Aptiv PLC (NYSE:APTV) Q4 2022 Earnings Call Transcript

Aptiv PLC (NYSE:APTV) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good day, and welcome to the Aptiv Q4 2022 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jessica Kourakos, Vice President of Investor Relations and ESG. Please, go ahead.

Jessica Kourakos: Thank you, Lynnette. Good morning and thank you for joining Aptiv’s fourth quarter 2022 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 we’ll address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for our Q4 financials as well as our full year 2022 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, which 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, including uncertainties posed by the COVID-19 pandemic, the ongoing supply chain disruptions and the conflict between Ukraine and Russia.

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, Jessica, and thanks, everyone, for joining us this morning. Let’s begin on slide three. 2022 was another year with record new business bookings and strong growth over market, driven by our industry-leading portfolio of advanced technologies, as well as our continued flows execution that’s kept our customers connected in this challenging environment. Highlights for 2022 included $32 billion of new business bookings, driven by significant active safety, high-voltage and smart vehicle architecture awards. $17.5 billion of revenues, representing 15 points of growth over vehicle production during the quarter, bringing our full year growth over market to 11 points. Operating income and earnings per share for the full year of just under $1.6 billion and $3.41, respectively, reflected the benefit of strong revenue growth and customer recoveries, partially offset by costs related to COVID and ongoing supply chain disruptions, which Joe will cover in greater detail a little later.

We also enhanced our portfolio of safe, green and connected technologies with the additions of Wind River and Intercable Automotive, both of which closed during the fourth quarter. I’ll expand on these, as well as our enhancements to our operating model on the next slide. As the industry transitions to fully electrified software-defined vehicles, we continue to enhance both our operating model and industry-leading portfolio to further strengthen our capabilities to solve our customers’ toughest challenges. As legacy functional and domain-based architectures are increasingly replaced by approaches aligned after smart vehicle architecture, it impacts both the way we design and sell our solutions. This means further strengthening our One Aptiv account-based model, positioning us to engage earlier in the development process and, therefore, more effectively design, specify and deliver optimized solutions across our portfolio, resulting in stronger customer relationships and greater ability to capture value from all our full system solutions.

We further enhanced our regional operating model, by increasing local capabilities and empowering those closest to the customer to address their needs quickly and efficiently. Additionally, the continued rollout of our Net Promoter System has resulted in actionable insights to improve our efficiency, our resiliency and service levels, thereby increasing customer intimacy. Lastly, proactive initiatives and risk mitigation actions related to our supply chain have contributed to our ability to keep customers connected through significant disruptions, giving them confidence in our ability to execute on current and future platforms. At the same time, we recognize that the software defined electrified vehicles consumers are demanding will require innovative new solutions and we’re investing organically and inorganically to position ourselves for that future.

Our acquisition of Wind River significantly strengthens our capabilities in software with an industry-first cloud data software platform that speeds development, streamlines deployment and enables full life cycle management for the software-defined vehicle, significantly reducing cost and time to market for our customers while also unlocking new business models. The acquisition of Intercable Automotive enhances our portfolio of high-voltage busbar and interconnect technologies and provides near-term synergies as we expand Intercable’s manufacturing capacity in North America and in China. Lastly, we’re also investing organically in solutions that further expand our portfolio of industry-leading high-voltage electrification solutions such as integrated power electronics and battery management systems.

To help fund these initiatives, we’ve implemented structural cost reductions that will save roughly $100 million in annual expense, which will take full effect throughout 2023. These actions further improve the efficiency of our underlying cost structure while allowing us to make investments that better position Aptiv for long-term outperformance. As shown on Slide 5, nowhere is the strength of our track record and portfolio more evident than in our new business bookings performance. 2022 bookings reached a record $32 billion, an increase of over 3% from last year’s record of $24 billion. advanced safety and user experience bookings totaled a record $12 billion, driven by $4.2 billion of customer awards for our smart vehicle architecture solutions across three different OEMs, including central vehicle controller and Power Data Center Bookings with the Volkswagen Group, bringing cumulative customer awards for SBA products since our launch to over $5 billion with five different OEMs. Active safety bookings of $5.2 billion, representing a combination of next-gen hardware and perception software building blocks as well as full system turnkey awards, including an award from a large European-based global OEM as well as the Chinese OEM BYD, which represents the seventh customer to select Aptiv scalable platform to efficiently support a wide range of advanced safety features.

The strength of our portfolio of active safety solutions is reflected in the $20 billion of cumulative bookings since 2018. Signal Power Solutions new business bookings reached a record $20 billion for the year, the result of strong growth in low voltage vehicle architecture, including a $2 billion like commercial vehicle booking with a major North American OEM in the fourth quarter and continued strong bookings in adjacent markets. A record $4.2 billion of high-voltage electrification bookings, up from roughly $2 billion just a few years ago, including awards from several North American, European and China-based OEMs, representing both traditional and new mobility providers across our electrical architecture and engineered components product lines, bringing cumulative high-voltage customer awards to $14 billion since 2018.

Our industry-leading portfolio, combined with our unparalleled ability to execute highly complex programs, even in today’s challenging environment positions us to continue to win new business, resulting in clear line of sight to roughly $32 billion of business awards during 2023. Moving to Slide 6 to review the segment highlights. Beginning with the Advanced Safety & User Experience segment. This past year, we became the first technology provider to successfully launch a full stack hands-free Level 2+ ADAS system with a European-based global OEM. This is a great example of our full system capabilities applied to active safety as well as our flexible business model and open platform approach, which allows OEMs to leverage their own innovations, as well as those from Aptiv and other third parties to deliver a unique, high-performing driving experience.

We’re also deeply engaged with several customers regarding Wind River’s cloud-native software platform, which we’re confident will lead to commercial awards over the course of 2023. Turning to Signal & Power Solutions segment. We continue to be perfectly positioned with an industry-leading portfolio of electrification solutions that span multi-voltage distribution, connection and cable management. Reflecting the accelerating demand for battery electric vehicles, the $4.2 billion of high-voltage new business bookings I referenced on the prior slide, accounted for over 20% of the segment’s total bookings, and high-voltage revenues increased 33% over the prior year, 28 points over vehicle production. In addition, our new offerings in power electronics and battery management systems are gaining traction as demonstrated by a significant integrated power electronics and BMS award from a North American-based global OEM, where a solution will be used across all their bet platforms beginning in 2025.

And the pipeline of customers evaluating the deployment of a similar solution is growing. Our customers recognize our track record of flawless execution, which is a driver behind the customer service, quality and supply chain awards we received. The cost recoveries we negotiated and the record level of new business bookings we’ve been awarded. Our full system edge-to-cloud vehicle architecture solutions have enabled us to pursue high-growth margin accretive opportunities that position us to continue to deliver outsized revenue growth and margin expansion for years to come. Moving to Slide 7. At this year’s CES event in Las Vegas, we brought the software-defined vehicle to life, showcasing Aptiv’s unique full stack capabilities. We debut Wind River software platform, fully integrated with a vehicle powered by SBA.

Designed vehicle demonstration of the industry’s first end-to-end cloud-native DevOps tool chain and vehicle software platform, showed how these solutions improve development speed, quality and efficiency, unlock new business models and enable software functionality to evolve and improve over the life cycle of the vehicle. We also showcased our turnkey Gen 6 ADAS platform, including differentiating KPIs and a public road demonstration. Our radar-centric solution, which is vision agnostic, utilizes artificial intelligence and machine learning to increase the availability, robustness and efficiency of the perception system, resulting in a solution that can be up to 65% more energy efficient, and 25% more cost effective than equivalent vision-centric solutions.

Lastly, we continue to highlight the commercial readiness of our Smart Vehicle Architecture solution. First, by deeply integrating it into a production vehicle, which enabled us to demonstrate a wide range of in-cabin user experience features as well as the fusion of our interior and exterior sensing, resulting in greater safety, comfort and convenience for passengers. And second, through our SVA demonstrator, which enabled guests to see firsthand how these advanced architectures reduce complexity, weight and mass, while also showcasing our latest high-voltage electrification solutions. With over 400 customers, 150 partners and 75 suppliers visiting the Aptiv CES pavilion this year, we reinforced our growing pipeline of commercial opportunities and set the stage for the deeper, more tailored engagements, which I referenced earlier.

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Moving to slide eight. Before I turn the call over to Joe, I wanted to touch on our outlook for 2023, which Joe will cover in more detail. Building on the foundation from 2022, we expect a very strong year for new business bookings, revenue growth over market and margin expansion. Our robust business model and portfolio of advanced technologies are resulting in sustainable value creation. We continue to widen our competitive moat with investments in advanced technologies and capabilities that drive our operational excellence. This has enabled us to demonstrate strong outperformance even in a weak production environment, as demonstrated by our 2023 outlook, where we continue to expect 8 to 10 points of growth over vehicle production, and 140 basis points of operating margin expansion and strong cash flow growth.

With that, I’ll now turn the call over to Joe to go through the numbers in more detail.

Joe Massaro: Thanks, Kevin. Good morning, everyone. Starting with a recap of the fourth quarter on slide nine. As highlighted earlier, the business drove strong growth in the quarter, with revenues of $4.6 billion, up 19% over prior year and representing 15 points of growth above underlying vehicle production. The outgrowth was across both segments, despite continued semiconductor supply chain constraints and COVID disruptions in China that negatively impacted customer production. Adjusted EBITDA and operating income were $674 million and $523 million, respectively. OI margins expanded 380 basis points versus prior year, reflecting strong flow-through on incremental volumes, the benefit of customer recoveries of direct material cost increases and cost reduction actions taken earlier in 2022.

Supply chain disruption costs were favorable by approximately $25 million from the prior year, and foreign exchange was negative in the quarter, reflecting approximately 20 basis points of headwind. EPS in the quarter was $1.27, an increase of 87% from the prior year, driven by overall earnings growth and interest income from higher cash balances maintained prior to the closing of Wind River, partially offset by interest expense and tax expense on higher earnings. The notional EPS impact was a loss of $0.29, an $0.08 increase over last year. Lastly, operating cash flow totaled $933 million and capital expenditures were $178 million for the quarter. Looking at the fourth quarter revenues in more detail on slide 10. Our growth was broad-based across all regions, despite the disruptions in China and continued supply chain constraints.

Price downs net cost recoveries and commodities was favorable by approximately $100 million. Foreign exchange negatively impacted revenue by approximately $300 million in the quarter and late quarter shutdowns in China was a negative $60 million. From a regional perspective, North American revenues were up 21%, or 13% above market, driven by our active safety and high-voltage product lines. In Europe, which continues to be impacted by acute supply chain constraints and macro concerns, adjusted growth was 22%, driven by strength in both segments. And in China, revenues were up 8% or 14 points over market. Moving to the segments on the next slide. Advanced Safety and User Experience revenues rose 15% in the quarter or 11 points of growth over underlying vehicle production.

Segment adjusted operating income was $77 million, up over 100% year-over-year, reflecting strong flow-through on incremental volumes as well as favorable net price and recoveries, partially offset by the negative impact of foreign exchange in the quarter. Signal and Power revenues rose 20% in the period or 16 points above market. Segment operating income improved by 64%, driven by strong flow-through on incremental volumes, favorable net price recoveries and commodities and lower supply chain disruption costs that partially offset the negative FX impact. Turning now to Slide 12 and our expectations for global vehicle production in 2023. Based on customer schedules, we are forecasting a decrease of 1% for the year reflecting approximately 85 million units of global production.

Regionally, we expect North America flat at approximately 15 million units; Europe, down 2% or approximately 16 million units; and China flat at approximately 27 million units. As we discussed during the fourth quarter of last year, we remain cautious about the impact of macroeconomic considerations, particularly in Europe as well as the impact of customer supply chain disruptions, including continued constraints of certain semiconductors. Although the overall supply of semiconductors has improved sequentially, we continue to see acute constraints, particularly in Europe and North America that impact overall customer production levels. Moving to Slide 13, you’ll find our 2023 full year outlook, which now includes Wind River and Intercable Automotive.

We expect revenue in the range of $18.7 billion to $19.3 billion, up 8% at the midpoint compared to 2022 with 9 points of growth over market. Note that our growth over market excludes the impact of acquisitions. As noted previously, we remain confident in our multiyear growth over market target of 8% to 10%, supported by continued success in our key product lines and high demand for our portfolio of advanced technologies. EBITDA and operating income are expected to be approximately $2.7 billion and $2 billion at the midpoint, reflecting strong flow-through on volume growth, continued margin expansion in high-growth product lines and lower COVID supply chain disruption costs. Adjusted earnings per share, excluding amortization is estimated to be $4.25.

EPS growth of 25% is driven by strong earnings growth, partially offset by an increase in the expected tax rate of 14.5% and higher net interest expense. The loss related to Motional of $310 million, represents a $0.07 increase over last year. We expect 2023 operating cash flows of $1.9 billion reflecting the higher earnings as well as improved working capital during the year. Capital expenditures are expected to be approximately 5% of revenues or $950 million for the year. With respect to capital deployment in 2023, we will continue to maintain a well-balanced approach to capital allocation as we continue to prioritize organic investments in the business to support our portfolio of advanced technologies and record new business awards. Execute our M&A strategy and focus on transactions that enhance our scalability across both the brain and nervous system of the vehicle, accelerate our speed to market with relevant technologies and access new markets.

And while we will continue to maintain our current financial policy, as it relates to our balance sheet leverage profile to the extent we can take advantage of market disconnects, we will be opportunistic in our share buybacks, returning cash to our shareholders. To that end, our 2023 guidance assumes we offset the impact of stock compensation dilution in 2023 via share repurchase, a practice we had in place prior to 2020. On slide 14, we provide a bridge of 2023 revenue and operating income guidance as compared to 2022. Starting with revenue. Our growth over market, combined with the decrease in global vehicle production, resulted in a net contribution to revenues of over $1 billion. The full year benefit of direct material cost recoveries will effectively offset changes in index commodity and price downs.

FX is estimated at a negative $300 million. And lastly, we expect Wind River and Intercable to contribute approximately $700 million for the year. Turning to adjusted operating income. We expect margin expansion of 110 basis points before the benefit of acquisitions, driven by continued strong flow-through on incremental volumes of approximately 30% and the negative impact of price downs, commodities and incremental inflation are partially offset by customer cost recoveries and higher direct labor and other indirect costs are more than offset by increased operating performance, including the benefit of cost saving actions, improved manufacturing performance, as well as a reduction in supply chain disruption costs, which are estimated to be $180 million in 2023.

The addition of Wind River and Intercable will increase 2023 operating income to $2 billion, or 10.5%, reflecting margin expansion of 140 basis points and incremental margins of over 27% for the year. With that, I’d like to hand the call back to Kevin for his closing remarks. Thanks, Joe. I’ll wrap up on slide 15 before opening the line up for questions. As the management team reflects on 2022, it’s clear that we strengthened our competitive moat and accelerated our commercial momentum, supported by a highly differentiated portfolio of safe, green and connected technologies. Together with our strong track record of operating execution, Aptiv has never been better positioned to provide our customers with full system solutions that advance the industry’s vision of the software-defined vehicle.

As a reminder, we’re hosting our 2023 Investor Day on February 14 in Boston, where we’ll provide our view on the industry and how we plan to usher in the next phase of our business strategy. In closing, I’m proud of what the Aptiv team accomplished during 2022 and have never been more excited about what we will deliver in the years ahead. As you’ll see in here on February 14, the best is yet to come. Operator, let’s now open the line up for questions.

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Q&A Session

Operator: And we’ll take your first question from Rod Lache.

Kevin Clark: Good morning, Rod.

Rod Lache: Yes. So, I guess my first question is on your bridge for 2023, you have $400 million of additional labor depreciation economics price. You offset that with $400 million of performance and it was either $135 million or $180 million of lower disruption costs. I’m just wondering about — just in light of the still inflationary environment that we’re seeing pricing is still negative. And at what point do you think you start to kind of get ahead of this and recover some of these disruption costs or headwinds.

Joe Massaro : Well, Rod, it’s Joe. I’ll start. I mean I think we have gotten ahead of it, to be honest with you. I mean, our business equation is working, right? Performance is offsetting labor inflation and the pricing and the material inflation, you see in that $100 million. We’ve vetted out from a top line perspective, customer recoveries this year, which are obviously benefiting from a full year effect or effectively offsetting price downs on the top line. So I think our view, and Kevin can jump in. I think our view is that the team has done a great job of pushing direct material costs through. And we’ve started to get performance up, including working hard to get the supply chain disruption costs out of the P&L.

Rod Lache: Yes, I guess, to just maybe clarify my question, Joe. Like I think that you had talked about $295 million of disruption that you’d start to recover over six quarters. And when I say ahead of it, in my mind, at least that means the positives are greater than the negatives. It looks like they’re sort of matching at least when optically, when you look at the bridge?

Joe Massaro : Certainly offsetting. Yes, we ended 2022 with about $330 million of supply chain disruption costs. We’ve taken that down to $180 million in the outlook. So we’re still assuming $180 million of disruption costs. It continues to be a difficult operating environment for certain customers, and we’re still seeing some disruptions, obviously, China in Q4, December, in particular, was heavily disrupted with COVID. So I think we continue to work through it. I think you’re right. We had always talked about sort of four to six quarters. So we’ve got some to continue to work through, but feel like we’ve made a pretty big step here in 2023.

Kevin Clark: Yes. Maybe if I can add on, I think it’s a great question. I think one of the challenges when you talk about getting full ahead of it, you need to have better predictability of what you’re getting ahead of. I think Joe’s point on the fourth quarter of 2022 in December, specifically to give you an example, roughly 90% of our employee base in China was suffering for COVID. That’s tough to predict. Yet at the same time, we were able to keep our factories running and keep our customers connected, which has been our ultimate objective, right? So operating in a less efficient way and being somewhat reactive in an environment where we can’t always predict what’s going to happen from a supply chain standpoint or COVID stand.

Rod Lache: Thanks for that. And just secondly, when you announced the closing of the Wind River deal, in your release, you talked about some recurring operating expenses and costs that led to changes in the terms. I was hoping you can maybe talk a little bit about what you meant by that? And what were the implications financially going forward?

Kevin Clark: Yes. I think the net results for Wind River from a revenue growth standpoint, a margin standpoint, accretion dilution standpoint remain largely unchanged. We’re not going to get into all the specifics, but operationally, there were some changes that we needed to make. And in light of that, we are in a position to renegotiate the transaction.