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Edited Transcript of APTV earnings conference call or presentation 31-Jan-19 1:00pm GMT

Q4 2018 Aptiv PLC Earnings Call

Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Aptiv PLC earnings conference call or presentation Thursday, January 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elena Doom Rosman

Aptiv PLC - VP of IR

* Joseph R. Massaro

Aptiv PLC - Senior VP & CFO

* Kevin P. Clark

Aptiv PLC - President, CEO & Director

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Conference Call Participants

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* Brian Arthur Johnson

Barclays Bank PLC, Research Division - MD & Senior Equity Analyst

* Christopher Patrick McNally

Evercore ISI Institutional Equities, Research Division - MD

* Daniel V. Galves

Wolfe Research, LLC - Director of Equity Research & Senior Analyst

* David J. Tamberrino

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Emmanuel Rosner

Deutsche Bank AG, Research Division - Director & Research Analyst

* Itay Michaeli

Citigroup Inc, Research Division - Director and VP

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Joseph D. Vruwink

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Richard Michael Kwas

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

* Ryan J. Brinkman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Amy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Aptiv Q4 2018 Earnings Conference Call. (Operator Instructions)

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

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Elena Doom Rosman, Aptiv PLC - VP of IR [2]

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Thank you, Amy. Good morning, and thank you for everyone for joining Aptiv's Fourth 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 excludes restructuring and other special items and will address the continuing operations of Aptiv. The reconciliation between GAAP and non-GAAP measures for both our fourth quarter financials as well as our outlook for the first quarter and full year 2019 are included in the back of today's presentation and in the earnings press release.

Now turning to Slide 2 for a disclosure on forward-looking statements which reflects 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 2019 in more detail.

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

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [3]

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Thanks, Elena. Good morning, everyone.

I'm going to begin by providing an overview of the fourth quarter and full year, highlight several of our key 2018 milestones and provide some perspective on how we're thinking about end markets for 2019. Joe will then take you through our 2018 financial results as well as our more detailed outlook for 2019.

I'm pleased to report a strong finish to 2018, a testament of Aptiv's ability to drive sustained outperformance even in a more challenging end market. Revenue, operating profit and earnings per share all finished above the guidance we provided in October. For the full year, revenue of $14.4 billion represents 10 points of growth over market, reinforcing the strength of our portfolio of advanced technologies aligned to the safe, green and connected megatrends. The strength of our technology portfolio also resulted in record new business awards totaling $22 billion for the full year, exceeding our prior year record of $19.3 billion.

Our 2018 financial performance also validates the robustness of our business model that can deliver in any environment and is positioned for solid through-cycle performance. As we kick off the new year, we remain laser focused on delivering value to our shareholders. Given the current macro and geopolitical environment, we believe it's prudent to be balanced in our 2019 planning assumptions, which we'll cover in more detail shortly. However, we're confident that the long-term fundamentals of our business remain intact. And I've never been more confident and excited about our future, as Aptiv is perfectly positioned to capitalize on the trends driving Auto 2.0 and deliver sustainable revenue and earnings growth while continuing to invest in our future.

Turning to Slide 4. Building a strong, sustainable business that makes the world more safe, green, connected is the focus of our management team. We made significant progress executing on a number of strategic fronts in 2018. First, we had very strong revenue growth over market and record customer new business awards, giving us confidence in our revenue growth outlook, and reinforcing that we have the right software, compute and systems integration capabilities required to help our customers adopt higher levels of advanced safety, electrification and connectivity.

Second, our record cash flow generation and disciplined capital deployment reinforced our strategy for long-term shareholder value creation. We funded both organic and inorganic growth initiatives, including additional capacity to support our strong backlog of active safety business awards; investments to fund the further development of our automated driving capabilities, smart vehicle architecture and connected services; and the acquisitions of KUM and Winchester Interconnect, further establishing Aptiv as a market leader in engineered components.

In addition, we repurchased $0.5 billion of stock, over half of which was in the fourth quarter, taking advantage of market disconnects over the course of the year. So in total, we returned over $700 million to shareholders through share repurchases and dividends.

Moving to the far right of the slide. As always, we remain maniacal about our cost structure, constantly working to improve the competitiveness of our business model and lower our breakeven to increase the flexibility of our cost structure and be in a position to fund the incremental growth investments while delivering earnings and cash flow growth.

While we've been on this journey for some time, our focus on continuous improvement means we're never finished. Our DNA is wired to naturally focus on delivering material and manufacturing efficiencies and also reduce overhead costs. $50 million of overhead and stranded costs related to the Powertrain spinoff were actually eliminated during 2018. Further, our engineering resources are critical to executing on our pipeline of new business awards. Our continued focus on maximizing engineering efficiency and effectiveness with agile methodologies, reusable software platforms and other tools allows us to expand our capabilities in software, artificial intelligence, machine learning and systems engineering faster than we've grown engineering spend.

In summary, our continuous improvement mindset is helping us improve operational efficiency while allowing us to meaningfully invest in our future.

Turning to Slide 5. You can see fourth quarter new business bookings totaled $6.5 billion, bringing the 2018 total to $22 billion, well above 2017's record of just over $19 billion. As I mentioned, these bookings are the direct result of our widening competitive moat in several advanced technologies across both Advanced Safety and User Experience and Signal and Power Solutions.

Beginning with active safety, where we won $3.9 billion of new customer awards, topping last year's record of $3.7 billion. These awards include multiple scalable Level 2+ programs leveraging our unique satellite architecture, active safety domain controller and perception systems. Infotainment and user experience customer awards totaled $2.8 billion driven in part by our integrated cockpit controller solutions, reinforcing our leadership position in central compute. Engineered components booked $6.5 billion of new customer awards, including $1 billion in high-voltage connectors, bringing 2018 high-voltage electrification awards to $2 billion, double the amount from the prior year.

Our continued momentum in new business bookings validates our ability to leverage the unique brain and nervous system, or the software and hardware foundation, that we've created and that enables new features and functions while optimizing the total system costs of the vehicle.

Turning to segment highlights in Advanced Safety and User Experience on Slide 6. Sales for the fourth quarter were up 12%. That's 14 points over market. Continued strong consumer demand for active safety and infotainment solutions drove revenue growth of 54% and 8%, respectively.

As the need for more complex software development and systems integration expertise increases, our unique ability to offer highly functional optimized solutions has driven several of our 2018 new business awards, including 6 new central compute awards in 2018 across multiple domains, including active safety, infotainment as well as body, chassis and propulsion, bringing our collective total customer awards to 11. The most recent example shown here is our conquest win with PSA for scalable active safety leveraging our satellite architecture solution which is being deployed across multiple vehicle makes and models and represents our seventh such award in active safety.

Finally, operating margins expanded 170 basis points for the year, excluding the impact of mobility investments, demonstrating the benefits of our competitive positioning and our cost structure.

Turning to Slide 7. Our Signal and Power Solutions segment is focused on next-generation vehicle architectures, including high-speed data and high-power electrical distribution, to enable advanced technologies that will shape the future of mobility. For the quarter, sales increased 6%. That's 9 points over market despite the weakening macros, driven by over 50% sales growth for high-voltage electrification products and very solid double-digit growth for engineered components.

Underscoring our industry-leading position in vehicle architecture, we were recently awarded the high-voltage electrical architecture on the Jeep Grand Cherokee. This high-value, high-volume award validates the increasing need for optimized high-voltage architecture across a full range of vehicle types. In 2018, high-voltage electrification revenues approached $300 million. That's up over 60% year-over-year, making it one of our fastest-growing and most profitable product lines. Based on the value of our new business bookings, this product line should reach over $1 billion of revenues in 2022, representing a 40% compounded growth rate over that period.

In summary, given the breadth and depth of our portfolio in both segments, we are perfectly positioned to benefit from the convergence of Auto 2.0 trends. And we are confident in our ability to continue to grow revenues in excess of the underlying market.

Given the more challenging macro landscape heading into 2019, on Slide 8 I'd like to provide some context for the key assumptions that underpin our vehicle production outlooks for the year. As we look ahead to 2019, we expect to see continued softening of vehicle production around the world. At a global level, we expect vehicle production to be down 2.5% for the full year and down 4% in the first half.

From a regional perspective, I'll start with China, as I know it's top of mind for many of you. We expect vehicle production to decline 11% in the first quarter and 8% for the full year. And while we will continue to experience strong revenue growth over market in this region driven by double-digit growth in our key product areas, including active safety, infotainment and high-voltage electrification, we're preparing for structurally lower industry volumes going forward. As a result, we're being prudent from a cost structure perspective. We've reduced salary costs in this region by almost 10%.

Turning to the other regions. We expect low single-digit production declines in North America and Europe. However, similar to China, we also expect revenues to grow in excess of vehicle production given our new launch cadence and market share gains. Finally, as Joe will outline in more detail shortly, we expect our portfolio of safe, green, and connected technologies, and balanced regional customer and platform mix to more than offset the industry macros, contributing to strong growth over market once again in 2019.

Before I turn it over to Joe to go through the numbers, I'd just like to highlight another great year at CES.

As we've done in the past, we provided automated rides on the streets of Las Vegas, accumulating nearly 10,000 autonomous miles just during the week of CES alone. While a number of our customers, our investors and their partners took advantage of our vehicles to transport them to destinations in and around the strip, downtown or to and from the airport, we also supported our normal operations for the general public. And since its launch earlier last year, we've conducted over 30,000 rides on the Lyft network, receiving a near-perfect 4.95-star rating out of 5, underscoring the quality of the ride experience.

Further, at our pavilion we gave customers as well as investors a look at the advanced software and hardware architectures that are enabling the safe, green and connected solutions our customers are demanding.

In total, we had over 100 customer meetings; and hosted a number of senior executive, customer VIP visits, which underscore the increasingly strategic role Aptiv plays in delivering fully integrated and optimized vehicle architectures. Our technology displays showcase our value-add across the full vehicle stack, from perception sensors -- or perception systems to cloud, with unparalleled strengths in advanced safety, the in-cabin experience, data services and autonomous solutions. As complexity increases, our customers appreciate that getting the architecture right today is critical to delivering the feature-rich, highly automated vehicles they need in the future.

As a result, we've positioned Aptiv as the only integrated provider of both the brain and the nervous system of the vehicle capable of conceiving, specifying and delivering the advanced architectures making the future of mobility real.

So with that, I'll hand the call over to Joe to take us through the fourth quarter and full year results and review our outlook for 2019.

Joe?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [4]

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Great. Thanks, Kevin. And good morning, everyone.

Starting with a recap of the fourth quarter financial slide -- financials on Slide 10.

Revenue, operating income and earnings per share came in at the upper end of the guidance we gave back in October. We saw strong sales growth in the quarter, revenue of $3.6 billion, up 8% or 11 points above vehicle production, reflecting the continued ramp of new program launches in both Advanced Safety and User Experience and Signal and Power Solutions. EBITDA and operating income of $600 million and $430 million reflected the benefits of strong volume growth, partially offset by FX and commodity headwinds and investments in future growth.

Earnings per share were $1.34, up 5%, $0.13 above the midpoint of our guidance. The combination of higher operating income and a slightly lower share count drove roughly half of the EPS beat, while a lower-than-expected tax rate contributed $0.07 of upside in the quarter.

Lastly, operating cash flow was $750 million, reflecting earnings growth and favorable working capital performance.

Turning to Slide 11. The continued strong launch volume we've had over the past year drove double-digit growth over market, which helped to offset a decline in vehicle production, unfavorable price and the FX commodity headwinds.

From a regional perspective, we saw strong growth over market in all major regions of the world despite weakness in Europe and China markets. North America sales were up 16 points over market, benefiting from multiple new platform launches in both segments and the addition of Winchester Interconnect. Europe saw 8 points of growth over market driven by continued active safety and infotainment ramp-ups. And China grew 9 points over market, partially offsetting lower-than-expected production volumes.

Slide 12 walks our operating income performance year-over-year. Operating income of $430 million was down 4%, up 3% when adjusted for FX and commodities. Tariffs in the quarter were approximately $5 million. Our operational performance continues to fund investments in our key growth areas, including high-voltage electrification, active safety, infotainment and mobility. Margins adjusted for FX and commodities were 12.5%, reflecting volume conversion on strong sales growth, offsetting unfavorable price and the impact of higher mobility investment spending.

Strong operating performance yielded higher earnings per share in the quarter, as shown in the walk on Slide 13. Earnings per share of $1.34 was up $0.05 per year-over-year, including a -- 5% year-over-year, including a $0.12 headwind from FX and commodities in the quarter offset by strong volume conversion, operational performance, favorable tax and other income. For the year, our tax rate was 14.3%. 2019 is estimated in the range of 14% to 15%. And we believe this range, an improvement from our prior long-term guidance of 15% to 16%, is sustainable, driven by our recent footprint and portfolio actions.

Moving to the segments on the next slide.

For the quarter, Advanced Safety and User Experience revenues grew 12%, driven by new launch volumes; and continued strong growth in active safety, up 54%, and infotainment and user experience, up 8%. Operating income grew 10% before the impact of higher mobility investments, driven by the accretive benefit of volume growth as well as improved material and manufacturing performance.

Our mobility investments for the full year totaled roughly $160 million, funding development of our next-generation automated driving software which will be launched with our new vehicle platform early this year. This represented an increase of $100 million year-over-year, consistent with our previous outlook. And for 2019, we continue to expect mobility investments of approximately $180 million.

In summary, another strong year of revenue and operating leverage in the Advanced Safety and User Experience segment.

Turning to Signal and Power Solutions on the next slide. For the quarter, revenues were up 6% or 9 points over market, driven by new program launches in North America, robust commercial vehicle sales and strong growth in high-voltage electrification despite lower vehicle production globally. Operating income adjusted for the dilutive impact of FX and commodities grew 4%. As we have discussed, the margin rate in 2018 was unfavorably impacted by FX and commodities headwinds related to both the translational and transactional effects of the weaker euro and Chinese RMB in the back half of the year. We expect these headwinds to continue in the first half of 2019 and have been contemplated in our outlook for Q1, which I'll cover in more detail in a moment.

Now turning to Slide 16 for a recap of the full year financials.

Revenue, operating income, earnings and cash flow all came in above the midpoint of guidance we set back in February 2018 despite macro challenges in the second half, including lower global vehicle production and unfavorable FX and commodities. That's a testament to the robustness of our business model and reinforces the progress we've made on both our portfolio positioning as well as our operational efficiency to build a more sustainable business and prove our through-cycle resiliency.

Turning to the next slide. The core tenets of our long-term financial framework remain unchanged. And we expect comparable performance again in 2019 before the impact of tariffs, which I'll address in more detail shortly. Revenue and earnings growth are being driven by our portfolio of relevant technologies and their ability to sustain above-market growth. Our flexible and efficient workforce, along with our relentless focus on operating performance, continually improves our cost structure. This enables us to fund investments in key growth areas as well as continue our track record of sustainable earnings growth.

The operating income walk on the right lays out the puts and takes for the year. Volume from record 2018 launches will continue into next year, more than offsetting lower vehicle production, as Kevin referenced earlier. Our annual pricing headwinds are 2%, in line with our historical run rate. Based on current estimates, we expect to see an unfavorable year-over-year impact from FX and commodities. Our material and manufacturing productivity and our cost reduction actions will more than offset higher engineering investments and inflation.

And lastly, we're addressing the U.S.-China tariffs directly. With our mitigation strategies already underway, we now expect tariff costs to be roughly $60 million in 2019. As a result of our long-running focus on cost and productivity improvements, we're confident we can continue to grow earnings at the forecasted volume levels.

Turning to the next slide for our 2019 guidance.

For the year, we expect revenue to be in the range of $14.6 billion to $15 billion, up 6% at the midpoint despite global vehicle production down 2.5%, with growth over market of over 8%. Looking at the segments and starting with Advanced Safety and User Experience, we expect near-double-digit revenue growth in 2019 driven by continued strength in active safety up 45%. And as we previewed last year, infotainment and user experience revenues will grow mid-single digit, lapping strong launch volumes in 2018 as we prepare to launch our next-gen integrated cockpit controller in 2020.

In addition, we will see the roll-off of the display audio product line in the first half of 2019, impacting year-over-year growth. In Signal and Power Solutions we expect mid-single-digit revenue growth again in 2019 driven by continued growth across the segment and the accretive benefit of recent acquisitions.

Operating income is expected to be $1.82 billion at the midpoint before the impact of tariffs.

And as a result, we expect earnings per share in the range of $5.45 to $5.65 per share, excluding tariffs, up 6% at the midpoint, with share count flat year-over-year, with cash flow of $1.7 billion up mid-single digits over 2018.

As it relates to tariffs, we are looking at those as discrete items from a mitigation perspective and are in the process of executing a number of actions that will reduce tariff exposure going into 2020. As a result, we estimate our U.S.-China tariff exposure to be approximately $60 million in 2019, reflecting the work that's been done to reduce the $75 million exposure we previously communicated. Tariffs will primarily impact Signal and Power Solutions, approximately $50 million of the $60 million, with the remainder in Advanced Safety and User Experience.

For the first quarter, revenue is expected in the range of $3.4 billion to $3.5 billion, up 1% at the midpoint or 5 points of growth over market, given our outlook for global vehicle production down 4%, with China production down 11% in the quarter. Operating income and EPS before tariffs are expected to be $345 million and $1.03 at the midpoint, respectively, reflecting the impact of a slowdown in China, the FX and -- and the FX and commodity headwinds I mentioned previously as well as higher engineering and mobility spend.

Tariffs for the quarter are estimated to be $10 million.

In summary for 2019. Despite the reduction in vehicle production, with our portfolio of relevant technologies, we will continue to outgrow the market, and we will continue to invest in the future growth of our key product lines. As Kevin mentioned, we do this through our relentless focus on improving our cost structure, positioning Aptiv to continue to grow earnings and cash flow even in a down production environment.

Turning to Slide 19 and as Kevin highlighted earlier. In 2018, we again executed on our capital deployment strategy to create value for shareholders. We invested in the business to support our strong bookings growth and fast-growing product lines such as active safety and electrification. We invested $1.2 billion in accretive bolt-on acquisitions, KUM and Winchester, which expanded the geographic and end market diversification of our Signal and Power Solutions business.

And lastly, we returned over $700 million to shareholders through share repurchases and dividends in 2018, bringing total cash to shareholders to over $6 billion since our IPO.

Looking forward, we'll continue to remain a consistent and well-balanced approach to capital allocation aligned to our strategic framework, focusing on reinvesting in our business both organically and inorganically while maintaining our investment-grade credit rating and paying a competitive dividend. Our M&A strategy focuses on accretive bolt-ons which provide attractive end market diversification as well as advanced technologies that accelerate speed to market and also provide access to new markets. And to the extent that we can take advantage of market disconnects, we will be opportunistic in our share buyback and returning cash to shareholders.

To this end, today, we announced a new $2 billion share repurchase authorization incremental to the roughly $500 million remaining on our current authorization.

In summary, we believe effective capital deployment is a major differentiator for Aptiv and an important lever for shareholder value generation.

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

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [5]

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Thanks, Joe.

Let me wrap up on Slide 20 before opening up for Q&A.

2018 was a great first year for Aptiv where we delivered on our financial commitments for revenue, operating income, earnings per share and cash flow even in a more challenging macro environment. Our performance underscores the journey we've been on to prove our through-cycle performance by having the right portfolio of advanced technologies enabling the safe, green and connected solutions our customers are increasingly demanding; the right cost structure driving earnings and cash flow growth while continuing to invest in our future; and the right people and processes to deliver the innovation and execution inherent in our strategy.

Looking ahead, the senior management team has never been more confident in our competitive position and excited about our future. Aptiv is perfectly positioned to continue capitalizing on the key global Auto 2.0 megatrends driving increased vehicle content and market share gains. We've done this while improving our cost base, which gives us great confidence in our outlook for 2019 and beyond.

We remain laser focused on delivering value to our shareholders today, building upon our strong track record of value-enhancing and balanced capital deployment. As a result, we have a more predictable and sustainable business model with robust downturn resiliency, better positioned to perform in any macro environment.

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

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Elena Doom Rosman, Aptiv PLC - VP of IR [6]

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Operator, we'll now take our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Dan Galves with Wolfe Research.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [2]

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Regarding China, it looks like you guys expect to underperform the market in Q1 and then significantly outperform over the course of the year. Can you talk a little bit about what's going on in Q1 and what's going to turn that around in the next 3 quarters?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [3]

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Yes, Dan. It's Kevin. Why don't I start? And Joe can certainly augment my response. Really when you look at China, and our growth relative to the market in China in the first quarter, it comes down to specific OE mix and specific platform mix within OEs. So there are a couple of OEs that we're seeing significant schedule reductions during the first quarter that the net result of that is our revenue dropping below market. And as we look at the go-forward schedules Q2, Q3 and beyond, we actually see some of that activity: one, lapping; two, new launches; and just three, more stabilization of those -- the production schedules on those particular platforms. So there are 3 or 4 OEs that we're seeing fairly significant reductions in schedules for Q1.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [4]

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Okay, got it. And then just following up on that. Do you think some of this is related to inventory destocking in Q1? And I guess, like, are you counting on big launches in the balance of the year? And kind of have you heard anything about delays in launches or anything like that?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [5]

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Yes, I would say that -- no major launches from a volume standpoint; continued strong growth in active safety, vehicle electrification, infotainment and user experience, but that -- we experienced that throughout, quite frankly, 2017 and 2018, so that's just a continuation.

With respect to the schedules both Q4 and Q1, certainly a significant portion of that is tied to inventory rebalancing or inventory reduction. As you know, visibility to inventory levels in China is less than perfect, but based on what we see they're certainly coming down. But there is also a consumer demand aspect that's taken place over the last 2 quarters, but having said that, as you look at Q2 through Q4, it's not as though we're betting on or planning on significant launch programs. And with respect to delays in that market, quite frankly, we haven't seen any. So it's really been volume schedules on existing platforms, principally passenger car platforms.

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Operator [6]

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

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [7]

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Joe, maybe just, first, a little bit of a clarification. Like if I look at Slide 11, adjusted growth of 8%, it looks like the acquisitions are maybe in that volume number, so I was wondering if you could call out how much that added? And then also how you're dealing with the acquisitions in your 8% growth over market guidance for '19.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [8]

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Yes, Joe, they're smaller deals. They're in there, particularly KUM. That was sort of a full-on integration, so we're starting to move things between plants. KUM is actually going to pick up some of the volume that's come out of -- some of the production that's coming out of China to deal with tariffs. So that one is getting a little mix. But Q4, call it about 1.5 points. And then 2018 (sic) [2019], call it about 2 points of growth coming from those 2 deals, round numbers.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [9]

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Yes. Sorry. In '18 or '19, 2 points?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [10]

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I'm sorry, '19. Did I say '18? Sorry. '19. About 1.5 in Q4 and 2 points in '19.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [11]

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Okay. And then just on the tariffs. Sorry if I missed it, but can -- what exactly are you assuming? Is it 301 List 3 at 10% for now, going to 25%? Do you assume it stays at 10%? And is that -- like, the numbers you gave, is that gross impact before the mitigations you've mentioned you're trying to do?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [12]

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Yes. So that's right. So we've got $60 million in, that's the total exposure, okay? So it's $10 million in Q1 and then, at this point, evenly throughout the last 3 quarters. The 10% in Q1 is at the lower rates through January and February then stepping up to the 25% in March, and we assume 25% for the balance of the year. We've left the full number in the guide at this point. We've got a number of remediation actions, but to some extent we're -- they'll get out of our control when they take effect, right? We'll need customer approval and those types of things. So at this point, based on what we know on tariffs, I'd say the $60 million is the worst case. And it's in there. We had some, we made some progress over the course of fourth quarter, remediating from the $75 million to the $60 million. That was what I'll call maybe some of the lower-hanging fruit in the remediation plans, where we could -- had multiple sources for the product, could source from another location. So you could make more sort of what I'll call easier changes in the product flow. Those actions have taken place, and those costs are now out for 2019.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Okay, so fair to say you have some ideas about how you can go to mitigate this, unclear whether they come through, but you're not counting on them in your guide.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [14]

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So yes.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [15]

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Yes.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [16]

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But I would say, Joe, it's more than ideas. As I mentioned, we're going to pull some production out of China. We're going to put it into Korea. That process has started. But we've got to get the line up in Korea. Then there's obviously customer validation. So that's really the issue with the timing. It's not that we've got ideas we're not sure they'll work. It's we're in motion on things, but by the time they get approved by customers, we're just not sure what the exact timing looks like, if that makes sense.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [17]

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Yes. So Joe, just let me sort -- operationally, we are not assuming these go away. So the $75 million original estimate reduced to $60 million is the result of specific actions that Joe and the team have been driving to reduce the overall exposure. And we're continuing to execute on a whole list of actions, supply chain, manufacturing and otherwise to reduce the net impact. And as Joe said, some of those activities require customer validation. Customers, certainly in North America, seem to be very engaged, so we would expect to get support in those activities, but we don't fully control it.

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Operator [18]

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Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [19]

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Wanted to ask you about your recent performance and the expected one in the context of your sort of like longer-term framework the way it was communicated at your Investor Day a little while ago. So in particular I think the framework on the revenue side used to call for 4 to 6 points over market through 2020, 5 to 7 points over market beyond that. It seems like, in 2018, maybe you did 10% over market. You're still planning for 8% in 2019. Are we still within the framework, or is there sort of like some upsides there?

And then a similar type of question on the margin front but the other way around: I mean I think that we have been looking for 20 to 40 bps of expansion a year initially, maybe so you do 50 bps beyond that. I think that, even excluding some of the macro headwinds, is it fair to say that we haven't seen as much expansion as you expected? Is it more expensive to essentially grow this business?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [20]

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Yes, Emmanuel. It's Joe. And Kevin can chime in as well. Listen, I think on the revenue side we've talked about it. We're obviously running ahead of where we thought we'd be back in September of '17. We see that continuing for 2019, obviously. And as we move into midyear and refresh the longer-term revenue outlook at our Investor Day, we'll certainly be updating that outlook. It is fair to say, though, particularly the active safety and high-voltage businesses are running ahead of where they thought -- we thought they'd be at this time. And as Kevin talked about with the bookings, it's -- that looks like it will continue, but we'll be updating the longer-term numbers midyear.

As it relates to margin rate, I'd really say 2 -- or margin, [margin] performance, there's 2 things: one, the FX and commodity rate impact, the optics on the rate have somewhat distorted in 2018. It's cost us a couple of points of margin. So you -- I do think you got to look through that from the point when we gave the original guide or the original framework. And we expect that to continue through the first half of '19.

The other thing I'll mention with respect to the operating performance in 2019, we've made the decision, and I think this will be short term. This will be in -- this will be in sort of 2019 and certainly the first half of 2019. We've made the decision to continue to make investments in things like active safety, mobility, high-voltage electrification even though we've seen the volumes pull back a bit, particularly in China, right? And our view, as we thought through the year and the longer-term outlooks for the businesses like active safety and high voltage, it didn't make sense for a couple of quarters of top line pressure in China to pull back on that spend. So that is impacting margins at this point, but again we think longer term it's the right thing to do. And it's -- this is more of a short-term investing through a couple of quarters here as we work through China.

Obviously, tariffs, we've talked about. They were an unexpected headwind on operating performance, but we're committed to working through those in 2019 as well.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [21]

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Yes. I mean I would just add quick to Joe's comment. I mean just as examples. As you know, we've won 7 Level 2, Level 3 active safety programs that will generate significant revenue in 2020 and beyond. And we feel as though, given our -- the technical knowledge that we've built in and around perception systems, in and around centralized compute, smart vehicle architecture, there's a real opportunity over the next year or 2 to significantly enhance that competitive moat and continuing to advance those technologies. And the net result over the near term has been on advancing [AS] programs, we're winning well north of what our average win rate is for traditional programs, probably closing on 80% or 90% win rate.

So in a very rapidly growing market that requires advanced technologies, it's our view, just as Joe said, that it's smart to continue to invest in the engineering capabilities even though we're seeing a near-term decline in vehicle production.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [22]

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And with that said, as Kevin mentioned, we're still very focused on the overhead side of the cost structure. And so there's actions being taken now in China to take out some of the -- what I'll call some of the indirect salary costs. So it's very -- our sort of investment, willingness to continue to invest is very specific to the high-growth product lines. And we're continuing to focus on a lot of the other cost elements in the P&L.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [23]

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Yes, that's great color. And then the -- just quick follow-up. I figured I'd ask you about the U.S. closing the hybrid tax loophole. I assume that there's no real impact on you since you're guiding to a specific tax rate which has been optimized for 2019 and that you view as sustainable, but have you specifically looked into it? And any impact at all?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [24]

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Yes, we have, and there is no impact at this point. So we did a -- we have taken a look at that and our team has been very active, just the rollout of the U.S. tax law changes really for the past year now, but that does not have an impact on us.

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Operator [25]

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

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Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [26]

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This is Joe Vruwink for David. Other than the industry volumes being better or worse than the assumptions you walked through earlier, can you discuss some of the more meaningful, be it mix or take rate assumptions within the guidance? Like you mentioned some difficult platform exposure in China during Q1. Any other considerations like that as the year goes on that could swing positive or negative relative to your views?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [27]

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No. Listen. I think the -- as we talked about through the balance of 2018, obviously active safety, high voltage running ahead of expectations, I think that's -- would be our equivalent of your take rate comment. And I would say the -- I think Kevin's comments on China in Q1. There are -- it's some platform, but this is a -- we've got a couple of OEs that are -- I think it's more the inventory balancing comment that Dan made. It's very specific schedules coming out as they sort of work through inventory, so it's more on the production side than any type of take rate changes in China. It's very much they're not making the vehicles. It's not a question of they're not making them without active safety. It's they're not actually making the cars.

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Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [28]

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Okay, great. And then one follow-up: Aptiv and Delphi have done a really good job over the years of proactively managing product lines in the portfolio. At the beginning of the call, you mentioned display audio. You're doing some pruning there. Any product categories that you look forward and they're just going to be rolling off because you've made a strategic decision to refocus elsewhere?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [29]

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No, I was going to say not at this point in time. The display piece, as we see the technology really go to centralized compute and value come out of the display, from our customers' standpoint, a lot of that display business has moved to directed buy of hardware. The value-add and, quite frankly, the margin profile of that business, as well as the concentration of some of the players that are in that display business, led us to the conclusion that we're better off allocating our resources to areas like active safety and smart vehicle architecture, vehicle electrification, so places where we have a real strong competitive position and markets growing rapidly and the technology component is much higher. So we're better positioned for it. But other than display, at least on -- as we looked forward now, we wouldn't expect anything else. But it's something that we regularly evaluate, yes.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [30]

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Yes. And to put it in context, that display business, part of it is we're not -- we're letting it wind down, right? So we stopped bidding on it. We're much more focused on sort of the compute platform behind the display than the physical screen itself. That total business is about $200 million in revenue, just to put it into context. So it's a very small product line that's just going to phase out over time. We called it out this quarter just given it's probably about $50 million in the quarter -- $40 million or $50 million in the quarter. So it's a little -- I'm sorry, for the year, about $20 million for the quarter. So it's a little bit bigger on a quarterly perspective.

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Operator [31]

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Your next question comes from the line of Brian Johnson with Barclays Capital.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [32]

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Just a couple questions. First, kind of more on the longer term, can you tell us more about the central compute wins? Are those like the same or different than multi-domain controllers? If they're similar to multi-domain controllers, are they oriented towards cockpit electronics and safety? And then just what sort of -- a question I often ask kind of the pace of discussions around the net various flavors of the next-gen architectures you outlined in CES. That's question number two. And when those might actually be hitting backlog.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [33]

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Yes. So maybe I'll answer the last, first. So we have one engineering development program on the smart vehicle architecture today with a large -- very large global customer; and likely will end up with a second relatively soon; and are in conversations with, I'd say, roughly a dozen OEs about that particular activity. So there are a number of the more advanced technology OEs who are very focused on re-architecting the vehicle and effectively centralizing compute platforms.

Our multi-domain controllers, yes, they are the same. We've won, I guess, 11 multi-domain or central compute platforms, Brian. Of those 11, roughly 7 are in and around ADAS. We have a couple, 2 or 3, that are in and around cockpit controllers; and then a couple that are really around chassis and powertrain. So we're seeing a significant trend towards -- for a consolidation of compute platforms that ultimately, in our view, arrives at the concept that we laid out from a smart vehicle architecture standpoint.

There'll be a period of time that we'll go through that sort of a process, call it, over the next 7 or 8 years, but ultimately we firmly believe, for OEs to build the vehicles they are looking to build to satisfy customer demand for whether it be vehicle electrification or active safety solutions or vehicle connectivity, the whole vehicle architecture needs to be rethought. And we feel as though we're -- based on our conversations with OEs and feedback from them, we're at the forefront of helping them rethink that.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [34]

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Okay. And second somewhat-related question. I believe your share in wiring harnesses, and engineered components, connectors has been roughly 35% to 40%. Of course, it's somewhat different competitors in the categories. Are you -- what -- you mentioned your win rate on some of the ADAS stuff earlier. What's been your win rate in electrical, the more traditional electrical businesses? Is it increasing? Or is it kind of that the market share is roughly the same but you might be gravitating towards higher value applications?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [35]

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I would -- so on the connector, engineered components side, I would say it's been high over the last couple years. A part of that is market share gains within auto. Part of that is focusing the portfolio outside of auto, in areas like commercial vehicle, where we've been less focused; as well as a real push through some of our acquisitions like Winchester, like HellermannTyton to grow outside of transportation in total, but within the auto market, we're gaining share there. On the wire side I would say we're growing, based on bookings and revenue growth, basically at market, maybe a little bit above.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [36]

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A little bit above, yes. Yes, Brian, I -- good examples within that SPS segment. I mentioned it in my prepared remarks. The commercial vehicle business in SPS alone, we were close to 20% growth this year, for Signal and Power Solutions. So that's a -- and that base is getting larger. We're over $1 billion in revenue, so it's not necessarily even off of a small base anymore. So we're seeing a lot of uptake from commercial vehicle OEs in our connection systems, in our electrical distribution system, technology, so I would say that, broadly speaking, that business is growing its share, right?

As we've often talked about, and you mentioned it, that we estimate that business has content on 1 out of every 3.5 vehicles manufactured globally. So it's got more market in it, so the growth rates will always be a little lower than some -- or lower than some, like in active safety. And that business is taking share.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [37]

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Okay. And then final question, more for modeling purposes. Can you give us any sense of your China exposure in terms of different types of OEMs? Because, for example, premiums held up much better than the lower end of the mass market. Asian -- excuse me -- Japanese and Korean, especially Japanese joint ventures have held up better than some of the American ones. So can you kind of remind us of the pie chart in terms of your end OEM exposure there or end segment exposure?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [38]

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Yes. So for 2018 total, 23% of our China business was with what we call domestic or local OEs. 90% of that, though, is concentrated really in the top 10 OEs, so it's a -- whereas Aptiv, given active safety, infotainment, electrification, we tend to be with the higher, larger domestic Chinese OEs. 77% was with the foreign JVs.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [39]

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Okay. And then kind of premium mass market within that, with JVs.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [40]

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Yes, it -- I don't have an exact percentage for you. It tends to be -- we do have a lot of the higher end in there, the FAW-VW, the SVWs, the Audi types of platforms. We can come back to you with a more specific number. We can take a look. I don't have it off the top of my head. I'm sorry.

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Operator [41]

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

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [42]

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I want to focus on your active safety business. I think with that 57% revenue growth you're probably around $900 million. How does that compare from a margin perspective for 2018 relative to corporate average? As the growth continues, what type of incrementals do you think the business will have on it? And when is that going to be above corporate average and, call it, materially accretive from a bottom line perspective?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [43]

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Yes. I -- listen. I'll start, and Joe can fill in the specifics. But as we've talked about, usually when we introduce nascent technology, the formula typically is getting to -- call it, $300 million gets you to break even, and then beyond that, you begin to expand margins. I'd say you're right. We're above $900 million. We're between $900 million and $1 billion as it relates to revenues. Today, those margin rates are roughly at corporate average. And as you head into 2019 and beyond, they will expand beyond that. So it's carrying its full weight from a profitability standpoint.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [44]

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Yes, yes. That's right. You were spot on with the $900 million. We're a little -- we finished a little bit over -- Kevin's comment. We're -- it's within 50 basis points of corporate average now. And next year, we have it moving well north of that, so this business is a sort of meaningful contributor at this point to the profitability and cash flow of the overall company.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [45]

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But that's including or excluding the autonomous investments you're making.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [46]

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No, active safety. That would just be excluding. That's the product line we're quoting, not the segment.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [47]

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Okay, fair. So then the incrementals for this should be probably high-20%s, low-30% range going forward on the ADAS side of the business.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [48]

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Yes, I would say it's closer to kind of mid 20%s as we launch, at least early stage some of those Level 2+, Level 3 programs, right? That's a much more advanced solution, especially as you approach Level 3. So I'd say there's some incremental engineering that goes in and based on timing of that engineering and revenue recognition where launch of those programs there'd be a little bit heavier engineering.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [49]

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Yes. This is -- David, it's just the growth in the business, right? I mean we're -- and again we'll update longer term, but you'll see 40 -- over 40 points of growth next year in active safety. It'll continue maybe slightly below that but in a very meaningful way in 2020. So we are continuing to grow the infrastructure of this business. So the incrementals, I'd say I -- to Kevin's point, the mid 20%s are probably a better estimate for the next couple years. And then you've got more to leverage, as it gets get larger.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [50]

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Got it, okay. So then focusing on the autonomous investments. I think the latest we had from you was maybe 2025 AMoD target revenue of about $500 million. You'll probably tell me you're just going to update it later in June or whenever the Investor Day is, but I want to understand kind of the confidence level to getting there and then if there's any material impact on your growth prospects for the business by potentially the German OEMs and suppliers having an autonomous consortium put together, as it's been potentially reported.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [51]

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Yes, well, listen. I'd say our level of confidence on the $500 million hasn't changed. So maybe at the Investor Day, we'll give a more precise number than the $500 million.

With respect to discussions across the OE and supplier universe, those kind of -- those have been going on for quite some time. And quite frankly, we're part of a number of them. And as we contemplated our revenue outlook and our investment requirement, it was under the contemplation that this is a bit how the -- there would be a lot of discussions, this is how things could play out. So we wouldn't see any impact on that revenue forecast at this point in time and certainly contemplated it when we originally estimated the size of the market and our market share.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [52]

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Okay. And lastly, for the tariffs, it sounds like a nice job so far going from the $75 million headwind down to $60 million. You've got a couple more actions coming through with moving the production lines, fine, and you'll get your customer validation. Can you share with us the magnitude of what the annualized run rate of those savings would be? I'm not trying to hold you to a timing but trying to understand how much that would potentially be, call it, a tailwind if it happened at the end of the year, end of '19, beginning of '20 and nothing else changed.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [53]

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Yes, yes. At this point, David, unfortunately we just -- we're just not far enough along. Had we had it, we would have worked it in or at least commented to it. So a lot of action being going on. Like I said, we're able to get the low-hanging fruit really taking care of the November and December and now working on some of the bigger projects. Again, it's stuff we are good at doing. We know how to pick up a production line and move it somewhere else. It's just a matter of timing, with a fair amount of that timing sort of being out of our control. So at this point, we're -- we've got the $60 million in there and we'll keep a running update of how we progress on that through the year.

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Operator [54]

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Your next question comes from the line of Itay Michaeli with Citi.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [55]

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Just maybe first question -- well, just first question, on 2019 margins. I guess the guidance implies you might be running kind of mid 12% beyond Q1. So first, hoping just to talk a little bit more about the cadence throughout the year. And then to that, is there anything that -- beyond 2019 that would prevent you from running at those margins sustainably?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [56]

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Yes -- no, that's the right way to think about the cadence, Itay. I -- listen. I think the -- and my -- I made the comments. I mean we're focused on this long-term framework, right? We believe that's what the business can deliver. We come back to it now in 2018, particularly with some of the FX and commodity moves; and also some of these newer macros that came in, the big move in the RMB and the tariffs. They're -- they knocked us off that framework for a period of time, but we don't see anything in tariff remediation or as the FX rates sort of stop moving, if you will, particularly on the transaction impact, of the ability to get back into that range of margin expansion. And we're also focused. And I think, just given the noise in the rate, and we'll again talk about this later in the year but focus on just what we think profit growth would look like, too, over time. But no, I don't see anything at this point that would take us off of -- take us off that longer-term track.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [57]

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Great. And then just my follow-up: You mentioned, I think, in the slides that the M&A pipeline is full. We'd love to get an update around what you're looking for and then also how the macro environment influences opportunities as well as your willingness to go after deals and manage the balance sheet at the same time.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [58]

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Yes. Listen. No, the pipeline remains full. The strategy has not changed, right? So we're looking at these accretive bolt-on transactions. A lot of those tend to fall into SPS, but certainly we look across the entire business. There's also maybe some opportunities for some of the technology-type transactions, but those would tend to be smaller. Think sort of Movimento- or Control-Tec-type deals. As we've said before, we don't envision another nuTonomy-type deal. That was a very strategic acquisition where we deployed a lot of capital for something that just is obviously not accretive in the near term. We would not expect to be doing those. So you're much more focused on those types of bolt-ons. And listen, I think the macro environment, certainly you get a little more thoughtful around diligence and valuations, but at this point I have not seen that impact the overall level of activity. We've got to be a little more thoughtful coming in. And then as I mentioned in my prepared comments, we're obviously from the capital allocation standpoint going to be focused on both. There's accretive M&A opportunities but at the same time being opportunistic as it relates to the share buybacks. And you really saw us do that in Q4. Q4 was a quarter where we put cash to work with the acquisition of Winchester but also did the $300 million of share buyback. So our view is we will remain balanced and focused on both.

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Operator [59]

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

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [60]

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So I may have missed it, but have you given the margin outlook by division, even just qualitatively, the down 10 to let's call it 40 basis points. Should we think about an equal decline in both divisions?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [61]

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You -- well, tariffs, yes, tariffs are a little bit more weighted to SPS, as I mentioned in the -- in my prepared comments. So call it about $50 million of the $60 million would hit the SPS.

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Elena Doom Rosman, Aptiv PLC - VP of IR [62]

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And then Chris, I would just also add, for Q1 S&PS sees more of the 3 -- China volume decline, which will impact their margin rate for Q1, in addition to the FX and commodities headwinds in Q1. But most of that $20 million of OI impact in Q1 hit S&PS, Chris.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [63]

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Okay, that sort of leads into the second question, I mean. And one of your competitors in electrical has talked about sort of different margins on, call it, legacy contracts or by region, with potentially higher margins in Europe on higher content, which I guess makes sense. Should we think about the regional exposure in a similar way for your Electrical Architecture in that the decrementals while Europe is weak could be harsher there? You mentioned obviously China. The rate of change is bad. But also it's something to think about as we think maybe in second half, where Europe could be rate of change better that we'd also see the incrementals get better as well.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [64]

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Yes, for us, it's -- Chris, it's Kevin. On a corporate basis, we're -- I'd say we're relatively balanced across regions, with actually for us Europe being a bit below the corporate average and North America and Asia Pac being a bit above. And all of that really ties, at least for us, cost of doing business in Europe relative to cost of doing business in North America and Asia is a bit higher. So we would, across our portfolio, tend to have lower margins in Europe than we have in, again, Asia Pacific or North America.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [65]

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Okay. And if I can just sneak one more in. I -- just because you gave the number. I didn't have the chance to go back historically, but on the buyback authorization, the $2 billion on top of the $500 million, you've been doing sort of in the, call it, the $400 million to $500 million range. And obviously over the last couple of years, you've been dialing back the buyback, that you the -- heavier on the acquisition side. It's a big number. I mean obviously it will take 5 years to do it at the current rate. Can you talk a little bit about the pace and how you're balancing the two about doing acquisitions this sort of late in the cycle?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [66]

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Yes -- no. And so the authorization is higher than our last, our prior authorization, which was at $1.5 billion. Listen. I wouldn't read into that a big shift in capital allocation strategy. We're going to remain very balanced, but it is more. And listen, we're -- as I mentioned on Q4, we're -- like most things, we try to manage that fairly actively. And when we say we're going to be opportunistic, we try to be. So Q4 is a good example, and again almost $700 million of cash used for the Winchester acquisition, but as we looked at what you could refer to market dislocation, particularly as you got into December. Our view was it was that would be a good time to be opportunistic, and we did. I think we'll continue to manage that way as we go.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [67]

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Chris, I think one of the -- Joe and I both talk a lot about cost structure, right? And internally as a management team, although it's maybe not as sexy to some people as autonomous driving, for us, we spend half our time on how do we optimize cost structure. And we talk about breakeven. Since we went publicly, we've lowered our break-even level by 10 points so that we've really focused on how do we drive as much flexibility and much resiliency in our business model which translates into more cash flow. And it's a tough year, right, when we look at the macros for this year. We're going to generate about $1 billion of free cash flow. And we don't have to announce huge restructuring programs across the enterprise. We've already done that, right, which allows us to -- if we find attractive, strategic, well-valued M&A opportunities, we can move on them. We certainly look at, we evaluate them through the lens of how does that return compared to buying back our own stock, but it puts us in a great position to have options in what's a tough macro environment. And we work really hard every day to make sure that we preserve optionality, and we think there's tremendous value in that.

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Operator [68]

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

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [69]

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Kevin, on the win from last quarter with Porsche with the body and chassis control, how do you see additional wins or announcements coming out over the next couple years? How do you see the cadence playing out?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [70]

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Yes, listen. I would -- yes, I would expect it. And obviously, bookings and size of bookings, there's lumpiness to it, but I would say the activity is significantly -- is going to continue to significantly ramp up. I think one of the great things with the Porsche win is not only is it a new domain for us. It validates that centralization. It's actually, with the VW group, I think that's our third or fourth central compute win. So it shows -- in my, in our view, it validates kind of the strategic relationship that you establish with these OEs when you're dealing with these highly technical, complex problems. And it reflects the moat that Joe and I have both mentioned before that we've been able to build based on our capabilities in vehicle architecture as well as in software.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [71]

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Is that weighted towards Europe OEs or Chinese-based OEs? How...

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [72]

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Yes, today, it tends to be more weighted towards European OEs. It tends to be more weighted to the more technical, higher-end European OEs, but the reality is even on the active safety side, given the ability to centralize, to take out mass, take out costs and improve performance, we're seeing it. We have wins with -- and I think PSA is a great example, with players like PSA that are looking for great technology solutions at lower cost. And so our general view is you're going to see it across those European OEs and it's going to accelerate.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [73]

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Okay. And then two for Joe, just on operating inefficiencies. I don't know. I think launch costs were included in this, but it was like $65 million, I think, was the last update we had for '18. I don't know how that ended, but what's the assumption for '19? And then separately, on tariffs, say best case scenario we get a kumbaya, everybody gets together and tariffs go away. Does this net incremental impact for '19 completely go away? Or is there some leakage around some of the activities you're embarking on or have already completed?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [74]

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Yes. So let me start. So the inefficiencies, we ended right above where we ended. We had 35 in the fourth quarter and 30 in Q3, and that's about where we came in. And I -- the way we thought about it for plan, and this is what we were talking about at the end of last year, with a little bit more of a planning horizon, we start to adjust the cost structure. So I'd say at this point we talked about China costs coming out. So we're -- we've dealt with inefficiencies, if you will, in the guide through longer-term cost actions. So that was really -- those inefficiencies tend to pop up in a more discrete period of time when you have quicker changes in volume, Rich, so -- and less of a discussion for '19. And it's, sort of, they're in there, and they're being dealt with now that we have the sort of the longer-term planning -- plans from the customers.

As it relates to tariffs, yes, that's one of the reasons we're sort of behaving as if they're not going away, right? We're starting to move things so that we are incurring some costs related to tariffs. We're incurring a little bit of CapEx to move plants, so you'll have that. If they were to go away tomorrow, we'd obviously have given up that -- those costs, but just as we're not sure that they're going away -- I don't think anybody can be sure. We want to get ahead of them. So, there is some investment in some small incremental costs that are going in the business to deal with them, but to your question, if they were to go away tomorrow, whatever -- obviously wherever point in the year we're in, the remaining portion of that $60 million should go away. And that's one of the reasons we're trying to frame it the way we do, externally.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [75]

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So on a pro rata basis that gets, that -- okay, so that goes away, okay. So there's no leakage around costs and stuff. That's already included?

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [76]

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Yes. It's included, but we are spending that money, right? We're not holding. And then listen, we'll work through over the course of the next couple of quarters what that actual remediation looks like, but at this point, based on everything we know, it's $60 million. $60 million is the max, so we'll be better from there.

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Operator [77]

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Your next question comes from the line of Ryan Brinkman with JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [78]

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One of your active safety competitors has commented that automakers have delayed the launch of some new vehicles perhaps to save money and that the softer industry environment is pressuring the revenue in 2019 even as the long-term outlook is unchanged or better. I'm just curious what, if anything, you might be seeing with regard to launch delays. I ask in part because I think this would negatively impact a strong backlog story such as your own given that new vehicles are likely to have more Aptiv content per vehicle than existing programs. But -- and similar to the conservative industry assumptions, your interviews would say, I think it would perhaps cast your 2019 revenue guidance in even more favorable light.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [79]

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Yes. Ryan, we haven't seen any program delays, no delays, no shifting, no cancellation really in any region. Now we've seen in North America and other passenger car volumes, sedan volumes, as you know, I mean that's been -- you follow it as closely as we do, seen significant reduction in those sorts of vehicle platforms. And they've been announced. And they've tended to be replaced with whether it's crossover SUV or truck volumes, but we've not seen delays or cancellations of future programs.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [80]

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Okay, that's super helpful. And then just lastly for me: Are you seeing anything? Or what's the latest you're seeing in terms of the latest when it comes to automaker plans for autonomous and semi-autonomous features? I think there was some discussion about maybe Level 4 or 5 being a little bit later but, at the same time, interest in Level 2 or Level 2+ coming sooner than what is expected. Is that the trend you're seeing? And how should that net out for Aptiv?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [81]

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Well, we're definitely seeing advancements or a pull forward of Level 2+, Level 3-, Level 3. So the amount of business opportunity or programs here that we're working with OEs on or quoting on, I'd say, is higher than what we would have expected a year or 2 ago. The Level 4, Level 5 programs, I'm not really sure I would say we've seen really a delay. I think in general it's a tough problem to solve. People are working on solving those tough problems, and there are players like ourselves as well as a few others out there that will be launching platforms over the next couple years. But active -- I would tell you active safety is a significant. I mean, given our growth rates, given the amount of bookings, we've seen a significant increase in activity in and around active safety.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [82]

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Right. And just as a follow-up to that, when it comes to the Level 4, Level 5, obviously a lot of automakers will have the supply base and do it all. Some of the automakers have been pretty vertically integrated. Is that more when it comes to testing? When they move from testing to commercialization, do you think that some of the companies that have been doing a lot of development in-house will in fact end up utilizing the supply base for things like drives or policy software, et cetera?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [83]

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Yes, I think, for some of the software and for some of the software integration certainly for the perception systems. So I would tell you, with virtually every OE out there that has an AD program today and internally -- whether they're doing all the work themselves or doing it across partners, I believe we're providing them with some product, whether it's architecture, whether it's perception systems, whatever the case may be. So whether or not we're doing the full software stack, there still is a tremendous opportunity for players like ourselves.

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Operator [84]

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Your next question comes from the line of Maynard Um from Macquarie.

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Elena Doom Rosman, Aptiv PLC - VP of IR [85]

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I think we have time for one more question.

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Operator [86]

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Your last question comes from the line of John Murphy with Bank of America Merrill Lynch.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [87]

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I actually just had -- believe it or not, I had just one follow-up question on China. And Kevin, I'd hate to kind of parse your words like Fed speak here, but when you were talking about Page 8 on China, you mentioned something about getting ready for structurally lower volumes in China. And obviously you're taking the workforce actions. Just curious as you think about that. Is that -- in absolute terms, is that growth rate? And then as you're kind of thinking about the actions you're taking on the workforce side, I mean, in '15 we saw a sort of a whipsaw and the scare, sort of the growth scare there. Is there any concern that you might see stimulus, even though we're not hearing it yet, come in and kind of bump stuff up there? And then others -- the other note to this, though, is that even if we saw slower growth or maybe even lower absolute volume growth from a maybe a cyclical standpoint here in China, does the content growth story for you just stand so strong that your 10% growth above market maybe just expands and you're not sort of tethered to this macro that I think we're all concerned about right now?

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [88]

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Yes, listen. I -- what we're basically saying is our outlook -- we've seen 3 straight quarters of weak production growth, and our outlook for the full year based on the schedules we see on unit volume is down. And I think, if you do the math, our number is effectively for 2019 a 26-million-unit China, right? Now that's a huge market. I -- those are -- when you put it in perspective with Europe and North America, that's a massive market. And off that 26 million units, our outlook is you'd have growth, but growth will be more tempered than what it's historically been. Having said that, given where we sit from a technology standpoint, our growth over market, we believe, will continue to be extremely strong, if not possibly accelerate, just given the demand for things like active safety, infotainment, user experience and vehicle electrification. So although a lower production level, growth over market and revenue growth, just pure revenue growth, will continue to be extremely strong. So we're positive about China. We're positive about where we sit in China. We just think you're going to see lower growth than what we have historically seen over the last 10 years.

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Joseph R. Massaro, Aptiv PLC - Senior VP & CFO [89]

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But John, just to add a little context to those 3 product lines. I mean we're -- as it relates to China, that's all 3 of those are triple-digit growth next year for us in China, right, as we start to go through that on a product line basis. So electrification is going to be well over 100% revenue growth. So they're small, but they're contributing a lot of growth to that business.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [90]

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So the workforce actions, are those sort of a rebalancing and we can expect some other folks to be hired in other areas? I mean that it sounds like you're kind of going after the workforce, but you're still seeing growth. I'm just trying to understand the balance between those 2 parts.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [91]

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Yes. I mean that's the balance. The balance is from a revenue growth standpoint, it's a region that's growing. I think we view this is an opportunity, quite frankly, to tighten the belt. And regardless of whether the market rebounds strongly, I don't think you'd see us doing any real whipsawing there. I think it's just operating off of a lower overhead base.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [92]

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Got you. And one just last one, on the SVA. You said you're talking to about a dozen other automakers. Could those be outside of our traditional and be companies like a Rivian or a BYTON or something like that, that might be out there that you're talking to on that? It seems like they would be really interested in that.

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [93]

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Yes, yes. Those discussions will be outside of the number of -- the dozen that I referenced, but yes, we're aware of all of them and have had ongoing dialogues with all of them.

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Elena Doom Rosman, Aptiv PLC - VP of IR [94]

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All right, thank you.

Kevin, do you want to...

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Kevin P. Clark, Aptiv PLC - President, CEO & Director [95]

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Yes. So listen, everyone. Thank you very much for taking the time to get an update on our fourth quarter earnings as well as our outlook for 2019. We appreciate your time, and we certainly appreciate you as investors.

So thank you.

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Operator [96]

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This concludes today's conference call. You may now disconnect.