Yahoo Finance Aptiv PLC (NYSE:APTV) Q1 2024 Earnings Call Transcript
Aptiv PLC (NYSE:APTV) Q1 2024 Earnings Call Transcript May 2, 2024
Aptiv PLC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Aptiv Q1 2024 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jane Wu, Vice President of Investor Relations and Corporate Development. Please go ahead.
Jane Wu: Thank you, Jess. Good morning, and thank you for joining Aptiv's First Quarter 2024 Earnings Conference Call. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at aptiv.com. Today's review of our financials exclude amortization, restructuring and other special items and will address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for our first quarter results as well as our 2024 outlook are included at the back of the slide presentation and the earnings press release. During today's call, we will be providing certain forward-looking information that reflects Aptiv's current view of future financial performance and may be materially different for reasons that we cite in our Form 10-K and other SEC filings.
Joining us today will be Kevin Clark, Aptiv's Chairman and CEO; and Joe Massaro, Vice Chairman of Business Operations and Chief Financial Officer. Kevin will provide a strategic update on the business, and Joe will cover the financial results in more detail before we open the call to Q&A. And with that, I'd like to turn the call over to Kevin Clark.
Kevin Clark: Thank you, Jane, and thanks, everyone, for joining us this morning. Let's begin on Slide 3. Operationally, we had a strong start to the year, demonstrating our ability to execute despite some headwinds. Touching on a few highlights. New business bookings reached almost $13 billion, reflecting the continued demand for our industry-leading product portfolio. First quarter revenue was just under $5 billion, representing adjusted year-over-year growth of 2%, impacted by continued slowing of electric vehicle production in North America and Europe production and increased labor inflation and earnings per share increased 27% to $1.16. Lastly, we repurchased $600 million of stock during the quarter... Hello. Apologies we seem to have had a technical difficulty.
So if it's okay, I'll start from the beginning. So again, thanks, Jane, and thanks, everyone, for joining us this morning. Let's begin on Slide 3. Operationally, we had a strong start to the year, demonstrating our ability to execute despite some headwinds. Starting on a few highlights. New business bookings reached almost $13 billion, reflecting the continued demand for our industry-leading product portfolio. First quarter revenue was just under $5 billion, representing adjusted year-over-year growth of 2%, impacted by continued slowing of electrical vehicle production in both North America and Europe. EBITDA and operating income totaled $720 million and $544 million, respectively, representing more than 20% growth and roughly 200 basis points of margin expansion, reflecting benefits from productivity initiatives and cost actions, which offset lower vehicle production and increased labor inflation.
And earnings per share increased 27% to $1.16. Lastly, we repurchased $600 million of stock during the quarter, bringing the total amount of shares repurchased to $900 million over the last 2 quarters. In summary, the team did an exceptional job delivering solutions to our customers, while at the same time, increasing operating efficiencies and reducing our cost structure. Turning to Slide 4. While we are encouraged by our strong first quarter execution, we believe that it's prudent to update our 2024 outlook to reflect the continued weakness in electric vehicle production, including significant customer schedule reductions over the past few weeks and the current negative impact of foreign exchange rates. As a result, we're lowering our full year 2024 revenue guidance by $450 million, principally reflecting a reduction in our outlook for high-voltage revenue growth.
While we continue to believe that all regions are on the path to full electrification, some will move faster than others, so we consider it prudent to reduce our near-term revenue expectations. As the industry navigates the current headwinds, we're maintaining our high standard of flawless execution, while continuing to reduce our cost structure and strengthen our sustainable business model. We're supporting our customers on a record number of new program launches, almost 2,300 in 2024, including over 750 program launches in the first quarter, the cadence of which gives us confidence in the acceleration of our second half revenue growth. We've also proactively executed initiatives that have lowered our cost structure. In early '23, we launched several initiatives to improve engineering efficiency in both our ASUX and SPS segments.
And in late 2023, we executed additional cost actions across all overhead and operating functions, targeting more than a 10% reduction in salary payroll. And in response to the recent softness of electric vehicle production schedules, we kicked off incremental cost actions that will generate an additional $50 million of cost savings through the balance of this year. The net result of these puts and takes is a $50 million reduction in our full year outlook for operating income to $2.5 billion, above the bottom end of our prior guidance range, representing 11.8% operating margin and just under 80% growth in operating income. I'm pleased to announce that we've reached a formal agreement with the Hyundai Motor Group regarding our Motional joint venture, which positions Motional for ongoing success while addressing the needs of both joint venture partners.
Joe will go into more detail later in the presentation. Lastly, we continue to believe that our stock is undervalued and presents an attractive opportunity to return capital to shareholders. As such, we're doubling our share repurchase target from $750 million to $1.5 billion during 2024. In summary, our conviction regarding the strength of our competitive position and the long-term value of our business is as high as ever, and we remain committed to delivering value to our shareholders. Moving to Slide 5. As mentioned, bookings reached nearly $13 billion in the quarter. Advanced safety and user experience bookings totaled $2.5 billion, driven by active safety bookings of $1.9 billion, including our first full system Gen 6 ADAS award, including in-cabin sensing and the full suite of Wind River Embedded and Studio developer software with an emerging EV player, bringing the cumulative active safety and user experience segment awards to $33 billion since the first quarter of 2021.
Signal and Power Solutions new business bookings reached a record of over $10.3 billion, reflecting electrical distribution systems bookings totaling a record $7 billion including an award from a leading global Japanese OEM for both plug-in hybrids and battery electric vehicles for the North American market and connection systems bookings totaling $2.5 billion including an award from a leading electric vehicle OEM for high-speed cable assemblies on a global electric vehicle platform, bringing cumulative S and PS segment bookings to $70 billion since the first quarter of 2021. In China, across both segments, we were awarded $3 billion in new business awards with both local and multinational OEMs including a vehicle architecture work from a leading local Chinese OEM for a low-cost battery electric vehicle, putting us on track to exceed our full year 2023 bookings of just under $6 billion.
With our industry-leading portfolio, our global scale and our ability to execute highly complex programs, we remain confident in achieving our target of $35 billion of business awards during 2024. Turning to Slide 6 to review our Advanced Safety and User Experience segment's first quarter highlights. The segment reported 5% growth driven by 24% growth in active safety, which is on track for 20% full year revenue growth, more than offsetting the challenging comparables for user experience in Wind River in the quarter. Solid revenue growth was coupled with ongoing productivity improvements, including the continued maturation of our global product organization, driving higher levels of platform usage and software reuse. The consolidation of engineering centers and the continued rotation of engineering resources to our tech center in Bangalore, India, which is driving our percentage located in best cost countries to over 75%.
The ongoing adoption of Wind River Studio, which is resulting in a roughly 40% improvement in workflow performance in the software building and scanning processes. And lastly, the continued progress we've made validating local Chinese semiconductor suppliers to meet the increasing demand from local Chinese OEMs for localized sources of supply and provide global OEMs with increased supply chain flexibility and resiliency at significantly lower costs. In terms of commercial highlights in the quarter, in addition to the Gen 6 ADAS award I mentioned earlier, we're awarded a radar program by a global Japanese OEM for applications across multiple vehicle platforms in the North American, European and Asia Pacific markets. And Wind River Studio developer was selected by a major local Chinese OEM to help increase efficiency and reduce costs associated with the development, deployment, operations and servicing of the intelligent edge systems.
Moving to Slide 7. As I mentioned earlier, an emerging electric vehicle OEM has selected the Aptiv Gen 6 ADAS platform to enable turnkey ADAS across a wide range of platforms and models with the start of production in 2026. This is our first full system productized Gen 6 ADAS platform award, building on Aptiv's proven hands-free highway full system solutions, which are already in production. This open modular and scalable ADAS platform will enable advanced hands-free urban and highway vehicle automation, driver safety and region-specific features, including fully integrated sensors, tightly coupled with Aptiv's edge to cloud compute framework. A containerized feature stack enabled by Aptiv's AI/ML enhanced solutions, including radar machine learning and ML-based vehicle behavior.
And Wind River's extensive offerings such as Wind River Edge with VxWorks and Wind River Studio develop, deploy and operate the software over the life of the program. This award is a testament to our ability to deliver a full system, productized solution to our customers while validating the value of our Gen 6 ADAS platform, which includes flexibility across key layers of the staff to meet our customers' needs, scalability of hardware and software components from entry-level compliance up to Level 3 and industry lead performance at a very competitive cost. Turning to Signal and Power Solutions. First, first quarter highlights on Slide 8. We continue to benefit from our industry-leading portfolio, global scale and experience designing and developing optimized vehicle architecture solutions across the entire range of powertrain platforms from the internal combustion engine to battery electric vehicles.
First quarter revenues increased 1%, driven by strong growth in China, partly offset by a decline in high voltage revenues, the result of the softening production schedule for electric vehicle platforms in both North America and Europe that I mentioned earlier. New business bookings during the quarter totaled over $10 billion. We continue to gain traction with top OEMs in China. During the quarter, electrical architecture bookings with China local OEMs reached more than $1 billion, including major awards across each of the 5 top local OEMs. And we received our first high-voltage integrated Power Electronics award for a DC-to-DC converters from a global EV manufacturer for its next-gen vehicle platform. As discussed previously, our Signal and Power Solutions segment continues to be impacted by increased labor inflation.
To mitigate the impact, the operating team has initiated several actions including the further consolidation of our manufacturing footprint, while rotating more of our footprint to Central America and North Africa and modifying vehicle architecture design to enable the increased automation of select manufacturing processes with a target to increase automation to 30% of standard labor hours by 2026 and over 50% by 2030. Moving to Slide 9, and our OEM partners adapt to the shifting pace of consumer electric vehicle demand and emission requirements. Aptiv is positioned to deliver high-performance, cost-effective solutions that span the powertrain spectrum and adapt our capacity to align with the needs of our customers. Starting on the left of the slide.
As we've discussed previously, we're benefiting from significant and increasing addressable content per vehicle from approximately 800 in electrical architecture content for an internal combustion engine platform to approximately 2,300 for a full battery electric vehicle. In many cases, this incremental content represents an opportunity to apply existing capabilities to a much larger addressable market. Although global penetration rates for hybrids and battery electric vehicles may fluctuate in the near-term, we firmly believe that the long-term macro tailwind remains attractive as the industry continues down path to full electrification. That said, we've taken a more conservative approach to the pace of electrification. And while we will continue to be more conservative than the broader market sentiment, our outlook still represents a significant market opportunity with meaningful future upside.
Finally, on the right side of the slide, the strength of our current portfolio across regions, powertrains and platforms significantly insulates the business from any single industry headwind. To illustrate this point, if we were to assume that growth of all electrified vehicle platforms on which we have content was reduced to zero in 2024, including low-voltage solutions on battery electric vehicles, with no substitution from ICE vehicle platforms, our overall growth rate would decline by 1 to 2 points. As a result, we believe that we're uniquely positioned to deliver innovative solutions to our customers and value to our shareholders across all powertrain platforms. Moving to Slide 10. Before I turn the call over to Joe to walk through the financials, I wanted to touch on 2 recent customer events.
In late February, the Wind River and Aptiv teams exhibited at Mobile World Congress in Barcelona, giving us the opportunity to collaborate with a wide range of telco customers and partners. The team showcased our ability to support operations at scale for 5G V-RAN and O-RAN deployments while highlighting solutions being leveraged by our customers to improve performance and reliability, reduce costs and unlock new business models. Among the many years of interest to our telco customers was our unique ability to support the convergence of telco infrastructure with a software-defined vehicle, enabling the deployment and update of new services much faster and much more efficiently. Last week, we took the opportunity to further strengthen our strategic partnerships in China during the 2024 Beijing Auto Show.
Led by our local China management team, we engaged with a wide range of customers to discuss key technology trends, consumer expectations and performance and cost requirements that are unique to the China market. Local OEMs are demanding full system solutions, spanning both hardware and software, while consumer interest is accelerating for higher levels of ADAS and enhanced user experience. Aptiv is perfectly positioned in this market to deliver solutions with increased flexibility, higher performance and faster speed to market, all at a much lower cost. While we have active engagements with customers across all regions and end markets, and it's important to note that all are essentially asking for the same thing: The right hardware, the right software and the right engineering tool chain to support software-defined functionality for mission-critical applications.
And as a result, our unique edge-to-cloud portfolio positions Aptiv to capitalize not only on the automotive industry's transition to software-defined vehicles, but also on the digital transformation and convergence of multiple industries as intelligence increasingly moves to the edge. By leveraging these proven solutions across industries, Aptiv is positioned for sustained long-term profitable growth. With that, I'll now turn the call over to Joe.
Joseph Massaro: Thanks, Kevin, and good morning, everyone. Starting with the first quarter on Slide 11. Aptiv delivered strong financial results in the quarter, reflecting robust execution across both segments and continued progress on our cost savings and margin improvement actions, resulting in operating margin improvement of 200 basis points over the prior year. Revenues were $4.9 billion, up 2% or 3% above underlying global vehicle production, which was down 1% in the quarter. Growth was negatively impacted by the continued slowing of battery electrical platforms in the quarter, particularly in North America and Europe, where we saw our high-voltage revenue down 2% and 6%, respectively. Revenues on ICE platforms and high-voltage solutions on hybrids were up 2% and 26%, respectively.
As I will discuss shortly, given the continued weakness in electric vehicle production, including significant customer schedule reductions over the past few weeks, we are revising downward our 2024 outlook for the year. Adjusted EBITDA and operating income were $720 million and $544 million, respectively. Operating income margin expanded 200 basis points versus prior year, in part driven by cost reduction and recovery programs put in place in 2023, as well as continued achievement of our operating performance initiatives, including the continued rotation of our engineering footprint to best cost locations. The year-over-year FX and commodity impacts were negligible. Earnings per share in the quarter were $1.16 and increased 27% from the prior year, including year-over-year earnings growth of 24%, partially offset by higher tax expense.
And share repurchases completed in 2023 in the first quarter of 2024 added approximately $0.03 to EPS in the quarter. Operating cash flow was strong, totaling $244 million. Capital expenditures were $265 million, and share repurchases totaled $600 million. Looking at first quarter revenues on Slide 12. As noted, revenue of $4.9 billion was up 2%. Revenue growth was driven by strong active safety growth as well as growth in commercial vehicle and engineered components partially offset by lower high-voltage revenue. Net price and commodities were positive to the top line, partially offset by foreign exchange. Moving to the right. Revenues outgrew vehicle production in all regions. North American revenues were up 2% or 1% above market, driven by increases in active safety and engineered components, partially offset by lower high voltage.
In Europe, revenues were down 1% year-over-year or 2 points above vehicle production with lower EV production in the region, partially offset by double-digit growth in active safety. And in China, revenues grew 5 points over market driven by growth with several key local OEMs. Moving to the ASUX segment on the next slide. Revenue growth was 5% or 6% above global vehicle production. Active safety was up 24% in the quarter, benefiting from new program launches as well as continued strong demand across all regions. User experience was down 8% in the quarter, primarily driven by the roll-off of the legacy program in North America and lower multinational JV volumes in China as discussed during our year-end earnings call. Wind River revenue decreased 16% in the quarter due to a strong year-over-year comparison.
As we have discussed, Wind River revenues are lumpy on quarterly basis. For the full year, we expect mid-teens revenue growth at Wind River. Segment adjusted operating income in the quarter was $155 million, up significantly over prior year driven by cost reductions taken in the second half of 2023 as well as ongoing performance initiatives, including continued rotation of our footprint. Operating income margin in the quarter was 10.8%. Turning to Signal and Power on Slide 14. Revenue in the first quarter was approximately $3.5 billion, an increase of 1% or 2% above vehicle production driven by growth in engineered components of 3%, declines in high-voltage revenue on BEVs were partially offset by growth in hybrids, which make up approximately 25% of our high-voltage product line revenues.
And China revenues were up 11% as we saw SPS growth of approximately 30% with local OEMs, while we saw growth of 2% with foreign OEMs. Segment adjusted operating income was $389 million or 11.2%, up 40 basis points over prior year as our cost savings and operating performance initiatives significantly reduced the impact of higher labor costs. Net price and commodities were positive. And on a year-over-year basis, the OI impact of foreign exchange was minimal. Moving to Slide 15 and our updated macro outlook. As Kevin mentioned, over the past several years -- over the past several weeks, we have seen both legacy OEMs as well as global EV OEMs, lower production schedules primarily in North America and Europe. These reductions are partially offset by select increase in ICE platforms, particularly in North America.
As a result, we estimate global vehicle production to be down 1% for the year from a prior forecast of flat. Our outlook for revenue growth is now 5% for the year versus our prior outlook of 7%, reflecting growth over market of 6%. As for our key FX and commodity rates for the remainder of the year, we are now assuming copper at $4.35, Mexican peso at MXN 17 to the dollar and the Chinese RMB at 7.15. Slide 16 has our updated full year outlook. As discussed, our Q1 operating results were substantially in line with our expectations, including the benefit of our cost savings and performance actions. However, as we look at the balance of the year, we do see several likely and persistent headwinds that have caused us to revise and derisk our full year outlook.
The revised outlook includes revenues of $21.15 billion, down from the prior midpoint of $21.6 billion, running adjusted revenue growth of 5%. The lower revenues resulted from the previously mentioned customer schedule reductions as well as an additional reduction to our H2 revenue growth based on current market conditions. As a result, first half revenue growth has been lower to 2% from our prior outlook of 4% and second half growth is now 8%, down from over 9%. Operating income of $2.5 billion or 11.8% of revenues, down $50 million from the prior midpoint. We are increasing our EPS estimate to $6.05 a share at the midpoint as the negative impact of the reduction in earnings is more than offset by the benefit of our share repurchase activity as well as the benefit of previously mentioned Motional transactions, which I'll cover in more detail in a moment.
We have increased our outlook for operating cash flow, primarily reflecting improved working capital. And we are now targeting share repurchases of $1.5 billion in 2024, up from our prior guidance of $750 million. Moving to the next slide, we lay out the more significant changes to our outlook. With respect to revenue, global vehicle production decreasing from a previous outlook of flat to now down 1%, reduction of our full year high-voltage revenue growth from 20% to 5%, the decrease in high voltage is partially offset by increases in ICE production schedules, primarily in North America as well as increases in net price and commodities, reflecting higher copper prices that offset the foreign exchange impact on revenues. The decrease in operating income is driven by the flow-through of lower revenues as well as the negative impact foreign exchange, primarily the peso and RMB.
As it relates to the Mexican peso, although many forecasts expect the peso to weaken over the course of the year, the peso has remained stronger than our initial expectations. Accordingly, we have updated our guidance to reflect an exchange rate of MXN 17 to the dollar. This is more in line with our spot level and also represents the level at which we have hedged approximately 90% of our 2024 peso exposure. And finally, despite the macro headwinds, we fully expect the benefits of the cost savings and performance actions we delivered in the first quarter to continue, partially mitigating the volume and foreign exchange impact. Turning to the next slide. We thought it would be helpful to walk our expected first half versus second half revenues in 2024.
Second half revenue is expected to increase approximately $800 million. The increases in both segments are driven by new program launches with key customers in all regions. ASUX half-over-half revenue is expected to increase approximately $200 million with over half of the increase coming from the launch of one of our largest active safety programs across additional platforms in North America and Europe for a global OEM. These additional platforms are internal combustion vehicles and represent several of the OEMs best-selling platforms. Approximately 40% of the launch volume is with local Chinese OEMs, including several launches that have already commenced. The increase in Signal and Power of $500 million includes a launch totaling over $100 million in a large North American internal combustion SUV platform, an additional $100 million across 2 OEMs for new internal combustion truck launches in North America and Chinese market launches and volume growth for both local and foreign OEMs of over $100 million.
The increase in sales will deliver margins higher in the second half with volume flow-through of approximately 30%, partially offset by incremental FX headwind of approximately $35 million due primarily to the peso. Moving to the next slide. As Kevin noted, we are excited to announce that we have reached a definitive agreement with Hyundai that provides for the future success of Motional while meeting the needs of the joint venture partners. As part of the agreement, Hyundai will provide Motional additional funding of $475 million. Hyundai will acquire 11% of Motional's common equity held by Aptiv for $448 million, and Aptiv will convert approximately 21% of our common equity interest to a preferred stockholding. Hyundai's funding to Motional will occur in the second quarter and we expect the acquisition of Aptiv shares, which is subject to customary regulatory review to close by the third quarter.
The preferred stock conversion will coincide with the sale of our common equity to Hyundai. Our updated guidance includes approximately $0.30 of additional EPS, reflecting the benefit of the lower Motional common equity holdings beginning in the fourth quarter of this year. On a full year pro forma basis, the lower dilution for Motional will result in incremental EPS of approximately $0.90 per share beginning in 2025. Before handing the call back to Kevin, I'd like to walk through our updated earnings per share expectations in more detail. Building off a strong performance in the first quarter, the year-over-year EPS growth of 24% is driven by higher earnings of $1.32 as well as the benefit of share repurchases in 2024 and the improvement resulting from the transaction with Hyundai to reduce Aptiv's common equity holdings in Motional, more than offsetting the increase in Aptiv's tax rate, which was included in our original guidance.
In summary, despite the lower vehicle production levels and slowdown in high voltage, we are confident that the measures taken to improve first quarter operating income and cash flow are sustainable for the balance of the year. The earnings and cash flow growth, combined with the proceeds from the Motional transaction, provide us the opportunity to continue our long track record of balanced capital deployment, including the return of capital to our shareholders. When combined with the 2023 share repurchases, our outlook for 2024 results in almost $2 billion of capital returned to shareholders in the past 2 years, increasing total capital returned to over $9 billion since our IPO. With that, I'll turn the call back to Kevin for his closing remarks.
Kevin Clark: Thanks, Joe. I'll wrap up on Slide 21 before opening the line up for questions. Overall, our strategy remains unchanged, while the industry navigates the near-term headwinds. We'll continue to provide flexible, high-performance, cost-effective solutions to our customers that enable the transition to the electrified software-defined vehicle. We remain focused on thought execution and operational excellence, which enables us to delight our customers while optimizing our cost structure to expand margins and deliver value to our shareholders. We executed well in the first quarter and are laser focus on continuing to execute, which will position us well for the remainder of the year. Operator, let's now open the line for questions.
Operator: [Operator Instructions]. And we will take our first question from John Murphy with Bank of America.
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