Shreyas Patil: 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?
Joseph Massaro: 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. 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 at Investor Day. I mean, I appreciate the high-voltage revenues come off. But a lot of other things we talked about at our 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’ll 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.
Shreyas Patil: 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.
Joseph Massaro: 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. The guide we had at MXN 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 MXN 17, which is why we pegged to the MXN 17 rate.
Operator: We’ll go next to Mark Delaney with Goldman Sachs.
Mark Delaney: 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?
Kevin Clark: 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. 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 the middle of the year, we’ll be able to give 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.
Mark Delaney: 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? And typically, 1Q is the seasonal low point for the year, but can you talk about how 1Q may compare to the normal seasonality with EBIT margin is? Is it more of a typical year or something more unusual in 1Q from 2024?
Kevin Clark: 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. We feel like the macro environment is 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 stabilize, we’ve been really, really hyper-focused on how do we significantly reduce our cost structure that through operational initiatives within the four walls 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 payroll — 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, including continued performance improvement really across all aspects of our cost structure. So it’s everything. It’s really everything.
Operator: We’ll go next to Dan Levy with Barclays.
Dan Levy: 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? And then is the expectation to still see 20% plus growth in ADAS for the year? Are you still seeing launches content growth intact?
Kevin Clark: 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.
Joseph Massaro: 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. But no, that business is strong, and we see that continuing. As Kevin mentioned, we had close to $2 billion of bookings in this quarter alone on active safety. So we continue to see very strong traction on active safety.
Dan Levy: 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? And then how much pricing did you get in 1Q? And what’s the pricing outlook for the year? Are we back to sort of typical 1.5%, 2% price down? Is there any offset that you’re getting in your commercial discussion?
Joseph Massaro: 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. 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. We 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.
Dan Levy: Got it. And then just within the quarter, what was the pricing? Because I said price commodities was one bucket.
Joseph Massaro: Price commodities, because you got the copper inflation in there as well was — it was about $35 million positive on the revenue line.
Operator: We’ll go our next question from Adam Jonas with Morgan Stanley.
Adam Jonas: So Kevin and Joe, nobody knows electrical vehicle architecture and active safety, combined, better than you. I mean nobody. So I’d be curious, in your opinion, from a user experience and from a capability perspective, do you see an advantage of Level 2+ systems fitted to a software-defined electric vehicle versus the capability and experience of the same system attached to an internal combustion nonsoftware-defined vehicle system?
Kevin Clark: 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. 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.
