Aptiv PLC (APTV) 2018 Q2 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Aptiv Q2 2018 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Elena Rosman, Aptiv's Vice President of Investor Relations. Elena, you may begin your conference.

Thank you, Crystal. Good morning, and thank you to everyone for joining Aptiv's Second Quarter 2018 Earnings Conference Call. To follow along with today's presentation, our slides can be found at ir.aptiv.com. And consistent with prior calls, today's review of our actual and forecasted financials exclude restructuring and other special items and will address the continuing operations of Aptiv. The reconciliation between GAAP and non-GAAP measures is included at the back of the presentation and the earnings press release.

Please see Slide 2 for 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.

Joining us today will be Kevin Clark, Aptiv's President and CEO; and Joe Massaro, CFO and Senior Vice President. Kevin will provide a strategic update on the business, and then Joe will cover the financial results and our outlook for 2018 in more detail.

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

Thank you, Elena. Good morning, everyone. Thanks for joining us today. I'm going to begin by providing an overview of the second quarter and highlighting the key new customer awards and recent developments across the business. Joe will then take you through our detailed financial results for the quarter as well as our outlook for the balance of the year.

Our strong second quarter performance reflects the continued momentum resulting from the execution of our strategy. We delivered record second quarter revenue growth as well as record operating income, EPS and free cash flow. Revenue was up 12% at 9 points over market. Operating income increased 19% to $474 million and margins expanded 30 basis points to 12.9%. Earnings per share totaled $1.40. That's up 24%. And free cash flow increased 34% to $360 million. New business awards totaled over $6 billion, bringing the year-to-date total to a record $11 billion, supporting our outlook for revenue growth across the portfolio.

In addition to delivering strong financial results during the quarter, we strengthened our product portfolio with 2 acquisitions. First, we closed on KUM, a bolt-on to our Engineered Components business, which enhances our competitive position in Asia; and second, we reached an agreement to acquire Winchester, a leading provider of custom-engineered interconnect solutions for a broad range of harsh environment applications. Both transactions increase our end-market diversification and provide solid platforms for further adjacent market expansion, which we'll cover in more detail shortly.

In summary, our strong second quarter performance validates the robustness of our strategy and our business model.

On Slide 4, you could see our portfolio of advanced technologies align to the safe, green and connected mega-trends are translating into customer awards. As I just mentioned, bookings totaled over $6 billion in the second quarter, bringing the first half total to over $11 billion. The record bookings are largely the result of our leadership position in several advanced technologies, beginning with active safety with $7 billion of customer awards since 2016, translating into $1 billion of ADAS revenues in 2018, reflecting over 60% revenue growth this year and very strong double-digit growth over the next several years. We've experienced a substantial uptick in Level 2+ awards from our traditional OEM customers, which I'll discuss in more detail shortly. This acceleration of Level 2+ commercial activity dovetails nicely with our discussions regarding Level 4 and Level 5 automated driving, which are principally with the players serving the mobility market but also includes select OEMs.

Moving to infotainment and user experience. Bookings have totaled $6 billion since 2016, giving us confidence that the strong revenue growth in this product line will continue beyond the end of the decade.

Turning to Signal and Power Solutions. Our Engineered Components business has booked $12 billion of new customer awards since 2016, including $1 billion of high-voltage connectors, bringing customer awards for high-voltage electrification to $2.5 billion over the last 2 years. Our first half pace of new business bookings puts us on a clear path to finish the year above 2017's record $19 billion and gives us confidence in our outlook for continued strong revenue growth.

Turning to segment highlights and starting with Advanced Safety and User Experience on Slide 5. We've experienced 10 consecutive quarters of strong double-digit growth. Second quarter revenues increased 23%. That's more than 20 points above market, driven by 48% and 24% growth in the active safety and the infotainment and user experience product lines, respectively. Based on our strong first half revenue growth, we now expect approximately 20% segment growth in 2018. As already mentioned, Aptiv's safety revenues will total over $1 billion, an increase over 60%; and infotainment and user experience revenues will reach $2 billion, up over 15%. Our expertise in both software development and vehicle architecture, including central compute platforms, enables us to offer uniquely optimized advanced safety and infotainment user experience solutions, which have driven several of our recent new business wins.

The democratization of active safety is accelerating. We're awarded 3 Level 2+ ADAS systems in Q2, with SGM, FCA and GAC. At the same time, the number of Level 3 through Level 5 commercial opportunities are increasing. The right side of this slide highlights our recent new business award from Great Wall Motors. Our China team secured a conquest win for the integrated cockpit controllers on the next-generation Haval and Wey SUVs which will power multiple cockpit dashboards, including the instrument panel, heads-up display and the center stack. This award represents our latest generation of integrated cockpit controllers, operating on a single controller solution, ensuring both the functional safety and network security required to deliver today's dynamic digital user experience.

Turning to Slide 6. The primary factors driving the democratization of active safety are consumer preference and willingness to pay. Consumers are demanding safer vehicles, and OEMs are responding, driving increased penetration of active safety systems across their full vehicle lineups, from the premium to the value segments. Central to our success of booking ADAS programs has been our ability to provide OEMs with scalable, highly reliable systems, but also lower total system cost. By centralizing the function and feature set into a multi-domain controller, we can cost-effectively scale the computer requirements up or down to meet the specified levels of active safety functionality. And by optimizing center configurations that can scale across platforms, we can significantly lower the mass and cost required to support more advanced ADAS features. As a result, our OEM customers can deploy these systems quickly and at competitive price levels.

As OEMs look to leverage their investment in development for Level 3 and above ADAS systems, the design of our multi-domain controllers and the optimized configuration of our sensors supports failsafe operational solutions in a more economically viable way. In short, our approach to advanced ADAS solutions is unique in the industry, and it's helping us win in the marketplace, including with the 4 major OEMs featured on the left side of the slide, while positioning us to be even more competitive in the future. We now expect active safety revenues to increase from $1 billion in 2018 to well over $2 billion in 2022, representing a continued very strong double-digit growth rate.

Turning to Slide 7. The advanced work we're doing today on Level 1 and Level 2 ADAS systems for our traditional OEM customers is being leveraged in the Level 3 through Level 5 automated driving solutions. A current application of this technology is on our Level 4 commercial deployment in Las Vegas. We've given over 3,500 automated rides utilizing the Lyft network, roughly 100 rides per day, earning a near-perfect rider rating of 4.96 out of 5. The vehicles in the Lyft network are running over a span of 20 hours per day and are serving 20 pickup and dropoff locations today, increasing to 30 by year-end. As our Las Vegas fleet scales, we're leveraging our data services platform to monitor, diagnose and update our automated driving software to dramatically improve development cycle time. Further, the data we're collecting about traffic flows and pickup and dropoff frequency is proving to be a substantial interest of potential mobility customers, providing additional opportunities for data monetization.

In addition, we're also seeing significant increase in connected services from traditional commercial fleet operators as they work to improve fleet utilization and meet more stringent regulatory targets. We view our vehicle deployment in Las Vegas as opportunities to learn how to best develop, how to operationalize and commercialize our automated driving technology. Consistent with that objectives, we're partnering with Hertz to provide management services for our fleet of roughly 75 autonomous vehicles in Las Vegas. The partnerships with Lyft and Hertz are an important first step on our path to commercialize automated mobility-on-demand in a thoughtful, prudent and safe manner, with multiple mobility partners across the globe.

Turning to Slide 8. Our Signal and Power Solutions segment is focused on next-generation vehicle architecture, requiring high-speed data and high-power electrical distribution to enable the advanced technologies that will shape the future of mobility. The business continues to benefit from the need for more scalable and optimized vehicle architecture to enable advanced vehicle features and functionality, which is reflected in customer awards. Our current pace of new business bookings in the segment translates into solid mid-single-digit revenue growth over the next several years, which is what we experienced in the second quarter, 8% revenue growth, 5 points over market, driven by 63% growth in high-voltage revenues and a 12% increase in Engineered Components revenues, the result of strong growth in both the automotive and industrial end markets. Revenue growth in the segment benefited from new platform launches in North America, which more than offset the continued weakness in passenger car volumes. Underscoring our industry-leading position in this segment, we were recently awarded the electrical architecture on a new North American truck and SUV program, a high-value, high-volume conquest win.

Turning to Slide 9. The acquisition of Winchester Interconnect ticks all the right boxes. It perfectly positions us to accelerate the end-market diversification strategy we articulated in 2017. Winchester provides advanced interconnect solutions for some of the most demanding harsh environment applications. The company's revenues are diversified around industrial applications serving the aerospace and industrial end markets as well as products for data infrastructure and medical. Consistent across each of these markets is the high cost of product failure and the need for products to meet the challenging temperature, vibration and other design specifications, which in many ways are transferable to Aptiv's expertise. Joe will discuss the integration plan for Winchester shortly, but we're confident their talented management team will enhance our ability to accelerate the growth of our $1.5 billion of current adjacent market revenues.

As we continue to execute our diversification strategy with the goal of improving our overall through-cycle operating performance, Winchester brings us closer to our target of 25% non-auto revenues by 2025, providing a business platform, from which to expand our product portfolio and geographic reach.

With that, I'll hand the call over to Joe to take us through the second quarter results and review our increased guidance for 2018.

Great. Thanks, Kevin. Good morning, everyone. Starting with a recap of the second quarter financials on Slide 10.

Results exceeded the guidance we provided back in May, with revenue of $3.7 billion, up 12% or 9 points over vehicle production, reflecting a continued ramp of new program launches in both our segments. EBITDA and operating income increased 19%, driven by higher sales volume and operational performance; and operating margins were 12.9%, up 30 basis points. Earnings per share of $1.40 was up 24%, despite the expected higher tax rate on a year-over-year basis. Importantly, operating income and earnings continue to grow double digits while investing in future growth. Lastly, operating cash flow was $566 million, up 37%, driven by higher earnings and favorable working capital.

Turning to Slide 11. Sales of $3.7 billion were approximately $135 million higher than expected, largely driven by stronger volumes in both segments, despite some variations in customer schedules in the quarter. FX and commodities were also a positive. From a regional perspective, North America sales were up 15% and benefited from a number of new program launches in Advanced Safety and User Experience and Signal and Power Solutions, more than offsetting continued passenger car production declines. Europe sales were up 9%, also better than expected, driven by the ramp-up of new program launches despite slightly lower -- slower production schedules. And China sales were up 11% as we continue to see strong revenue growth and expect to grow 8 to 10 points over market for the year.

Slide 12 walks our operating income performance year-over-year. Operating income of $474 million was up 19%, while margins expanded 30 basis points to 12.9%. Conversion on strong volume growth and operating performance more than offset price downs, which were slightly below 2% for the quarter and the higher mobility investments. FX and commodities were a modest benefit in the quarter. Although as we've discussed in the past, revenue from stronger FX and commodities are dilutive to operating margin rates. Stronger operating performance yielded higher earnings per share in the quarter, as shown on the walk on Slide 13. Earnings per share were $1.40, up 24%, as operating income growth translated into $0.28 of earnings. And all other items were a net $0.01 headwind.

Moving to the segments on the next slide. Advanced Safety and User Experience revenues grew 23% in the quarter, driven by new launch volumes and higher take rates globally in active safety and infotainment and user experience, which grew 48% and 24%, respectively. Operating income grew 35%, and margins expanded 80 basis points before the impact of mobility investments, driven by strong revenue growth and improved performance. Our mobility investments totaled roughly $40 million in the quarter. And as a result of the acceleration in commercial activity, we now expect full year mobility spending to be roughly $160 million, a $20 million increase versus our prior outlook. Segment revenue growth is now expected to be approximately 20% for the full year.

Turning to Signal and Power Solutions on Slide 15. Revenues were up 8% in the quarter, driven by new product launches and increasing high-voltage electrification and Engineered Components volumes. For the year, we expect 6% to 7% revenue growth, with strong growth across all product lines. Operating income grew 24%, and margins were up 130 basis points in the quarter. Operating margin flow-through is being somewhat impacted by operational inefficiencies driven by variations in customer schedules and higher launch volumes, primarily in North America and Europe, which we've assumed will continue for the balance of the year.

Turning to Slide 16. We are raising our outlook for 2018. Revenues are now expected to be in the range of $14.35 billion to $14.55 billion, with an adjusted growth range of 8% to 9%, up from 6% to 7%, previously. As you can see, we are still targeting global vehicle production up 1%, despite movement within the regions and some variations in customer schedules. Our outlook now assumes $1.16 euro rate for the remainder of the year, down from $1.18 and $6.80 for the Chinese RMB from our prior outlook of $6.50. Adjusted EBITDA and operating income are expected to be $2.455 billion and $1.805 billion at the midpoint, respectively, up 15% and 13%. Earnings per share are expected in the range of $5.30 to $5.40, up from our prior range of $5.20 to $5.40, reflecting a 15% increase year-on-year at the midpoint. And operating cash flow is expected to be approximately $1.6 billion, also up mid-teens over 2017, with CapEx unchanged at roughly $750 million. For the third quarter, revenues are expected to be up 10% at the midpoint on production growth of roughly 3.5%. Adjusted operating income is expected to be $420 million at the midpoint, up 7% versus prior year as volume growth is partially offset by the previously mentioned higher mobility investments and operating inefficiencies and FX and commodities revert to a headwind, both sequentially and year-over-year, accounting for approximately 50 basis points versus Q3 of 2017. EPS in the range of $1.21 to $1.26, up 5% to 10%, and assumes a 15% to 16% tax rate.

Looking at the 2018 operating income walk on Slide 17. Performance highlights include: continued sales growth across both segments; price downs remaining in line with expectations; a modest benefit year-over-year from favorable FX and commodity pass-through; and then operational performance and cost-reduction initiatives fund our investments for growth, including $100 million increase in mobility investments year-over-year.

Turning to Slide 18. Our strong balance sheet allows us to execute our strategy for growth and create value for shareholders. You'll recall we came into the year with a large cash balance as a result of the dividend from the Delphi Technologies spin-off, relatively low net debt and a conservative leverage profile. We're committed to maintaining our investment-grade rating and targeted debt-to-EBITDA ratio of less than 2x, which is roughly where we expect to be at the end of the year. This is a result of executing our consistent capital deployment strategy, focus on investing in our businesses both organically and inorganically and opportunistically returning cash to shareholders.

Our recent bolt-on acquisitions of KUM and Winchester will be accretive to EBITDA margins and drive growth in our Signal and Power Solutions businesses as it benefits from a more balanced mix of customers, regions and end markets. We're also funding CapEx to support our strong bookings and fast-growing product line such as active safety, infotainment and high-voltage electrification. And for the year, we expect to return approximately $450 million to shareholders through share repurchases and dividends.

Moving to Slide 19. Before handing the call back to Kevin, I want to spend a moment reflecting on our recent acquisitions aligned to our strategy. Both KUM and Winchester strengthen our Signal and Power Solutions business, where we're a global leader in electrical distribution, automotive connectors and cable management and fastening systems. KUM with approximately $250 million of revenues annually expands our range of automotive connectors, has an attractive facility footprint and will enhance our growth in the Asia Pacific region.

Moving to Winchester. As Kevin mentioned, their portfolio of precision-engineered interconnect solutions creates a platform to further expand in adjacent end markets by adding over $250 million of revenue to our current $1.5 billion in nonautomotive revenues.

Upon closing, Winchester will operate as an independent business unit of Signal and Power Solutions segment and will continue to go to market under their existing brand name, similar to HellermannTyton. By leveraging our expertise to expanding to adjacent markets with design requirements for the harshest of environmental conditions, we are confident we can achieve our target of 25% non-auto revenues by 2025, significantly improving our through-cycle performance with increased diversification.

In summary, we have an exceptional track record with bolt-on acquisitions to achieve accretive growth in earnings and expect KUM and Winchester to do the same.

With that, I'd like to hand the call back to Kevin for his closing remarks.

Thanks, Joe. Let me wrap up on Slide 20 before we open it up for Q&A. We delivered another strong quarter with record revenue growth as well as record operating income, earnings per share and free cash flow. As a result, as Joe said, we're raising our guidance for the second time this year, with 8% to 9% adjusted revenue growth, 13% operating income growth and 15% earnings per share growth. We continue to make significant progress executing our strategy and optimizing our business model, including increasing revenues faster than underlying vehicle production through content growth and market share gains as customers increasingly look to Aptiv as their partner of choice, as reflected in our bookings performance; continuously improving our cost structure and increasing our operating efficiencies to both reinvest in the business and to expand margins and grow earnings and cash flow; leveraging our balance sheet for further value creation; investing roughly $1.5 billion in acquisitions in 2017 and 2018 combined, while returning over $1 billion of cash to shareholders through dividends and repurchases; positioning Aptiv for the future, strengthening our portfolio of safe, green and connected advanced technologies to widen our competitive moats; capturing opportunities in new markets and diversifying our business mix to ensure less volatile operating performance through the cycle.

With that, let's open the line up for Q&A.

Thanks. Crystal, we'll now take our first question.

(Operator Instructions) Our first question comes from the line of Brian Johnson with Barclays.

A couple housekeeping questions and then a more strategic one. In terms of housekeeping, so a couple of things around the guide for 3Q. Is -- Volkswagen has called out delivery delays, [brand] increasing production delays to reflect as an IHS due to the need to push vehicles through the WLTP compliance. So does your third quarter outlook kind of take not just the IHS numbers, but some of the production schedules are merging or likely to merge from your customers when you put out that guide?

Yes. Q3 has got schedules, Brian, as best as we have them from the customers at this point. Obviously, get more to IHS as you get in the final couple of months of the year. But at this point, as best we have and we're tied up to schedules.

Okay. Second sort of housekeeping, which will transition more to kind of strategic one. The third quarter operating guide implies -- third quarter guide implies an operating margin of 12% to 12.2%, a bit lower than many of us had modeled. Could you maybe dimension how much of that is mobility, launch costs or other kind of expenses?

Yes. It probably starts -- if you -- particularly if you're focused on margin rate, the biggest change is going to be the FX and commodities. So that, as I mentioned in my prepared remarks, that's about 50 basis points off the 12.1% of the midpoint. So if you adjusted for the FX and commodities, including the revised macros we used for Europe -- for euro and RMB, you're up to about 12.6%. We've taken the RMB down to $6.80. It ended Q2 in the 6.3s. So we've got -- and it's trading above or below $6.80 now. So we've got a little bit of catch-up on the reval in the quarter coming as we adjust from sort of where we ended the $6.30 and change to the $6.80. So that on a margin rate perspective, that's effectively 0 revenue and the reval coming through the OI line. So it plays a little bit of havoc with the rate. Mobility investment, the additional $20 million, that's pretty much spread evenly through the balance of the year, so call that $10 million. And then the operating inefficiencies, I mentioned, they impacted us a bit in Q2. We're forecasting them to continue. That, in part, is the higher launch volumes, particularly in SPS. But also, as I mentioned, we've got things like Meridium that happened in Q2. You've got some other changes in schedules, which aren't necessarily call-downs of volume, but they're making it much more lumpy within a given quarter. And obviously, it's harder to react if you're running slower for a 2- or 3-week period. It's obviously harder to react from a cost structure perspective than any type of longer-term change. So call that another 15 or so in the quarter as well, 15 to 20. The rate is probably around -- the rate delta and we have this challenge going the other way in the first quarter. The rate challenge is really on the FX and commodities impact.

Okay. So I know -- sort of gets into a question on the Veoneer call, management described, as was in their Investor Day, the cash flow characteristics of taking on active safety business. Of course, recognizing they're a different scale than you. But describe the couple of years of cash and expenses for application engineering. Some of it gets reimbursed towards the tail end of the project, then of course, launches. So with your strong bookings pace and with a strong launch activity, how should we be thinking about sort of the headwind in a good way to the margins in active safety and maybe less or so, infotainment as you go through this growth period?

So maybe I'll start, Brian. So as you know, last year, we booked about $3.7 billion in active safety business this year. Today, just under $2 billion and on track to do well over $3 billion. As we've talked about in the past, typically, in our product range, when you launch a new program or a new technology, when you size the revenue from 0 to 300 you're investing effectively in the technology. And then from 300 on, you're actually positive from an operating margin standpoint. And hit $1 billion in run rate revenues today, our active safety business is at the ASUEX operating margin rate X the investment mobility. So for us, it's a strong very profitable business.

Okay. So at your scale then, the increased bookings don't lead to a margin headwind from development expense?

Well, I mean, it creates development expense and probably creates some margin headwind, but the incremental volume more than offsets that. That's how I would describe it. Listen, we've gone from 5 active safety customers back a couple of years ago to we're heading pretty close to 20. So there's launch activity and development activity affiliated with both of those. But at $1 billion of run rate revenues, we're solidly in the black from a margin standpoint.

Yes. When we have volume ramping obviously on the previous launches, the mobility investment obviously that's focused on the AMod, Brian. And I think I mentioned in my prepared remarks, if you backed that out, the core ASUEX business, which includes all of its own development business, the only thing that's in that mobility number is truly the AMod investment. Those margins expanded about 80 basis points year-over-year, so we're seeing that business perform as we would have expected.

Our next question comes from the line of Chris McNally with Evercore.

Yes. Just wanted to think about the operating leverage. And we've discussed in the prepared remarks for Q3 and second half, but sort of to Brian's question, as we start to think about 2019, you've had such a big jump in obviously everything autonomous driving. You had a lot of launch activity. Could we start to think about in 2019 that the incremental margins get back to a more normalized operating leverage? Typically, your kind of 20% or I think your longer-term guidance of 20 to 30 basis points of margin improvement.

Yes, Chris. We would stay focused on that framework we provided in Investor Day, 20 to 40 basis points of margin expansion while investing in the business. Again, I think, and -- you got to watch the FX and commodity. The beginning part of this year has been somewhat volatile and disproportionately affects the margin rate itself. But as we look out, our best estimates of FX and commodity rates right now would probably give us a little bit over a 10 basis point headwind on margin rate for the year, which would put us north of 20 basis points of margin expansion, even with the increased mobility investment. And that's a framework we're very focused on maintaining.

Yes, Chris. It's Kevin. I would just add one additional point. So we'll launch about 1,700 programs this year, of which about 250 we consider to be major launch programs. And a lot of that activity is in the SPS business, as Joe talked about earlier. And when you look at that on a year-over-year basis, that's roughly a 70% increase in critical launch activity. And as Joe mentioned, there were a couple areas from an operational standpoint, I think we could've performed a little bit better in Q2, and quite frankly, in Q3 and Q4. So as that launch activity slows as you head in 2019, we should get the incremental benefit.

Okay. That's perfect. And then just for the second half because obviously with everything trade -- FX is going to remain such a focus for short-term performance, does sort of the rule of thumb that you have for the renminbi still $20 million per, I think it's roughly every 1% or for every $0.06.

Yes.

Does that still hold post this sort of big move that we've had over the last 3 quarters...

Yes. Generally, it holds. It flows -- the renminbi flows a little bit higher than the other currency, just because of some of the balance sheet translations over there. So it may flow close. We usually say FX flows at 10%. We usually say -- that may flow a little somewhere between 10% and 15%.

Okay. 10% to 15%. And then you said for Q3, specifically, 50 basis points, which overall could be roughly $20 million of EBIT year-over-year...

Total FX and commodity between 15 and 20. And a big part of that is just the renminbi really has moved here since the end of the quarter, so we're assuming we sort of take the full $6.30 to $6.80 -- $6.30 something was the quarter-end to the full $6.80 at the end of Q3, which is really what's driving that FX and commodity line. Obviously, not a lot of revenue associated with that. Just really the reval.

Your next question comes from the line of Joe Spak with RBC Capital Markets.

Kevin, just -- I was wondering if you could spend a minute talking about Level 3 because we've heard from some competitors, it seems like conversations with companies are ramping up. I think in prior quarter, you've indicated that as well, more interest in that product. But then -- and we see stuff like Audi sort of limiting the Level 3 product in the U.S. So I guess, I just want to understand where we really stand with Level 3.

Yes. No, that's a great question. It's very customer-dependent. There are OEs who are very focused on developing Level 3 and leveraging Level 3 into Level 4 and Level 5. So we're in a lot of those dialogues. There are other OEs, Joe, who at least, as of now, are looking at the incremental cost of Level 3 versus, let's say, a Level 2 or a Level 2+ solution. And seeing more value in the Level 2+ solution on a kind of a cost-per-benefit standpoint. So it's a bit bifurcated, quite frankly. Those who -- those customers who tend to have a -- let's call it a sequence (inaudible) development strategy as it relates to autonomous driving moving from Level 2 to 3 to 4 to 5, are focused on advancing to a Level 3, those who are coming at it from 2 different directions, the Level 0 to a Level 2+ being ADAS and a group that works on that and a separate group working on Level 4 and 5 seem to be considering skipping that Level 3 step.

Okay. So the $2 billion active safety target that you put out in 2022, can you give us a sense of the breakdown of that between, I guess, more like Level 2 or than Level 3+?

Yes. A lot of that -- well, that would be ADAS business for us. So we're -- the guidance we've given is 2025, we'll do about $1 billion of automated driving revenues. Roughly $500 million of that will be Level 3; $500 million, Level 4, Level 5. The $2 billion of ADAS business is Level 2+ and Level 0, 1, Level 2+. But I'd say, most of that growth being in Level 2+ over the last year or so. So active safety sells. So consumers are asking forward, as I said in my prepared remarks, we're seeing OEs really pull for it. We're seeing a lot of opportunity around the Level 2 and Level 2+ area, so that will drive most of the growth.

Okay. And then just separately, if you are approached or -- I guess, would you consider direct investment in some of your autonomous efforts, similar to what we've seen some other players in the industry do?

When you say, direct investment in some of our autonomous efforts, if -- would we invest in others? Or...

Well, no. It's kind of taking new capital just directly into some of your efforts.

Well, as you've heard Joe and I said, we're about driving shareholder value, so it starts with that. So how do we best drive shareholder value? If an opportunity like that presented itself and it delivered shareholder value, that's something that we certainly would do, obviously, should do. Having said that, we need to have a good understanding of what the capital -- how much capital it was -- what effectively we'd use it for. I think if you'd ask Joe and myself at this point in time, we feel like we're spending the right amount of money to do everything we need to do to develop our automated driving technology both for OEM customers as well as for the AMod customers and really don't view there to be a gap in what we're developing or working on as it relates to resources, people or funding. So we really need to understand the situation. But again, as we've always said, we're about driving shareholder value.

Our next question comes from the line of David Leiker with Baird.

I want to talk about the mobility investment that you're doing. The $31 million increase year-over-year from -- if I'm reading the chart right. Is that correct?

Correct. $40 million of mobility spend in the quarter.

In the quarter.

The increase of $31 million year-over-year.

Yes. In the quarter, you're talking about, yes.

In 2Q.

In what line item does that flow through? Is that in the cost of goods sold?

Yes. That's primarily -- there's some in SG&A obviously, oversight and such, but a lot of it flows up through the engineering -- our engineering flows up through cost of goods sold.

And then as we look, that number has been growing for you. What does that look like next year? The following year, the total spend?

Yes. It's obviously early days to roll it out. I mean, you won't see the step level change, and we said this a couple of times. You won't see the step-level change obviously that you saw in '17 or '18. Could you wind up in '19 at $180 million, maybe close to $200 million? Possibly. We're still working really through that. It would really all depend on the opportunities. The increase that we've come out with this quarter, completely related to the opportunities, and quite honestly, getting close to what I'd almost call commercial pursuits at this point with some of the major OEs and some of the mobility-on-demand providers. So to the extent we see greater opportunities, we'd increase the spend. But the step-level change that you saw from '17 to '18, we certainly would not expect to repeat without a significant known sort of commercial event.

And then the last item on here, what do you think that time line looks like to reach profitability for those efforts?

We've talked about having that sort of $1 billion of revenue in 2025, $0.5 billion of that coming from AMod. I think we're on a sort of a growth trajectory sort of come from 2021 through 2025. And it will, to some extent, mirror our other product lines, where we sort of breakeven at that $350 million of revenue and would expect to grow from there. There may be some opportunities, just given the nature of this revenue, some software sales, some recurring data service fees, where we climb profitability a little bit faster than our traditional product lines obviously. But we really still look at this business is from a revenue perspective evolving from sort of 2021 through 2025.

Yes, David. The other thing I think -- and we don't count for it this way. We're careful not to count for it this way. But as we develop the technologies related to AD, that's something that we clearly transfer to our active safety program, principally around perception systems, as you can imagine. And I think one of the big reasons we've been able to, in addition to market growth, but when you look at winning percentages and overall bookings in ADAS, principally around Level 2, Level 2+, the reason we've been so successful in the last year or so, and would expect to continue to be, is as a result of both investments that we're making. Now again we don't count it that way. We keep it separate. We make sure that we're focused on how do we drive revenue profitability in the AD business separately. There is a benefit there.

Yes. Those assets and investments are definitely guiding revenues in other parts of the business.

Our next question comes from the line of John Murphy with Bank of America Merrill Lynch.

Just wanted to follow up on that mobility investment. When you think about this over the long run -- I know you just kind of went through sort of how this morphs into or supports other parts of the business. When you think about sort of returns in mobility, where do you think they ultimately go? I mean, do we turn the corner in 2025? And all of a sudden, return on invested capital here is much higher than the corporate average? Just curious how you think where this will ultimately land.

Yes. Listen, I think well before 2025, you're at or above our return or average return on capital in this business, right? We're not looking to manage fleets. That's not the business we're in, so we're not going to invest significantly in building cars. Fleets will be owned by others. We'll provide the technology related to those fleet. We'll provide the software. We'll provide the perception systems. And as you know, the more software that goes into those solutions, the higher the return. So I think it's well before 2025, John.

Okay. That's helpful. And then just second -- sort of staying on the return side. I mean, when you think about active safety as you're talking about it, Kevin, on, I think it was Slide 5, as you democratize this technology, there's a lot of concern in the market that margins and returns may come down. But if you have the ability to scale and leverage the sort of the initial technology investment, the returns may actually expand. Just curious as how you think about the democratization, how that will work.

Yes. Listen, software you do once, right? And I think definitely on low-end systems, you'll see increased cost pressure. It's the nature of the business that we operate in. And it's, quite frankly, what we deal with across all of our products. And it's something that we do a very good job of managing with our customers, with our partners. Having said that, there's real demand going up the chain from a technology standpoint from Level 0 to Level 1 to Level 2+; I'm confident, Level 3, and so on. And those will continue to be products that consumers are willing to pay for. And they're advanced technologies, which very few people can, quite frankly, develop and can integrate into vehicles, and you'll see margin benefits.

Okay. And then also just on diversification to the nonautomotive business. I mean, going to get 25% as a target. As we think about margins and returns there, will those also similarly be higher than corp average as they stand right now?

Yes. Those are -- that is -- that strategy is pretty straightforward. There are opportunities in places like commercial vehicle where we take our products that we manufacture today. And we sell in the markets that historically we haven't had as much focus on. We had focus, but not as much focus. So there are concerted efforts to further pursue to take existing technology, existing products and pursue opportunities in that market. The second is, in and around the Engineered Components space, where the product portfolio is often very, very similar. Now the go-to-market is very different or can be very different. The approach from a sales standpoint can be very different. And as you know, we bought HellermannTyton a few years ago. That's a business that has operated extremely well. It's been a great case study for us. It's grown well over 10% per year, with a real strong sales force. And as Joe mentioned, with respect to Winchester, we think it's a great asset with a great management team, a great footprint. And to the extent we can provide them capabilities, maybe leveraging sourcing and things like that, maybe their products that we have in our portfolio today that they can add into their portfolio to sell in the industrial and other markets, if we can diversify our revenues, be less cyclical in a very low-risk way, we think it's multiple-enhancing and it's return-enhancing.

Sounds good to me. Then just lastly, maybe one odd question right now, just given that you just executed sort of a separation spin. As we look at what's going at Autoliv, with Veoneer, I mean, you have some great technology that is much higher growth than maybe average, particularly in active safety and safety and high voltage. Would you ever consider sort of another spin of this super-high growth stuff just given some of the frenetic valuations that they put on some of this high-growth stuff, even without positive cash flow?

Yes. I -- Well, one, I think our high growth has positive cash flow. So I want to make sure -- and every business is different. So the Veoneer business is a very good business with great technology, and I don't have all the specifics as it relates to their product portfolio and where they're investing. But we have a great business that's high growth, has positive cash flow, significant software capabilities. Again, Joe and I go back to, we entertain whatever creates the most value for shareholders. Now having said that, we think being able to leverage both the hardware and the software capabilities is very unique. And we think that's one of the reasons we've had the win rates we've had on a -- from a booking standpoint, from an ADAS standpoint, from an infotainment user experience standpoint, and we think we'll have more to talk to you about as it relates to smart vehicle architecture. So solutions -- future solutions for the architecture of the car. So we think there is an incremental benefit of having the 2 together.

So it's fair to say, right now, no plans, but over the long run, if there's an opportunity to create shareholder value, would be something you'd entertain. Is that accurate?

Yes. Right now, no plans. Yes. Right now, no plans. And always, always focused on driving shareholder value.

Our next question comes from the line of David Tamberrino with Goldman Sachs.

I want to dig in a little bit more on the Advanced Safety and User Experience business. I think you've mentioned a couple of integrated cockpit controller wins. Wondering how much growth you're seeing within your business, how much further RFPs are out there from OEMs and what the competitive landscape is for that subset within advanced safety and UX.

Yes. I mean, we've had strong bookings over the last couple of years. The ASUEX, the infotainment user experience business is growing kind of mid-teens for growth rate. From a CAGR standpoint, we expect it to continue to do that through the end of the decade. There'll be some movement up and down based on programs rolling on and off. There continues to be significant demand for the product. OEs are looking for ways to consolidate controllers and increase compute power. We've talked about our Integrated Cockpit Controller. You saw at CES, our CFP, which has 40x the power of our Integrated Cockpit Controller, less mass and safety OE cost. So there's a lot of focus from an OE standpoint, how to get leverageable compute power, how to kind of centralize it and how to increase or enhance the software operations of the software on the hardware.

Okay. And from a competitive landscape, I mean, how many folks are you seeing out there that are competing against you within that segment or achieving better target margins? And -- or you're looking at better potential target margins than what you're looking at? Maybe just a little bit...

Yes. So yes, I think, given our software and our hardware and our systems integration capabilities, again, we feel like we're the most uniquely positioned to play in this space (technical difficulty) we run into more typically are players like HARMAN, who we traditionally ran into, who had strong software capabilities. And I think with their more recent transaction with Samsung have some hardware and systems integration capabilities.

Some infotainment, yes.

Yes. On the infotainment side. That's true.

Yes. And I think, David, on active safety, we've talked about it before. To us, particularly, when you get to the Level 2 and the Level 2+ systems, we feel the moats expanding. So there's fewer and fewer folks, at least, from what we're seeing, that are sort of in the room with us, at least on some of those initial bids. And I think they're the ones you'd expect really the Bosch, the Contis, the big global players that could deliver this technology certainly on global platforms. And for us, that's a pretty good spot for us to be. We compete well against those guys. It's a structured market. And again, we think, just given some of the complexity going on in this technology, that moat's widening as to who can really do that.

Understood. And then maybe just switching gears and thinking about mobility and services, your update 3,500 plus rides. I think the last time, there was maybe like 400-plus rides with 99% fully autonomous post the Detroit -- I think it was updated at Detroit Auto Show. What's the percentage of mileage that's being driven autonomous right now or kind of live to date in Vegas? How many disengagements -- or what type of disengagements you're seeing? And maybe just talk a little bit about the learning of the system that you're seeing from when we're out there in Vegas to today and July?

Yes. So the program -- so the system we have today is obviously stronger than what we had at CES, so we go through a regular process of updating and enhancing. And quite frankly, that's why we have the Las Vegas location, it's for further validation and development of the underlying technology. The vehicles tend to continue to be riding at roughly 99% autonomous. We have roughly 15 vehicles on the Lyft network today. We have roughly 75 in total, 15 on the Lyft network, growing to 30 before year-end. We serve 20 locations now. We'll be 30 by the fall or year-end as well. As it relates to takeovers, things like that, I don't have that data in front of me, but we continue to make improvements on the underlying system.

Yes. It's certainly strong. I think, David, the learnings -- as we've talked about before, the learnings at this point from Lyft are really on the commercial side of things, right? As Kevin mentioned in his prepared remarks, data coming off the cars, who's that data valuable to, how best to incorporate -- and these are learnings for both us and Lyft, how best to incorporate these vehicles into an existing mobility-on-demand network, where to deploy them, when to deploy them. As Kevin said, these cars have the ability to run consistently for longer hours of the day. So at this point, certainly, from a takeover and an automated drive perspective, the numbers continue to go up from where they were in January. But really, this is focused on how best to use these assets to turn revenue.

Yes. And on that front, have you seen interest -- are you closer to anyone kind of setting up or signing someone up to purchase that data?

Yes. We've had -- we have several dialogues with a number of folks who'd be interested in location and other data in and around Las Vegas.

Our next question comes from the line of Emmanuel Rosner with Guggenheim.

So on active safety, it looks like your integration capability is a strong competitive advantage. Have you noticed any meaningfully improved win rates for business now that the OEs request quotes that are -- that include not just ADAS, but also highway autopilot?

Yes. I don't know if I have right in front of me. Well, I don't have data really to win rates on ADAS. Our win rate overall has gone up this year versus prior years. And given the amount of ADAS activity, I would assume that, that would show a similar sort of trend, Emmanuel. But I think, to Joe's point on the active safety side, given there's very limited group of players out there that can do both hardware and software and then overlaying our vehicle architecture capabilities on top of that, I think it's differentiated us and has resulted some of the significant wins that we showed in our presentations. I mean, those are pretty complex ADAS programs with large multinational OEs. And when you get to Level 2+ systems, you need to be able to be a strong systems integrator.

Understood. And then I guess, in terms of your efforts to sort of diversify the revenue streams, so you spoke about non-autos at 25%. That's obviously an ambitious target. What is required to get there? And then separately still on the diversification, you -- I think you had laid out some directional targets for having a portion of your revenue from software or from recurring sources. Can you sort of like quantify those or put a time line on that?

Yes. I think it's -- and really, I mean, Emmanuel, we focused a lot of on conversation around 2025 where we've talked about that $1 billion of AMod, automated driving revenue, half being from mobility-on-demand service providers. So obviously, there's a large percentage of that which we expect to be data services and software sales of the mobility stack. So that service -- obviously part of -- when we think of non-auto revenue, it's not tied to light vehicle production. So that's certainly part of it. The other key things we need to execute on and I think we've started making progress already, organic growth of the commercial vehicle business, and that really goes across both segments. Solid growth in the quarter and we expect solid growth in 2018 as it relates to CV. And that has continued to focus within SPS, continue to focus on those adjacent markets where we think it makes sense. For businesses like HellermannTyton, that will include organic growth into those nonindustrial -- into those nonautomotive industrial markets, but it will also be a big part of the inorganic growth strategy. We think Winchester will serve as a great platform for non-auto ECG acquisitions. We'd often come across smaller connector businesses that we like that were non-auto that we saw we could acquire at a reasonable multiple. But we really didn't have a place to plug them into. And we're obviously a large company. And without a platform to bolt on to, if you will, it is hard to do bolt-on transactions. So Winchester really gives us the ability to go into those markets and identify opportunities there. Winchester, as Kevin mentioned, solid management team, very experienced at M&A. We'll help them in a couple of ways. We think we'll have some material saving synergies long term that benefit them. They're also 80% to 85% North America at this point. And for a smaller company going into Asia Pacific, going into Europe in a meaningful way, it's more challenging, just given the infrastructure. We obviously had a lot of capabilities in those parts of the world to help them ramp more quickly in Europe and Asia Pac. So we certainly see, broadly speaking, SPS, but particularly the Engineered Components Group, is a meaningful next step in that nonautomotive revenue.

Our next question comes from the line of Rich Kwas with Wells Fargo Securities.

Just 2 for me. So I didn't hear anything on tariffs, so I assume that is immaterial at this point on 301?

Yes. So good question. Yes, it is. We've benefit there really from our operating model, right? We're very focused on localized production, localized sourcing. If you look right now, what I'll call it, the direct -- potential direct impact, we only have about $400 million of material flows between the 2 countries. And quite honestly, as we started to look at that, we found pretty straightforward ways to localize about half of that. The only reason that's not localized now, and this is particularly along the Engineered Components Group, from a capital deployment perspective, at the moment, it's more capital-efficient to produce in one place than ship. To the extent that became more expensive than the tradeoff of putting capital locally, we'll obviously switch, and we'd be able to localize. So it's just at this point, at $400 million, you're talking about maybe a $5 million to $10 million impact from tariffs. So it's just not material. Given the portfolio moves of the business, we've significantly changed our buying, what we buy, what we need to buy to manufacture. Our global steel and aluminum buy is less than $10 million annually, so that's just not registering as problematic at this point.

And Joe, on that $5 million to $10 million, is that annualized number or half year number?

Annualized.

And then, Kevin, just a question on -- so on Winchester, it gets in the [parts and hazardous]. How much scale does this give you? Are there other opportunities out there where you could do additional M&A and further business scale?

Yes. Yes. Definitely. Definitely. So Winchester, as I said, strong operating teams, strong business team, great systems, has experience with M&A in the smaller spaces that Joe alluded to, and our edict to them will be continue to go out and do what they have been doing. And we'll provide them support in certain areas from a synergy standpoint and a control standpoint.

Okay. Is that market fairly fragmented?

Yes.

Yes.

Yes. It's -- yes. When you look at the connector, Engineered Components space, it's very fragmented. As Joe said, there was a period of time where consolidation took place, where the larger players -- we bought MVL back in 2012. I would say that was the last of the medium-sized connector players that were out there. And then from there, it dropped down to relatively smaller businesses out there, so -- and a number of them are very strong. So we'll continue to acquire those businesses, integrate them into the Winchester business model. But again, a big piece of our diversification strategy is really about doing more with what we already have. So Joe talked about the commercial vehicle market. That's taking existing product portfolio with more focus and selling into commercial vehicle. We purchased the Control-Tec business, the data business. It's growing just under 20% per year, it's non -- in terms of product, it's non -- it's not tied to vehicle production, tied to data and value per data, continue to grow that business and focus that business in the OE market as well as in the AMod market. And that's in the connector space or Engineered Components space.

Our next question comes from the line of Steven Fox with Cross Research.

First question, just getting back to the mobility landscape. There's been a lot of activity in the last 90 days along the lines of tie-ups between different types of companies, capital structures, et cetera. I was curious, if you step back and look at all that, and given your investments increasing, what does it say for how maybe the landscape is changing relative to your position? And then I had a quick follow-up.

Yes. I think -- and Joe should comment as well. Listen, I think it depends that -- the answer to the question depends on the perspective through which you're pursuing opportunities in this market, right? I think it's important to know, we're focused on selling autonomous driving systems and perception systems and vehicle architecture into the automated driving market, whether that'd be with OEMs or that'd be with mobility providers. So we're pursuing all the opportunities to generate incremental profitable revenues. As Joe sometimes alludes to, we're not looking to be the Army. We're looking to be the arms dealer. And all the players that you talk about, we sell product to -- that are used on their automated vehicles. And it ranges from vehicle architecture, to perception systems, to other software. And that's a space that we really like to be. We think it's the best space to be. Now a part of our strategy is to sell the full system. And that's primarily focused to fleet management providers, right? But folks, OEs or others who decide they want to do a portion of this business on their own, we're more than happy to provide them with whatever it is that they need. And Joe, you should...

Yes. I know. I think, from what we see, and one of the reasons we've increased spend to sort of accommodate the level of commercial discussions we're seeing now, when you have a big announcement from Waymo or GM Cruise, the other folks interested in being in this space tend to want to accelerate their development. And we're viewed as a leading enabler of this technology. I think the Lyft cars on the road in Vegas are a clear demonstration of that. And so our activity from all the others, we actually tend to see a bit of a pickup in the discussions when you see big meaningful announcements coming out of, again, like a Waymo or a GM, SoftBank.

Great. That's really helpful. And just a clarification, just to be painfully clear on the Winchester deal. You're setting it up to sort of be its own entity and to leverage its brand name with your own technology. I get that part. But to the extent that it is a broadline connector maker under your umbrella, how do you position it against some of the major players out there like a TE Connectivity and the (inaudible) as you diversify your own business?

Yes. Listen, I think, for Winchester, it's -- they position themselves very well. We'll -- much like we did with HellermannTyton since 2015, we will provide a global footprint from (inaudible) Capital, provide things like material synergies and some horsepower, but that management team has done a great job over the last few years of positioning themselves to be very competitive as it relates to very complex harsh environment interconnect systems, whether that's into Mil-Aero or some of the other industry. So really the way -- much like we did with HellermannTyton. Again, HellermannTyton, as Kevin mentioned, was a very good teacher for us on how to incorporate a well-run business that is not 100% auto into our broader system. And we'll continue to use that playbook with Winchester. So Aptiv will support from behind, but it's really that management team through their product development efforts, their marketing efforts, great sales force that's really been able to distinguish the Winchester brand. And bring in customers that -- quite honestly, as Aptiv, even if we had the technology or could port the know-how from auto to other industries, we'd have a really hard time going into a Boeing or going into an Airbus. And as we sit here today on that part of the business, we now have through HellermannTyton, and then through Winchester, are going to have content on platforms like the 787, the Airbus A350, the F-35, so we're really starting to broadening that base. But our perspective, when we do businesses like Winchester and HellermannTyton, as we buy really smart management teams that understand their channels, understand their go-to-market strategies. And we support them, but we're really leveraging that management team to do a lot of the commercial activity and product activity.

Yes. I think it's important to note, to really reinforce Joe's comment about like HellermannTyton, this is about acquiring a great asset and its business. Quite frankly, the numbers speak for themselves, high single-digit revenue growth and EBITDA margins that are in line with our control, our connector...

Yes. North of 20%, yes.

So it's a very well-run business with a great team and a great set of assets. And how do we bring additional value to them? Whether that be from sourcing, synergies or incremental resources.

Yes. And I think -- as I mentioned earlier, where we really thought -- there was both sides, the Winchester side and ourselves thought we really complemented each other. We would have had a hard time buying smaller connection system businesses without a platform to bolt them into, right? It'd be very hard to buy a $30 million or $40 million revenue Mil-Aero connector business and plug it into the auto business. It's just not the way they're run. It would be distractions on both sides. So we needed a platform. And they, quite honestly, would benefit from being part of a large global player that can support them accordingly.

Our final question comes from the line of Colin Langan with UBS.

Just one clarification. You mentioned the China tariff would be a $5 million to $10 million headwind. I guess, that means that there's tariff placed on parts that I don't think are official yet. The rate's reported as 10%. I know you said there's $400 million in transit. Would that be like a $40 million number? Or what am I missing on the math there?

On the tariff math?

Yes. I think on that stuff, with -- from the schedules we've seen, it's where we go in and look at what we'd pay on those individual products. And again -- and we'd start sort of mitigating instantly, if not somewhat proactively.

So it'd be less than 10% on the parts that you expect?

Yes. Yes.

Okay. And just to clarify for the guidance. Is KUM included in the updated guidance? And if so, how much of a help was that?

Yes. Okay. Listen, KUM was -- we thought it was going to close a little later in the year, it was effectively in the range in Q1. It's going to close a little bit earlier. It is in the guidance now since we've closed. I'd call it about $10 million of EBIT for the balance of the year. This is one where you obviously, you pick up sort of the full purchase accounting deal amortization before you start to hit all the synergies and stuff. So it will ramp over the course of '19, but I'd call it $10 million of -- aligned in the back half of the year, about probably $0.03 of EPS.

Got it. And just strategically, how is the infotainment market shaping up today? Because I know there's -- some people are talking about Android getting more involved in the market. I think they're actually launching their own infotainment product. Are you concerned about that? Or is that a different space from the kind of infotainment you're providing?

Yes. So listen, we think any -- bringing any content into the automotive space, especially if it's from consumer electronics, is helpful. As a systems integrator, we actually are launching one of those Android programs. So we're one of their partners. We think it's something that, quite frankly, given our systems integration capabilities and software capabilities, provides additional opportunity.

Got it. And just lastly, can you just quickly remind us of the -- what is the main content you have on the Audi A8 first Level 3 vehicles? Is the multi-domain controller, is it mostly hardware and software? Any dimension there would be helpful.

Yes. It's the multi-domain controller. It's software. It's some systems integration and then it's radar technology.

All right. Well, listen, thank you, everybody, for your time. We greatly appreciate it.

Thank you, all.

That concludes the Aptiv Q2 2018 Earnings Conference Call. Thank you for joining. You may now disconnect.