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Aptiv PLC (NYSE:APTV) Q3 2023 Earnings Call Transcript

Aptiv PLC (NYSE:APTV) Q3 2023 Earnings Call Transcript November 2, 2023

Aptiv PLC beats earnings expectations. Reported EPS is $1.3, expectations were $1.2.

Operator: Please standby. Good day, and welcome to the Aptiv Q3 2023 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jane Wu, Vice President of Investor Relations and Corporate Development. Please go ahead.

Jane Wu: Thank you, Marjorie. Good morning, and thank you for joining Aptiv's third quarter 2023 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 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 third quarter financials, as well as our full-year 2023 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.

A technician working on an automotive electronic, showcasing the company's dedication to innovation.

Joining us today will be Kevin Clark, Aptiv's Chairman and CEO; and Joe Massaro, CFO and Senior Vice President of Business Operations. 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. With that, I'd like to turn the call over to Kevin Clark.

Kevin Clark: Thanks, Jane, and thanks, everyone, for joining us this morning. Let’s begin on Slide 3. We delivered another strong quarter exceeding our expectations despite some headwinds. Touching on a few of the highlights, new business bookings totaled $6.6 billion, bringing the year-to-date total to a record $27 billion. Revenues increased 7% to $5.1 billion, 2 points over the growth in vehicle production, reflecting double-digit growth in ASUX revenues and S&PS revenue growth in line with global vehicle production, the impact of the UAW strike in North America, as well as customer mix. EBITDA and operating income were both records totaling $727 million and $560 million respectively, reflecting solid flow-through on volume growth and ongoing operating performance initiatives, partially offset by unfavorable FX, timing related to customer recoveries, and the impact of the UAW strike.

We expect continued sequential margin expansion as the headwinds related to supply chain disruptions continue to dissipate, customer recoveries are closed and the benefits from further cost structure actions take hold. The team remains laser-focused on continuing this trend in the fourth quarter and into 2024 and beyond. Turning to Slide 4, touching on the key themes and macro trends that have had an impact on our operations this year. Our customer relationships and new business bookings are stronger than ever, driven by robust demand for smart vehicle compute and software, high voltage electrification and ADAS solutions. As automotive OEMs continue on the path toward fully electrified, software defined vehicles, we are their partner of choice, delivering unique full system solutions that provide enhanced features and greater flexibility all at a lower cost.

We're also benefiting from the transition to the software defined future across several other industries with opportunities in the commercial vehicle, telecom, AMD and industrial markets. Global automotive vehicle production has been stronger than we initially forecasted, as easing supply chain constraints have led to fewer disruptions enabling increased production. Our strong year-to-date results had put us well on our way to reach the top end of the full-year guidance we laid out in early August. However, the UAW strike, which affected the production schedules of our top three North American OEM customers, has had an impact on both our third and fourth quarter results. While tentative agreements have been reached with all three North American OEMs, there remains some uncertainty on vehicle build schedules as the OEMs work to finalize their plans to ramp up production during the balance of the fourth quarter.

Our operating teams in North America are working closely with our customers and supply chain partners to help accelerate the ramp up of production and minimize any potential disruptions. Moving to Slide 5. As already mentioned, new business bookings during the quarter were $6.6 billion, bringing our year-to-date total to a record $27 billion on track for our target of $32 billion for the full-year. Advanced Safety and User Experience bookings totaled $2.2 billion, driven by over $1 billion in active safety awards. Signal and Power Solutions bookings reached $4.4 billion, including $1.1 billion in bookings for our high voltage electrification solutions split across geographies, bringing the year-to-date total to $4.3 billion, already surpassing last year's record of $4.2 billion.

As OEM strategies around their vehicle architecture platforms evolve, one constant will be the need for solutions that deliver improved performance at a lower cost. And Aptiv is perfectly positioned to leverage our full system capabilities to enable a fully electrified, software defined vehicle. Turning to Slide 6, to review our Advanced Safety and User Experience segments third quarter highlights. Revenues increased 13%, 8 points above vehicle production, the result of a 30% increase in active safety revenues, reflecting strength across all regions as the launch of our Level 2 and Level 2+ ADAS solutions continue to ramp. Operating income totaled $109 million, reflecting a 7.6% operating margin, an increase over the prior period, but sequentially lower than the second quarter due to the seasonality of Wind River revenues and the timing of customer recoveries.

New business bookings totaled $2.2 billion and included $1.2 billion of active safety customer awards, including a major award with a large German truck manufacturer underscoring the strength of our high performance radar technologies and their applications outside of the automotive industry. As demand continues to increase for more advanced active safety solutions, our unique insights and proven domain expertise position Aptiv to deliver differentiated value to our customers. To that end, we're excited to have recently launched our automated parking solution, an additional feature to our AI/ML-enhanced Gen 6 ADAS platform to address complex parking scenarios. Aptiv's unique solution enables fully modularized automated parking features that scale from Level 2 to Level 4, from auto parking assist and memory parking all the way to auto park delay.

Automated parking is just one of the many features that we have under development in our Gen 6 ADAS technology roadmap, which will scale to a full Level 3 ADAS platform in 2026. Turning to the Signal and Power Solutions segment on Slide 7. Third quarter revenues increased 5% in line with global vehicle production. High voltage revenues increased 13%, reflecting strong growth across all product lines, partially offset by customer mix in Europe and Asia and the impact of the UAW strike in North America. The $4.4 billion in S&PS bookings that I mentioned previously included a low voltage architecture award with a Chinese OEM demonstrating the progress we're making further penetrating the local Chinese OEMs. Another strong quarter for Intercable Automotive with $400 million in new business awards, including a major award with a global customer in North America reflecting continued strong commercial traction and a high voltage system award with a European OEM that includes products across our electrical distribution, connection systems and Intercable Automotive portfolios, demonstrating how our full system approach sets us apart from the competition.

Lastly, we're proud to announce that Aptiv has once again been recognized as an automotive PACE Award finalist. A Rapid Power Reserve solution is a groundbreaking technology that provides a highly reliable, redundant power source for a variety of critical functions, eliminating the need for a low voltage battery in the vehicle, significantly reducing weight, mass and costs. This recognition validates Aptiv's industry-leading technology as well as the value and impact our continuous innovation provides our customers. Turning to Slide 8. We're excited to showcase many of our new innovations at the Consumer Electronics Show in Las Vegas in early January next year. We'll bring our vision of the future to reality including vehicles with Aptiv smart vehicle architecture, running applications for next-generation ADAS and in-cabin user experience.

Vehicles with our complete portfolio of optimized electrical vehicle solutions purpose built for demanding power requirements and Wind River's edge-to-cloud platforms supporting the latest safe, green and connected applications from Aptiv. We'll be providing live demonstrations of how we're leveraging our deep insights into the brain and nervous system of the vehicle, along with Wind River's proven software technology to develop optimized and scalable solutions that meet OEM needs for performance, flexibility and lower costs. Moving to Slide 9. In recognition of our strong commitment to innovation, operational excellence and sustainability, Aptiv was recently named by Newsweek as one of America's Greenest Companies. At Aptiv, our business strategy is directly aligned with our sustainability goals.

We provide solutions of the highest quality, designed, developed and manufactured responsibly that enable a safer, greener and more connected world. In doing so, we take care of our people and our communities while minimizing our carbon footprint. Sustainability is an enterprise-wide commitment, and I'm proud of our entire team for helping us to achieve our goals and ensuring that our company, our customers and our planet continue to thrive. Moving to Slide 10. Before I turn the call over to Joe to walk through the financials, I wanted to touch on our current view of 2024. Building on the solid foundation we've established in 2023, we're well-positioned for continued strong revenue growth and margin expansion despite the macro headwinds. Our safe, green and connected product portfolio is perfectly aligned to the demand for feature-rich electric vehicles, as well as the acceleration of the software defined future in adjacent markets.

Our advanced technologies and capabilities will continue to drive strong performance across multiple industries. While some macro uncertainties remain, we're confident in our ability to execute flawlessly in a dynamic environment. With that, I'll now turn the call over to Joe to go through the numbers in more detail.

Joe Massaro: Thanks Kevin, and good morning, everyone. Starting on Slide 11, as Kevin highlighted, Aptiv reported another quarter of strong financial results exceeding our expectations, despite the impact of the UAW strike in North America. Revenue was up 7% to $5.1 billion, or 2% above underlying vehicle production, excluding the impact of acquisitions. As I will discuss shortly, our growth over market was negatively impacted by the UAW strike in North America, as well as customer mix and program timing in Europe and China. Active safety and high voltage electrification reported strong double-digit growth of 30% and 13%, respectively, and the UAW strike had a negative impact on revenue in the quarter of approximately $80 million.

Adjusted EBITDA and operating income were $727 million and $560 million, respectively, reflecting strong flow-through on increased volumes, continued progress on our ongoing performance initiatives, including reductions in supply chain disruption costs that more than offset higher labor costs. The UAW strike had a negative impact to approximately $30 million, and foreign exchange was a headwind versus last year. Earnings per share in the quarter were a $1.30, an increase of $0.02 from the prior year, primarily driven by the higher operating income, partially offset by higher interest expense. Operating cash was $746 million, a significant increase over prior year, primarily driven by higher earnings and improved working capital levels. Capital expenditures were flat to prior year at $212 million.

Looking at revenue in more detail on Slide 12. Revenue in the third quarter was $5.1 billion, reflecting sales growth of $299 million, representing adjusted growth of 7%. The Wind River and Intercable acquisitions added $153 million of revenue and net price and commodities as well as foreign exchange were slightly positive in the quarter. From a regional perspective, North America revenues was up 10%, reflecting 2 points of growth over market as the UAW strike negatively impacted D3 customer volumes relative to overall North American vehicle production in the quarter. In Europe, revenue grew 10%, or 4 points above underlying vehicle production, driven by strong growth in active safety, partially offset by program timing and slowing growth for certain BEV platforms.

In China, revenue was in line with underlying vehicle production due to our customer mix and slowing BEV growth. As noted earlier, despite the lower growth over market, our Q3 adjusted growth and revenue were in line with our expectations. The lower growth over market in North America is consistent with the strike impact we experienced in 2019, and as we have said in the past, growth over market will be lumpy given customer mix and program timing. Moving to the ASUX segment on the next slide. Revenue rose 13% in the quarter, or 8 points over vehicle production. The outperformance was driven by strength in active safety, where revenue was up 30%. User Experience was down 5% in the quarter, reflecting the timing of certain customer programs and a more difficult year-over-year comparison.

Price downs in the quarter were less than 1%. Segment adjusted operating income was $109 million, up 35% when compared to the same period last year. Year-over-year ASUX margins in the quarter were negatively impacted by the timing of certain material inflation recoveries from customers, which partially offset the flow-through on incremental volumes and improved performance. Also, ASUX margins were lower on a sequential basis versus Q2 2023 due to expected seasonality in Wind River's Q3 results. We had noted this seasonality at the start of the year. The Q3 impact of the UAW strike on ASUX was relatively minimal, reflecting approximately $10 million of revenue and $5 million of operating income. Turning to Signal and Power on Slide 14. Performance in the quarter was strong, despite a challenging operating environment.

Revenue in the quarter was $3.7 billion, an increase of 5% in line with vehicle production, despite a negative strike impact of approximately $70 million of revenue or 2 points of growth. High voltage electrification grew 13% in the quarter, reflecting a slowdown in growth rate from prior quarters. Despite the slowing of EV production, we continue to expect our high voltage business to have a strong double-digit growth in 2023. Price downs in the quarter were less than 1%. Segment adjusted operating income was $451 million in the quarter, up 2% from prior year, including a $25 million negative strike impact. Operating performance including lower supply chain disruption costs were positive in the quarter and offset the negative impact of higher labor costs.

Customer recoveries offset material inflation and the negative commodity impact in the quarter, while foreign exchange, primarily the peso and RMB continued to present a headwind on a year-over-year basis. However, the FX impact is in line with the updated guidance we provided in August. Adjusting for the impact of FX and the strike adjusted EBIT margins for Signal and Power Solutions were 13.3% in the quarter. Moving to cash generation and the strength of Aptiv's balance sheet on Slide 15. As we have discussed in the past, our focus on cash flow generation and cash conversion is as disciplined as our operational improvement efforts. The past quarter was a clear example of that, as we saw the results of our efforts to reduce the higher working capital levels we maintained during the recent supply chain disruptions.

Despite the operating challenges in North America, we were able to improve operating cash flow by over $300 million versus prior year, resulting in cash flow conversion of 200% in the quarter and an ending cash balance of $1.8 billion. Given this strong performance, in October, we opportunistically paid down our $300 million term loan Aptiv's most expensive borrowing, increasing our average tenor from 15 to 16 years. As we have discussed in the past, our sustainable business model is enabling us to convert more income to cash and we believe there is no shortage of attractive deployment opportunities as we continue to maintain a well-balanced approach to capital allocation, including prioritizing organic investment in the business to support our portfolio of advanced technologies and record new business awards, executing our M&A strategy by focusing on transactions that enhance our scalability, accelerate our speed to market with relevant technologies and access new markets, maintaining our current financial policy as it relates to our leverage profile and opportunistically returning cash to shareholders.

I will wrap up with our full-year outlook on Slide 16. Given our continued strong performance and a higher outlook for global vehicle production, we are maintaining our full-year outlook for 2023 despite the impact of the North American strike. Key assumptions now underpinning our outlook include global vehicle production up 6% plus for the year versus a prior estimate of 4%, driven by higher expected production levels in Europe and China. No significant strike impact beyond October 2023. During the month of October, we experienced a negative strike impact of $100 million in revenue and $50 million in operating income. Our outlook assumes a restart of customer production and a return to pre-strike production levels over the coming couple of weeks and no further meaningful disruptions.

Accordingly, we expect revenue in the range of $19.95 billion to $20.25 billion, including the impact of total lost strike revenue of $180 million. I would note that while our revenue and adjusted growth rate remain unchanged, given the Q4 strike impact, we are forecasting our growth over market for 2023 to be below our long-term forecast range of 8% to 10%. EBITDA and operating income are still expected to be approximately $2.8 billion and $2.1 billion at the mid-points, respectively, including total lost strike earnings of $80 million. No change to adjusted earnings per share of $4.75 at the mid-point, and operating cash flow of approximately $2 billion. As Kevin will discuss further in his closing remarks, despite the macro challenges of the North American strike and the significant foreign exchange headwinds, our relentless focus on improving operating performance and cash flow generation has allowed us to continue to deliver in a difficult operating environment.

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

Kevin Clark: Thanks, Joe. I'll wrap up on Slide 17 before we open the line for questions. As Joe and I have discussed, we experienced strong underlying business performance in the third quarter, driven by further easing of supply chain constraints, which partially offset layering headwinds related to material and labor inflation, unfavorable FX rates, and the UAW strike in North America. We continue to see tremendous momentum in new business awards and are well on our way to reaching our bookings target of roughly $32 billion by year-end. While our teams continue to work tirelessly to mitigate the impact of the UAW strike in North America, including the ramp up of North American production, we're executing on further cost structure actions to enhance our operational resiliency.

Our portfolio of advanced technologies and strong operating execution gives us confidence in our ability to further strengthen our competitive position and deliver sustainable value creation for our shareholders. Operator, let's now open the line for questions.

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