Aptiv PLC

Good morning. My name is Amy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the active Q4 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. I would now like to turn the call over to Elena Rosman, Vice President of Investor Relations. Elena, you may begin your conference.

Thank you, Amy. Good morning, and thank you for everyone for joining Aptiv's fourth quarter 2018 earnings conference call. To follow along with today's presentation, our slides can be found at ir.aptiv.com. And consistent with prior calls, today's review of our actual and forecasted financials exclude restructuring and other special items, and will address the continuing operations of Aptiv. The reconciliation between GAAP and non-GAAP measures for both our fourth quarter financials as well as our outlook for the first quarter and full year 2019 are included in the back of today's presentation and in the earnings press release. Now turning to slide two. for a disclosure on forward-looking statements which reflect Aptiv's current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Kevin Clark, Aptiv's President and CEO, and Joe Massaro, CFO and Senior Vice President. Kevin will provide a strategic update on the business, and then Joe will cover the financial results in our Outlook for 2019 in more detail. With that, I would like to turn the call over to Kevin Clark.

Thanks, Elena. Good morning, everyone. I'm going to begin by providing an overview of the fourth quarter and full year, highlight several of our key 2018 milestones, and provide some perspective on how we're thinking about end markets for 2019. Joe will then take you through our 2018 financial results, as well as our more detailed outlook for 2019. I'm pleased to report a strong finish to 2018, a testament of active visibility drive sustained outperformance, even in a more challenging end market. Revenue, operating profit, and earnings per share all finished above the guidance we provided in October. For the full year, revenue of $14.4 billion represents 10 points of growth over market, reinforcing the strength of our portfolio of advanced technologies aligned to the safe, green, and connected megatrends. The strength of our technology portfolio also resulted in record new business awards, totaling $22 billion for the full year, exceeding our prior year record of $19.3 billion. Our 2018 financial performance also validates the robustness of our business model that can deliver in any environment and is positioned for solid through-cycle performance. As we kick off the new year, we remain laser-focused on delivering value to our shareholders, Given the current macro and geopolitical environment, we believe it's prudent to be balanced in our 2019 planning assumptions, which we'll cover in more detail shortly. However, we're confident that the long-term fundamentals of our business remain intact, and I've never been more confident and excited about our future as Aptiv is perfectly positioned to capitalize on the trends driving Auto 2.0 and deliver sustainable revenue and earnings growth while continuing to invest in our future. Turning to slide four, building a strong, sustainable business that makes the world more safe, green-connected is the focus of our management team. We made significant progress executing on a number of strategic fronts in 2018. First, we had very strong revenue growth over market and record customer new business awards, giving us confidence in our revenue growth outlook. and reinforcing that we have the right software, compute, and systems integration capabilities required to help our customers adopt higher levels of advanced safety, electrification, and connectivity. Second, our record cash flow generation and disciplined capital deployment reinforced our strategy for long-term shareholder value creation. We funded both organic and inorganic growth initiatives, including additional capacity to support our strong backlog of active safety business awards, investments to fund the further development of our automated driving capabilities, smart vehicle architecture, and connected services, and the acquisitions of KUM and Winchester Interconnect, further establishing Aptiv as a market leader in engineer components. In addition, we repurchased half a billion dollars of stock, over half of which was in the fourth quarter, taking advantage of market disconnects over the course of the year. So in total, we returned over $700 million to shareholders through share repurchases and dividends. Moving to the far right of the slide, as always, we remain maniacal about our cost structure, constantly working to improve the competitiveness of our business model and lower our break-even to increase the flexibility of our cost structure and be in a position to fund the incremental growth investments while delivering earnings and cash flow growth. While we've been on this journey for some time, our focus on continuous improvement means we're never finished. Our DNA is wired to naturally focus on delivering material and manufacturing efficiency and also reduce overhead costs. $50 million of overhead and stranded costs related to the powertrain spinoff were actually eliminated during 2018. Further, our engineering resources are critical to executing on our pipeline of new business awards. Our continued focus on maximizing engineering efficiency and effectiveness with agile methodologies, reusable software platforms, and other tools allows us to expand our capabilities in software, artificial intelligence, machine learning, and systems engineering faster than we've grown engineering spend. In summary, our continuous improvement mindset is helping us improve operational efficiency while allowing us to meaningfully invest in our future. Turning to slide five, you can see fourth quarter new business bookings totaled 6.5 billion, bringing the 2018 total to 22 billion, well above 2017's record of just over 19 billion. As I mentioned, these bookings are the direct result of our widening competitive moat in several advanced technologies across both advanced safety and user experience and signal and power solutions. Beginning with active safety, where we won 3.9 billion of new customer awards, topping last year's record of 3.7 billion. These awards include multiple scalable level two plus programs leveraging our unique satellite architecture, active safety domain controller, and perception systems. Infotainment and user experience customer awards totaled $2.8 billion, driven in part by our integrated cockpit controller solutions, reinforcing our leadership position in central compute. Engineer components booked $6.5 billion of new customer awards, including $1 billion in high-voltage connectors, bringing 2018 high-voltage electrification awards to $2 billion, double the amount from the prior year. Our continued momentum in new business bookings validates our ability to leverage the unique brain and nervous system, or the software and hardware foundation, that we've created and that enables new features and functions while optimizing the total system costs of the vehicle. Turning to segment highlights and advanced safety and user experience in slide six, sales for the fourth quarter were up 12%. That's 14 points over market. Continued strong consumer demand for active safety and infotainment solutions drove revenue growth of 54% and 8%, respectively. As the need for more complex software development and systems integration expertise increases, our unique ability to offer highly functional, optimized solutions has driven several of our 2018 New Business Awards, including six new Central Computer Awards in 2018 across multiple domains, including active safety, infotainment, as well as body chassis and propulsion, bringing our collective total customer awards to 11. The most recent example shown here is our conquest win with PSA for scalable active safety, leveraging our satellite architecture solution, which is being deployed across multiple vehicle makes and models and represents our seventh such award in active safety. Finally, Operating margins expanded 170 basis points for the year, excluding the impact of mobility investments, demonstrating the benefits of our competitive positioning and our cost structure. Turning to slide seven, our signal and power solution segment is focused on next-generation vehicle architectures, including high-speed data and high-power electrical distribution, to enable advanced technologies that will shape the future of mobility. For the quarter, sales increased 6%. That's nine points over market, despite the weakening macros, driven by over 50% sales growth for high-voltage electrification products and very solid double-digit growth for engineered components. Underscoring our industry-leading position in vehicle architecture, we were recently awarded the high-voltage electrical architecture on the Jeep Grand Cherokee. This high-value, high-volume award validates the increasing need for optimized high-voltage architecture across a full range of vehicle types. In 2018, high-voltage electrification revenues approached $300 million. That's up over 60% year over year, making it one of our fastest-growing and most profitable product lines. Based on the value of our new business bookings, this product line should reach over $1 billion of revenues in 2022, representing a 40% compounded growth rate over that period. In summary, given the breadth and depth of our portfolio in both segments, we are perfectly positioned to benefit from the convergence of all the 2.0 trends, and we are confident in our ability to continue to grow revenues in excess of the underlying market. Given the more challenging macro landscape heading into 2019, on slide 8, I'd like to provide some context for the key assumptions that underpin our vehicle production outlooks for the year. As we look ahead to 2019, we expect to see continued softening of vehicle production around the world. At a global level, we expect vehicle production to be down 2.5% for the full year and down 4% in the first half. From a regional perspective, I'll start with China, as I know it's top of mind for many of you. We expect vehicle production to decline 11% in the first quarter and 8% for the full year. And while we will continue to experience strong revenue growth over market in this region, driven by double digit growth in our key product areas, including active safety, infotainment, and high voltage electrification, We're preparing for structurally lower industry volumes going forward. As a result, we're being prudent from a cost structure perspective. We've reduced salary costs in this region by almost 10%. Turning to the other regions, we expect low single digit production declines in North America and Europe. However, similar to China, we also expect revenues to grow in excess of vehicle production given our new launch cadence and market share gains. Finally, as Joe will outline in more detail shortly, we expect our portfolio of safe, green, and connected technologies and balanced regional, customer, and platform mix to more than offset the industry macros, contributing to strong growth over market once again in 2019. Before I turn it over to Joe to go through the numbers, I'd just like to highlight another great year at CES. As we've done in the past, we provided automated rides on the streets of Las Vegas, accumulating nearly 10,000 autonomous miles just during the week of CES alone. While a number of our customers, our investors, and our partners took advantage of our vehicles to transport them to destinations in and around the Strip, downtown, or to and from the airport, We also supported our normal operations for the general public. And since its launch earlier last year, we've conducted over 30,000 rides on the lift network, receiving a near perfect 4.95 star rating out of five, underscoring the quality of the ride experience. Further at our pavilion, we gave customers as well as investors a look at the advanced software and hardware architectures that are enabling the safe green and connected solutions our customers are demanding. In total, we had over 100 customer meetings and hosted a number of senior executive customer VIP visits, which underscored the increasingly strategic role Aptiv plays in delivering fully integrated and optimized vehicle architectures. Our technology displays showcase our value-add across the full vehicle stack, from perception sensors or perception systems to cloud with unparalleled strengths in advanced safety, the in-cabin experience, data services, and autonomous solutions. As complexity increases, our customers appreciate that getting the architecture right today is critical to delivering the feature-rich, highly automated vehicles they need in the future. As a result, we positioned Aptiv as the only integrated provider of both the brain and the nervous system of the vehicle, capable of conceiving, specifying, and delivering the advanced architectures, making the future of mobility real. So with that, I'll hand the call over to Joe to take us through the fourth quarter and pull your results and review our outlook for 2019. Joe? Great.