Aptiv Q1 2024 Earnings Call Transcript

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

Thank you. 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 as best as possible, they view us as a local supplier given the fact that we have fully localized capability for that particular market. Our customers have come to us asking us to make sure that we focus on developing the, call it, Tier 2, Tier 3 supply chain to provide them with solutions.

As you can imagine, given some of the geopolitics, they are especially focused on the semiconductor space. So that is an area just again given the strength of our supply chain and our historical presence in the market, we had some capabilities over the last two years, especially post the semiconductor crisis in 2021 and 2022. We doubled down on enhancing our capabilities in that particular market. I think I've mentioned previously we're partnering with over a dozen semiconductor manufacturers in China to deliver their solutions to the automotive market in China and that's from SoC down to the peripheral sort of semiconductor chips. So that's an area of focus. Alternatively, we have a number of non-Chinese OEMs who are very focused on cost reduction and material savings who we're presenting these opportunities to. Several of them are interested in the options and will report out when we actually have commercial OEMs.

As it relates to the Japanese -- recent Japanese awards, especially on the ADAS side as well as on the plug in hybrid and BEV side, listen, over the last couple of years, we've been increasingly focused on Japanese OEMs, especially Japanese OEMs and the Japanese market. So I think it's the net result of the progress we've made and quite frankly the momentum we've built with several of the players like Honda, like Nissan. And now we're starting to make progress with the largest Japanese OEM.

It's all 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 the problem of complexity of overall vehicle architecture in the past to more of a software defined vehicle to smart vehicle architecture. Those savings are as a percent of labor hours. So I don't have offhand the average number of labor hours on an average wire harness, but it's a 30% reduction in those labor hours. So it'd 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 ADAS, I don't want to give the specifics because from a -- as you can imagine, from a pricing standpoint, it's somewhat sensitive commercially and competitively. We've talked in the past about L2 plus 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 AIML standpoint with our radar solution given our overall approach to sensor fusion. I guess we've talked in the past our overall Gen 6 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, yeah, as we said in the prepared remarks, I think we're closer to 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.

Yeah, Joe, I would say nothing stands out 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 costs out of the business. We had some cost actions that we put in place last year and this engineering rotation has been going on for a period of time. So 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-10s.

Yeah. 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 -- local Chinese OEMs. Over the past three or four 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 roughly 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 a local Chinese OEMs a significant portion of our bookings last year and this year, we will 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, There are several of those -- the leading Chinese local OEMs who are very focused on export to Europe and possibly to North America, as well as manufacturing in Europe and North America. I would say we are working now with virtually all those who are entertaining that, who are looking for supply solutions that meet the requirements of the European and the U.S. markets, which tend to be a little bit different from what's in the China market. So we feel like we're well positioned for both growth in China as well as very well positioned as they decide to either export or move production outside of China.

Yeah. In China, we're running -- the exact number -- probably close to 70% local bookings versus the multinational JVs last year. We were up over a little over 60%. So it's been certainly moving in that direction...

Take 70% of $6 billion.

Yeah. One second, Chris. Let me make sure I'm getting the right number. SPS 11.2% in Q1. Yeah, I would say you're in the call of 12% to 12.5% for coming out of the year.

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

Yeah. Chris, I think at current levels, it's fair to assume we would continue to buyback stock at fairly healthy levels. The reality is we view our stock as 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.

Yeah. I think Shreyash, 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. Obviously to move a bit with vehicle production, we're obviously working through the high voltage headwind at the moment. We've seen those schedules come down. But as I talked about in my prepared remarks, we're seeing good hybrid growth. We're seeing the internal combustion volumes come back up. So -- and Kevin talked about from a portfolio perspective sort of fully capable of servicing all powertrains. There's really no capability or product line that we lack from that perspective.

Yeah. Automation is longer term as Kevin talked about. 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 it shouldn't surprise folks. We've looked at the cost structure. We've had a salary and overhead reduction, took out some overhead. We always do that. We've been pretty vigilant over the past 10 years at least of managing that cost structure and really what you're seeing now is the benefits of that as well as what we talked about in investor day. I mean, I appreciate the high voltage revenues come off. But a lot of other things we talked about investor day are on track, right? We talked about that engineering rotation. We talked about getting engineering down as a percent of sales. We talked about as you recall that performance bucket with a few hundred million dollars of performance initiatives every year between '23, '24 and '25. And we are ticking the boxes on those and that's where you're seeing that margin improvement.

Yeah. RMB is 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 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. The guide we had at 18.25 as I said in my prepared remarks, we expect that peso to strengthen over time. It is obviously not happening and I think our view as we do with most macro headwinds once it's clear, they're not abating is we put it into the guide and we take out cost to offset it and that's effectively what we've done. We also as I said have a benefit of a hedge we put in place where 90% of our peso exposure is protected below 17, which is why we peg to the 17 rate.

I'll start with -- our customers and knowledge of their customers, our customers are still pushing forward with the introduction of battery electric vehicles. So you can hear from their public statements. They're still standing behind them and certainly pushing in that direction. In addition to that, they're talking about launching incremental plug in hybrid or hybrid programs as well to augment their overall product portfolio. So likely near term, our general view is you'll see a richer mix of plug in hybrid relative to what we've had historically on a go forward basis from an overall growth rate of electrification, we'll see. Obviously, it's been a couple of challenging quarters as it relates to our high voltage revenue growth. As Joe and I have mentioned, over back end of the quarter and in April, we saw a significant reduction in schedules. They seem to have stabilized. But as we get closer maybe into the middle of the year, we'll be able to get more visibility as to what we think that growth rate looks like. But I think it's fair to assume you're going to see more plug in hybrid mix relative to battery electric vehicle mix.

Yeah. Maybe I'll start. Listen, I think we'll go back to 2018. We went through COVID 2020, 2021 and then we went through semiconductor challenges. So we had three years there that were extremely choppy from an overall operational standpoint and margin standpoint. We feel like the macro environment has largely at least stabilized from an availability of products to keep the supply chain full. So we're able to operate much more efficiently and effectively as are our customers, as are our suppliers. So it gives us greater ability to plan. As Joe mentioned in his prepared comments, we're always focused on reducing costs, but we did spend a year or so really focused on keeping our customers connected. And since 2023, when things stabilized, we've been really, really hyper focused on how do we significantly reduce our cost structure. That's through operational initiatives within the four worlds of our plants as well as initiatives in our engineering factory, as well as continuing to reduce our overall overhead. So I think I mentioned we reduced salary payroll last year over 10% by delayering, by consolidating, by making the organization operate more efficiently. That's something we'll continue to do.

Typically, this is a business where you see margin expansion from first half to back half because back half tends to have more production than the first half than the first half does. We'll see how this year plays out. There's a little less clarity right now as we sit here based on what we've seen over the last month, but we'd expect to see continued operating improvements -- continued performance improvement really across all aspects of our cost structure. So it's everything. It's really everything.

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.

Yeah, Dan, it's Joe. We'll be -- we're forecasting 20% plus -- a little bit over 20% for the year. So we'll have like things as we go back to just the old way the businesses historically run. It won't shoot 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 have a bit. But no, that business is strong and would see that continuing. As Kevin mentioned, we had close to $2 billion of bookings in this quarter alone on active safety. So continue to see very strong traction on active safety.

Yeah. Dan, I would say the dynamics move from direct material inflation to very much labor inflation. So 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. So I would say we've seen significant slowdown in sort of those direct material costs that needed to be passed through with customers and it's more of an inflation discussion around labor and those.

There's a couple of levers we have to pull on those. And like we talked about, we've started to take cost actions to deal with it and I think there'll be a number of things that you see. I think long term and we've said this for a while, we'll return to that net price was right around 1.7% before all the material inflation, would expect that to continue long term. I'd have that in the outlook. But I think labor inflation is something we'll deal with both at the customer level to the extent customers don't want to relocate facilities or get serviced out of other countries will have increases. And in other cases, we will move the plants.

Price commodity because you get the copper and inflation in there as well, it was about $35 million positive on the revenue line.

Yeah. That's an interesting question. I'm not sure if the consumer experience ultimately would be better on an electric vehicle of that vehicle architecture versus this architecture around internal combustion engine. I think what we would say ultimately is the BEV architecture would be more optimized and ultimately would allow for savings both from an architecture standpoint and from an ADAS system standpoint, right? And would enable a much more optimized vehicle architecture, hardware architecture as well, software architecture. So it would provide more flexibility as it relates to upgrades, enhancements, things like that. It would make it easier. And maybe the way I would translate easier is into more cost effective. So that's one of the kind of our views as we take a step back. We can't perfectly predict the timing of all aspects of the future. But we still believe there's a significant momentum towards electrification, towards smart vehicle architecture, towards a software defined vehicle and it all comes down to performance and cost. And there's an element of gravity there.

Yeah. That's a great question and a complex question. Listen, I agree that AIML has changed. It's changed a number of things. And you're right, it's actually changed how we approach a number of the products that we develop, like radar solutions, right, is a great example, any perception solution. So I think it's a pretty easy argument to it, pretty easy argument to make today that the utilization of tools like AIML allows the advancement to move much faster in 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. Use of AIML allows us to drive down the cost of the perception system, which allows us to actually reduce the compute in this particular platform and reduce cost.

I think one of the items that -- so we're using AIML. One of the items that we think is somewhat unique relative to the automotive industry. And I guess one could debate whether it's necessary or not, but the concept of safety and traceability and the complexity that things like AIML can introduce to that in terms of lack of traceability makes that calculus a bit more complex. And when we sit down with our customers today and talk about how systems that are integrated operate, they want to know why things or how things sail or how they can determine things sail. Now we'll see if that changes at some point in time in the future. But now it needs to be a balance between an element of the traditional rules based and a full AI -- generate AIML based.

It's a different product line. So if 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 have that produce products for both low voltage as well as high voltage solutions. So there's some ability to pivot there. When you think plug in hybrid and hybrid, there's some overlap between that product portfolio that goes on a BEV vehicle that would also go on a plug in hybrid or a hybrid vehicle. There's some work that needs to be done, but it depends on the specific situation and oftentimes, it's not real significant to shift from one to the other.

Yeah. It's not something out sized, Tom, that you'd see, like pop up in capex or something. I think it can be managed within the existing business financial framework.

Yeah. We brought our outlook for vehicle production down 1 point. The biggest piece of that is that related is because Joe and I have talked about, there are some OEMs that we've seen an increase in production schedules for products at internal combustion engines, but net-net, we view production to be down.

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

Great. Thanks.

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