Q2 2020 Aptiv PLC Earnings Call

[music].

All lines have been placed on mute to prevent any background noise.

Speaker's remarks, there will be a question and answer session. Thank you.

Erosnow afterwards, Vice President of Investor Relations you May begin your conference.

Thank you shall be good morning, Thank you to everyone for joining after second quarter 2000, Twangy earnings conference call.

Following along with today's presentation, our slides can be found an IR dot afterwards.

Today's review of our actual financials exclude restructuring and other special items and will address the continuing operations adoptive.

A reconciliation between GAAP and non-GAAP measures for Q2 financials are included in the back of today's presentation and the earnings press release.

Please see slide you for a disclosure on forward looking statement, which reflect after its current view a future financial performance, which may be materially different from our actual performance for reasons that we site in or.

Form 10-K, and other as you see filings, including uncertainties posed by the Cobot 19 pandemic and the difficulty in predicting its future course and impact on the global economy.

Joining us today will be Kevin Clark opt ins, President and CEO, and Joe Massaro, Senior Vice President and CFO.

Kevin will provide a strategic update on the business and then Joe will cover the financial results in more detail.

With that we'd like to turn the call over to Kevin Clark.

Thank you line and good morning, everyone.

Beginning on slide three I'd like to spend a minute providing an update on how active is responding and contributing to the fight against covered 90.

We concentrate our efforts on ensuring the health and safety or people [noise] communities, where they live in where we operate as well the safe and efficient restart of our operations. So that we can policy server customers around the world and at the same time, we've taken incremental actions to preserve our financial strength and enhanced our competitive position.

As we emerge from this crisis.

I'm proud to be one of the global giving partners that are supporting hospitals and clinics pretty cold in patients around the world Interactive team members and pontiacs, while delivering Virgin health care supplies volunteering their time and personnel resources help stop spread in the corner virus in their local communities.

Our same store protocols the additional safety measures that we put in place at the very start of the pandemic and have been shared with customers suppliers and government agencies across the goal of allows for the safe successfully restarted each of our facilities worldwide, allowing us to effectively ramp operations.

Proud of how well we performed in these challenging time and I'm grateful 14 fashion sense of urgency ensuring our efforts are making a real difference.

Moving to slide four.

As expected.

Quarter proved to be challenging was called related shut downs driving unprecedented decline in vehicle production about North America and Europe.

Despite the depth of declines in April and the slope phasing a restart operations beginning in may.

Rebound of vehicle production in China, combined with solid operating execution.

The better than expected financial results.

Global vehicle production declined to 54%.

Revenues declined 43%.

Most of $2 billion 11 points favorable to the underlying vehicle production market.

EBITDA and operating income losses totaled 49 million and 229 million, respectively and earnings per share was a loss of $1.10.

Looking at each geographic region, the economy in China continued to improve resulting in better than expected bounced back in vehicle production, which was up 6%.

Vehicle production declined, 68% North America, and 62% in Europe.

Switching to complete shutdown in both regions during the month of April and the slow restart of operations beginning in May.

Well, we told them in the North American Europe crude production schedule for me somewhat volatile primarily the result of periodic supply chain disruptions principally in Mexico due to cope with 19.

And visibility into the pace of recovery in the second half of your remains low.

Which is reflected in our outlook for vehicle production to be down 10% to 15% versus the same period prior year.

The deliberate actions, we've taken to strengthen our business model over the last few years, including portfolio changes in cost structure initiatives have positioned us to respond in a down in as much more challenging environment.

Turning to slide five.

Despite the challenging macro environment, the proactive steps, we've taken to protect our employees to deliver for our customers and enhance our financial strain.

This is a strong position to continue executing our strategy.

As it stands today.

Operational with each other how does the 26 major manufacturing sites up and running.

I'm pulling or standardize safety protocols, allowing us to operate across our global network, roughly 85% over normalized capacity and even a higher at some of our manufacturing locations.

As our facilities prepared to restart operations, we hadnt resources in place to safely ramp up production once received the necessary government approvals in alignment with customer production schedules.

Three as I mentioned very volatile during the quarter.

I'm happy to say that as a result was a strong coordination in collaboration with our supply chain partners, we had zero customer disruptions during a restart of operations.

With the learnings from a successful restarted production we gained meaningful experience an operating safely was called 19, which is critical.

We believe that the residual impacts will remain with us for some time, resulting in lower production volumes and continued operational inefficiencies and as such we're not expecting a rapid recovery and continued to be cautious.

2021.

However, the demand for our industry, leading portfolio of advanced technology solutions aligned to the safe Green and connected Mega trends remain as strong as ever as evidenced by the increase in program launch volumes here today and as a result, we continue to make the necessary investments to support the strong pipeline of new business person.

Okay.

And new program launches in 2020 and beyond.

That's a cold 19 outbreak later this year our teams have been working collaboratively focusing on the health and wellbeing of our employees and then identifying unique value added solutions for our customers.

To do so we've leveraged technology to do more digital tools by upgrading our data center hardware network connectivity, we were able to significantly enhanced scale and the quality of our employee conferencing and collaboration capabilities, keeping our workforce conducted an operating more efficiently, allowing for the uninterrupted execute.

One of our strategic imperatives.

In summary, we continue to build on our strong track record of execution innovation and remain focused on delivering for our customers and it's the same time, making active even more resilient.

Turning to slide six.

New business bookings totaled 5.9 billion year to date, reflecting the impact of challenges related to operating with Covance 19 over the last six months.

As a situation stabilizes, we expect to more normalized run rate of new business awards to occur during the second half of this year.

Our advanced safety and user experience segment of approximately 1 billion in the first half of the year as a handful customer awards have been pushed to the second half of the year.

In our single power solutions segment had new business bookings totaling roughly 5 billion year today, including 700 million of high voltage electrification awards, driven by the rapidly increasing demand for electrified vehicle platforms.

The result of more stringent Joe to regulations and increasing consumer demand.

So in summary, our new business bookings over the last several years reinforces our ability to sustain strong above market growth well into the future underscoring the strength of our portfolio of market relevant technologies, a line to the safe Green and connected Mega trends.

Turning to slide seven.

Our competitive mode is expanding just as a total addressable market, both our core automotive and new in adjacent markets continues to grow.

Our core markets are expected to increase over 50%. The next five years, reaching 120 billion with the most significant portion that growth coming from active safety and high voltage electrification.

Two markets, where we have a very strong competitive position.

In addition, our traditional strikes in areas such as central compute engineered components and vehicle architecture enable us to unlock incremental opportunities in adjacent markets and our capabilities in software development data analytics position us well for opportunities new markets, including connected services and autonomous driving.

Which bring new business models with recurring higher margin revenue streams.

The opportunities in our core new and adjacent markets position us for more profitable and sustainable growth in 2025, well beyond.

Turning to slide eight.

Our strong track record of new business bookings and revenue growth over markets are proof points that our portfolio strategy is well aligned to the areas of growth within our industry.

As a result, we continue to fully fund investments in several strategic growth initiatives, including advanced Adas systems high voltage electrification and vehicle connectivity all markets that are poised for continued robust growth in the years ahead.

Hi, letting few examples in advanced safety and user experience our unique approach to compute centralization and satellite sensors has been a game changer from the industry with five Oems launching our first an industry scalable it asked platform over the next 18 months.

We secured 8 billion of lifetime bookings on the satellite architecture platform today, which will be deployed across 10 million vehicles over the next five years.

More importantly, our Gen. Two platform will increase our lead was the deployment of next generation perception systems. The extensive use of AI at higher levels software abstraction that will deliver even more consumer value, while enabling new business models for after.

And our signal powered solutions segment, we're leveraging our industry leading position in vehicle architecture become the partner of choice for both our traditional OEM and emerging customer is planning to launch electrified platforms.

By incorporating our portfolio of high voltage electrification solutions, including the conductors conductors electrical centers in cable management systems, we're able to dramatically reduce the way and physical size of the electrical distribution system by up to 40%, thereby reducing costs.

And lastly, our customers are looking for more intelligent connected in integrated solutions to detect address warranty issues faster and resolve them much more efficiently.

We're currently working with one global OEM to meet its called connecting 100% of all new vehicles with our connected edge hardware and software application, enabling enabling a much higher level of customer satisfaction and.

And significant significantly reduced warranty expense.

Turning to slide nine.

Billion leverage our unique full stack systems capabilities is helping our customers realize your future technology Roadmaps.

They understand the changes as vehicle architecture are critical to delivering the feature rich highly automated vehicles they need in the future.

As a result, our customers are converging around new architectures to deliver the higher contested more safe green and connected vehicles for the future well, we know how to provide value.

Thanks to our unique position as the only provider the brain and the nervous system of the vehicle we serve as a strong collaboration partner for increasingly complex architectures and the path to Sta with industry, leading capabilities in power and data compute precession systems software and sensor fusion.

Our customers recognize after this technology partner capable both the design and manufacturing of advanced hardware.

Fully integrated into the most complex vehicle systems, which combined with our differentiated modularize software capabilities creates value for our customers at every level stat accelerating their development of the same screening connected features consumers want with a proven automotive brake systems that they can trust.

Smart vehicle architecture is a scalable architecture solution that lowers the total cost of ownership for the OEM, while also unlocking the opportunity for active to capture more value in the vehicle.

I'll wrap up I'll wrap up on slide 10, before I hand, the call where to Joe.

Despite the challenges we face the last six months, we remain laser focused on continuing our track record of outperformance and long term value creation as we execute our strategy and deliver on our vision for the company.

The vision is logic is a logical extension of our business strategy leveraging our unique position at the intersection of the safe Green and connected Mega trends that are transforming our industry, allowing us to outperform in any environment.

He was a rigorous execution of our strategy, we've been creating more sustainable business defined by improved revenue diversification across regions customers vehicle platforms in end markets and accelerated and more predictable growth profile.

Increased profitability and cash flow growing sales faster than costs in converting more income to cash with significant upside from disciplined capital deployment.

All of which resulted in meaningful shareholder returns.

With that I'll hand, the call over to Joe to take us through the second quarter results in more detail.

Thanks, Kevin and good morning, everyone, starting with a recap of the second quarter financials on slide 11.

As Kevin highlighted earlier, there was another difficult quarter for wrapped into the industry.

At the time over last earnings call, China was starting to come back online and customers had shut down operations in Europe, and North America, which lasted well into may.

Despite the extent of the shutdown, we had strong execution across our businesses as we learn to operate safely in a co bit 19 environment.

Revenues of $2 billion were down 43% as vehicle production declined 54%.

Despite the sorted in severe cold related declines, we worked hard to achieve near breakeven levels in the second quarter.

As a result, adjusted EBITDA was a loss of $49 million better than we planned attributed a strong cost management with austerity measures of approximately $135 million and better manufacturing performance as we restarted our operations as well as slightly higher volumes.

Adjusted earnings per share in the quarter was negative $1.10 and assumes the convertible preferred shares issued last month were treated as if they were outstanding in the weighted average share count.

Lastly, operating cash flow was negative $106 million, including working capital usage of only 107 million a testament to our team's ability to officially managed working capital.

As production ramps up in June.

[noise] looking at second quarter revenues in more detail on slide 12.

Adjusted growth was down 43%, reflecting 11 points of growth over market.

Despite volumes declining by $1.5 billion, we saw strong growth over market in every region.

Price downs were approximately 1.5% and unfavorable foreign exchange and commodities approximately $80 million.

Our regional performance reflects the timing and pace of restart activities around the world.

Starting with North America vehicle production declined 68% in the quarter.

Our operations resumed later in May about two weeks after Europe, and we saw favorable platform mix is Oems prioritized higher content that vehicles as they began rebuilding inventory.

In Europe, we continued the trend of strong double digit market outgrowth, driven by continued interest in active safety and high voltage electrification platforms.

Lastly, in China, our revenues increased 14% outpacing the market by eight points driven by a significant increase in new launches, which we expect to stabilize in the back half a year.

[noise] moving to the segments on the next slide [noise].

Advanced safety and user experience revenues declined 47% this quarter.

Reflecting seven points of growth over market without growth across all product lines.

Yes, and you actually EBITDA declined 129% driven primarily by lower volumes.

Compatibility purposes, the automated driving spend that is now part of the after the high end I joint venture is excluded from the prior year results.

As Kevin mentioned, we're seeing some co bit 19 effects and OEM launch schedules with certain launches pushed into late 2020 or early 2021.

Turning to signal in power solutions revenues are down, 42%, reflecting 12 points of growth over market share.

Driven by the unfavorable impact of customer shutdowns in the quarter, partially offset by market outperformance in our high voltage electrification and engineered components product lines.

As well as better performance in our industrial end markets some of which continued operating it's essential businesses during the shutdown.

EBITDA in the segment declined approximately 100%.

Generally driven by lower be lower volumes and inefficiencies associated with the shutdown and subsequent restart.

Turning to the next slide.

Ill provide some further perspective on how active is flexible operating model is allowing us to manage through the current environment.

Starting with more diversified revenue gross.

Our disciplined growth strategy has allowed us to ship more of our revenues to faster growing areas within automotive.

Such as higher content to trucks and issue bees.

An active safety in high voltage electrification solutions, where penetration is driving significant growth.

While we continue to expand our capabilities and reaching commercial vehicles and diversified end markets.

All of which has allowed us to say sustained strong secular growth over market.

We also remain laser focused on optimizing our cost structure and redeploying those savings into high return investments for growth.

As previously discussed over the last several years, we've worked hard to lower our overall costs improve efficiency and lower our breakeven levels as evidenced by our second quarter performance, which includes the additional cost associated with operating with Covance 19.

We will continue to rationalize our fixed costs in light of the lower production environment as we head into 2021 and focus on productivity initiatives in areas have structurally lower our costs improve service levels and enhance the flexibility of our business model to position the company for better through cycle performance.

Our financial framework includes reinvestment our businesses, both organically and Inorganically.

And further positions the portfolio for accelerated growth and margin expansion.

Allowing us to deliver flawlessly for customers and enhancing our through cycle resiliency.

Our continued focus on long term shareholder value ensures we make the appropriate trade off between short term goals and executing our long term strategy.

As we navigate the second half of the year, we will continue to utilize our safety protocols to ensure we protect our employees and deliver for our customers.

Reinvest in our growth businesses with high ROI Capex investments largely to support new customer wins and expansion of key product lines.

And be disciplined acquirers by increasing scale and leverage in our engineered components businesses and enhancing our autotech capabilities and software artificial intelligence machine learning and systems engineering.

The consistent execution of our strategy even in the face of today's unprecedented challenges is a major differentiator for active and an important lever for shareholder value generation going forward.

[noise] turning to the next slide and the outlook for vehicle production in the second half.

While operations have resumed.

Customer schedules remain very fluid.

We have tightened our outlook for vehicle production this year to a decline of approximately 25%, assuming a slow ramp up and vehicle production declines in every region in the second half.

Starting with North America, and the second quarter, we safely returned 55000 employees, representing 85% of our labor force with minimal incidence of infection since reopening.

That's a testament to the outstanding job our team has done putting the right measures in place so rafe safely restart operations and save start employees.

However threat of plant closures and potential customer supply chain disruptions is something we continue to watch closely as new hot spots arise across the U.S. in Mexico.

In Europe, we saw similar progress recovery has been more gradual stimulus initiatives of stable I have helped stabilize demand and accelerate the penetration of electrified vehicles.

And while China production levels have increased.

Inventories remain elevated and customers are adjusting schedules accordingly.

The second half outlook is highly variable as the impact on near term consumer demand and the risk of additional Tobin related disruptions is reflected in the third and fourth quarter schedules, we are seeing from our customers.

As a result, we expect 2020 vehicle production to be around 70 million units globally.

And if we had to snap the chalk line today.

We would expect modest end market growth in 2021.

Actively adjusting for the shutdowns in the first half for 2020.

Taking global vehicle production to approximately 77 to 78 million units in 2021.

[noise] however, despite the near term end market weakness the long term secular growth drivers remain intact.

Growth over market can be choppy on a quarterly basis, we expect full year outgrowth in 2020 in the range of six to eight points as previously communicated.

In summary, our ability to optimize how we operate and weak macro environment will allow us to continue to outperform in 2020 and beyond.

Turning to slide 16.

Getting in Q1, as we saw the impact of Cobot 19 shutdowns on our operations.

We took decisive actions to enhance our financial flexibility.

The austerity measures, we implemented in the first quarter, which totaled over $600 million, an annualized cash savings helped preserve our liquidity and enhance our financial help during the unprecedented volume declines in the first half of the year.

In June our.

Our 2.3 billion dollar equity offering helped to reinforce our financial flexibility against any further business disruptions during the recovery, while allowing us to continue to invest for growth and take advantage of additional organic and inorganic investment opportunities.

And we subsequently paid down our revolver in full.

As a result, we ended the quarter was $1.9 billion in cash on hand, and $4.1 billion of total liquidity.

This coupled with the actions we've taken the last few years to strengthen our capital structure has allowed us to keep a well laddered debt maturity profile and extend the weighted average tenor on our debt.

In summary, the proactive steps, we've taken to protect our employees deliver for our customers reduce expenses conserve capital and preserve optionality as put us on an even stronger footing as we emerged from the current prices with that I'd like to hand, the call back to Kevin for his closing remarks.

Thank you Joe let me wrap up on slide 17, before opening up for Q1 thing.

As I mentioned earlier, the second quarter proved very challenging industry met unprecedented declines in vehicle production in both North America and in Euro.

With a successful restart of operations, we believe our robust business model and the solid execution of our strategy have validated our through cycle resiliency and of differentiated active such that even in the most difficult times, we're capable of capitalizing on the safe Green and connected Mega trends that are driving increased vehicle content.

And translating that capability in a market share gains.

While the near term outlook for underlying market trends and overall end market demand for new vehicles remains uncertain. The actions we've taken to enhance our financial flexibility during the crisis will drive continued financial outperformance.

We're confident that our disciplined approach to capital allocation will lead to additional value creation opportunities for active and drive increased shareholder returns our confidence in our ability to deliver sustainable value creation is underpinned by the dedication and commitment of our people, which is our greatest asset.

I'd like to reiterate how proud I am over 160000 team members, who through all the recent challenges has made significant personal sacrifices while continuing to think can act like owners. So that after the could operate safely and deliver for our customers and for our shareholders.

Looking ahead.

We're confident we will emerge from this crisis more unified in our mission in a stronger competitive position and financially even more resilient with that let's open up the line for QNX.

Thanks.

If he would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you're using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

In press Star one.

Good question, well pause for just a few moments to allow everyone an opportunity to signal for questions.

Well take our first question from Dan gaps with Wolfe Research.

Hi, good morning, everybody.

Morning.

Can you talk a little bit about the austerity measures and the cobot costs I think about.

No 100 million.

Savings <unk> in Q2.

How much of that is sustained into the second half and if you could give us any sense of what we should be modeling.

In terms of by incremental margins on the revenue recovery from the second quarter.

Yeah, Dan It's Joe is that you're right. It's about net 100, so cold, but it was about call. It round numbers, a little more than 30 in the quarter.

And that's the direct costs, so the cost of P.P. and alike.

I think it's fair to assume those continue for a period of time in scenarios, we brought back more employees.

We're currently roughly 85% that would go up that's obviously variable there's an element of that that's variable to the employee number.

The austerity measures Q2 was you know a.

Yes fairly significant effort from an austerity perspective that 135 million with a lot of people out on furlough and COO.

Obviously, that's harder to sustain are not sustainable once you get up to 85% production. So those costs and started coming back into the.

Back into the business.

Away I would think about that hermine goals at this point I'd expect.

The back half of the year to look more like Q1.

Maybe a little more favorable to Q1 since Q1 had a couple of points in there as it related to the China shutdown, but I'd be thinking more of sort of a Q1 decremental than in Q2, maybe a couple of points better if a if we don't experience shutdowns.

Okay, great and just longer term.

Our Korean TV and plug in hybrid adoption.

Ramp up in 2020.

How does that make you feel about youre high voltage target going out a couple of years.

Yes, yes, maybe I'll I'll make a comment on that I listen we feel like we're extremely well positioned from a portfolio standpoint.

Principally in that Sps segment to benefit from the drive towards more high voltage whether it be battery electric vehicle or plug in hybrid.

And when you look yeah.

At least.

Industry projections as it relates to a high voltage electrification out to 2025 to roughly let's call it 25% of a vehicle production and well beyond that in 2030, we feel as though we're extremely well positioned both based on the strength of our existing high voltage product portfolio.

As well as our competitive position in low voltage market quite frankly.

Right well run roughly one of every three to four vehicles globally. So we're dealing with those customers those traditional Oems today.

And have significant opportunities with the emergence of emerging Oems in the future.

And we'll take our next question from Joseph Spak with RBC capital markets.

Thanks, Good morning, everyone.

Morning.

Maybe just a follow up on Monday.

Sturdy measures.

As you sort of you know evaluate how you do business and Kevin you gave a whole bunch of examples like is.

Do you see an opportunity over time for for some of those to stick or is there an opportunity for you to you know maybe take additional action to to make some of those temporary costs more more permanent has easier to reevaluate what the global environment looks like over the next couple of years, Yes, maybe I'll I'll start drilling Joe can certainly.

Chime in I.

I think we should start with you know over the last several years as you all know we've been very focused on optimizing our cost structure.

So you know over the past three to four years, we've taken out $350 million to $400 million of overhead costs out of our cost structure. So in reality as you look at how we've operated historically there there wasn't a whole lot of extra cost less [laughter].

To.

To reduce having said that you know given given the lower volume outlook from the current year and as we look at 2021 relative to our perspective, a year or so ago.

There's opportunity from a footprint and Resourcing standpoint.

Obviously, we're evaluating.

You know, our overall manufacturing and engineering footprint.

How we how we operate so there is some opportunity there.

Having said that at least for the foreseeable future, there's going to be incremental costs related to keeping our employees safe and operating with the safety protocols.

So there's no again theres some opportunity to operate more efficiently I'm not sure. We would tell you that we learned anything new going through this process.

I would say we recognize that production is going to be operating in a lower level. Therefore, there there are actions, we need to take to reduce our overall cost structure.

Joe is there anyway, I think that's well said Joe the only thing I'd add is was I think.

The discipline and though you know sort of called the muscle within the organization to manage costs that.

That's the same discipline of muscle we used to take the 350 out. It's the same discipline, we used to manage Q2 and the austerity measures and lobbyist, we continue to apply that to a lower volume scenario.

They won't necessarily be the same costs, but.

Confident the organization is you know is very good on executing at these types of things I think as Q2 shows.

I think the put the comment generally about how well we operated in the second quarter just to put it in perspective and provide you with a.

A little bit more context through Q2.

Roughly 95% of our salary workforce was working from home.

And when you look at it on average on average roughly 64% of our global hourly workforce was on T. Hello.

So in periods of time, where that was well north of 80%.

So the ability to ramp down production and then ramp back up production to be operating as we talked about at roughly 85% of manufacturing normalize capacity.

To do that managed to supply chain and have zero customer inter interruptions is really a testament to how strong.

The team managed and operated during the quarter.

I'm very very aggressive Kevin maybe.

Just one more during the quarter I guess really in the past month or so we saw another.

High profile automaker maker I couldn't big announcement about domain compute and you architecture and.

It seems like most of the luxury players are now there and recognizing that is future. It's clearly something you've talked about in the past.

Are those conversations now starting to migrate down to the some of the mass volume brands is cost still an issue are now how scalable is it do you really think from sort of the high end to the low end and how do you see that market evolving.

Yeah, No I think Joe to your point there, there's a lot of momentum as it relates to recognition that vehicle architecture needs to be really reevaluated and the approach to how how vehicles are architected in engineered need each you change.

I guess as Weve.

Communicated before we're in discussions with I don't know 10, 10 to 12 Oems regarding smart vehicle architecture, our initiative programs, they're working on.

You're right, there's more or has been more momentum as it relates to the luxury.

Oems.

More recently, there has historically been more momentum with the with the luxury Oems I think more recently, you're seeing more momentum with those who also operate in the mass market, we feel as though we have a solution that.

Thats scales from what we can consider more traditional mass market vehicle up to the luxury segment.

As Weve disclosed previously we have to advanced development programs or two programs to advanced development programs with Oems are actually three total programs.

That we believe learnings.

From our perspective and from the OEM perspective, you'll see more adoption.

Yes, he approach across a broader mix of Oems.

And quite frankly. It is is is that whole is that trend of domain centralization that you're seeing in eight asset you're seeing an integrated cockpit controllers that you're really seeing across the entire vehicle.

And our second generation eight absolution, you'll see a significant step function move forward as it relates to.

The how that system architected extraction of software from hardware.

In scalability of the system.

So a lot of momentum.

Well take our next question from Brian Johnson with Barclays.

Thank you just drilling to some of the drivers over growth in market.

In particular the interplay between.

New product launches and then mix impacts.

So should we kind of thing forward first of all the 10% growth or put market.

In this quarter, then kind of roll forward that the eight ish percent for the next couple of years or a few questions kind of one.

To the extent that Oems to for programs, how does that factor in.

Second if the programs when they launched or smaller than when you put together your revenue forecast.

How much are a headwind could that be and then on the more positive side.

What is the impact of option mix and take rates on the organic growth numbers are you seeing any evidence I certainly when we talk to other suppliers will hear things like big screens eight asked penetrating into all but the most strip down version of mass market cars. So is that a tailwind.

Yeah, Brian It's Joe maybe I'll start and Kevin can jump in I sort of start with the caviar and we've talked about this historically, but also a lot during the last couple of months, just given the shutdowns and restarts.

The over market is gonna be lumpy over the next few quarters as production just comes up and what gets produced with that said I mean, we're still very confident is not long term, 6% to 8% growth.

Based on every everything we've seen so when you think about.

You know when you think about a quarter or things that drove drove some of the upside obviously in North America. There was a tendency to relaunch some of the higher content to trucks and ask you bees first someone a relative to sort of restart production that was a favorable mix for us I'd expect that to normalize out we'll still have.

Great content on those platforms, but as other platforms come back online and in larger numbers you could see that Europe very consistent with Q1, it was strains and active safety and electrification.

High voltage electrification.

China was helped this quarter by some launch activity.

So we saw strong launch activity that we think will.

Flatten out the back half of the year, we'll also have a comp with some strong launch activity in the back half of last year in China. So you'll start to see that that flatten out again, a little again a bit for the you know just just for the for that back half and it's it's transactional it's it's nothing long term.

As it relates to lower vehicle production you know today that we got asked his question a lot over the past two years.

Really haven't seen the elasticity between our outgrowth and vehicle production and by that I mean, a shrinking or a closing of the gap right, we've really been able to stay.

Stay within the forecasted range and in some cases do a little bit better at this point, we have no reason to believe that changes. We think we'll we'll hold up well even with lower vehicle production, obviously customer delays for launches.

You know launches that lower volumes can can sort of certainly impacted the total revenue dollars, but again really haven't seen that type of elasticities.

And I think we would agree and Kevin can jump and we would agree with the comment around sort of the democratization of active safety in some of those technologies being looked to.

Looking to push some of those technologies down to lower models, Kevin Yes, no listen I just had a couple things I think Brian to the extent, we've we haven't seen anything but the said we've heard discussion in around delays as it relates to.

Play active safety that would be in the level three category and the reality is those those revenues are kind of 2025 and beyond.

Active safety you know as a product helps Oems sell and then you have the yet added benefit of the tailwind of and Caf standards and in Europe, and you know the commitment here in North America driving.

More demand for active safety and then it's something consumers want as as it relates to high voltage when you look at the cost pressure that the interest the incremental cost pressure the industrys under.

If anything we've we've seen a more a stronger commitment toward high voltage.

And you know likely stronger demand from OEM customers as well as consumers as they you know.

As a tend to.

Increase the focus on on costs coming down battery cost coming down as well performance vehicle going up.

And then third as it relates a vehicle connectivity. The industry is you know spending $50 billion year on warranty costs and [noise].

One of the Big solutions is OTI, a in vehicle connectivity and with vehicle connectivity those costs can be.

Reduced significantly so thats certainly as an area that we've seen a lot of traction over the last few quarters from and from an OEM standpoint, and expect that to continue.

Okay, and sort of a housekeeping, but also strategic just follow up on anything in the quarter or the outlook outside of light vehicle in commercial Jade.

Production, So I guess a couple of things one how did your non auto non vehicle markets hold up and what's the outlook and then second.

Do you have anything question, you're probably getting in conferences approaching what you might call recurring revenue from software either in those industrial or vehicle businesses that maybe also held up differently than global production.

Yeah, Brian else, it's Joe I'll start with the adjacent markets. The non auto in CV again small number is relatively speaking, but has actually held up quite well as I mentioned in my prepared remarks.

A number of those operations with designated essential businesses and remained open.

And you know have have so therefore, it didn't necessarily the reopener come back in and have maintained.

You know maintained themselves pretty well I think your that part of the business. We're looking to so to be flattish to prior year to down low single digits, depending on the market depending on the product so how holding up on a relative basis quite well.

I think as it relates to you know the ongoing or or sort of more software software like revenue streams, obviously, that's something we're continuing to develop and.

And to work on Theres, nothing sort of significant a a that nature and the a and the actual results today.

Well take our next question from Mark Delaney with Goldman Sachs.

Yes. Good morning, Thanks, very much for taking my question.

Hey, Mark.

I was hoping to better understand your comment about potential production in 2021, and I think you talked about 77 to seven 8 million units as a current planning assumptions can you provide more context about how active is coming up with that number is that primarily based on what your customers are telling you in terms of their their forecast or is that more based on after its own assessed.

That's in the market and third party estimates and more yeah. Thank you.

It's really it's a mix of both right. It's is it.

It is July right.

So there is up a fair amount of time between now and the began 2021, but just based on what we're seeing today in front of US based on dialogue with customers based on.

Looking at.

Kind of the macro picture in a view that we're going to be dealing with co bid for some period of time.

That you're going to have some flare ups of co bid in North America is well is Europe.

You look at you know GDP growth and unemployment as we head into the back half of the year.

That a portion of the strength in Q2 and you are early Q3 production is about rebuilding inventory levels.

That you know all that factored into our outlook our early outlook.

For 2021 vehicle production.

Okay. That's helpful. And then they have you mentioned in the prepared comments that.

Part of the use of capital from the recent equity raise could be inorganic opportunities. So I'm going to better understand how active the M&A landscape may be and what areas. After it may be looking to do inorganic investments. Thank you.

Yeah, Mark it's Joe I think the you know very consistent with where we sort of left off in 2019, so really.

Well go the activity within Sps I'm always have a sort of a near to the ground for opportunities within I guess, you X, but they're just just given the nature of that space and sort of how we about distance ourselves you know sort of from a product development organically. There there are a little bit fewer and far between some mostly within Sps around the engineer.

It's businesses element Titan connection system bolt ons bolt ons for Winchester or the non auto interconnect business.

As expected the we have seen some processes start back up.

They tend to be domestic ones and they tend to be smaller ones at this point.

You know some of that tends to be just around the travel restrictions and getting from here to their but we do have a couple of processes that it did start back up during the quarter you know as I mentioned during the the equity raise but a number of management presentations that were or cancel them that February March timeframe.

We had expected those to start back up as you as you may know within engineered components those types of deals a lot of them tend to be private equity owned.

So there's an element of you know they're going to be for sale at some point I think there's there's opportunities depending on the end markets.

I would expect that to the extent we can.

You know get enough information to get enough visibility around price discovery.

You know, we see some of those coming back in the back half of the year.

Well take next question from our men testing because this year.

Morgan Stanley.

Great. Good morning, Thank you for taking the question.

Just wanted to dive in a bit and to the a the growth over market for a signal on tower.

As we think about it going forward.

In New York City at least the disguised have never been clear for as long as I've lived here and it's hard to imagine that we go backwards here.

So and then also.

There's a proposal in California to accelerate.

Option, among lift and Hooper lifted promise to go electric by 2030.

The thing about the upside potential here for signaling power as we move or have you seen any any pick up where is that a bit muted just given that we're going to covert environment and everyone. Just trying to get through first before pushing ahead with such initiatives.

Yeah, well day to day to day right I think the industry or we think the industry is just trying to push push through and get back on get back on track.

But but you know starting quite frankly, starting last year quite frankly, the last couple of years incremental focused on on on high voltage electrification as a propulsion solution most of that coming out of Europe and out of Asia Pacific The one item that.

Maybe kogut is held accelerate is the cost pressure associated with developing solutions I solutions as well as electrified solutions and it appears to be more OEM seem to be just just given capital constraint more committed on.

How do we focus on the development of technology in one area versus two areas.

From a cost effective from a cost management or capital management standpoint.

Which we believe will ultimately translate into.

Continued acceleration of high voltage adoption.

When you look at what's being talked about at least as it relates to the election here in the U.S. and you know the platforms as some of the candidates clearly more supportive electrified vehicles.

Whether that funding of technology or incentives for consumers to buy electrified vehicles.

And then we tell you the last tailwind related to high voltage is quite frankly consumer demand I mean, we did a survey recently survey respondents over half said, they would entertain entertained buying a high voltage vehicle.

25% of the respondents said that they would buy a high voltage or battery electric vehicle is or next vehicle purchase.

So as you can imagine that's quite a switch from three years ago. So our view is is high voltage is a real strong tailwind.

For our Sps segment, and as Jos taking you through the numbers in the past.

Content in a high voltage vehicle is quite that on a traditional internal combustion engine vehicle. So.

So as unit unit and content opportunity.

Okay, and just maybe a follow up.

What would have to happen.

For Smbs to grow not mid single digits, but high single digit say next year. What are some of the pieces that would really have to fall into place or is that.

A bit of a stretch.

Yeah, I would say based on everything going on we're certainly I can speak to 2021 of renters at this point, but.

So we're very comfortable with.

With that with the growth profit profile, we've laid out for Sps as Kevin mentioned this clearly some upside from.

From the high voltage business, you know our connection systems business, whether it's on the auto or on the non auto side continues to do quite well.

As does hellermanntyton, but I I think to get to get to that level you'd need to be firing on all cylinders sort of all the time and.

Certainly never assume that is gonna be the case, but very comfortable to gross profit profile, we've laid out that as a great business. It's a you know it's performing well on the topline as well as.

As well as the as well as the operating performance certainly expect that to continue even in a weaker environment 2021, Yeah. I think one of the points to join I've tried to articulate in our prepared comments is clearly 2000 2020 twenties challenge given co bid.

Clearly the the industry's improving but our view is it's a slow phased recovery that impacts 2021, but as it relates to our technology and how we're positioned and.

The tailwinds related to the industry and where we fit from a product portfolio standpoint, where we sit from a global footprint standpoint, we're perfectly positioned.

And that all comes together certainly in the out years and we hope it comes back quite frankly sooner, but when you think about overall vehicle mix high voltage.

Level, two plus level, three adoption and things like active safety all vehicles, having OTI OTI a so we have more vehicle connectivity, that's a couple of years out.

Well take our next question, Dan Levy with credit Suisse.

Hi.

Good morning, Thank you, Hey, Hey, Hum first just wanted to ask a question on the outgrowth and as it relates to the launch cadence and I know you mentioned it sounds like there's some delays here, but you know it's still the case that the launch cadence is still heavily lever to China and if China is.

You know and I guess that we all have our own how book, but China is the relatively outperforming region globally why not provide.

Stronger outgrowth of.

Or is it just conservatism.

No I I'd say, our okra, our launch activities pretty balanced globally right. We're launching a number of active safety in high voltage products in Europe.

Actually working through the T. onex excess you'd be launch in North America now so I think it's fairly balanced it.

Our launch activity you know pre Cove. It was always lumpy right. You go one of these big launches and you ultimately.

You know level off on a sequential basis and lap on a year over year basis. So that's sort of that cadence is continuing.

But that's a that's a very consistent stores already been in the past and very balanced you know our regions certainly not quite a third a third third but roughly in that direction. The bookings have been roughly in that direction.

And the law as a result, the launch activity again it. It can change you know overtime as big programs launched different places, but it's a fairly consistent level of activity. It just sort of cycles through we've got a lot of launches in China. In Q2, we had a lot of launches in the back half of last year in China, So you're going to see some sequential.

Actual sort of stabilization and a little bit of lapping year over year.

And again as we've talked about that growth over market. While why we think it's important as a sort of a full year metric in a guide post for.

No for thinking about the out years it it often doesn't shoot straightened out and it could predict what quarter and given all the disruptions to production over the past five months. Its you know going back to China shutdowns. It's just hard up you know, it's hard to expected to shoot strays every quarter and I think it'll be like that for the next few quarters.

Okay. Thanks, that's helpful.

Just wanted to follow up with the question about active safety and just more broadly the market dynamic here.

On one hand.

Obviously, you've seen a lot as momentum and you seem to be winning the awards and it's reflected in the bookings.

But if we look at.

You know the announcement by Ford Oh, we could go a couple of weeks ago in which.

Seem to me that they're getting more work directly with Mobileye noble idling the sensor fusion, which is typically something that would have been done by.

By the tier one it seems like that typical relationship where it's here to supply for the tier one tier one packages everything and then getting that plug and play to the OEM that that's that relationship to the quota anymore. So maybe you could help US reconcile you know these two data points of on one hand, you seem to be getting a lot implemented at the same time.

Typical relationship of the two two to the tier one hi Inn shifting a bit and can use also comment on your margin trajectory.

Active safety, that's still a corporate average.

Sure So it's Kevin what Tonight.

So I I.

I don't know all the specifics about the so the mobileye announcement.

You know, there's clearly a trend from an industry standpoint head towards platforms toward scalable platforms.

Based on what we're aware of the relationship between various providers of perception systems really hasn't change sometimes.

That kind of tracking goes through the tier one sometimes it goes directly to the OEM.

I can tell you with respect to.

Platforms that were on.

We do all the sensor fusion right. So its our radar solution. It's our camera, there's a vision solution from up from a provider and as you know we have a great relationship with mobile line there our vision provider, we do all the sensor fusion in our compute platform.

We provide the eight asked controller.

So from our perspective in the particular example, you're talking about based on what we know and we feel like we know it pretty well there's really no change.

And you will see periodic situations, where the OEM for you'll probably quite frankly for purchasing leverage decides that they want to contract directly with a provider.

And the.

Tier one continues to do the integration some tier ones will bring additional capabilities, whether its feature development.

Feature development perception system development do that integration do that sensor fusion.

So that the up the entire eat ATF system operates and that's.

Clearly, how we operate in no change in the model that.

That you know, we're selling to customers and that we're operating honor.

Yeah, and then Dan real quickly just your margin question from our perspective.

No no longer term changes in our margin expectations for for active safety or that are the S.U.S. segment, clearly 20, Twentys, a very disruptive year and you think of the segment being down.

129% on on EBITDA in the quarter, obviously that goes all the went out of the product lines right, that's where those costs are so.

But you know that that high single digit low double digit.

[noise].

EBIT profitability, we were talking about and you know in prior years and expecting in 2020.

The long term view of that has not changed.

Well take our next question from John Murphy with Bank of America.

Good morning, guys Sea bass wanted to.

I wanted to clarify one thing on the 85%.

Can you number you're talking about is that a staff number was that right at the or what exactly does that mean that raised the ended the quarter and if we think about going forward. The market you know numbers, you're talking about increasing about 10% next year. It kinda. It seems like you don't want to staff capacity basis, you won't be dead a lot of cost.

Back and everything that comes in we'll be variable purchased you know raws ore processed parts purchases, so that that incrementals could be significantly higher going for registration wanted me to understand that what that 85% means you're referring to.

Yes, John It's Joe I think its labor capacity. This amount of heads we brought back and I mentioned sort of that.

55000 folks come in backend.

Back into Mexico.

Obviously, there are some and I were not were.

Very cautious with those were not going to give 2021 thoughts around incrementals and such as a lot of moving pieces, but.

You don't have those fat folks back in obviously, there's some inefficiencies around restart there's some inefficiencies around operating was cold in the environment with that said I think the restarts gone very well all things considered you know, where we need to add costs or take cost out.

Going into 2021, it's really going to be dependent upon.

Schedules by region and customers by region right. It's as you can sort of sit there and say okay. If you're at 85% you only thank you Ross said and that sounds like its leverageable, there's going to be a little bit aware that isn't on what product lines with what customers before you can sort of balance that all out. So there's obviously a lot of work to do for us and we'll we'll we'll work through it over the next.

Over the next four to five months here in working through where where those moving pieces are and where they're going to come from.

But I mean, if you're looking at a market you have down 25% year over year on year I'm only up down to up 10% next year I mean, I've got to imagine calling back a lot of a lot of heads above and beyond what you've done you don't see 5% level.

Probably not going to be necessary I know, there's pockets and there's regions and there'll be some ebbs and flows of a slight mismatches, but I mean, it seems like you've got the people back you need.

For the most part through the end of next year, if the market shakes out the way that you're talking about I know, there's puts and takes but I mean is that you had a fair statement.

Yes, John but I think that 85% relates really to kind of late Q2, and if you look at kind of sequential from Q2 to Q3 to Q4 right.

You know either you do see some ramp up or production, so you'll you'll you'll see us bring back.

Some additional employees.

Our next question from Chris Mcnally with Evercore ISI.

Thanks, So much team one question on on margins and then one on second half growth. So on the margin and Joe. Thanks for the the incremental margin comment on second half, but maybe if we can think about it a little bit differently. Because theoretically production is only down 10% you had very high content per vehicle growth.

You know that the the loss revenue can be actually a pretty small number you talk about inefficient piece could you sort of put a dollar amount on the extra cost that is being burdened every every quarter at least in the next two quarters from.

Lower lower efficiencies and that way, we can kind of run a more normalized down 20% decremental and they just add a number for that that loss I productivity.

Yeah, I know credits its still a little bit early days for that right again, you've got to remember we've been up and running for for three and a half four weeks in the quarter with.

In June with that would that type of activity. So it's literally for that again I my sense of what we're looking at and certainly what where we're working towards are working to do better would be.

My earlier comment as to be at Q1, with probably a couple of points of improvement Q1, Decrementals with a couple of points of improvement assuming no shutdowns because we were shut down for a period of time and.

And China during Q1 and that obviously, you know adds to a pretty significantly to the decrementals. So.

No that's apart from the direct costs as I mentioned to Dan's question. You know, we're you know can see $30 million to $35 million cost per quarter direct costs.

And then sort of overcoming that to get back down to that sort of Q1 decremental with with maybe a little bit of health from a from not being shut down and it's just it those are we're working through all of that but you need you need to Ron you need to run consistent way you need some schedule normalization here do a you know to be able to work through that and that's it.

That's what we'll do for 21 21, and that'll obviously again as I mentioned, we were very confident our ability to take a look at our cost structure and figure out how to do better.

I think is just seen us during the last couple of years, and obviously Q twos, a bit of a testament to that as well and.

Just need some time to work through that as we get into 2021.

Okay.

That makes sense and then the second question is around the outgrowth in second half you talked about the 6% to 8% court or being we reiterated fig first half, it's something like 12, 12% or would it kind of implies a lower second half should we just take that as your normal sort of conservativism, maybe we don't have that.

His ability on all the pushouts or is there anything about it.

It's a very tough calculation to do outflows given that the weighted average you know any any just detail around what second half, maybe a little bit less strong than 10%, yes, I think there's some sort of good old fashioned lapping launches so sort of the normal.

And then you know part the other thing I think as I mentioned, a couple of times now you know, you're just going to see as as production.

A various platforms comes back at different times that just going to be a very choppy calculation, but from what we're looking at.

You know we've had some strong launch activity back half last year with hasn't been launch activity.

You know even in China in Q2, and some of that's going to sort of flatten out and lap is really what's what's driving it I mean, that's you know there's some of that that's going to be driven by cobot, but that's also the just the way. We've historically worked over the past number of years. It just.

It's not a perfect calculation every quarter.

[noise] and we'll take our last question from Emmanuel Rosner with Deutsche Bank.

Yes, Thanks for squeezing me in.

Good morning.

Good morning, So just a quick follow up on the.

The second half I guess growth overall markets when when you did though the capital raise I think one of the goals opportunities I guess was.

The ability to win away some business from competitors.

Automakers essentially approach you towards that is that the sort of can you give us an update maybe on our that's been going in is that sort of things that could materialize in the second half bookings or not at the later on.

Yeah, No mail, it's Kevin.

So no <unk>. So how are we seeing the up to the opportunity remain absolutely.

I would say given the pressure on the supply chain.

Both just just logistically.

From a capability standpoint is wall is cost.

Oems seem to be much more focused on.

Strong global capabilities, as well as ability to scale and the opportunity leverage platforms in and and so.

So we're in the midst of a number of discussion discussions about those opportunities, but those are not opportunities for the revenues switch gets flipped into quarter two.

It's it's you know, it's a year or two years, it's a year would be short very very short term more normally it's a couple of years out from a revenue opportunity.

Okay and for the bookings as well.

No that's it.

The booking opportunity is near term revenue I thought you were talking about revenue. The revenue opportunity is is in reality a couple of years out even if it's an existing program. It's under production is the reality is.

Activity needs to be transition manufacturing needs to be transition supply chain needs to be changed obviously Oems are very sensitive to any risk of disruptions. So that takes some amount of time.

But certainly the bookings opportunities are there first half bookings just given covance 19, when you look at the level of opportunities at least since I've been around here, probably the lowest that we've seen.

The book it booking opportunities the extent they don't shift out of the back half of the year are at much higher levels than what they've been previously I think it's fair to assume though just given dealing with covance. The you know that then it remains in the environment. There's some inefficiencies so there will be some slight shift.

King.

No we've talked about it in the past being anywhere between a couple months to a quarter maybe too.

But the the opportunities there are real.

Okay. That's a that's helpful. And then just on the Incrementals I know you haven't commented in Mexico, but 2021, yet I think shorts conferences during the quarter, you sort of suggested that as sales and volumes recover.

The incrementals could be tours to reflect the just normal level in that and that higher is that still the is that still thinking.

No annual listen I think the general take away from from from my perspective at least as.

You know the focus on our keeping our financial framework intact and I know we commented on that 20% to 22% you know that's that's historically what we've seen we do believe we'll see that go forward.

And then there's a number of other things that are happening in the world right around P.P. and shutdowns of Cobot comes back and again, it's I think it's just very early days to be speculating on on those types of those types of things. So you know I think it's just saw with Q2 and hitting that basically break even when you when you think about 30.

5 million, a pea and a negative 49 million dollar EBITDA number you know and we've talked for two or three years now about getting our breakeven EBITDA down to a 40% decline in revenue and I think where you know that was part of our framework. We were effectively there. So you know we'll work hard to offset what can be offset but I think that's up.

I I tend to stick to the framework when I think about the business.

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

Thank you everyone. We we appreciate your attending our call we all hope everyone stay safe Okay.

Take care. Thank you.

This concludes today's call. Thank you for your participation you may now disconnect.

[music].