Q4 2024 Aptiv PLC Earnings Call
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Speaker Change: Good day and welcome to the after Q4 'twenty 'twenty four earnings call Today's conference is being recorded at.
Speaker Change: At this time I would like to turn the conference over to Jean Wood, Vice President of Investor Relations and corporate development. Please go ahead.
Speaker Change: Thank you Jeff.
Jean Wood: Good morning, and thank you for joining after the fourth quarter 2024 earnings Conference call.
Jean Wood: That's release and related tables, along with the slide presentation can be found on the Investor relations portion of our website at <unk> Dot com.
Jean Wood: Today's review of our financials exclude amortization restructuring and other special items and will address the continuing operations of active.
Jean Wood: Reconciliations between GAAP and non-GAAP measures for our fourth quarter and full year of 2024 results as well as our first quarter and full year at 20 to 25 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 <unk> 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.
Kevin Clark: Joining us today will be Kevin Clark Apt as chair and CEO and Maria Executive Vice President and Chief Financial Officer, Kevin will provide a strategic update on the business and Darren 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, Thanks, Jane and thanks to every.
Jean Wood: One for joining us this morning, let's begin on slide three.
Jean Wood: <unk> ended the year on a solid note with fourth quarter results in line with our expectations demonstrating our ability to execute in today's dynamic market environment touching on a few of the highlights new business bookings reached a fourth quarter record of $10 1 billion, reflecting the strength of our portfolio of industry, leading advanced technologies revenue.
Revenue totaled $4 9 billion, that's down 1%. The result of strong revenue growth from new program launches across key product lines offset by continued weakness in production schedules at select Oems, primarily in Europe, and with multinational joint ventures in China quarterly.
Jean Wood: Quarterly operating income reached $623 million, reflecting strong operating performance and ongoing cost reduction initiatives initiatives, which also along with share repurchases and the restructuring of after this ownership interest and the emotional joint venture drove earnings per share growth of 25%.
Jean Wood: Lastly, operating cash flow totaled a record $1 1 billion, allowing us to accelerate our deleveraging, which Ron will discuss shortly.
In summary, our team is doing an exceptional job addressing the evolving needs of our customers. While also operating efficiently and further optimizing our cost structure.
Jean Wood: Yeah.
Jean Wood: Turning to the next slide.
Jean Wood: To cover our major achievements during 2024.
Speaker Change: <unk> continued to capitalize on the safe Green and connected Megatrends, reaching numerous technology milestones during the year, including two awards for full system. Gen. Six eight as platforms, one of which is from an EMEA based OEM that also included in cabin sensing and our full suite of wind river embedded and studio developer software.
Multiple program launches with Mahindra that utilize our integrated cockpit controller, which consolidates multiple east use into a single compute platform capable of supporting higher levels of performance and scalability.
And the expansion of our portfolio of 48 volt connectors to meet increasing demand from Oems.
Speaker Change: Also capitalizing on strong commercial traction with the local Chinese Oems, leading the transition to software defined vehicles, reflecting 16% revenue growth with the domestic Oems.
Speaker Change: Our recent FCA Zone Controller award from Cherry.
Speaker Change: Both wind river and after software.
Speaker Change: And lastly, when rivers want elixir probe, which has generated significant interest from the broader enterprise when exactly system with launch partners, including AWS Capgemini Gemini Intel S T I C and supermicro.
Speaker Change: Notable achievements during 2024 validate the strength of our industry, leading portfolio and at <unk>.
Speaker Change: Solid and new business bookings of 31 billion, including record bookings for signal and power solutions.
Speaker Change: Record operating income and earnings per share.
Speaker Change: Our strong operating performance and optimize cost structure and record operating cash flow positioning us to continue to invest in the business. While also accelerating the return of a significant amount of capital to shareholders, which will result in more than a 20% reduction in outstanding shares.
Speaker Change: We continued executing on our long term strategy, while also launching a record number of new vehicle programs and increasing the resiliency of our supply chain.
Speaker Change: We're extremely proud of our accomplishments in 2024 and the performance of the App Dev team.
Speaker Change: Moving to slide five to review New business Awards as I mentioned on the previous slide our industry, leading portfolio of advanced technologies enabled us to reach just under 31 billion of New business awards during the year.
Speaker Change: Vance safety and user experience bookings totaled $4 4 billion driven by active safety bookings of $2 7 billion, including the two Gen. Six eight as platform Awards I mentioned earlier as well as Gen. Six radar award with a German luxury OEM and two large Japanese Oems.
They know about our solutions bookings reached $26 4 billion, including 8 billion in the engineered components group across the full product portfolio in multiple end markets and a record $18 4 billion in the electrical distribution systems business and lastly across all product lines, a record $7 billion of new business in <unk>.
Speaker Change: China of which over 5 billion was with top local Chinese Oems in the U S based global electric vehicle OEM.
Speaker Change: With a broad portfolio of advanced technologies that provides Oems with increased flexibility at a competitive cost we have clear line of sight over $31 billion of new business Awards in 2025.
Speaker Change: Turning to slide six to review the highlights for advanced safety and user experience segment.
We achieved record revenue and earnings in 2024, underscoring the competitiveness of our product portfolio and the strength of our operating capabilities.
Speaker Change: Revenues increased 2% driven by double digit growth in North America with local Oems in China, partially offset by low single digit declines in Europe and Asia Pacific.
Speaker Change: Active safety revenues increased mid teens, partially offset by declining user experience revenues due to the roll off of legacy programs.
Speaker Change: Operating margins were over 12% the benefit of the continued rotation of our engineering footprint to India.
Speaker Change: Ongoing adoption of when rivers Dev ops tools, which have improved the productivity of our software developers by over 20%.
Speaker Change: When you remember revenues increased 14% in the fourth quarter, primarily driven by studio operator awards in telco, but full year revenues were down slightly the result of the continued slowdown in investment in <unk> infrastructure, and telco impacting closure rates on commercial opportunities and a longer selling cycle for steel.
Speaker Change: The developer in the automotive and industrial markets.
Speaker Change: Increased investment when rivers commercial product organization during the year to enhance our existing portfolio of products, including Dx works, operator developer and also build new products, such as Elixir Pro which we're confident will drive strong revenue growth in 2025 and.
Speaker Change: In addition, the advancements in AI is.
Regarding with providing wind river with incremental growth opportunities.
<unk> looked to reduce cost by moving AI workloads to the edge.
Speaker Change: Overall advanced safety and user experience provide solutions that increased flexibility, while lower cost, making us a partner of choice for our customers. This is reflected in our recent awards, including a central Computer award for active safety and user experience applications across multiple Julie brands.
Speaker Change: An award for an integrated cockpit controller from a major global truck manufacturer.
Speaker Change: Additional awards with a leading Japanese Oems for Gen six radar solution.
Speaker Change: And an award with boost mobile drive core to edge cloud infrastructure for the world's largest open ran deployment, which demonstrates when rivers leadership position in the telco industry.
Speaker Change: Turning to the signal and power solutions segment on slide seven.
Speaker Change: Revenues declined 3% during the year with electrical distribution systems impacted by lower vehicle production schedules with select Oems in North America, and Europe and to multinational JV in China.
Speaker Change: In engineered components group benefiting from growth in non auto markets offset by lower high voltage revenue.
Speaker Change: Further margin expansion in electrical distribution systems, we're accelerating the rotation of our manufacturing footprint to Central America, and North Africa, while also increasing the automation of select manufacturing processes targeting automation levels of 30% by 2026 and over 50% in 2030 as we've discussed previously.
Speaker Change: We've also demonstrated strong commercial momentum across all regions as reflected in fourth quarter bookings, including a significant electrical architecture award with a major north American OEM for their light and heavy duty truck platforms over 1 billion of New business awards with leading local Oems in China and several customer award.
Speaker Change: For interconnect solutions in the aerospace and defense space and industrial markets.
Speaker Change: Moving to slide eight I wanted to touch on our recent announcement to separate the electrical distribution distribution systems business from apt is creating to optimally positioned independent companies each with its own unique product portfolio and financial profile and with greater flexibility to pursue their own individual market opportunities and capped.
Speaker Change: Little allocation strategies.
Speaker Change: By enhancing strategic and operational focus were positioning both abdomen etfs to more effectively address the evolving needs of our customers and to further capitalize on market opportunities, which we believe will drive even greater success and value creation for both companies.
Speaker Change: We're targeting the completion of the separation by March 31, 2026 subject to final approval by <unk> Board of directors and customary conditions in the meantime, we will continue to keep investors updated as the separation progresses and will host investor days for both abdomen Etfs in the fall of this year.
Speaker Change: Moving to slide nine and our outlook for 2025.
Speaker Change: We remain confident that the trend towards greater levels of electrification automation digitalization and connectivity will continue with our portfolio of advanced technologies Apt and is well positioned to address the evolving needs of our customers and to further capitalize on market opportunities across multiple industries.
Speaker Change: The market remains dynamic and the recent announcements regarding trade policy has created incremental uncertainty, which could impact supply chain and vehicle production.
Rune: As a result as rune will discuss shortly we believe it's prudent to include additional conservatism for North American vehicle production in our current outlook for 2025.
Rune: To be clear, our what our outlook is that factored in changes in tax trade or tariff policy by the new administration.
Rune: Monitor the situation closely and take actions as necessary, while continuing to capitalize on growth opportunities, including the continued growth in electric vehicles and ongoing adoption of advanced Adas solutions globally, and improved customer mix by new vehicle program launches and continued penetration and accelerated.
Rune: Both with the leading local Chinese Oems.
Rune: We will continue to optimize our cost structure pursue strategic capital deployment opportunities, including further debt paydown bolt on M&A and the opportunistic return of cash to shareholders and flawlessly execute eds separation targeted for the first quarter of 2026.
Ross: And now I'll turn the call over to Ross to go through the numbers in more detail.
Ross: Thanks, Kevin and good morning, everyone, Kevin shared an overview of the quarter and I'll share further details, including insights into segment performance.
Ross: Additionally in connection with the previously announced plans to spin off our electrical distribution systems business effective first quarter of 2025.
Ross: We are realigning our business into three reportable segments.
Ross: Yes.
Ross: <unk> and <unk> to reflect this change we are finishing supplemental recast financial information for 2024 and 2023.
Ross: With slide 10 after delivered strong earnings growth in the quarter, despite revenues down 1%.
Ross: We continue to drive operating performance improvements across the business.
Ross: Consistent with a third quarter revenue growth was impacted by lower vehicle production at select customers.
Ross: Fourth quarter, adjusted EBITDA, and operating income was $811 million and $623 million respectively with.
Ross: With performance more than offsetting labor economics, which contributed to an increase in operating margin by 50 basis points over the prior year.
Ross: Some commodities, we're at $26 million tailwind in the quarter, primarily the favorable impact of the Mexican peso.
Ross: We delivered quarterly adjusted earnings per share of $1 75, an increase of 25% from the prior year, which primarily reflects the benefits of share repurchases and the restructuring of the emotional joint venture.
Ross: Operating cash flow for the quarter totaled a record $1 $1 billion.
Ross: Capital expenditures were $166 million.
Ross: Finally during the quarter, we paid down $1 1 billion of outstanding debt, including the one 5% Euro notes that were due in 2025.
Ross: As well as $315 million over half of the term loan a due in 2027.
Ross: Moving to slide 11.
Ross: As previously stated revenue was negatively impacted by lower vehicle production, which was down 4% in the quarter driven by revenue on electrified vehicle platforms down 20% globally.
Ross: Net price and commodities were positive in the quarter.
Ross: Partially offset by foreign exchange.
Ross: Revenue performance was mixed across regions with North America up 3% driven by strong active safety growth Europe was down 8% impacted by slower growth in electrified vehicle platforms, partially offset by active safety and China grew 4% with sales to local Oems up.
Ross: <unk>, 5%.
Ross: Bringing full year 2020 for revenue mix in China to 53% with local Oems.
Ross: 4% with multinational debentures and the balance with a large global EV manufacturer.
Ross: Moving to the <unk> segment on the next slide fourth quarter year over year revenues were up 2%. The active safety product line grew 15% in the quarter driven by North America, which grew over 50% as a result of proliferation across platforms.
Ross: And the smart vehicle compute and software product line grew 13% in line with expectations.
Ross: Offset by the user experience product line down 12% in the quarter, reflecting rollouts of legacy programs as well as lower multinational JV vehicle production in China.
Ross: Fourth quarter, adjusted operating income and margin were $193 million and 14% respectively.
Ross: Resulting from significant year over year improvement in operating performance and our continued focus on cost improvement initiatives.
Ross: For the full year revenue grew 2% with strong active safety growth of 16% offset by user experience down 12%.
Ross: Full year operating income and margins were up 58% to $714 million with 440 basis points of margin expansion.
Ross: Turning to signal and power on slide 13.
Ross: Revenue in the fourth quarter was $3 5 billion down 2% due to lower volumes, partially offset by 5% growth in both auto and markets.
Ross: Quarter, adjusted operating income was $413 million or 12, 1% impacted by the lower volume so true.
Ross: For the full year.
Ross: Revenue growth was down 3% as weakness in North America, and Europe was partially offset by 16% growth with local China Oems, while low voltage and high voltage revenue was electrified platforms was down 16% full.
Ross: Full year segment adjusted operating income was $1 7 billion or 11, 8% up 20 basis points, reflecting improved operating performance as well as net benefit from price and commodities, while the year over year FX impact was not significant.
Ross: Turning now to slide 14, and macro expectations for 2025.
Kevin Clark: As Kevin mentioned, we remain cautious about the impact of geopolitical factors, including uncertainty around tariffs.
Kevin Clark: While our outlook does not reflect the direct impacts of potential trade policy changes. We have included additional conservatism in our expectations for North America production.
Kevin Clark: Forecasting active weighted global vehicle production to be down 3% for the year, reflecting approximately 92 million units.
Kevin Clark: Regionally, we expect strong full year revenue growth in North America, Despite production down 5% driven.
Kevin Clark: Driven by content growth with key customers, including the deep Creek, which represents over half of revenue in the region.
Kevin Clark: Europe production down as major European Oems transition from ice to electrified vehicle platforms, which I expect it to grow approximately 20% year over year.
Kevin Clark: In China production flat with local China Oems continuing to win share from multinational joint ventures give.
Kevin Clark: Given the dynamics as well.
Kevin Clark: Our accelerating traction with local beds, we are on track to exit the year approaching market parity on China revenue.
Kevin Clark: Moving to slide 15, and our full year 2025.
Kevin Clark: Outlook, while we expect a lower vehicle production environment, we remain confident that our continuous improvement initiatives will drive strong operating performance and cash flow generation going forward.
Kevin Clark: Given the volatility in production schedules last year, we also want to provide guidance on our expectations for the first quarter.
Kevin Clark: First quarter revenue is expected to be in the range of $4 6 billion to $4 $8 billion down 3% at the midpoint.
Kevin Clark: Operating income and adjusted EPS are expected to be $520 million and $1 50 at the midpoint of the range respectively.
Kevin Clark: Our full year outlook for revenue is in the range of $19 6 billion to $24 billion up 2% at the midpoint year over year, reflecting <unk> up mid single digits.
Kevin Clark: <unk> up low single digits and eds flat.
Kevin Clark: EBITDA and operating income are expected to be approximately $3, one 9 billion at.
Kevin Clark: At $2 $42 billion at the midpoint, reflecting flow through on sales growth and performance and cost reduction initiatives offsetting labor headwinds.
Kevin Clark: Adjusted earnings per share is estimated to be in the range of $7 at $7 60 up 17% at the midpoint.
Kevin Clark: With operating cash flow of $2 1 billion and capital expenditures at approximately four 5% of revenue.
Kevin Clark: On slide 16, we provide a bridge of 2025 revenue and operating income guidance as compared to 2024.
Kevin Clark: Starting with revenue sales growth of over $500 million is expected to be driven by active safety up high single digits year over year, and low voltage and high voltage on electrified platforms up low double digits.
Kevin Clark: We expect annual price declines within the historical range of down one 5% to 2% offset by commodities and recovery rates.
Kevin Clark: FX is estimated to be a headwind of $200 million.
Kevin Clark: Turning to adjusted operating income, we expect margin expansion of 10 basis points at the midpoint of our guide driven by flow through on incremental sales, partially offset by net price commodities and FX was performance initiatives are expected to offset incremental labor inflation.
Kevin Clark: Slide 17 provides further detail on adjusted EPS built.
Kevin Clark: Building on our strong performance last year and year over year adjusted EPS growth of 17% is driven by volume flow through partially offset by higher tax expense due to the OECD pillar, two implementation and our proactive capital allocation actions, including share repurchases and a re.
Kevin Clark: <unk> equity holdings emotional.
Kevin Clark: Before handing the call back to Kevin I would like to touch upon our cash flow outlook.
Speaker Change: While we generated a record $2 $4 billion in operating cash flow into 2024, we expect 2025 to be impacted by a return to growth.
Speaker Change: And the strategic inventory build a semi conductors in anticipation of possible shortages in late 2025.
Speaker Change: Early 2026, which we will calibrate based on availability and demand forecast.
Speaker Change: We'll also continue to maintain a balanced approach to capital allocation.
Speaker Change: Including investing in the business to drive innovation that will deliver sustainable profitable growth.
Speaker Change: And while we increased leverage lost here to return capital to shareholders, including the $3 billion.
Speaker Change: Sure.
Speaker Change: We are ahead of our commitment to de lever our balance sheet.
Speaker Change: Building on our debt Paydown in the fourth quarter as I mentioned earlier.
Speaker Change: Stronger performance in cash we have retired an additional $215 million year to date.
Speaker Change: By extinguishing the term loan.
Speaker Change: Entire Richie.
Speaker Change: And bringing our total debt pay down in the last two months to $1 $4 billion.
Speaker Change: We also plan to accelerate further debt pay down into the first half of 2025.
Speaker Change: We will consider utilizing excess cash to explore bolt on M&A opportunities and Opportunistically return capital to shareholders.
Speaker Change: All within the parameters of investment grade ratings with that.
Speaker Change: I'd now like to hand, the call back to Kevin for his closing remarks, thanks Rune.
Kevin Clark: I'll wrap up on slide 19 before opening the line for questions.
Kevin Clark: As the management team reflects on 2024, we expect the market to remain dynamic and the pace of innovation and continue to accelerate and drive ongoing transformation across industries.
Kevin Clark: Looking forward, while our 2025 guidance does not include the impact of future policy changes, including tariffs. We believe that we've taken an appropriately conservative approach to our outlook.
Kevin Clark: Purpose built our technology portfolio to deliver flexible high performance and cost effective solutions that address our customers' needs on a global scale and at the same time, we remain committed to flawlessly executing.
Kevin Clark: And delivering strong operational performance, enabling us to unlock incremental profitability and deliver long term value to our shareholders in closing I'm proud of what the Optum team accomplished during 2024 and I am excited about what we'll deliver in the years ahead, operator, let's now open the line for questions.
Speaker Change: Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Speaker Change: The speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: We request that you limit your questions to one and Michelle with one follow up so we may take as many questions as possible.
Speaker Change: Ken Please press star one to ask a question, we'll pause for just a moment to allow everyone the opportunity to signal.
Speaker Change: Yeah.
Speaker Change: We will now take our first question from John Murphy at Bank of America.
John Murphy: Oh, good morning, guys.
Speaker Change: Kevin just a first question a question on your on your you know your statement that you're taking somewhat of a conservative outlook, which is totally understandable given what's going on in the world and in the country in the U S right now, but but when you look at that down 5% in North America.
Speaker Change: We said that was closer to flat you know it seems like it would add you know I don't know 360 370 million you know more sales roughly.
Speaker Change: If that were to occur what kind of incremental margin and I'm, saying, yeah right. I mean, it's you know it's a big if what.
Speaker Change: What kind of incremental margin do you think you would you would get on those incremental sales that were to occur.
John Murphy: So John let me start with just a.
John Murphy: Our profits on it I had just in light of a couple of things one just the dynamics from a geopolitical standpoint, the dynamics as it relates to the policy whether that be trade, whether it be tariffs whether it be.
The tax we think it's very very important at this point in time to be.
John Murphy: Uh huh.
John Murphy: To be more conservative quite frankly, and then when you overlay on top of that.
John Murphy: Fact that inventories in North America are still relatively high, especially for the D. Three where we have a fair amount of exposure that's something that we're watching closely as well as we look at the first quarter and the early early part of this year a lot of a lot of progress has been made reducing that.
John Murphy:
John Murphy: In the fourth quarter of last year, but but inventory still remain relatively high so as we came into the year and we thought about the first quarter that was the context or the lens that we were we were reviewing it through.
John Murphy: As it relates to <unk>.
John Murphy: Production in North America being stronger than the first quarter.
John Murphy: It's a possibility.
John Murphy: It's again, it's not in our guidance, we would expect volumes to flow in the range that we've traditionally talked about in that 18% to 22%.
John Murphy: Sort of flow through range.
John Murphy: Volume, but again, we've not included that in our guidance and we've done that very intentionally just given the environment right now.
John Murphy: Okay and then just.
John Murphy: Second follow up on on slide five of the $31 billion.
John Murphy: Gross bookings there was another big year for you as you kind of walk for two to three years out has anything changed in sort of the mix of customers in China and now you're shifting more quickly towards the domestics than you were previously I'm. Just curious were there any updated thoughts there.
John Murphy: I'm not sure if it's more rapid it's been rapid the last 12.
John Murphy: <unk> 12, or 24 months I think we picked up roughly 10 points of share with us.
John Murphy: Mix with local Chinese Oems during 2024, maybe a little bit less than that I think our outlook for 2025 is a full 10 point increase.
John Murphy: So.
John Murphy: At the end of 2025 early 2026, we should be at parity with market mix in terms of vehicle production of locals versus the multinationals.
John Murphy: So we've made a lot of progress and that's what accounts for as you look at our outlook for the full year relative to where we are guiding in the first quarter that some of the pickup in revenues that were seeing now and we expect to continue through the balance of 2025.
Speaker Change: Great very helpful. Thank you very much.
Joe Spak: We'll move next to Joe Spak with UBS.
Joe Spak: Hi, good morning, everyone.
Speaker Change: Kevin maybe you know just going back to sort of the conservatism comment are there any other areas of the outlook that you'd highlight besides that sort of adjustments to north American production.
Joe Spak: And somewhat related I mean, just you know.
Joe Spak: The growth over market I'm wondering I know, it's not sort of an official metric anymore, but.
Joe Spak: Slide in North America, maybe just some commentary on what's what's driving that for the year.
Joe Spak: Yes.
Joe Spak: Again as it relates to <unk>.
Joe Spak: Conservatism overall, the bulk of it sits in North America, I would say Europe in.
Joe Spak: U S. We have a more conservative outlook for EV growth.
Joe Spak: Market right now I believe IHS is forecasting were up roughly 20% growth.
Joe Spak: And EV production.
Joe Spak: Our outlook from a revenue standpoint is roughly 10% plus so mid single digits.
Joe Spak: So we've taken a more conservative approach our revenue outlook given.
Joe Spak: Our experience last year.
Joe Spak: As you look at growth over market in North America, I would say it's really.
Joe Spak: A couple of things.
Joe Spak: <unk>.
Joe Spak: Pace of launch cadence back half of this year.
Joe Spak: Into the start of next year or so new program launches were up roughly 10% last year versus the prior year. A lot of that was was really starting in Q2 through Q3, and Q4 and will benefit from that and then I would say, Joe Theres a little bit of.
Joe Spak: The normalization as it relates to.
Joe Spak: A couple of the Oems, where we saw significant significant corrections or reductions in their vehicle production schedules.
Joe Spak: In 2024, especially.
Joe Spak: In the third and fourth quarters, we expect that to.
Joe Spak: Actively normalize and not see.
Joe Spak: The same level of declines.
Joe Spak: <unk> stability basically and schedules.
Speaker Change: Okay. Thank you for that.
Joe Spak: I guess just as a second question.
I know bigger picture, because there's obviously a lot going on but.
Joe Spak: It sounds.
Speaker Change: Like the automakers.
Speaker Change: I guess should be at least have some contingency planning scenarios, if they have to react to.
Speaker Change: The tariffs even even if you know my impression is.
That's still might be a lower a lower probability, but I guess I'm sure you're doing something similar from a contingency planning perspective, I am curious, though.
Speaker Change: Any of those OEM conversations have cascaded down to you because if anything like this award to need to occur there would obviously need to be some pretty meaningful.
Speaker Change: Meaningful coordination and time and validation and ramp up so I guess I just want to understand you know how.
Speaker Change: How you guys are internally planning for this and the level of coordination across the college.
Speaker Change: Yeah, I would say the level of coordination as is.
Speaker Change:
Pretty good I think the magnitude of what was initially proposed regarding tariffs within North America from an industry standpoint was a bit surprising.
Speaker Change: But I would say we've been working with our OEM customers.
Speaker Change: Late last year early this year as it relates to where possible for deploying inventory.
Speaker Change: As we've talked about.
Speaker Change: A lot last year in terms of supply chain and supply chain visibility, that's something that we're very closely connected with our Oems.
Speaker Change: <unk>, we spent a lot of time with our North American Oems, making sure they understand our supply chains well. So we've developed I would say it.
Speaker Change: At least near term plans.
Speaker Change: In terms of addressing some of the challenges that if there was a flip of a switch.
Speaker Change: How we would deal with that including investments in inventory, including areas, where we have duplicate manufacturing.
Speaker Change: In North America, and other regions and then some discussion.
Speaker Change: I wouldn't call them firm plans at this point in time, but some discussions about alignment of their production schedules and importantly product mix.
To simplify the situation so that we can pre produced products in certain areas, where it's a little bit more complicated to do for.
Speaker Change: For example, wire harnesses products like that so I would say we're reasonably.
Speaker Change: Coordinated to the extent this.
Speaker Change: This gets implemented but ultimately obviously it would be it would be somewhat disruptive.
Speaker Change: Yeah, Okay I appreciate that thank you.
Speaker Change: We'll move to Chris Mcnally with Evercore.
Chris Mcnally: Thanks Carsten.
Speaker Change: Just that you can see the tone of everyone's questions is around the conservatism.
Speaker Change: In the guide in Q1 at Kevin, particularly around the volatility we've seen in mix over the last two years.
Speaker Change: I think one of the things that we all we all struggle with is the.
Speaker Change: The discussion of production.
Speaker Change: That you gave for Q1 and for you you look below IHS.
Speaker Change: Minus 5% minus 3%.
Speaker Change: But that's probably on a on a active regionally adjusted basis have you looked at those numbers for top customers, where your top customers are for for Q1 and full year. Just so we can have a sense of how much the conservatism is built in.
Speaker Change: Yeah listen I, we're not going to provide kind of a specific customer.
Speaker Change: Customers, who are our production schedules right right, Chris and you understand that.
Speaker Change: It is our estimate for production.
Speaker Change: Lower than what customer schedules currently show, yes. They are.
Speaker Change: They are in and our forecasting process and guidance process and planning process.
Speaker Change: We've gone through customer by customer platform by platform region.
Speaker Change: By region. So we've gone through it in detail have those been haircut, yes have they been haircut more than they typically.
Speaker Change: Or for the first quarter, yes.
Speaker Change: Last year was volatile.
Speaker Change: As as you said, we don't want to go through that again.
Speaker Change: But then overlaid on top of that what we what we do worry about is.
Speaker Change: Just given.
Speaker Change: Some of the.
Speaker Change: Announcements regarding trade policy and tariffs that does introduce a certain amount of <unk>.
Speaker Change: Certainty into the system, which in our view will affect supply chains.
Speaker Change: And when it affects supply chain it will affect production.
Speaker Change: It's tough to predict exactly how much.
Speaker Change: But it will so we've gone through that process into the best as we can as we could estimated what we thought Q1 could look like in light of some element of that uncertainty.
Speaker Change: I know thats not the detailed answer.
Speaker Change: We tried to be really.
Got it.
Kevin Clark: Yes, and Kevin I would say I mean, I think trying to figure out March depending upon how tariffs play out.
Speaker Change: Sort of across the street.
Speaker Change: As really done so that does actually super helpful. And you did call out North America, I think which is where the concern.
Speaker Change: <unk>, particularly when we've seen two of the three Oems, who had who had good years sort of last year were already being cautious on Q1, and you mentioned the third who was going to rebound.
Speaker Change: A simple one for me I I don't know if this is has been answered yet I apologize if it has just sort of peso benefit you.
Speaker Change: Year over year.
Speaker Change: We've been sort of waiting for it got a little bit of help in second half, but with peso at 'twenty one should this be a tailwind.
Speaker Change: Material margin in 'twenty five thanks, so much.
Speaker Change: Hey, Chris it's bottomed out yet and it's all about managing risk right and so.
Speaker Change: We tend to take out hedges and that basically is what it is so we don't really expect it to.
Speaker Change: We've kind of covered the risk for 2025.
Speaker Change: Yes, so no no big tailwind as it as it relates to peso weakening is that if if if that continues to happen.
Speaker Change: Excellent. Thanks, so much Steve.
Speaker Change: We'll move next to Dan Levy with Barclays.
Dan Levy: Hi, good morning, Thanks for taking the questions.
Speaker Change: Wanted to ask about China.
China commentary, which shows that you're expecting some underperformance.
Speaker Change: First is.
Speaker Change: The China market.
Speaker Change: Is this just a continuation of what we saw in 2025 or 2024, where.
Speaker Change: It was just a couple of key customers that were dragging down results that you are still growing with the domestics, maybe you could just provide a little more color on the expectations within China and the domestic versus multinational split.
Speaker Change: Yes, we expect.
Speaker Change: China locals to continue to take significant share.
Speaker Change: Not not to the extent that they did in 2024.
Speaker Change: They'll still continue to take significant share.
Speaker Change: We expect the multinationals global multinational traditional Oems to continue to lose a fairly significant share that's factored.
Speaker Change: In our outlook.
Speaker Change: I think the net the net impact for us is our revenue growth.
Versus vehicle production.
Speaker Change: In China is basically.
Speaker Change: Our growth over vehicle production is down 1% versus what it was.
Speaker Change: In 2024, so we're closing that gap.
Speaker Change: We have internally or more.
Speaker Change: I would say aggressive outlook for China local share gain.
Speaker Change: Relative to what IHS has I mean, we're north of 75% share gain.
Speaker Change: In 2025.
Speaker Change: So we expect them to continue to take some share.
Speaker Change: As I mentioned, we'll reduce the differential in growth versus versus market down to about.
Speaker Change: Roughly one point and then in 2026 as I mentioned, where we're at parity.
Speaker Change: Okay, and the underlying domestic growth.
Speaker Change: In line with sort of where where the market is.
Speaker Change: The underlying outlook for domestic growth our outlook is slightly higher than what IHS would have for vehicle production growth in.
Speaker Change: And our growth with those customers is.
Speaker Change: Is over there market share growth rate.
Speaker Change: So we're growing over market with the local Oems in China.
Speaker Change: Okay, great. Thank you.
Speaker Change: As a follow up wanted to ask about some of the cost actions, which you had talked about.
Speaker Change: Third quarter call I think there are a number of things you've talked about salary reductions and flexing the workforce.
Speaker Change: Carol costing factoring pricing.
Speaker Change: I see in your bridge that you were assuming some positive performance, but maybe you could just double click on the extent to which youre seeing benefits on the cost actions, what's the low hanging fruit.
Speaker Change: Versus what's going to take a little more effort to achieve on the cost side.
Speaker Change: Maybe I'll start at a high level in the room can answer in more detail if that's okay.
Speaker Change: The last couple of years.
Speaker Change: Last several years, we've been very focused on reducing overhead you've heard us talk about that.
Speaker Change: Last year, we had roughly a 10% reduction in salaried.
Speaker Change: Workforce this year.
Within our plan.
Speaker Change: We were.
Speaker Change: Targeting the mid single digits.
Speaker Change: Given what we're you know we're hearing regarding trade trade policy will be increasing.
Speaker Change: We'll be increasing that to some extent just to provide additional room and offset any any incremental risk. That's out there. So those are our activities that we have a pretty good muscle for I think as it relates to when you think about footprint rotation that requires a bit more.
Speaker Change: But it is something that obviously, we do when you think about material cost savings, there's two aspects to that there's the leveraging price to price, which the team has done a great job I think the mapping of our supply chain building, our digital twin and.
Speaker Change: Significantly.
Speaker Change: Secondly, increasing visibility too.
Speaker Change: Bom costs, and where there is leverage that's paying dividends, although it requires negotiation that requires effort.
And negotiating with both customer and supplier and then when you think about what's more permanent engineering in low cost solutions or engineering out higher cost components, that's something that group or the team has been doing for the last couple of years.
And.
Speaker Change: A big portion of our year over year material performance in 2025 will be the result of that it is important to note, though that to do that it requires support from our OEM customers.
Speaker Change: And at times customers given constraints on resources are less focused on it but this is an area that we've seen a lot of progress so.
Kevin Clark: Kevin I think that's comprehensive.
Speaker Change: Okay.
Great. Thank you that's very helpful.
Speaker Change: We'll move next to Emmanuel Rosner with Wolfe research.
Emmanuel Rosner: Thanks, Good morning.
Emmanuel Rosner: My first question is around the outlook for eds.
Emmanuel Rosner: I wanted to zoom in to it because he will obviously be its own stock you know soon enough and investors.
Emmanuel Rosner: Need to understand how to value it so.
Emmanuel Rosner: Basically it looks like revenues was down 6% in 2024.
Emmanuel Rosner: In your guidance for 2025, you assume stable.
Speaker Change: Revenue in Eds, and then obviously when you announced the future spin off mid.
Speaker Change: Mid single digit is sort of like the midterm targets in terms of gross for it. So can you maybe just give a little bit of color on what you expect for this year why white just stable if electrification accelerates a little bit maybe in Europe.
Speaker Change: And then what will drive this acceleration to mid single digit through 2028.
Speaker Change: Yes.
Emmanuel Rosner: Yes, Emmanuel so so adjusted growth for Etfs in 2024 was down 5% a big driver of that.
Emmanuel Rosner: Where the customers we mentioned, but then an incremental overlay on as it relates to high voltage or EV.
Emmanuel Rosner: <unk> exposure, so put it in perspective high voltage revenues for that for the ETS business were down just shy of 20% in 2020.
Emmanuel Rosner: Four so significant impact.
Emmanuel Rosner: Throughout the year, our outlook for growth in 2025.
Emmanuel Rosner: Is basically flat growth so about three points over global vehicle production.
Emmanuel Rosner: In terms of our outlook for average weighted market growth when you look at our view for.
Emmanuel Rosner: EV penetration adoption and the impact on an overall growth rate, we would expect roughly.
Emmanuel Rosner: Mid double digit growth in Etfs on.
In the EV space.
Emmanuel Rosner: To be a driver as well is strong growth with commercial vehicle Oems who.
Emmanuel Rosner: We've had a concerted effort over the last couple of years to diversify revenues more broadly and transportation benefit there.
Emmanuel Rosner: So we would say as we look at the at 2025 those are the primary drivers as we look at.
Emmanuel Rosner: Beyond 2025 is the continued pace of <unk> adoption.
Emmanuel Rosner: Continued market share gains we've talked about our bookings in Etfs in 'twenty.
Emmanuel Rosner: 2024, how strong they were they were actually strong in 2023 as well so it's low voltage as well as high voltage growth market share penetration.
Emmanuel Rosner: The rollout of those new programs that will drive growth in the out years beyond.
Emmanuel Rosner: Right.
Emmanuel Rosner: Got it.
Emmanuel Rosner: Thanks for the color.
Emmanuel Rosner: And then I wanted to come back on the potential.
Emmanuel Rosner: Potential for cost reductions so in the <unk>.
Emmanuel Rosner: In this year's guidance you have about 400 million of performance offsetting essentially or economics in and.
Emmanuel Rosner: Increased depreciation.
Emmanuel Rosner: What is the potential for <unk> to take further cost actions or the appetite for it beyond just sort of attacked performance inefficiencies we've seen.
Emmanuel Rosner: Some other suppliers meaningfully scaled back maybe Rd N E based on.
Emmanuel Rosner: Maybe a slower pace of electrification than previously.
Emmanuel Rosner: Dissipated is there room to do something that is sort of like a more structural or have those actions have already been taken and now it's really about offsetting the economics.
Emmanuel Rosner: Yeah listen there's always an opportunity.
Emmanuel Rosner: Emmanuel So we're always focused on it I mentioned T mentioned, what we're doing from payroll reduction so that will continue footprint rotation.
Emmanuel Rosner: Rotation, especially within the ETS business has been accelerated so we'll get we'll get benefits there as well.
Speaker Change: Material cost is a big piece of what we what we.
Emmanuel Rosner: A big piece of our cost structure and the bond for <unk>.
Emmanuel Rosner: As it relates to a bill material for Oems. So that's an area that we're really focused from an engineering standpoint.
Emmanuel Rosner: We got a lot of productivity out of engineering in 2020 for I mean a lot.
Emmanuel Rosner: And we did that principally by.
Emmanuel Rosner: It wasn't about reducing advanced engineering or R&D was more about.
Emmanuel Rosner: Operating engineering, so program launch.
Emmanuel Rosner: Manufacturing engineering within our facilities software development engineering with any within ASU lax. So those were areas, where we were able to get that productivity and we'd expect to continue to get productivity out of engineering in 2025.
Emmanuel Rosner: Transparently it won't be as significant as it was in 2024 just given the.
The size of the change in 2024.
Emmanuel Rosner: Great. Thank you.
Speaker Change: Well move to Adam Jonas with Morgan Stanley.
Adam Jonas: Hey, everybody a bit longer term question, if if I may.
Speaker Change: You mentioned aerospace and defense.
Adam Jonas:
ASP DNS and also like diversifying your Tam within wind River as well I'm curious who are you winning business with.
Speaker Change: How how significant is the aerospace and defense contribution today and I'm curious how big this could be in any other any other tam that you might describe.
Speaker Change: Here, because your customers I, I believe especially post spin.
Speaker Change: If you only anchor your revenue to the auto industry and the legacy auto industry. There are scenarios, where those companies are going to be much much smaller than many of them won't exist. So.
Speaker Change: I haven't see kind of a gold standard of Western EV Tesla.
Speaker Change: They're effectively they're pillaging resources getting resources out of.
The traditional electric vehicle market and the other markets, even humanoids and things that gives you a very unique perspective I think of those next Tam. So I didn't know if you are in the border are kind of actively tracking this and any messages that you had for investors today thinking thinking longer term of the surface area between what you do in other express.
Speaker Change: <unk> of smart machines beyond just cars banks, yes.
Speaker Change: No.
Speaker Change: Great.
Speaker Change: It is a great question and I would say, it's one of the.
Speaker Change: The big pillars of our strategy that the board has us focused on in terms of diversification.
Speaker Change: Through adjacent markets accelerating that making sure that as a priority from a business plan the strategy and quite frankly from a compensation standpoint aerospace and defense is one of those priority markets. There are applications as you measure what we do now in those markets too.
Speaker Change: <unk> was in the A&D space when you consider.
Speaker Change: When you consider what we have within the <unk>.
Speaker Change: Sps business and <unk> business is probably about $400 million in revenues growing fast.
Speaker Change: It's a higher margin profile it is a longer selling cycle.
Speaker Change: But we have strong relationships.
Speaker Change: With all of the primes in the in the A&D space as well as the various.
Speaker Change: No.
Speaker Change: Parts of the armed forces, so they're existing customers today, and we're looking to leverage the position that wind River has.
Speaker Change: And that our portfolio of businesses within Winchester have to continue to penetrate that market and obviously its going to be a high growth market.
Speaker Change: The second area outside of Aerospace and defense is in around energy.
Speaker Change: Energy distribution there is a relationship that we have with our global EV OEM, where that's one of the year is where.
Speaker Change: We've been awarded business and we expect to continue to be awarded business and participate in that.
Speaker Change: That that is an exciting area and then lastly, your point on robots humanoids, others, whether it be.
Speaker Change: The edge software or it be from wind river or it'd be the perception systems for ASE lax or it would be a V.
Speaker Change: Vehicle architecture solutions, where the wire harnesses connectors from Sps those are all opportunities and again with.
Speaker Change: There are a couple of customers that were actually working on that specific area now those revenues arent quite as significant at this point.
Speaker Change: That's fair.
Speaker Change: Thanks, Kevin you guys you guys made our humanoid 100 by the way so congratulations but look forward to continue. Thank you got you and that's all I got.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: We'll go to Colin Langan with Wells Fargo.
Colin Langan: Oh, great. Thanks for taking my questions.
Colin Langan: Just wanted to follow up on if I go through the margin walk on slide 16.
Colin Langan: Talked about the pace is not an issue this year.
Colin Langan: If I if I translate the FX would be smaller than 100 million drag.
Colin Langan: What is driving that headwinds.
Colin Langan: Headwinds for FX on margin and also what is the net price and commodity is the commodity headwind, we should be thinking about there.
Colin Langan: Yes.
Colin Langan: Colin is Florida.
Colin Langan: I mentioned earlier with regards to the Mexico, the Mexican peso.
Colin Langan: We are largely hedged so even though a weakening of that current skewed really doesn't bring us any tailwind and then with regards to the other commodity where we actively participate from a hedging perspective is copper and then the other area, where we essentially a hedge also so again, it's all about managing risk for us.
Colin Langan: Within the FX in the commodity side of it.
Colin Langan: There are some elements with regards to credit policy and stuff is coming through in <unk>.
Colin Langan: With the U S dollar.
Colin Langan: We are still seeing some fluctuations of that and while we have.
Colin Langan: Largely hedged for some of the major currencies.
Colin Langan: We do see some some risk okay, yes, maybe if I can add to it so I think.
Colin Langan: The headwinds on an FX are largely euro and RMB related okay.
Colin Langan: When you think about 2004 to 2025, so just sort of walk us through and said from up from a copper standpoint, that's largely indexed with our customers so that hedge.
Colin Langan: <unk> remains in place, we hedge incremental amounts.
Colin Langan: Of what's not then.
Colin Langan: What's not index, but that's not a huge amount those are those are the big pieces of that as it relates to price and price recoveries.
Colin Langan: Our expectation I think we've talked about it as pricing to be somewhere between one and a half and 2%.
Colin Langan: Historically, we've done a good job managing through that as you know we have some element of price recoveries.
Colin Langan: In our plan not.
Colin Langan: Remotely close to what we've had in historical periods.
Colin Langan: But there still is some element of.
Colin Langan: Labour recovery, especially as it relates to Mexico, and still a few items related to material inflation from prior periods that we.
Colin Langan: We need to close out on.
Colin Langan: Got it.
Colin Langan: We talk a lot about trying to catch up with the mix with locals in China.
Colin Langan: There is growing concern about the profitability on that business.
Colin Langan: The product side.
Colin Langan: So short, it's kind of hard to sort of get your cost back from all the upfront investment.
Colin Langan: Any color on how your margins with China locals look today, and whether you're able to kind of get the added sort of tooling costs, given the shorter lifecycle of products over there.
Colin Langan: Yes, so so first worse worse, we're very selective.
Colin Langan: Terms of.
Colin Langan: <unk> programs and customers, we're pursuing as we mentioned <unk> heard as mentioned previously we're really focused on those at one either export or expand manufacturing outside of China. We feel like we can bring more value in those programs quite frankly.
Colin Langan: <unk> price pressure on average you do see.
Colin Langan: Lower margins on those programs, we've been able to balance it.
Colin Langan: To date or I should say lower pricing on those programs, we've been able to balance to date with further cost reductions.
Colin Langan: So our China team is.
Colin Langan: Has been consolidating footprint as an example.
Colin Langan: To the extent, we're investing in the development of new technologies, we're getting support.
Colin Langan: From the Chinese government use that were.
Colin Langan: Investing in engineering, we've used the opportunity to ship.
Colin Langan: Ship footprint out of for instance, Shanghai into other other locations west to lower our overall cost and again.
Colin Langan: Not only the hourly cost differential lower but we've been able to get.
Colin Langan: Pretty good support from the Chinese government in terms of enabling that both from setting up facility standpoint, as well as subsidizing the employees. So.
Colin Langan: Got it alright, thanks for taking my questions.
Speaker Change: Well move to our final question from Tom Narayan with RBC capital markets.
Speaker Change: Thanks for taking my question first.
Speaker Change: First question is on <unk>.
Speaker Change: We heard from.
Speaker Change: One of the <unk> last night that they're in a critical point in deciding on what to do with advanced autonomy.
Speaker Change: They work in house or do more partnerships with others and we've experienced year guys level, two plus demo at CES and quite impressive not overly costly just curious it's been in recent months, we've experienced an increase in interest for advanced autonomy.
Speaker Change: And on the flip side that the UX side, it seems to be structural kind of impediments. There just curious how you see.
That business playing out if there's things you can do to reverse a structural issues there.
Speaker Change: Yes.
Speaker Change: Good questions on both sides.
Speaker Change: I would we would say that we're in more discussions with more Oems as it relates to advance a das.
Speaker Change: They like our cost effective solution I think several of them are dealing with kind of vehicle architecture decisions platform mix decisions.
Speaker Change: Which is making that decision and that process play out over a longer period of time.
Speaker Change: There's a lot of interest lots of interest in our solution given its cost.
Speaker Change: I think fewer of the Oems are now of the view that.
Speaker Change: There are certain aspects of this that our religion and they need to own that there is a more cost effective approach from a supplier standpoint, especially in our case, where we've developed solutions that are openly open architected that gives them flexibility.
Speaker Change: To contribute to the platform to do more to do less.
Speaker Change: And even supplier alternatives, whether it be on the Soc ERP on the perception systems. So we're trying to present them with the flexibility that flexibility. So we're in the midst of negotiations slash discussions with multiple Oems across the globe now.
Speaker Change: Sure.
Speaker Change: I feel like that will translate into significant bookings during 2025, I'd say a few of the decisions dragged out of 2024 into 2025, but we keep working at it as it relates to <unk>.
Speaker Change: We have some programs that we're working on now that we expect will translate into awards youre right. The traditional infotainment model that operated within automotive five years ago, It's very different today, our real focus is in and around the software or the <unk>.
Speaker Change: Controller with with end user experience, especially given the trend to.
Speaker Change: See the up integration of the user experience.
Speaker Change: Domain controllers into the Adas controller. So that's a place that we continue to play Theres a couple of large pursuits that we're in the midst of at this point in time.
Speaker Change: Awards that will position that business for stronger growth.
Speaker Change: And listen we continue to evaluate our.
Speaker Change: Our entire product portfolio in terms of where it sits what what it's enabling for our customer what the return is.
Speaker Change: And how do we maximize value for shareholders. So that's the one of the areas that we consistently.
Speaker Change: Just given some of the changes we're consistently evaluating.
Speaker Change: Okay My quick follow up.
Speaker Change: On that.
Speaker Change: Topic, just the shortfall you see is that.
Speaker Change: Is this company specific or is it like an industry wide dynamic or something you were always expecting yes, yes. Our concern is it's an industry wide dynamic with the advancements in AI and and the need for more compute.
Speaker Change: That youre going to see more pull into computers laptops into other areas.
Speaker Change: So a possibility that you see a shortage of semiconductors in areas that were similar to what we saw back a few years ago. So we're going to monitor the situation very closely for Roos all over this.
Speaker Change: To the extent we start seeing.
Speaker Change: You know extended kind of periods in terms of order and delivery of product will start ramping up investment in inventory. If we don't see it we will we will make the investment, but we thought it prudent to include in our outlook for.
Speaker Change: Free cash flow.
Speaker Change: Got it thank you.
Speaker Change: And that will wrap up the Q&A portion of today's call I will now turn the conference back to Mr. Kevin Clark for any additional or closing response.
Kevin Clark: Thank you everyone for participating in our call. We appreciate you.
Kevin Clark: Joining us and look forward to seeing all of you in the upcoming <unk>.
Kevin Clark: And other conferences that we'll be attending so thank you very much and have a great day.
Kevin Clark: Ladies and gentlemen that will conclude today's conference. We thank you for your participation you may disconnect at this time and have a great day.
Kevin Clark: Yeah.
Kevin Clark: Yeah.
Kevin Clark: Okay.
Kevin Clark: Okay.
Kevin Clark: [music].
Kevin Clark: Yeah.