Good day and welcome to the Aptiv Third Quarter 2020 Earnings Conference Call. My name is Tracy, and I’ll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you.

Elena Rosman, Aptiv’s Vice President of Investor Relations, you may begin your conference..

Thank you, Tracy. Good morning and thank you to everyone for joining Aptiv’s third quarter 2020 earnings conference call. To follow along with today’s presentation, our slides can be found at ir.aptiv.com. Today’s review of our actual financials excludes restructuring and other special items and will address the continuing operations of Aptiv.

The reconciliation between GAAP and non-GAAP measures for our third quarter financials are included at the back of today’s presentation and the earnings press release.

Turning to the next slide, you can see here a disclosure on forward-looking statements, which reflect Aptiv’s current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and impact on the global economy.

Joining us today will be Kevin Clark, Aptiv’s President and CEO; and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business, and then Joe will cover the financials results and outlook for the remainder of the year in more detail.

With that, I would like to turn the call over to Kevin Clark..

Thanks, Elena. Good morning, everyone. Beginning on Slide 3, our strong third quarter results reflect our culture of continuous improvement, which has created a more sustainable business that thrives in any environment.

Our portfolio of safe, green and connected technologies has translated into year-to-date revenue growth, which is 10 points over underlying vehicle production. And our optimized cost structure is a competitive advantage, positioning us to withstand the 50% plus reduction in this year's second quarter volumes and remain EBITDA breakeven.

Our culture of flawless execution has allowed us to ramp up production to meet the rapid rebound of customer schedules, while managing through the challenges related to labor availability and a tightening of the global supply chain with zero customer disruptions in a quarter that we experienced a 60% sequential increase in vehicle production.

The proactive portfolio and cost structure actions we’ve taken over the last few years to strengthen our business model have positioned Aptiv to outperform in any environment with more sustainable earnings and cash flows, a disciplined improvement approach to value creation and the flexibility to accretively deploy capital.

I'm proud of how our team has performed during this challenging year. And I'm grateful for their commitment to our culture that drives continuous improvement, ensuring Aptiv can outperform in any environment. Moving to Slide 4.

The strong rebound in vehicle production combined with solid operating execution contributed to strong financial results in the third quarter. Revenues increased 3% to $3.7 billion, representing 7 points of growth over vehicle production.

EBITDA and operating income totaled $581 million and $389 million, respectively, and adjusted earnings per share reached $1.13. Looking at each region.

Government fiscal policies and improved business conditions, boosted vehicle production a 11% in China and OEMs in North America and Europe are aggressively restocking vehicle inventories, resulting in the strong ramp up in vehicle production, which translated into a year-over-year decline of 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, principally related to Tier 2 and Tier 3 electronics and component manufacturers, which resulted in a volatile customer schedules leading to some operational headwinds.

We're closely monitoring the more recent spike in COVID-19 cases in both Europe and North America and the potential impact on the global supply chain and customer schedules, but it's not reflected incremental disruptions in our outlook for the fourth quarter and 2021 global vehicle production.

Joe will cover our fourth quarter and full year guidance in more detail shortly. As shown on Slide 5, third quarter new business bookings totaled $4.6 billion, representing a more normalized run rate for new business awards.

Year-to-date bookings reached $10.5 billion 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 & User experience segment new business bookings totaled just over $2 billion year-to-date as a handful of customer awards initially planned for this year has been pushed to 2021.

And new business bookings for our Signal & 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 billion 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, validating the strength of our portfolio of market evolving technologies, aligned to the safe, green and connected megatrends.

Looking at our business segments in more detail, beginning on Slide 6, with Advanced Safety & User experience.

As a need for more complex software, hardware and systems integration expertise increases, our unique ability to offer highly functional, scalable and optimized solutions across the active safety and user experience domains 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 8 points of growth over market in our Advanced Safety & User experience segment this year reaching roughly $3.5 billion of revenues. Turning to Slide 7.

Our OEM customers continue to launch advanced safety solutions across our vehicle platforms and democratize these features across our vehicle lineups to meet increasing consumer demand. While at the same time, Europe and China NCAP standards are accelerating the adoption of advanced safety solutions.

Several OEMs have decided to make automated -- automatic emergency braking as well as other ADAS features standard equipment in U.S by 2022, all of which translates with significant demand from OEMs for Level 2 and 2 plus ADAS solutions, exceeding the next big wave of market penetration, even as the industry experiences lower vehicle production volumes due to COVID-19.

Our unique first in industry approach to compute centralization and scalable satellite architecture, has strengthened 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 5 years ago.

And our satellite architecture solution will be deployed across 10 million vehicles over the next 5 years. As such, we're 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 Gen 2 ADAS 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 Aptiv and reduce investment for our OEM customers.

Turning to our Signal & Power Solutions segment on Slide 8. We're leveraging our industry leading position in 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, we're able to reduce the weight and physical size of the electrical distribution system by up to 40%, thereby reducing costs for OEM customers.

We are also leveraging our expertise in a harsh environment electronics to penetrate adjacent markets, such as the commercial vehicle, data [indiscernible] and industrial sectors.

Our momentum in our Signal & Power Solutions segment gives us confidence in delivering revenue growth of 9 points over vehicle production this year reaching $9 billion of revenues. Moving to Slide 9.

We continue to see an acceleration of powertrain electrification driven by both more stringent CO2 regulations, principally in Europe and China and increasing consumer demand globally. Our complimentary high-voltage distribution and connection systems, as well as cable management solutions, leverage our low voltage core competencies.

That includes vehicle architecture optimization, system level of expertise and 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 position Aptiv to benefit from the two-fold increase in addressable content at a high voltage electric vehicle.

Our unique holistic approach to designing, developing, and manufacturing system level solutions for electrified vehicles make Aptiv the partner of choice for OEM customers, and has contributed to continued strong new business awards with both traditional high volume OEMs where we've recently been awarded new business on a series of conquest pursuits, including with a leading major European OEM for innovative, long range electrical vehicles that will begin launching in 2022.

It was non-traditional battery electric vehicles focused OEM customers, where we increase our share of wallet with an industry leader who's been expanding both their vehicle offering 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 Aptiv's mission of enabling a safer, greener and more connected world had more meaning than it does today.

The COVID-19 pandemic has led to a much broader perspective and how the global community view 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 your 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 in 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, platform, and newly adopted GRI and SASB 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 a directly related positive impact we have on our people, our portfolio, and our planet. I'll now hand it over to Joe Massaro for an overview of our financial results..

Thanks, Kevin, and good morning, everyone. After 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 the strong financial results shown 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 COVID.

In light of the stronger recovery, a need to ramp capacity quickly in the third quarter, we concluded our 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, promotional 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 SUV and truck platforms and expect to return to strong growth and growth over market in the fourth quarter. In 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 & User Experience revenues increased 3% in the quarter, reflecting 7 points of growth over market with all product lines contributing.

AS and UX EBITDA declined 24% driven by the cost 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 compatibility purposes the automated driving spend that is now part of Motional, the Aptiv Hyundai joint venture is excluded from the prior year results. Turning to Signal & Power Solutions. Revenues were up 2%, reflecting 6 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 COVID 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 COVID related disruptions or shut downs.

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 on the left, we expect revenues up 3% on an adjusted basis at the midpoint, 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 $0.85 to $1.

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 9 points of growth over market with equally strong contributions from both segments.

EBITDA in the range of $1.52 billion to $1.57 billion, reflecting a 12.2% EBITDA margin rate at the midpoint. This includes over $100 million in COVID 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, reflecting a 10% to 11% 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 $600 million consistent with our post-COVID 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 has sustained strong above market growth.

While the work we have done in 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 earnings going forward, while effectively deploying capital and enabling further growth in the recovery.

While it's 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 million 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 8-year low at levels last seen in 2012. However, the long-term secular growth drivers remain intact, which once again, contribute to growth over market in 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 by higher volumes year-over-year and the assumed absence of COVID 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 the 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 Aptiv 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 for his closing remarks..

Thanks, Joe. I'll now wrap up on Slide 17 before opening it up for Q&A.

Despite the challenges we faced in 2020, we remain laser focused on further enhancing our track record of our performance 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 megatrends that are transforming our industry.

The sequential 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 customer's 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, 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. I'm grateful we have an organization that is focused on flawlessly serving our customers while creating value for all of our stakeholders. With that, let's open up the line for Q&A..

Thanks, Kevin. Tracy, we will now take our first question..

[Operator Instructions] We will now take our first question from Rod Lache from Wolfe Research. Please go ahead..

Good morning, everybody..

Good morning, Rod..

Thanks for that commentary on directionally the 2021 margins that is really helpful. I had a couple of questions on that. In the past at least in active safety, you've made the judgment that it made sense that to add a bit more R&D spending in the short run, because there was a payback in the longer term.

I was wondering if you can give us some comments on how you see that progressing as you look out to next year? And do you see kind of a similar dynamic with the electric -- electrification pipeline growing? Does that require additional R&D spending in advance of the big ramp that you've seen in the years ahead?.

Yes. Rod, 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 ADAS, 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 in to further widen our competitive mode. Those investments are reflected in the outlook that Joe has given both for the fourth quarter as well as next year.

We think if we continue to invest, we're uniquely positioned based on our capabilities, software perception systems, as well as connectors, cable management and wire harness capabilities on the vehicle architecture side to really one significantly accelerate revenue growth, and then to expand margins.

So that's something that we will continue to do, but again, that incremental investment reflected in the outlook that Joe has provided..

Okay.

So there is some incremental spending, but it's something that you're managing here with the growth that you've got?.

Yes. There's incremental spending, but I think it's balanced. I think it's relatively balanced and again, it's reflected in our outlook..

Okay. And just secondly, I noticed that pricing looked like it ticked up, just [indiscernible] above 2%, which is I think the upper bound of what we've seen in the past couple of years, correct me if that's incorrect.

But any comment or color on what actually is driving that and how you’re thinking about that going forward?.

Yes, 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 -- it's similar to bookings, just when things got signed, when deals got done.

So 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 a bit of a backlog of agreements got completed..

Yes, I think if you look, Joe, correct me, if I'm wrong, first half of the year pricing was significantly below our typical sort of pricing range. So I think we'd say, Rod, it's been more of just a normalization for the full year..

Yes, that's correct..

Okay, great. Thank you..

Thank you..

We will now take our next question from Adam Jonas from Morgan Stanley. Please go ahead..

Hey, everybody. Just the first kind of ….

Hey, 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 is sustainable? I know a lot of companies made these very, very aggressive, nobody travels, cut everything discretionary and some of that, maybe isn't repeated.

I didn't know if it gives some color on that delta as we run numbers of the $100 million COVID maybe, god-willing not repeated, how much of the austerity continues on the other side you follow?.

Yes. No, I got it, Adam. Thanks. Yes, listen, what we were able to do for the most part, the big pieces of austerity, the furloughs, the TLOs, obviously we brought those costs back in as we started to ramp, we really had to. Those were the vast majority of the sort of north of $100 million of that -- of those austerity measures.

We do have things like travel and others, which you would expect at some point in 2021 to come back. But I would frame those types of costs more in that sort of $30 million to $40 million range.

The other thing we're starting to see and Kevin's mentioned, I mentioned it, there are some inefficiencies, obviously just working with customer schedules, working with this environment in addition to the COVID costs.

So we're working through those, but to Kevin's comment on engineering, those are -- our best estimates of those are in that margin outlook for Q4 and for next year. But at this point, I'd expect sort of the turn back on type costs in that $30 million to $40 million range..

That’s very helpful..

Adam, one thing -- I think just to underscore, I think it's important just to reiterate. Over the last couple of years, we've reduced overhead costs in this business by close to $400 million. And so we've been aggressively attacking the cost structure over the last several years.

I think one of the questions we wrestle with right now, just given where vehicle production is and given where capacity sits, how we think about kind of fixed cost structure, facilities where, as an example, in light of an 84 million unit of global vehicle production estimate today, balancing that though with -- if you look at our outlook for next year, call it mid-teens revenue growth.

So although vehicle production is at a significant low relative to where it's been in 2018, 2019, you look at our revenue growth rate knock on wood in assuming COVID stays under control.

You should see fairly significant revenue growth and kind of working into capacity that was put in place when we head up more robust outlook for global vehicle production pre-COVID..

Thanks, Kevin. Just next one, please.

There's an argument that as suppliers roll off ICE legacy and then bring on new EV that it's a zero-sum game at best, maybe a less than zero-sum game, or are you at a point where as you see that transition from some ICE rolling off and being at the margin replaced by higher voltage that that is margin accretive or balanced, maybe give some color..

It is margin accretive to our SPF segment. So it's from a content per vehicle standpoint, it's over 2x content per vehicle opportunity relative to ICE, and its margin accretive..

Even at this level of scale, even that scale is still pretty darn low versus [multiple speakers]?.

Yes. It is [indiscernible] Adam. Part of it is just -- if you think of the nature of our high voltage portfolio it's so complimentary to the low voltage. So there's a lot of leverage of the existing infrastructure with an SPF..

Got it. Yes..

I mean, we've historically set our product lines breakeven between $350 million to 500 million of revenue, which was the case with active safety and sort of get to segment margins by $750 million to $1 billion. Our high voltage portfolio basically was sort of at segment margins out of the gates.

And as you know, as we marched towards sort of this $1 billion 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 thing..

That's a helpful dynamic. If I could squeeze one more in, on mobility and services.

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? My understanding Joe and Kevin is that it has the potential to be regular and recurring revenue coming off the data derived from your fleet customers.

Perhaps, right now it's more one-off service revenue. I don’t know if you could just give a little color on the growth and then where it's coming from? That's it..

Well, maybe we'll -- I'll talk about it and, Joe, you can comment on growth. So today its regular recurring revenue. It's below $100 million, it's regular recurring revenue. Revenues were certainly impacted this year. Based on the impact, I'd say more of COVID quite frankly than vehicle production.

Most of our revenues today sit without global OEMs on a pre-production basis. We have some business that's post production and we have a significant focus on growing our position, not only within automotive, but have made progress outside of automotive in the commercial vehicle and fleet markets..

Yes, it's again lower dollars. I'd call it flattish, Adam, this year. And part of that is because a good percent of that business is pre-production. So they're using the technology in the plants. So obviously the shutdown, the global shutdowns had a significant impact on that business.

They just weren't using necessarily that tech, while they were shut down for that 8 to 9 weeks. So to Kevin's point it's sort of disproportionately impacted by the shutdowns versus vehicle production..

Appreciate it, Joe. Thanks. Thanks, Kevin..

Thank you..

We will now take our next question from Joseph Spak from RBC Capital Markets. Please go ahead..

Thank you. Good morning, everyone..

Good morning..

I wanted to follow back on some of the high voltage business.

I mean, now that there are more programs launching and certainly more programs being quoted, do you have a sense of whether your win share on those programs is higher than maybe on low voltage? And the reason I ask is it seems like the larger players like yourself that are able to sort of really -- have been able to invest in that business are probably better positioned than maybe some of the fringe players that exist on the low voltage side..

Yes. So, Joe, that's a great question. So we should start from a high voltage strategy, we're very focused from a pursuit standpoint. So we very much focused on OEMs who have a strong market position, strong global position and a reputation for technology and 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 the new newer battery electric focused OEMs. So we've made sure that we're positioned to carve a nice position 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 them.

When you look at opportunities quoted, call it roughly 15, just a couple of years ago, this year we'll quote on probably close to 40 opportunities and we have a win rate of north of 70%.

Now some of that, again, I think is attributed to we're very focused in terms of where we're allocating it and dedicating those resources and making sure that we're positioned with those OEMs, who we really feel are going to drive volume in the future..

That's very helpful. Joe, maybe just one on the fourth quarter guide. So at the midpoint it looks like [indiscernible] of operating income on sales of a little bit over $3.7 billion.

I mean, if we adjust last year for the GM strike and the movement of the JV, sales are at about that level, but it looks like operating income was about $100 million higher. And I get that there's COVID costs from year-over-year basis of $30 million.

D&A is higher, maybe $15 million and there's some higher R&D as well, you haven't given that number, but I don't know, maybe it's $20 million, $25 million, still leaves a hole.

And I was wondering if you could help us understand what -- what's some of that other delta might be?.

Yes. Joe, listen, I think you're -- it's that engineering investment, although we are starting to lap that to some extent. Remember, we started putting those costs in Q4 last year. It's really around COVID and it's around some of these launch costs. We're seeing a significant uptick in launches in the fourth quarter.

We had sort of a bit of a trough here in Q3 of launches. You can kind of see that in the North American numbers and getting ready for sort of Q4 and Q1 launches next year. And then as I -- as both Kevin and I mentioned, these schedules are choppy.

So there is some inefficiencies around the customer schedules, whether you want to call them customer schedule inefficiencies or COVID inefficiencies, they're sort of all intertwined at this point.

But I would say we're doing a very good job of operating, but it's probably not as efficient as it was in a prior and call it a year ago outside of the strike. So you've got some of that dynamic as well.

But again, pretty happy with where we are in terms of coming back to strong instrumentals and where the business is performing, giving the challenges we have..

Yes, Joe, if I could add -- just to underscore Joe's point on operating with COVID at the same point in time and we made the decision to make sure that we allocated excess resources. We're in the midst of launching [indiscernible], F-150, S Class for Daimler, 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 a 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 out..

Thank you..

We will now take our next question from Chris McNally from Evercore. Please go ahead..

Thanks so much team. Two questions. One just on the short-term and one for medium-term. On the short-term in orders, I think you mentioned some of the shortfall for the full year, if you adjusted for production you'll be roughly flat.

Can I just get a clarification? When you're booking those orders, are you making forward production assumptions of a return to normal? It looks like [indiscernible] the lifetime value you would use some more normalized for production assumptions..

Yes, Chris, we basically -- we're sticking to the methodology just to make sure we have sort of apples-for-apples over multiple years. So we use IHS basically when we strike the deal, and we don't adjust prior bookings.

Kevin talked about sort of if you did look at the 2019 bookings, what the impact would be, but obviously we haven't sort of restated any bookings. So we use IHS at the time, it's an outside service.

It's -- it allows us to make sure both internally and externally, we have some consistency 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 or Q4 is back into that sort of $20 billion to $24 billion as obviously IHS has come up. Okay. So that's super helpful. The second question -- thanks so much for the [indiscernible].

So much seems like it will be based on the rate of positive change at ASUV [ph] margin, which is still obviously well below your sort of adjusted target of 10% plus.

Could you just give an idea, in that 10% to 11% for next year, should we make a pretty big jump on the ASUV margin year-over-year, or is it going to take longer because of the investments?.

No, listen, I think it's -- I would -- obviously, I don't want to get into too much detail. That was a sort of 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 the $2 billion of ASUX revenue getting to 2022.

We did put additional investment into engineering this year in ASUX, but as I mentioned, we're starting to lap that -- some of that started to go in the back half of this year. So we haven't -- have not revised long-term margin expectations for that business. Again, I'm going to be hesitant to sort of provide specifics until we work through.

And there's a lot going on to Kevin's point, some of those launches where we're staffed up are on the active safety side. So there's still a lot of moving pieces for 2021, but certainly comfortable with the framework we talked about..

Okay. Thank you..

We will now take our next question from Emmanuel Rosner from Deutsche Bank. Please go ahead..

Hi, good morning..

Good morning..

Can you start with -- I was hoping to take your brains on LiDAR. Obviously, quite a bit of noise around it, with a few of the leading startups there coming to market.

From your perspective and in your conversation with the automakers around sort of like Level 2 plus and higher levels of autonomy, how prominent -- how important is often is LiDAR part of the solution that you're invited to [indiscernible], and how you’re essentially dealing with it? I know you had struck multiple agreements with different LiDAR companies in the past.

And as part of this all, what was the thinking around working with others rather than sort of like developing some of it yourself?.

Yes. From a LiDAR standpoint, where you begin to see the need for LiDAR and we believe it's necessarily from a technology standpoint on Level 3 solutions and higher a manual. We have not seen any as it relates to Level 2 plus Level 3 minus Level 2. So a solid place in Level 3 and above.

Having said that, as a radar technology company, we're working very hard to advance our radar technology. Pushing to see if we can put -- advance the technology to the point where you minimize the need for LiDAR technology on Level 3 solutions. So advancing that technology forward.

What's driving that is quite frankly the desire from an OEM standpoint to bring down costs of that technology, or of that solution providing that Level 3 solution. Why we decided not to invest in LiDAR, we have strong capabilities in radar. We've not previously worked on developing LiDAR solutions. There were others out there who were further along.

So from a capital standpoint, we made the decision to partner with those who are already in the business and have the capability..

Okay. That's a very good color. And then the second question on -- a follow-up on 2021 margin outlook.

How should we think within that about incremental margins as volume recover? Obviously, you're assuming a 10% to recovery in global auto production, if you were to think more like 14% or 15% like guide says, what would that do to your margin outflow for next year?.

Yes, Emmanuel, as I mentioned to Chris, we're not going to go into too much more detail on 2021. I think that frameworks, we've got a lot of work to do. I think that framework hopefully is helpful to folks.

I do think as you look through incrementals 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 going to get too much more specific on 2021. We've got lots of work to do to finalize those numbers..

And that's understandable. Thank you..

Thank you..

We will take our next question from Itay Michaeli from Citi. Please go ahead..

Great. Thanks. Good morning, everyone..

Hi..

Just on -- one more on incrementals. I know in the past you've talked about sort of a low 20 long-term incremental margin.

Joe, any changes to your thinking about kind of that long-term incremental?.

No, no. I mean, listen, you got to work through when you really clear all of the collective COVID noise.

But as we've said, a couple of times the longer -- we've seen nothing at this point other than the -- there's this short mid-term disruption, nothing that's changed our longer-term thinking about things like growth over market or the long-term profitability of the business..

Okay..

Yes, Itay, one thing we're sensitive to, I think we want to just 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 costs. And our focus -- our priority is keeping our employees safe and serving our customers.

So that does add incremental cost to the system and that needs to be factored in when you think about incremental margins, incremental and detrimental margins. So ….

Absolutely. Just a follow-up on active safety. Do you quantify the market share gains, discussed on Slide 7, maybe talk about your win rates? And then Kevin, I think you alluded also earlier in your prepared remarks to kind of new business models with inactive safety. I'm wondering if you can expand on that as well..

Yes. Sure. Win rates on active safety for us are running at north of 70% on active safety. Also solutions as well as components we're developing our second generation ADAS platform.

So the advancement of the satellite architecture program where you'll have further domain centralization, you'll have more compute more advanced perception systems, the ability to scale the number 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, we 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 Sensor Fusion, the underlying software or a portion of the features, all or some of the features.

So it's providing our OEM customers -- in fact the target is with a lower cost solution with more flexibility for them as well as more flexibility for us..

Great. That's very helpful. Thank you..

We will now take our next question from Brian Johnson from Barclays. Please go ahead..

Hi, Brian..

Good morning. A couple of questions.

So first semi housekeeping, semi strategic is what are your thoughts on capital allocation going into '21 and '22, and specifically on what you might do in terms of -- or recommending to the Board around the dividend?.

So I'll start, Joe [indiscernible] specifics. I mean, we continue -- we've done a great job from a cash flow management standpoint this year. So obviously continued focus on increasing cash flow.

Our priorities continue to be first organic investment in our business, whether that's high voltage, whether it's the Gen 2 ADAS platform that I talked about, advancing our perception system capabilities, certainly smart vehicle architecture.

As we talked about back in June, we have a very deep funnel of M&A opportunities in and around the engineered component areas, both within automotive as well as outside of automotive, that certainly is a priority.

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 a recommendation and bring it forward to the Board..

Yes, and I'd agree with that, Brian. I think our -- again, like many things we've talked about, the long-term 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 timing.

And when we really feel comfortable, we've cleared the trees here from a broader COVID and impact perspective..

A, you're happy with a bunch of solutions on the market and you're bringing it to OEMs as an integrator; or B, you have some internal capabilities and we haven't heard a lot them or see in terms of adjacencies, this is an area you might be looking at..

Yes, so cybersecurity, obviously given and I don't need to tell you this, Brian, just given connectivity in the vehicle in the various systems, cybersecurity is a bigger area of focus for OEM customers.

To support our product development capabilities, we have -- I don't know, 25 or 30 cybersecurity engineers focused on product, focused on our product and focus on the integration of what we develop as well as what we integrate into our solutions from other providers. We've used cybersecurity, quite frankly, it's table stakes.

We don't view that as a commercial business. So we tend to do work internally as well as use outside parties that -- more often that are directed by the OEM. So I hope that answers your question..

So that's not a capability you 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 our self. We view it as a necessary requirement and it's included -- it's a part of the solutions we provide our customers..

Okay. Okay. Thanks..

We will now take our next question from John Murphy from Bank of America. Please go ahead..

Good morning, guys..

Hi, John. Good morning..

I'm not going to beat the dead horse on margins here.

I appreciate that 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 couldn't get back to 12% plus operating margin and maybe even expand from there?.

[Indiscernible]..

Okay. [indiscernible]..

No..

That's great. Okay..

Yes, again, I think it's important -- Joe highlighted this.

We're dealing with round numbers $30 million of COVID related cost per quarter, right? And at the same time dealing with supply chain choppiness or disruptions related to Tier 2, Tier 3 electronics and components, suppliers who probably are dealing with labor availability challenges and 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, we're wrestling through..

It makes all the sense. [Indiscernible] thanks. Just a second question. When you think about diversification, I was curious if you could talk about the non-auto business in the quarter because the other verticals, in particular, in the commercial vehicle side or not quite as strong as what we're seeing in the light vehicle side.

In the short-term and then over time, just kind of remind us where you're trying to go with that, what that potentially can mean for margin, 1 to 5 years out?.

Yes. Those businesses continue to be -- again, relatively small. We finish the year with about 15% of non-auto non-light vehicle revenues, so commercial vehicle and industrial. 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 call some of that non-auto business around telecom, where we've seen really strong growth both through the addition of Gabocom, but also on an organic basis and well above market.

The military business on the interconnect side continues to be very strong. We tend to be more heavily weighted towards Mil Aero versus commercial aerospace. So that's been helpful overall.

But again, as you think about that engineered components business, Winchester, HellermannTyton continue to be accretive to growth rate and margin I would expect them to continue to be. So that's certainly where we've -- where we're focusing those investments both organically and inorganically..

Got you.

And then just lastly any election game planning around what could happen here in November 3rd or after November 3rd?.

Yes, we watch it. We're watching it closely, John. Obviously, it sounds like one administration would be more focused on clean energy here in the United States that could have an impact on our sales high voltage solutions. We feel like we're well positioned and could benefit from that.

Obviously, a lot of the growth that we're experiencing is in Europe and China with those OEMs and under either [indiscernible] either a party where to win our view is you'll still have a certain amount of regionalization of the supply chain due to [indiscernible] on tariffs and trade..

Great. Thank you very much..

Some impact, not a huge impact..

Yes, yes. Yes, not like '16. Thanks very much..

Yes..

We will take our next question from David Kelley from Jefferies. Please go ahead..

Good morning, Kevin, Joe and Elena..

Hi, David..

I appreciate you squeezing me in here. I’m doing well. 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, customer interest in the space, things like on the highway autonomous driving would be great..

Yes. Yes. So L2, L2 plus is today the fastest growing area from an ADAS standpoint. We've actually seen, I'd say a bit of a pause on L3, given cost and given 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 ADAS standpoint, again, tends to be that L2 plus, L2 plus sort of area. Active safety helps OEM customers sell. When you watch advertising for vehicles today, now it tends to be about active safety solutions. Consumers are demanding it. OEM customers make money off of it.

So it continues to be a major area of focus for OEM customers..

Okay, got it. Thank you.

And maybe just a follow-up on that point, Kevin, is that -- is L2 plus, should we see driver monitoring solutions and that sort of solutions? I mean, is that something you're doing in house as well?.

Yes. Yes, so we've won a number of driver monitoring programs as part of our active safety solution set. Obviously, it gets more advanced when you head to Level 3 solutions where you need to re-engage the driver and certainly even more enhanced when you think about L4, L5.

But it's a product area we've been in for roughly 5 years and have a number of programs..

All right. Perfect. Thank you..

Thank you..

We will now take our last question from Dan Levy from Credit Suisse. Please go ahead..

Hey..

Good morning, Dan..

Hey, guys. Thanks for squeezing me in. First, can you maybe provide an update on Motional. It's been live for a couple of quarters now. Where's the progress -- it gives a sense of progress, and I think when you announced the deal, you were talking about plans for commercialization, or you’ve your platform ready by 2022.

Is that intact, and what's the update on customer discussions on uptake of that?.

Yes, it's going extremely well. So our Gen 1 platform is launching this year. Gen 2 is on track to be launched in 2022 the integration, or the integration of the joint ventures are bringing together the [indiscernible] organization and former Aptiv organization is going extremely well.

[Indiscernible] in office and so we're expanding our technology center in Singapore. We've moved into a new facility in Pittsburgh, a significant amount of hiring has taken place over the last 9 months. And most importantly from a technology development standpoint, everything is on track.

We've -- after COVID hit, we stopped our Las Vegas pilot with Lyft, that's been restarted.

We announced a partnership with [indiscernible] a city to be determined, but that will happen over the next 6 months or so, we'll pick a city and actually we'll be providing rides with them that are integrated into the public transit system in a particular city.

And then continue to have commercial discussions with several different ride [indiscernible] healing companies and would expect to be able to announce something in the not too distant future. So all on track..

Great. Thank you. And then just a second, just a follow-up on the broader concept of just restructuring.

I think when COVID started, you mentioned the potential to take some deeper restructuring, and obviously what we've seen is a much better recovery on the end markets and what most of us would have anticipated to maybe probably less footprint production required and what would have initially been anticipated.

So the question is where do you stand on, I guess, post-COVID restructuring. And one of the issues in the past, I think, was challenges on being maybe too proactive on responding to end markets was taking the staffing out and not having enough staffing in place for a volume snapback.

Is that inefficiency at all a risk, or do you have ample sort of staffing personnel in place for a volume snapback? So just ….

Dan, it's Joe. Let me take that. So we certainly, as I mentioned, we sort of ended the austerity programs as people came back to and we needed people to come back to work.

In Q3, we have started to look at the people side of things, think the overhead functions and such and have taken some incremental restructuring, that benefit will flow into the -- to the back half of the year, call that sort of a $45 million number sort of on a full year basis maybe a little bit more. Those plans are in place.

And as I talked about in my prepared comments, Kevin's mentioned, I mean, really the -- what we're looking at now for 2021 is how best to balance some of those footprint decisions and take longer term. Do you take longer term restructuring actions versus where do you think you're going to need capacity.

And for us that's a -- that's an effort over the next couple of months really based on where we see, very strong, continued outgrowth of that 6% to 8%, plus 10% vehicle production, how quickly do we get back to sort of where we were capacitized to pre-COVID.

And I think, those actions will -- it will be directly related to how fast we view ourselves as getting back. So that's in process. But I think we did a good job in the first half of the year with the austerity where looking at opportunities for additional savings going into next year on the people side as appropriate.

And then a longer term, what I'll call sort of infrastructure type decisions will really be based around where we see capacity. And I would just remember, and I’m -- I 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 3, 4 years very aggressively going at overhead costs and how to improve the overall profitability of that 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 that muscle is very well exercised in the company and will continue to apply it as needed..

Great. Thank you..

Thanks..

Thank you for your [multiple speakers]. Sorry, go ahead, Tracy..

That concludes today’s question-and-answer session. I would now like to turn the conference back to the host for any additional or closing remarks..

Thank you, Tracy. As always, we'll be available today and the latter part of this week and into next week for any follow-up questions. And I'll just turn it to Kevin, if you have any final comments..

No. Thank you everyone for your time. We appreciate you participating in our phone call. Please stay safe..

Thank you..

This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect..