side. Just curious if we'll see a flip sometime in 2022 Clos.
On John I don't I don't think we Didnt vision, a flip relative to the growth rate you see in aid half I think just given the nature that that market the market opportunity, having said that.
We think there's there's opportunities, especially with.
With the mix of high voltage mixed with some of the product portfolio that we haven't the connection systems business.
To to grow off kind of mid single digit.
Over underlying vehicle production.
Including both the impact of a non automotive as well as our automotive connector portfolio.
In large it's an enabler of all the software and other items that were talking about.
As it relates to estimate asked me again I mean, our views there was a portion of this EFI activity. That's all that has already started with domain centralization.
Some of the cockpit controllers, the active safety control, where some of the programs that we've actually already one with respect to SP, a specific and what we showed at CES.
We're working today with we have three advanced development programs with too.
Automotive, though always those programs are going to come forward with RF eyes are our Hughes in the coming months. So the commercial opportunity hopefully we have something report in terms of business wins this calendar year and revenue shortly thereafter.
Great. Thank you very much.
Thanks.
Your next question comes from the line of David Leiker with Baird. Your line is open.
Good morning. This is actually earn welcome back on for David.
My question there through your ability to drive growth in non auto businesses. This year.
So you them acquired a number of businesses over the last couple of years and so from an organic perspective at least wondering how the the opportunities that is developing your ability to drive growth even in a declining commercial vehicle market. This year.
Well the home and tightened business is probably the best business. When you think non auto overall non auto and that's a business.
The for the last several years outside of auto has been growing high single low double digits.
And we'd expected to continue to grow in that sort of.
A range for the foreseeable future I think when you look at the other acquisitions, we made and given their mix and Mil Aero industrial and some of the other markets again those have been solid amid.
High single digit growth rate trip.
That's right and then with with as it relates to commercial vehicle you know, we're still just given our relatively low penetration, we're still sort of years away from having a cycle discussion about CV.
We started a lot of content growth opportunities and it's really it's really sort of greenfield for us when we get into some of the CV.
Markets, particularly around Sps the connector business element tightens focus on CV, so well, while it impacts us at some level, we were still able to grow well above CB market at this point, yes, so Aaron that would equate to low single digit commercial vehicle revenue growth any commercial vehicle market lets say.
Yes.
Great. Thanks for taking my question.
Thanks.
You are lining touched warmer.
Okay. Your last question comes to mind, if Dan Levy with credit Suisse. Your line is open.
Hi, Good morning, Thanks for joining me on leasing in say.
Just a quick one on on the guidance as it relates to the JV Deca deconsolidation I believe in the past you noted EPS neutral. So just if you could provide some context on the.
10% EPS would have been up 10% for equity income and also I see that you have implied performance JV deconsolidation of the 200 that benefit on margins, that's like 290 million I assume that 290 million.
That 130 of that is the nonrepeat of the mobility spend so just some color on that on the guidance for yes.
All right. We've got about round numbers 40 million 40, plus million end Q1, and then on up end of Q1 close about 130 million sort of geography.
Moving down to the.
Equity income line, and then that will be augmented by the step up and purchase accounting.
That the JV has to go through which well basically make it EPS neutral said away.
My comments were escrows about 2% as reported.
If you sort of calculated as before the equity income affected the JV were up 10%. So that's the that's the.
Negative EPS impact from the JV coming in at the equity income line.
Great. Thank you and then just lastly wanted to ask a more strategic question on the on the JV and it's obviously focused on level for technology, but I think.
One of the benefits you've cited in the past as an opportunity to diesel learnings and tech to really refine your.
Level two plus.
Three per product so, but this is a JV and you do have a partner so to what extent our expectations really aligned with your JV partner as it relates to the JV is focused on purely level for technology versus your expectation to leverage this JV to improve your level two plus level three product.
Yeah listen is closely aligned I is very closely aligned so we have the opportunity to provide.
Products and services through the joint venture and vice versa.
And given our historical relationship than our future relationship, but we'll continue to be.
Real opportunity.
The share information share best practices, and ultimately we hope at least to create incremental commercializable opportunities.
And that's something that that our joint venture partners very supportive of as are we.
So.
That interaction will continue.
Great. Thank you very much.
Thanks, Stephanie.
Okay well. Thank you everyone. We appreciate you joining for joining us for Q4 earnings call have a great day.
And this concludes today's conference call you may now disconnect.
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