Q3 2020 Aptiv PLC Earnings Call
Representing seven points of growth over vehicle production.
EBITDA and operating income totaled $581 million, and 389 million, respectively, and adjusted earnings per share reached a $1.13.
Looking at each region government fiscal policies and improved business conditions boosted vehicle production, 11%, China and Oems in North America, and Europe are aggressively restocking vehicle inventories, resulting in a strong ramp up in vehicle production, which translated into a year over year decline.
Only 1% and 8% respectively during the quarter.
The increase in COVID-19 cases during the quarter, especially in Mexico, and Eastern Europe created supply chain disruptions, Princeton principally related to tier two and tier threes electronics and component manufacturers, which resulted in a volatile customer schedules leading to some operational headwinds.
We are closely monitoring the more recent cyclical at night in cases in both Europe, and North America, and the potential impact on the global supply chain and customer schedules, but.
But its not reflected incremental disruptions in our outlook for the fourth quarter.
2021 global vehicle production.
Joe will cover our fourth quarter and full year guidance in more detail shortly.
As shown on slide five third quarter, new business bookings totaled $4.6 billion reference representing a more normalized run rate for new business Awards.
Year to date bookings reached $10.5 billion benefit.
Benefiting from a meaningful increase in new business win rates, partially offset by the day to day operating challenges related to COVID-19.
Advanced safety in user experience segment, new business bookings totaled just over 2 billion year to date as a handful of customer award initially planned for this year has been pushed to 2021.
And new business bookings for a signal and power solutions segment totaled more than 8 billion year to date.
Including $1 billion of high voltage electrification awards, driven by the increased demand for electrified vehicle platforms.
For the full year, we now expect new business bookings in the range of 16 to 17 billion roughly flat to 2019 levels when adjusted for our current outlook for lower global vehicle production.
The cumulative amount of our new business bookings over the last few years gives us tremendous confidence in our ability to sustain strong above market growth across both of our business segments valve.
Validating the strength of our portfolio of market relevant technologies aligned to the safe Green and connected Megatrends.
Looking at our business segments in more detail beginning on slide six with advanced safety and user experience.
As the need for more complex software hardware and systems integration expertise increases our unique ability to offer highly functional scalable and optimize solutions across the active safety and user experienced domains has.
Has driven continued strong revenue growth over market. Despite the decline in vehicle production over the last few years and our increasing capabilities in software development and data analytics positions us well for future high growth high margin opportunities in new markets.
These industry trends and our unique capabilities underpin our outlook for eight points of growth over market and our advanced safety and user experience segment. This year, reaching roughly three and a half billion dollars revenues.
Turning to slide seven our OEM customers continue to launch advanced safety solutions across their vehicle platforms and and democratize. These features across our vehicle lineup to meet increasing consumer demand while at the same time, Europe and China Encap standards are accelerating the adoption of advanced safety solutions.
Revenue.
Several Oems have decided to make automated automatic emergency braking as well as other rate at features standard equipment in the us by 2022.
All of which translates into a significant demand from Oems for level, two and two plus eight at solutions seeding. The next big wave of market penetration, even as the industry experiences lower vehicle production volumes due to COVID-19.
Our unique first an industry approach to compute centralization and scalable satellite architecture to strengthen our competitive position and sustained our strong revenue growth and is validated by the fact that we now provide OEM customers with more than 6 million radars annually compared to only 1 million just five years ago.
And our satellite architecture solution will be deployed across 10 million vehicles over the next five years.
As such we are confident that we will continue to grow our active safety revenues at a compounded rate of 25% per year over the next few years, reaching over 2 billion by 2022.
Importantly, our tend to Ada Es platform will further increase our competitive mode with the deployment of next generation perception systems, and a higher level software abstraction that will deliver even more consumer value, while enabling new business models for active and reduce investment for our OEM.
Customers.
Turning to our signal and power solutions segment on slide eight we are leveraging our industry, leading position and vehicle architecture to become the partner of choice for both our traditional and new emerging OEM customers.
By integrating our broad portfolio of low and high voltage solutions, including the conductor connectors electrical centers and cable management systems were.
We were able to reduce the weight in physical size of the electrical distribution system by up to 40%, thereby reducing costs for OEM customers.
We're also leveraging our expertise in harsh environment electronics to penetrate adjacent markets such as the commercial vehicle data telecom and industrial sectors.
Our momentum in our signal power solutions segment gives us confidence in delivering revenue growth of nine points over vehicle production. This.
This year, reaching 9 billion of revenues.
Moving to slide nine we continue to see an acceleration of powertrain electrification driven by both more stringent fuel to regulations, principally in Europe, and China, and increasing consumer demand globally.
Our complimentary high voltage distribution in connection systems as well as cable management solutions leverage our low voltage core competencies that include vehicle architecture optimization system.
System level expertise in global manufacturing and supply chain management to enable the acceleration of powertrain electrification by significantly reducing the weight and mass of the vehicle architecture through smarter more efficient design.
Perfectly positioning assets to benefit from the two fold increase in addressable content on a high voltage electric vehicle.
Our unique holistic approach to designing developing and manufacturing system level solutions for electrified vehicles make active the partner of choice for OEM customers and has contributed to continued strong new business awards with both traditional high volume Oems, where we have recently been awarded new business on a c.
These have conquests pursuits, including with a leading major European OEM for innovative long range electrical vehicles that will begin launching in 2022.
And with non traditional battery electric vehicles focus folks.
Focus OEM customers, where we increase our share of wallet with an industry leader who's been expanding both their vehicle offerings and their global reach.
As a result high voltage electrification continues to be our fastest growing product line with revenues increasing at a 40% compounded rate for the next few years, reaching roughly $1 billion by 2022.
Turning to slide 10 never the App to the mission of enabling a safer greener and more connected world has more meaning that it does today the.
The COVID-19 pandemic has led to a much broader perspective on how the global community use safety, both inside and outside of the vehicle.
We've all become more sensitive to our environment and have had a glimpse of a greener world with fewer cars on the road and planes in the Sky and every day. We're all reminded of just how connected the world is and how much more it could be as more of us work remotely.
We are proud of the progress we've made this year on our enterprise wide commitment to corporate social responsibility, which can be explored and our 2020 sustainability report that was published in September and includes our sustainability framework, new 2025 commitments for each of our foundational pillars, which include people product.
Planet platform and newly adopted Jerre I in SCS be reporting standards, which supplement our adherence to the United Nations sustainable development goals.
Our ability to meet these commitments on sustainability is built on a cultural foundation of always doing the right thing the right way.
We believe that our long term success and ability to create value for all our stakeholders are directly linked to building a more sustainable business.
And directly related positive impact we have on our people our portfolio and our planet.
Ill now hand, it over to Joe Massaro for an overview of our financial results.
Thanks, Kevin and good morning, everyone.
After a challenging second quarter global automotive manufacturing has continued its recovery in the third quarter against the backdrop of improving customer schedules and increasing launch activity.
Resulting in a strong financial results shown on slide on slide 11.
Revenues of $3.7 billion were up 3% over last year as vehicle production declined 4%.
Due to the benefits of our flexible operating model.
Adjusted EBITDA was $581 million roughly flat compared to the prior year, reflecting robust sequential improvement in production volumes strong cost management and cost reduction activities.
Partially offset by the ongoing operating costs associated with Covance.
In light of the stronger recovery and need to ramp capacity quickly in the third quarter. We concluded our shirt short term austerity measures implemented earlier in the year.
Resulting in less than $5 million of benefit in Q3.
Earnings per share in the quarter were $1.13 and reflected lower operating income the emotional JV results and increased share count as a result of the June equity issuance.
Partially offset by favorable tax expense.
Operating cash flow was strong at 559 million, reflecting working capital management and cash conservation efforts, partially offset by higher cash restructuring costs.
Lastly, capital expenditures were $117 million, reflecting a year over year decrease of roughly $50 million.
Looking at the third quarter revenue in more detail on slide 12.
Globally, we benefited from both stronger vehicle production.
As well as increased demand for active safety systems and electrical architecture.
North American revenues declined 3%, primarily due to year over year program launch timing.
We continue to see demand for core revenue being truck platforms and expect to return to strong growth and growth over market in the fourth quarter.
And Europe, the trend of strong double digit market outgrowth continued as the production rebound benefited from active safety and high voltage electrification programs.
And lastly, China growth outpaced the market and our expectations as a sharper recovery in sales led to production upside with our major customers.
Moving to the segments on the next slide.
Advanced safety and user experience revenues increased 3% in the quarter.
Reflecting seven points of growth over market with all product lines contributing.
Asked and you X EBITDA declined 24% driven by the costs associated with new launches and the inefficiencies associated with lower vehicle production volumes as well as price declines in the quarter.
As a reminder for comparability purposes, the automated driving spend that is now part of motion all the Aptwo hundred joint venture is excluded from the prior year results.
Turning to signal and power solutions revenues were up 2%, reflecting six points of growth over market.
Strong growth across the segment, particularly in Europe, and China was driven by new launches increased electrification and industrial end market recovery.
EBITDA in the segment declined 2%, which included the additional coal that operating costs as well as costs associated with launches and production ramp.
Turning to the next slide and the outlook for the rest of the year.
Looking at the fourth quarter, specifically, we expect continued variability in customer schedules and operational inefficiencies related to volume absorption similar to what we saw in the third quarter.
This is reflected in our outlook for vehicle production in the fourth quarter of down approximately 3% year over year.
And does not assume any meaningful extended cobot kobin related disruptions or shutdowns.
North America, and Europe are both expected to be down low to mid single digits as inventory rebuilds and improved levels of demand support current production rates and in China. We expect the pace of underlying demand to continue with modest production growth in the quarter.
As a result, we now expect 2020 global vehicle production to be around 76 million units.
But despite improved visibility and customer schedules the threat of plant closures and potential customer supply chain disruptions remain.
Turning to slide 15.
Based on these improved customer schedules, we are reintroducing and providing guidance for the full year and fourth quarter.
Starting with the fourth quarter in the left we expect revenues up 3% on an adjusted basis at the mid point similar to what we saw in the third quarter.
EBITDA in the range of $575 million to $625 million, reflecting a 16% EBITDA margin at the midpoint.
Operating income of $385 million to $435 million is expected to yield a 10.9% operating margin at the midpoint.
And EPS in the range of 85 cents to one dollar.
Moving to the full year that translates into revenues in the range of $12.5 billion to $12.7 billion down approximately 11%.
Reflecting the shutdowns in the first half.
And nine points of growth over market was equally strong contributions from both segments.
EBITDA in the range of $1.52 billion to $1.57 billion, reflecting a 12.2% EBITDA margin margin rate at the midpoint.
This includes over $100 million in coated related operating costs and approximately $150 million in austerity saving measures, which helped to mitigate the impact of lower first half volumes.
Operating income in the range of $775 million to $825 million.
And EPS is expected to be $1.65 to $1.80 rig.
Reflecting a 10% to 11% effective effective tax rate for the full year.
Operating cash flow is now expected to be almost $1.1 billion.
And includes approximately $200 million of restructuring cash as we continue to rationalize our fixed costs in light of the lower production environment.
And Capex is expense is $600 million consistent with our post co bid revised estimate for the year.
Turning to the next slide.
Looking ahead to 2021, our sustained focus on shareholder value ensures we continue to execute our long term strategy consistent with the financial framework, we have previously communicated.
Despite the very challenging first half and lower production environment overall, we have demonstrated our ability to deliver on this framework.
Our industry, leading growth portfolio portfolio has sustained strong above market growth.
While the work we have done the last several years to optimize our cost structure and improve efficiency has positioned us to mitigate the effects of lower industry volumes and grow and grow earnings going forward.
While effectively deploying capital and enabling further growth in the recovery.
While it is still early in the planning process for 2021, we are confident in our ability to outgrow the market.
Which as of today, we assume the market will be up approximately 10% in 2021, taking global vehicle production to 83 to 84 million units.
To put this into perspective. This is roughly 10 million units less than what we saw in 2019.
And reflects an eight year low at levels last seen in 2012.
However, the long term secular growth drivers remain intact.
Which will once again contribute to growth over market.
And the range of 6% to 8%.
As a result, we would expect to return to double digit operating margins in the range of 10% to 11% driven.
Driven by higher volumes year over year, and the assumed absence of kobin related shutdowns.
And our relentless focus on optimizing our cost structure to adjust to lower industry volumes, while balancing our overall capacity utilization as the recovery unfolds.
In addition, we will continue to effectively deploy capital with a focus on value enhancing M&A and investments to add scale and leverage to key product lines and further position the company for accelerated growth and margin expansion.
The consistent execution of our strategy is a major differentiator for active and an important lever for shareholder value generation going forward.
We will give our official 2021 guidance when we report fourth quarter 2020 results.
With that I'd like to hand, the call back to Kevin first closing remarks, thanks, Joe.
I'll now wrap up on slide 17, before opening it up for Q and a.
Despite the challenges we face in 2020, we remain laser focused on further enhancing our track record of outperformance in long term value creation.
As we execute our strategy and deliver on our vision of the company leveraging our unique position at the intersection of the safe Green and connected Mega trends that are transforming our industry.
Quenches strong increase in third quarter revenue earnings and cash flow reflects the flexibility of our business model and the execution capabilities of our team.
As we look ahead, our ongoing efforts to provide technology solutions that solve our customers' toughest challenges improve our revenue diversification to have a more predictable revenue growth profile.
Further optimize our cost structure to increase the flexibility of our business model X.
Expand our profit margins to generate more earnings which can be efficiently converted into increased cash flow and maintain a strong balance sheet and smartly deploy capital creates a more sustainable business and delivers meaningful shareholder returns as the recovery continues to unfold.
Our confidence is underpinned by the dedication and commitment of our employees our greatest asset.
Im Grateful we have an organization is focused on broadly serving a cost.
While creating value for all of our stakeholders with that let's open up the line for QNX.
Thanks, penetrating and we will now take our first question.
Thank you if you would like to ask a question.
Second by pressing star one on your telephone keypad.
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Go to reach our equipment I.
Hi, Good press Star one to ask a question we will now take our first question from Rod Lache from what research. Please go ahead.
Good morning, everybody.
Good morning, Thanks for thanks for that commentary on.
Directionally the 2021 margins at that that is really helpful.
A couple of questions on that.
In the past at least in active safety you've made the.
The judgment that it made sense that to add a bit more R&D spending in the short run that because it was a payback and in the longer term.
Was wondering if you can give us some comment on on how you see that progressing as you look out to next year and do you see kind of a similar dynamic with.
These dielectric electrification pipeline growing does that require.
Additional R&D spending advance of the big ramp that you see in the years ahead.
Yes, Rob it's Kevin so.
We feel as though as we said we continue to feel and actually feel even more strongly now that we have.
Very very strong competitive positions.
In areas like eight apps in areas like smart vehicle architecture.
And even more recently increasingly on the high voltage electrification space and those are areas that we're going to continue to invest into further up.
Widen our competitive moat those investments are reflected in the outlook to Joe's given both for the fourth quarter as well is.
Next year.
We think if we continue invest we're uniquely position based on our capabilities software perception systems as well as.
Connectors cable management.
And wire harness capabilities on a on the vehicle architecture size side to really was significantly.
Accelerate revenue growth and then to expand margins. So thats something that we will we will continue to do but again that that incremental investments reflected in the outlook that chose provided.
Okay. So there is some incremental spending but it's something that's that.
That that you're managing here with the the growth yes.
Yes, theres incremental spending, but I think its balance I think it's relatively balanced and again, it's reflected in our outlook.
Okay, and just secondly, I.
I noticed that the pricing looked like it ticked up to just it just a hair above 2% which is.
I think the upper bound of what we've seen in the past couple of years.
Correct me, if thats incorrect, but.
Yeah, any comments or color on what actually is driving that and how you're thinking about that going forward.
Yeah, Rod, it's Joe that's a fair observation and I would attribute that to a little bit of just some of the lumpiness. We saw in the commercial side of the business over the course of the last couple of quarters, just a it's a it's similar to bookings you know just when things got signed when deals got done so you know not.
Not a long term change to our view that we're right around 2%, but.
Did run a little bit hotter in the quarter, just as you know a bit of a backlog of of agreements got completed I think if you look through a credit or wrong first half of the year pricing was significantly below our typical sort of pricing range. So.
I think we'd sales right. It's been more of just a normalization for the full year, yes, Thats correct.
Great. Thank you.
Thank you.
We will now take our next question from Adam Jonas from Morgan Stanley. Please go ahead.
Hey, everybody just first a good morning.
Good morning, Joe just a quick one for you the 150 million austerity measures as I'm thinking 20 to 21.
How much of that you think sustainable I know a lot of companies made these very very aggressive you know nobody travels caught everything cut everything you know discretionary and some of that maybe isn't repeat I didn't know if you give some color on that delta as we run numbers of the 100 million Cove, It maybe oh God willing not repeated how much of the austerity.
Continuous on the other side you follow.
Yes.
Thanks, Adam listen that you know, what we were able to do for the most part the big pieces of austerity. The furloughs that close obviously, we brought those those costs back in as we started to ramp we really had to.
Those were the vast majority of.
Of the of the sort of north of $100 million of that of that up those austerity measures.
We do have things like travel and others, which you would expect at some point 2021 to to come back, but I would I would frame those types of costs more in that sort of $30 million to $40 million range. You know the other thing we're starting to see and Kevin's mentioned and I mentioned that there are some inefficiencies obviously.
Early I'm just working with.
Customer schedules working with this environment. In addition to the Kobe cost. So we're working through those but but to Kevin's comment on engineering. Those are our best estimates of those are in that margin outlook for Q4 and and for next year.
In place when we had a more robust outlook for global vehicle production.
Pre KOVA tanks, Kevin just a net.
The next one please.
Our clients breakeven between $350 million to $500 million revenue, which was the case with active safety and sort of get to segment margins by 750 to a billion.
Our high voltage portfolio basically was was sort of add segment margins out of the gates and as you know as we March towards one of the billion dollars of volume by 2022 to 2023, we believe that becomes more accretive so okay.
And it's again, it's really just leveraging that very strong low voltage business. The same engineers the same equipment that type of things.
Helpful dynamic if I could squeeze one more in on mobility and services.
Yes, I know, it's small, but what is the year on year growth for that business.
For example in the quarter, it's getting a lot of investor attention, even though I know you've said, it's well below $100 million kind of revenue right now, but remind us where is this revenue coming from who's paying it.
I am I understanding it Joe and Kevin is that.
It has the potential to be regular and recurring revenue coming off the data derived from your fleet customers yeah, perhaps.
Perhaps right now its more one off service revenue I don't know if you could give a little color on the growth and then.
Where it's coming from Thats it well, maybe we'll I'll talk about in joking you can comment on on on growth. So today. It is regular regular recurring revenue is below $100 million. Its regular recurring revenue revenues were certainly impacted this year.
Based on the impact I'd say more of co bid quite frankly than vehicle production.
Most of our revenue today sit with those global Oems.
On a pre production basis, we have some business that's post production.
Have been able to invest in a business are probably better position than you know maybe some of the fringe players that exist on on the low voltage side.
Yeah. So.
Joe That's a great question. So I, we should start from a high voltage strategy, we're very focused from a pursuit standpoint.
So we very much focused on on Oems, who have a strong market physician strong global position.
In a a reputation for for technology in a real commitment to building out a high voltage portfolio and that's both on the traditional OEM side as well as on kind of a new newer battery electric focused OEM.
So we've we've made sure that we're positioned to carbon nice physician in those in with those Oems grow as they grow their product lines and as they expand geographically so make sure that we can grow with him.
When you look at.
Opportunities quoted call. It roughly 15, just a couple of years ago. This year will quote on probably close to 40 opportunities and.
And we have a win right up north of 70% now some of that again I think is attributed to we're very focused in terms of where we're allocating and dedicating those resources and making sure that we're positioned with Zoe those Oems, who we really feel are going to drive volume in the future.
Okay. That's that's very helpful. Joe maybe just one on the fourth quarter guide them. So at the mid point. It looks like you know for 10 of operating income on sales and a little bit over 3.7 billion. I mean, if we adjust last year for the G. M strike in the movement of the JV sales are at about that level, but.
You know it looks like operating how much about 100 million higher and I got that you know there's covid cost me earlier basis of 30 million Dnase higher maybe 15, and there's some higher R&D as well you haven't given that number but I dunno, maybe it's 20 million 25 million still leave as a whole and I was wondering if you could help us understand you know what what somebody that other delta it might be.
<unk>.
Yeah, Joe listen I think you're.
That engineering investment, although we are starting to lap that to some extent remember we started putting those cops and in queue for last year, it's really around Covid and.
And it's it's around some of these launch cost, we're seeing a significant uptick and launches.
In the fourth quarter.
We had sort of a bit of a trough here in in Q3 of launches you can kind of see that in the North American numbers.
And you know getting ready for sort of queue for in Q1 launches next year and then there's a at both Kevin and I mentioned you know these schedules are choppy. So there is some there is some.
Inefficiencies around the customer schedules, whether you want to call them customer schedule inefficiencies or covid inefficiencies, there's sort of all all intertwined at this point, but I I would say we're doing a very good job of operating but it's you know, it's probably not as efficient as it was in in a prior and call it a year ago.
[noise] outside of outside of the strike so you've got some of that dynamic as well, but again pretty pretty.
Happy with where we are in terms of coming back too strong.
Rentals, and where the business is performing giving the challenges we have Joe bike today. It just underscored Joe's point on an operating with Covid.
At the same point in time, and we made the decision to make sure that we allocated access resources.
We're in the midst of launching.
Do you want to have sex F 150, S class for dime or Brian.
Bronco.
Early next year. So those are launches that we don't want to be in a position, where we impact the customer based on things we control.
So just to underscore Joe's point balancing what's going on from <unk>.
Supply chain standpoint today, plus the importance of those platforms for those Oems and a successful launch we've made the decision we're going to allocate incremental resources to make sure that we deliver up.
Thank you.
Even now take our next question from Chris Mcnaney. Some Evercore. Please go ahead.
Alright, thanks, so much team.
Two questions one just on the short term in one form or medium term on the short term and orders and I think you mentioned some of.
The shortfall for the full year, if you adjusted for for production.
You'd be roughly flat can I, just get a clarification and when you when you're booking those orders are you making forward.
Production assumptions of a return to.
Normal cause I imagine a lifetime value would use some some some more normalized for production assumption.
Yeah, Chris we basically we're sticking to the methodology just to make sure we have sort of apples for apples over over multiple years. So we we use IHS basically when we strike the deal.
And we don't we don't adjust prior bookings, Kevin Kevin talked about sort of if you did look at 2019 bookings what the impact would be but obviously haven't sort of restated any bookings. So we use IHS at the time, it's an outside service since it allows us to make sure both internally and externally we have some consistency in.
And can sort of explain changes going forward and we've continued to do that.
Okay. That's great and then I can even look at the second half where the run rate depending on Q3 824 is back into that sort of 2000 24 billion as as the obviously I, Texas has come up okay. So that that's super helpful. The second question.
Thanks, so much for the 21.
<unk> so much seems like it'll be based on the rate of of positive change. It a sue's margin, which is which is still obviously.
Well below instead of adjusted target of 10% plus could you just give me an idea in that tend to 11% for next year.
Should we make it.
A pretty big jump.
On the margin.
You have a year or is it going to take longer because of the investments.
No. That's what I think it's you know I would obviously don't want to get into too much detail that was a that was certainly a framework not guide.
But I'll go back to sort of my comments, we continue to be on.
The longer term trajectories, we talked about Kevin mentioned that $2 million have asked you X revenue getting of 2022.
We did put additional investment into engineering this year and I asked you expose as I mentioned, we're starting to laugh at some of that started to go in the back half of this year. So.
So we haven't had not revise long term margin expectations for that business again, I'm going to be hesitant to.
Provide specifics until we worked through and there's a lot going onto Kevin's point, some of those launches, where where where staffed up or on the active safety side. So there's there's a lot of moving pieces for 2021, but certainly comfortable with the framework we talked about.
Okay. Thank you.
Leave a note taker next question for me Manuela all static from tight Chipmunk. Please go ahead.
Hi, good morning.
Good morning.
I was hoping to take your brain zone.
Lidar, obviously quite a bit of noise around it.
A few of the leading startups, they're coming to market.
From your perspective, and you have a conversation with the auto makers around.
Like level, two plus and higher levels of autonomy huh, how prominent or importance as often as late are part of the solution that you're invited to to survive and how you essentially doing.
With it I know you Chuck multiple agreements with different glider documents in the past.
And as part of this all what was the thinking around working with others, rather than sort of affects developing some of it yourself.
Yeah from from a light or Sam.
Standpoint.
Where do you begin to see the need for Lidar and we believe it's necessary from a technology standpoint on on level three solutions and hire a manual we have not seen any as it relates to the level two plus level three minus.
Level too.
So so.
A solid place in level, three and above having said that.
A radar technology company, we're working very hard to advance our radar technology.
Pushing to see if we can put advanced technology to the point, where you minimize the need for Lidar technology on level three solutions.
So advancing that technology forward.
What's driving that is quite frankly, the desire from an O&M standpoint to.
Bring down costs of that technology.
Or of that solution, providing that level three solution.
Why we decided not to invest in lighter we have strong capabilities and radar. We've not previously worked on developing Lidar solutions. There were others out there who are further along so from.
Capital standpoint, we made the partner with those who are arguing in the business and he had the capability.
Okay. That's that's very good color.
And then the second question on a follow up on 2021 margin outlook.
How should we think within the <unk>.
Incremental margins as as volume recover obviously you're.
Assuming about 10% to recovery Global auto production you know if you were to think more like 14% of 15 that guy chest.
What would that do to your margin outcome for next year.
Yeah, Daniel as I mentioned, a credit we're not going to go into too much more detail in 2021, I think that frameworks. We've got a lot of work to do I think that framework hopefully as helpful to folks.
I do think gives you a visual look through incrementals in and.
In the back half of the year I think those are certainly indicative to what we think the business is capable of doing but again I'm not I'm not going to get too much more specific on 2021, we got <unk>.
Lots of work to do to to finalize those numbers.
That's understandable thank you.
Thank you.
Well, you're gonna take her next question E Tai Shan eat some sushi. Please go ahead.
Oh, great. Thanks, good morning, everyone.
Just.
Oh I'm wanting on Incrementals I know in the past you've talked about sort of a low twenties longterm incremental margin to join any changes to your thinking around come at that longterm incremental.
No no no no no no I mean listen you got you got to work through when you're really clear all of the collective covid noise, but as we've set a couple of times the longer we've seen nothing at this point.
Other than that.
There's this short mid term disruption nothing that's changed our longer term thinking about things like growth over market or the.
So the longterm profitability of the business day.
Great.
Yeah, one thing we're sensitive too I I I think we want to just to make sure that everyone understands we're dealing with a lot of covid noise the supply chain.
Is tight as it relates to managing through Covid and that has an impact on cost and our focus.
Our priority is keeping our employees safe and serving our customers. So that does add incremental costs of the system and that needs to be factored in when you think about incremental margins incremental decremental margins. So.
Absolutely just a follow up on on active safety.
You are quantified the the market share gains discussed on slide seven maybe talk about you when rates and then Kevin I think you alluded also early in your prepared remarks to a new business models with the inactive safety I'm wondering if you could expand on that as well.
Sure.
When rates on an active safety for us are running at north of 70% on active safety.
Also solutions as well as as components.
We're <unk>.
Developing or second generation eight ask platform. So the advancement of the satellite architecture program.
Where you'll have further domain centralization, you'll have more compute.
More advanced perceptual system. So the abilities L. The number of of radars that are used in the system.
And the ability to extract software from hardware so in a position where we can provide the full platform.
Can provide a portion of it which could be anywhere between the perception system or the hardware or just the software solutions, whether it's under the underlying central fusion.
The underlying software or a portion of the of the features all or some of the teachers.
So is providing our OEM customer inside the target is with a lower cost solution with for flexibility for them as well as more flexibility for us.
Great. That's a very helpful. Thank you.
Even I'll take our next question from Brian Johnson from back East. Please go ahead.
Hey, Brian.
A couple of questions. So first semi housekeeping semi strategic is what are your thoughts on cap allocation going into 21, and 22 and specifically on what you might do in terms of read or recommending to the board around the dividend.
So I'll start drug into specifics I mean, we continue.
We've done a great job from a.
Cash flow management standpoint, this year, so I'm, obviously continued focus on increasing.
<unk>, our our priorities continue to be first organic investment in our business.
Whether that's high voltage whether it's the gen. Two eight F platform that I talked about advancing our protection system capabilities, certainly smart vehicle architecture as we talked about back in in June.
We have a very D.
Funnel of M&A opportunities and around the engineered component areas, both within automotive as well outside of automotive.
Certainly is is a priority.
Uhm I think as it relates to dividend and share repurchase we'd like to let the dust settle a little bit more on covid before we finalize are a recommendation and bring it forward to the board.
I'd agree with that I think are again like many things we've talked about a long term stir.
Strategy remains intact that included a very deliberate capital allocation.
Policy, we would expect at some point to get back to that but it's really a matter of of timing and when you know when we really feel comfortable we've we've cleared the cleared the trees here from from a broader covid an impact perspective.
Okay. Thanks second question, a little bit more strategic.
You had a blog post earlier or a week or two ago around and sharper security standards, you know breaking out.
Connectivity and security as a as one of the parts of your pie.
But similar to the Lidar question at least I'm not aware of a cyber security unit within active is this something that either a you're happy with a bunch of solutions on the market and you're bringing it too Oh yams as an integrator or be you have some in turtle capabilities, and we haven't heard a lot them or.
See in terms of Adjacencies. This is an area that you might be looking at.
Yeah.
So cyber security, obviously, given and I don't need to tell you. This Brian just giving connectivity in the vehicle and the various system cyber security is is a bigger area of focus for OEM customers to support our product development capabilities. We have I don't know 25 or 30 cyber secured.
Engineers.
Alcohol on product focused on our product and focused on the integration of of of.
What we develop as well as what we can integrate into our solutions from other providers.
We view cyber security quite frankly is table Stakes, we don't view that as a commercial business.
So we tend to do work internally as well as us outside parties that more often than that are directed by the OEM.
So I hope that answers your question so.
So that's not a capability you'd think about making an acquisition for.
No. It's a capability we have we don't view that really as a viable commercial business for a player like ourselves we view it as a necessary requirement and it's included as a part of the solutions, we provide our customers.
Okay. Okay. Thanks.
Even now take our next question from John Murphy, Sometimes if America. Please go ahead.
Good morning.
Well I'm not beat a dead horse on on margins here I. Appreciate the 2021 framework, but is there anything shifting in the business as far as investment or mix that would lead you to believe that you can get back to 12% plus operating margin and maybe even expand from there.
No actually right now okay.
No.
That's great Okay.
Yeah again, I think it's I think it's important Jo how are highlighted is we're dealing with.
Random numbers $70 million of Covid related cost per quarter.
Right and at the same time dealing with supply chain choppiness or disruptions related to tier two tier three.
Electronics and component suppliers, who probably are dealing with labour availability challenges in other issues and.
Our focus is on making sure that we deliver for our customers.
So that's something that.
As we deal with Covid or.
Or wrestling through.
<unk> makes all the sensible well. Thanks, just a second question. When you think about diversification just curious if you could talk about the non auto business.
In the corner because the other verticals.
And of course vehicles side or not quite as strong as what we're seeing the light vehicle side you know in the short term and then over time, just kind of remind us what are you trying to go with that what that potentially can need for margin.
Yeah, one to five years out.
Yeah, I know that those businesses continue to be you know again relatively small finished the year with about 15% of non auto non like vehicle revenue so commercial vehicle on industrial.
Those those businesses continue to perform well, they're accretive to both the growth over market and the margin.
And we expect them to continue to be there's a couple of areas within.
What I'll comfortable about non auto business around telecom, where we've seen really strong growth.
Both through the addition of Gaba calm, but also on organic basis.
And well well above market.
The military business on the interconnect side continues to be very strong we tend to be more heavily weighted towards mill arrow versus commercial aerospace. So that's that's been helpful. Overall.
But again I should think about that engineered components business Winchester element Titan.
Continue to be accretive to growth rate and and March and I would expect them to continue to be so that's certainly where we've we're we're focusing those investments both organically and inorganically.
Gotcha, and then just lastly, any election game planning.
And what could happen here November 3rd or you know after November 3rd.
Yeah, we watch it we're watching it closely John.
You know obviously.
You know it sounds like one administration would be more focused on clean energy here in the United States that could have.
Impact on our sales high voltage solutions.
We feel like we're well positioned and couldn't could benefit from that.
Obviously, a lot of the growth that we're experiencing as in Europe and China.
With those Oems and under either scenario that either.
A party where to win our view is you'll still have a certain amount of regionalization supply chain supply chain you to.
Use on tariffs and trade.
Great. Thank you very much for some impacts not a huge impact.
Yeah, Yeah, Yeah, and I'd like to 16, thank you very much.
Cleveland take our next question from team that can eat some jaffray's. Please go ahead.
Hey, good morning, Kevin Joanna Lane it'd be a very Shh you squeezing me in here to do.
A couple of questions I really appreciate the active safety slide just curious if you could talk about semi autonomous maybe what you're seeing there you know customer interest in this space you know things like on the highway autonomous driving would be great.
Yep, So L. Two L two plus.
Is today the fastest growing area from an <unk> standpoint, we've actually seen I'd say a bit of a pause on L. Three.
Given cost and give them the reset on volumes due to covid, So I wouldn't say.
Cancellations, but delay of programs with those Oems who were allocating resources.
Against it.
But the fastest growing area from an <unk> standpoint, again tends to be that helps cause Elton plus plus sort of area active safety helps ODM customers cell.
When you watch advertising for vehicles today now it tends to be about active safety solutions consumers are demanding it OEM customers makes money off of it.
So it continues to be a major area of focus for OEM customers.
Okay got it thank you and maybe it's just a follow up on that point. Kevin is that is L. Two plus should we see drunk monitoring solutions and and that sort of solution seven is that something you're doing in house as well.
Yep, Yeah. So we've we've we've won a number of driver monitoring programs part of our active safety solution set.
Obviously, it gets more advanced when you had to level three solutions, where you need to re engage the driver and certainly even more enhanced when you think about a L. Four L. Five but it's a product area. We've been that in for roughly five years and have a number of programs.
Alright, perfect. Thank you [laughter]. Thank you.
Even though I would take our last question comes Diana D V from Credit Suisse. Please go ahead.
Okay. Good morning again.
Thanks, Thanks for squeezing me Uhm first.
Maybe provide an update on an emotional it's been live for a couple of quarters now just.
Where's the progress and you just get that set up on the progress I think when you announced the deal you were talking about plans for commercialization or that you're.
Your platform ready by by 2022.
Is that okay, and what's the update on customer discussion on the uptake of that.
Yeah, it's going extremely well so our general platforms is launching this year 10, two is on track to be launched in.
2022, the integration or.
The integration of the joint ventures from bringing together the Ah di organization and former active organization is going extremely well in Bolton office and.
And so we're expanding our our technology center in Singapore.
We've moved into a new facility in Pittsburgh Cigna.
Significant amount of hiring has taken place over the last nine months and most importantly from a technology development standpoint, everything's on track.
We've.
Sure Covid hit we stopped our.
<unk>.
Las Vegas pilot with lift that's been restarted.
We announced a partnership with via a city to be determined.
But that will happen over the next six months or so will take us pick a city, an actual will be providing rides.
With them that are integrated into the.
The public transit system in in particular city and then continue to have commercial discussions with several different ride healing companies and would expect to be able to announce something in the not too distant future.
So all on track.
Great to thank you and then just a SEC used to follow up on.
Broader concept interest restructuring you know I think when Covid started you mentioned the potential to take some deep restructuring and obviously, what we've seen contended that much better recovery on the end markets and what most of us with anticipated tomato, probably left foot drink reduction required and what would have initially been answered to me. So question is where where do you stand on I guess.
Covid restructuring and one of the issues in the past I think with challenges on being maybe two proactive on responding to embark is with taking staffing out and not having enough staffing in place for volume Snapback is that inefficiency at all the risk or do you have ample certain staffing personnel in place for a volume.
Snapback.
My Dad is Joe let me, let me take that so we we certainly as I mentioned, we sort of.
Ended the austerity programs is keep as people came back toe and we needed people to come back to work.
And in Q3, we have started to to look at the people side of things. Thank the overhead functions and such and have taken some incremental restructuring that benefit it will flow into the to the back half of the year call that sort of a $45 million number sort of on a.
On a full year basis, maybe a little bit more those plans are in place and as you know as I talked about my prepared comments Kevin's mentioned I mean really what we're looking at now for 2021.
How best to balance some of those foot footprint decisions and take longer term do you take longer term restructuring actions versus you know, where where where do you think you're going to need capacity and ran for us that that you know that.
An effort over the next couple of months really based on where we see you know very strong continued outgrowth that that's 6% to 8%.
Plus 10% vehicle production, how quickly do we get back to sort of where we work capacitance too pretty covid and I think those actions will you know if it will be directly related to how how fast we view ourselves as getting back so that's in process.
But you know I think we did a good job in in the first half of the year with the austerity where.
Looking at opportunities for additional savings going into next year on the on the people side is appropriate.
And then a longer term what I'll call sort of infrastructure type decisions will really be based around where where we see capacity and I and I would just remember and.
Try not to be sensitive to this but we didn't need covid to tell us how to run our business more efficiently as Kevin mentioned, we really spent the last three or four years.
Very aggressively going at an overhead costs and how to improve the overall.
Profitability of the business and how to fund some of the initiatives. So I think we've done a really good job over the last few years and you know that that muscle is very well exercise in the company and will continue to apply it as needed.
Alright, thank you.
Thanks.
Thank you for your business.
Hi.
Thank God training.
Second here today, a question and answer session and I'd like to turn the conference back to the house for any additional are kind of thing where Max.
That's all it will be available today and no matter part of it.
I think for any follow up questions and I'll just turn it to Kevin If you have any final no. Thank you everyone for your time, we appreciate you participating in our phone call. Please stay safe.
Okay.
This concludes today's call. Thank you for your participation ladies and gentlemen, you may now disconnect.
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