Aptiv PLC — 2024 Q1

John, I guess we had your second half of the question. The first half, you broke up a little bit with respect to, I think, it was a mix of electrification bookings or revenues.

Listen, let me start with the second part of the question or the second question, and I'll come back to the first. As it relates to the Chinese OEMs, especially the Chinese local OEMs, the reality is they are looking for local sources. And it's one of their objectives to localize the supply chain. As you know, we've had this conversation. We've been in China for close to 30 years and have operated in China to serve the China market. So I think it's best as possible that you view us as a local supplier given the fact that we have fully localized capability for that particular market.

It's really -- it's all of the above. So it solves the problem related to availability of labor. It solves a problem as it relates to cost of labor and quite frankly, it solves a problem of complexity of overall vehicle architecture in the past to more of a software-defined vehicle smart vehicle architecture. Those savings are as a percent of labor hours. So I don't have off hand the average number of labor hours on an average wire harness, but it's a 30% reduction in those labor hours. So it would be a significant cost savings, as you can imagine.

Baseline right now, we're running at roughly 15%.

I'll answer the first question, maybe Joe can answer the second. As it relates to the Gen 6 ADS award, I don't want to give specifics because from, as you can imagine, from a pricing standpoint and somewhat sensitive commercially and competitively. We've talked in the past about L2+ sort of L3 content per vehicle -- this particular program in addition to our ADAS platform has our in-cabin sensing solution as well as the full suite of Wind River both embedded and studio solutions. So as you think about that, you should think about it being roughly in that traditional range that we've talked about, given what we're doing from an AI/ML standpoint with our radar solution, given our overall approach to sensor fusion. I guess we've talked in the past, our overall Gen6 ADAS platform can deliver anywhere between 15% to 30% savings to our customers, depending upon the configuration of the platform. So it's a very competitive solution.

And Itay, it's Joe on growth over market, yes, since with the prepared remarks, I think we're closer to the 6% of that range based on how we see 2024 today. Obviously, too early to rack up 2025, particularly with just some of the dynamics we've seen in customer schedules over the past -- really, over the past month. But I would think it's within that 6% to 8% range. I certainly wouldn't go up above that at this point.

Yes, Joe, I would say nothing stands out in the quarter from a sort of a one-off perspective, certainly nothing material. I would say we've been working very hard on those margins for a long period of time, as you know, with both the supplier side of things and then taking cost out of the business. We have some cost actions that we put in place last year. This engineering rotation has been going on for a period of time. So you'll -- I think you're talking about sort of seeing the high 10%, call it, 10.5% to 11% margin in that business being maintained certainly for the full year. It's going to be -- it's a little lumpy. Q3 is obviously a little lower for us at times. But I think that's where we're starting to see this business and should come out of the year, call it, in the mid-10%.

Yes. Listen, as you know, as I said, we've been in the China market for a long period of time and clearly, the market has rotated from dominance by the multinational joint ventures to a much stronger localized Chinese -- only local Chinese OEMs. Over the past 3 or 4 years, we've talked about the rotation of our bookings and the mix of our bookings significantly rotating from the multinationals to the locals. I think over the last couple of years or so, our bookings -- dollar value of our bookings is lawfully matched, the mix change between the Chinese locals and the multinational JVs. We're still a little bit behind that from a revenue standpoint, but it's well over 50% that now is with the local Chinese OEMs. A significant portion of our bookings last year and this year, we'll be with the Chinese locals. So that's an area where we think we'll continue to close that gap over the next 12 to 24 months from a revenue standpoint.

Yes. In China, we're running the exact number or probably close to 70% local bookings versus the multinational JVs. Last year, we were up over -- well over 60%. So it's been certainly moving in that direction. And it should I guess a year to 2 years.

Take 70% of $6 billion. So...

Two questions, one pretty simple. Just Joe, you mentioned new margin for [ AS ] at 10.5%. Does that sort of imply we think SPS is probably on the lower end of something more like 12% to 13%. That's probably where you have more of the pace of exposure.

Yes, 1 second. Chris. Let me make sure I give you the right number. SPS 11.2% in Q1, yes, I would say you're in the, call it, 12% to 12.5% for coming out of the year.

And then the same, the growth over market split, ASUX probably high single digit and SPS because of the high voltage now at 5%. Is that closer to 3% or 3% to 4%? What's the split on growth over market...

I'd say low to mid-single digits on SPS, yes.

Perfect. And then the second question is a bigger question. When I think about capital allocation, obviously, $1.5 billion for the buyback this year, use words like opportunistic. Obviously, your stock at a very low multiple. But when I look at the free cash flow generation over the next couple of years, anywhere from $1.2 billion this year to $2 billion in the next couple of years, could this sort of level of buyback or sort of this new priority be something that stays for a multiyear basis? Traditionally, you've been a lot more acquisitive or bolt-on the large acquisitions. So I'm just curious if this could be something that's more sustainable higher level buyback for a multiyear basis, at least until the stock rerates.

Yes, Chris, I think at current levels, it's fair to assume we continue to buy back stock at fairly healthy levels. The reality is we view our stock is undervalued. Obviously, we'd like to see stock price appreciation and important part of what we're trying to do is to build out our capabilities in and around the software stack as we've talked about, and quite frankly, diversify our revenues further in the industrial markets as well. So we would like to assume that there's a fair amount of acquisition activity that happens during 2024, 2025 and beyond.

Maybe just thinking about where the underlying growth rate is for the business today. So you're pointing to 6 points of growth over market for this year. I know there are a lot of puts and takes, but I think in the bridge that you had provided last quarter, it implied about maybe 2 points of tailwinds from price recoveries, for example, that were tied to semiconductor inflation last year. But there are also mix headwinds in China, where it sounds like you're mitigating with new launches. So just trying to get a sense of where the underlying rate of growth is today as you see it.

Yes, sure. I'm not sure I get the pricing comment or the recovery comment. But listen, I think our long-term view, the framework is 6% to 8% in a flat market, right? So that growth over market is generally consistent with the adjusted growth rate.

Okay. I guess then from thinking about the incremental performance savings that you're expecting this year, are those tied to the automation initiatives you're talking about? Or is that more of the footprint actions like in SPS?

Automation will be longer term, as Kevin talked about. We've -- at the end of last year, second half of last year, really started to focus on -- and again, right, the business has changed a bit. So if it shouldn't surprise folks. We've looked at the cost structure. We've had a salaried overhead reduction, took out some overhead. We always do that.

Okay. And then maybe just a quick last one is just on FX. You didn't see much of an impact in the quarter, but it looks like the headwind's going to be for the rest of the year. I mean last year, when we saw the peso strengthening was kind of the opposite effect where it was largely impacting you in Q1. So maybe just trying to think about how much of that FX impact is peso versus RMB? Just trying to get a sense of that.

RMB's in there. The peso is the more significant. Listen, I think you got to distinguish between the actuals year-over-year and the guide, right? The actual -- the peso, unfortunately, in Q1 is pretty consistent with where it was in Q1 of last year between the 16 and low 17s. So that's why there's not a significant impact on a year-over-year basis, comparing actuals to prior year actuals.

You took your view for high-voltage revenue for '24 to 5% from 20%. Beyond this year, does have to think a 20% CAGR in high-voltage revenue still achievable? And does the composition between BEVs and PHEVs changed at all as you think about the longer-term high voltage outlook?

Yes, I'll start with our customers and knowledge with our customers, our customers are still pushing forward with the introduction of battery electric vehicles. So you can hear from their public statements that they're still standing behind them and certainly pushing in that direction.

Second question I had was on margins. You had your best 1Q EBIT margin, I think, since 2018. Can you talk a little bit more on what led to the margin strength in the first quarter? And specifically, how much of the footprint actions may have contributed?

Yes. Maybe I'll start. Listen, I think you go back to 2018, we went through COVID 2020, 2021, and then we went through semiconductor challenges. So we had 3 years there that were extremely choppy from an overall operational standpoint and margin standpoint.

Wondering if you could just address a couple of points on active safety. Any voice over on the solid results in the quarter, I think it was up 25% or so?

Yes. Yes. So as Joe mentioned, we're launching across -- we're launching both new programs as well as launching existing programs across a broader set of models within OEMs. There continues to be increasing significant consumer demand for active safety solutions. It's something that our customers are clearly looking for. So it continues to be an area that we believe we'll see strong revenue growth.

Dan, it's Joe. We'll be -- we're forecasting 20% plus a little bit over 20% for the year. So we'll have a -- like things as we go back to just the old way the business is historically run. It won't show perfectly straight every quarter, but we go into some very heavy launch activity, as I said in my prepared remarks in the back half of the year -- launches run up and then ebb a bit.

Great. And then as a follow-up, wondering if you could just provide some comments on the price versus inflation dynamics. Inflation, and you talked to some incremental inflation coming into the cost structure this year. Is that coming in as planned?

Yes. Dan, I would say the dynamics move from direct material inflation to very much labor inflation. But we're obviously in discussions with customers around issues, around labor inflation. Some of that's recovery. Some of that, as Kevin mentioned, is going to be leaving places like Mexico that are becoming too expensive, and reducing labor in those places to Kevin's point on automation.

Got it. And then just within the quarter, what was the pricing? Because I said price commodities was one bucket.

Price commodities, because you got the copper inflation in there as well was -- it was about $35 million positive on the revenue line.

Yes, that's an interesting question. I'm not sure -- and if the consumer experience ultimately would be better on an electric vehicle with a BEV vehicle architecture versus this architecture around an internal combustion engine.

Yes. It's -- that's a great question and a complex question. Listen, I agree that AI/ML is changing. it's changed a number of things. And you're right, it actually changed how we approach a number of the products that we develop like radar solutions, right, is a great example, any perception solutions. So I think it's a pretty easy argument to make today that the utilization of tools like AI/ML allows the advancement to move much faster at a much lower cost. And we're seeing that and we're benefiting from that. And that's one of the big benefits about this Gen 6 ADAS platform that we've talked about.

It's a different product line. So it's pure BEV product. So whether it's a bus bar or it's a connector for a battery electric vehicle or a harness, it tends to have a specific set of equipment with specific tools. A lot of those are within existing facilities that we had to produce products for both low voltage as well as high-voltage solutions. So there's some ability to pivot there.

Yes, it's not something outsized, Tom, that you'd see like pop up in CapEx or something. I think it could be managed within the existing business and financial framework.

Yes, that's -- we brought our outlook for vehicle production down a point. The biggest piece of that is that is BEV related, as Joe and I have talked about. There are some OEMs that we've seen an increase in production schedules for products that have internal combustion engines, but net-net, BEV production is down.

Yes. As I said in my prepared comments, Tom, April was a month of schedules coming down with a few exceptions. There are some ICE platforms that popped up. But I would say both legacy global OEMs and global EV-only OEMs, we saw schedules come down in the past 4 or 5 weeks and that's really what -- that's what is driving the takedown in the top line.

Thank you, everyone, for taking the time today to listen to our earnings call. I apologize for the technical problem at the start. Take care and have a good day.