Aptiv PLC

Good day. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Apertive fourth quarter 2019 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 during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. We would like to request that you limit yourself to asking one question and one follow-up question during the Q&A session. Thank you. Elena Rossman, Vice President of Investor Relations, you may begin your conference.

Thank you, Matthew. Good morning, and thank you to everyone for joining Aptiv's fourth quarter 2019 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 Q4 financials as well as our outlook for the first quarter and full year 2020 are included in the back of today's presentation and the earnings press release. Please see 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. With that, I'd like to turn the call over to Kevin Clark.

Thanks, Alaina. Good morning, everyone. I'm going to begin today's earnings call by providing an overview of our 2019 fourth quarter and full year strategic and financial highlights. Joe will then take you through our fourth quarter and full year results in more detail, as well as provide our financial outlook for 2020. Starting with the fourth quarter, revenues increased 2% to $3.6 billion, despite a 7% reduction in global vehicle production, representing nine points of growth over the underlying market. Operating income and earnings per share totaled $388 million and $1.15 respectively above the top end of our previous guidance range due to flow through on higher volume growth and a lower than originally forecasted headwind from the GM labor strike during the quarter, partially offset by weaker exchange rates for the Euro and RIM and B. For the full year, revenues totaled $14.4 billion, representing nine points of growth over the underlying vehicle production, reflecting the strengths of our product portfolio aligned to the safe, green, and connected megatrends. Despite declining industry volumes, we had our eighth straight year of record new business bookings, reaching $22.1 billion, exceeding 2018's record of $22 billion. Our 2020 outlook further validates the strength of our business strategy and the continuing widening of our competitive moat. Based on near-term customer production schedules, as well as the mid-term macro and geopolitical environment, we expect global vehicle production to decline 3% during the year. Despite the anticipated production decline, we're forecasting 4% revenue growth, seven points over the underlying market. highlighting the fact that our business is built to outperform in any environment. In summary, we continue to build on our strong track record of execution and innovation and remain focused on delivering the integrated solutions that are making vehicles safer, greener, and more connected. Turning to slide four, our 2019 performance reflects the efforts we've made to further strengthen our through-cycle resiliency, ensuring that we can outperform in a challenging environment. including having a more balanced mix of customer, regional, and market revenues. No one customer now represents more than 10% of our annual revenue, and we've nearly doubled the percentage of revenues not tied to light vehicle production, from 8% in 2017 to almost 15% in 2019. During the past two years of declining vehicle production, we've also increased the engineering investments necessary to ensure that we have the software compute, vehicle architecture, and systems integration capabilities required to help our customers solve their biggest challenges. To help fund our increased investment in the development of these advanced technologies, we continued to reduce our overhead costs, further enhancing the flexibility and competitiveness of our business model. And we also announced the 50-50 joint venture with Hyundai, which advances the development of production-ready, autonomous driving systems, both cost-effectively and at scale, which we now expect to close at the end of the first quarter. Our more sustainable business model is able to convert more income to cash. In 2019, we generated $1.6 billion in cash from operations and increased our free cash flow conversion of net income to 85%, positioning us to continue our track record of value-enhancing capital deployment both investing in acquisitions and returning almost $650 million of cash to shareholders through share repurchases and dividends. In summary, our ownership mindset reinforces the team's attitude that we're never done and you can expect more of the same in 2020. Turn to slide five. Fourth quarter new business bookings totaled a record $8.1 billion, bringing the 2019 total to $22.1 billion. Fourth quarter bookings reflected both increased customer sourcing activities and a strong active win rate. To put the pace of our new business bookings in perspective, since 2017, the forecast for global vehicle production has actually declined 10%. During the same period, our new business bookings have increased 15%, reflecting our strengthening competitive position across several advanced technologies. Our advanced safety and user experience segment booked $3.2 billion of new customer awards in the quarter and $7.6 billion for the full year. Our industry-leading capabilities in central compute platforms and sensing and perception systems allows us to deliver smarter, safer, and more integrated solutions both outside the vehicle with active safety as well as in the vehicle through enhanced in-cabin safety and user experience systems. Our signal and power solution segment had new business bookings totaling $4.9 billion during the quarter and $14.5 billion for the full year, including a second straight year with over $2 billion of high-voltage electrification awards. Our long track record of increased new business bookings each year validates our ability to leverage the unique brain and nervous system for software and hardware foundation that enables new features and functions while optimizing the total system cost of the vehicle, and reinforces our ability to sustain strong above-market growth, underscoring our relevant portfolio aligned to key secular growth trends. Turning to highlights in our advanced safety and user experience segment on slide six. Sales for the fourth quarter were up 4%, 11 points over market. Continued strong consumer demand for active safety and user experience solutions drove revenue growth of 23% and 3% 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 2019 strategic highlights, including further penetration of existing customers who've deployed our scalable satellite architecture platform, helping them democratize active safety solutions across their vehicle lineups. We're also introducing advanced technologies for use in the nascent field of interior sensing, which is expected to grow at a 50% compounded growth rate through 2025, albeit off a relatively low base. During 2019, we were awarded three new programs focused on assessing driver availability and engagement to meet NCAP regulations, as well as support partially automated functionality, such as Highway Pilot and Traffic Jam Assist. During the year, A premium OEM customer awarded us our first zone controller program, representing another step in building the technical and commercial foundation for Aptiv's SVA approach. And lastly, we also launched the first Android infotainment solution with Volvo Car, powered by native Google automotive services in real-time OTA, enabling a best-in-class in-cabin experience and underscoring Aptiv's leading agile solution development capabilities, Enroll is a partner of choice, serving as the best bridge between the automotive and the tech industries. Turning to slide seven, active safety penetration in the United States has reached the point where we're beginning to see fatality rates decline as OEMs move from initial level zero applications to level one and more advanced level two ADAS applications. Consumers are demanding safer vehicles and OEMs are responding. accelerating the penetration of more advanced ADAS systems across their vehicle lineups, from the premium to the value segments. Underpinning our continued strong growth in new business bookings for ADAS systems has been our ability to provide OEMs with highly reliable, scalable platforms, which allow them to deploy advanced ADAS systems more quickly and at a more competitive price level. As OEMs increasingly look to leverage their investments for Level 2, level 2 plus and even level 3 ADAS systems, the growth in our pipeline of new business pursuits is actually accelerating, even while underlying vehicle production schedules declined. Our scalable ADAS solution is unique in the industry and has been very successful in the marketplace, positioning us to enhance our market position in the future. Active safety bookings increased to a record $4.2 billion in 2019, and we're on track to reach over $5 billion in 2020. And we expect our active safety revenues to almost double from $1.3 billion in 2019 to more than $2.5 billion in 2022, significantly outpacing the underlying growth of the active safety market as reflected on the chart. As we've discussed previously, the accelerated growth in our commercial pipeline for advanced ADAS programs has led us to decide to increase our investment in the advanced engineering customer pursuit, and program launch resources necessary to take the opportunity to widen our competitive moat and ensure we position Aptiv to be the leading player in the active safety market. Joe will provide more detail on this investment later in our presentation. Turning to slide eight, our signal and power solution segment is focused on next generation vehicle architectures, including high speed data and high power electrical distribution enabling the advanced technologies that will shape the future of mobility. In the fourth quarter, sales increased 1%, eight points above market, despite the impact of the GM strike, driven by new launches across our electrical distribution and connector product lines. High-voltage electrification revenues increased 28% in the quarter, while non-auto revenues were up 26%. Our leadership position in optimized vehicle architectures has positioned us to be the partner of choice for both traditional and new mobility customers. As evidenced by our recent high-voltage award with Tesla on the Model Y and the expansion of our low-voltage business on the Model Y and Model 3 in China. Also during 2019, our connection systems business launched an expanded line of automatable modular Ethernet connectors, AMET connectors, capable of handling up to one gigabyte of data per second with several global OEM customers. This family of interconnects enables the evolution of modern vehicle architecture, which is necessary to democratize high levels of safety automation with fast and reliable data transfers. Together, these new business bookings underscore our strength in optimizing power and signal distribution for complex architectures, as well as our ability to serve customers globally through consistent engineering, and launch execution. Diving deeper into our high-voltage electrification product line on slide nine, our strong pipeline of new business awards reinforces the fact that we're at a significant inflection point in the growth of high-voltage electrification. Despite the slowdown in 2019, China's new energy vehicle initiative is driving increased powertrain electrification, and European OEMs cannot achieve the new more stringent CO2 targets without the combination of plug-in hybrids and battery electric vehicles. As a result of these factors, we're confident that by 2022, well over 20% of the vehicles produced annually will include an electrified powertrain. And as we've mentioned several times before, our total addressable content per vehicle for the full range of high-voltage alternatives, including traditional hybrids, plug-ins, and fully electric vehicles, is in the range of 1.5 to 2 times that of a traditional low-voltage vehicle. Our 2019 high-voltage electrification revenues total approximately $350 million. That's up almost 40% year-over-year, making it one of our fastest-growing product lines. Between now and 2022, OEMs are expected to launch roughly 40 new high-voltage platforms globally, spanning hundreds of nameplates. Based on the value and program launch timing of our new business bookings, product line revenues are expected to increase more than threefold to over a billion dollars in 2022, representing a 40% compounded growth rate over that time. So in summary, we're perfectly positioned to continue to increase revenues significantly above underlying vehicle production as we leverage our increasingly differentiated competitive position and continue to benefit from the increased demand for advanced safety solutions, vehicle connectivity, and high voltage electrification. Before I turn it over to Joe on slide 10, I'd like to touch on our recent activities at CES in Las Vegas. As we've done in the past, we hosted a number of customers, partners, and investors in our pavilion, featuring our smart vehicle architecture, which lowers the total cost of ownership, while enabling the software to find feature-rich vehicles consumers want. In total, we had nearly 1,000 stakeholder visits and hosted a number of senior executives from our customers. which underscored the increasingly strategic role Aptiv plays in delivering next-gen vehicle technologies to our customers. During our many meetings, customers validated the need to streamline and simplify vehicle architectures to both reduce costs and enable the necessary advancements in high-voltage electrification and vehicle autonomy. Our SVA centerpiece display highlighted the benefits of Aptiv's unique brain and nervous system technology portfolio. with prototypes of new and existing electrical and electronic solutions that allow us to effectively manage and take advantage of the up-integration of the vehicle's compute domains. Our capabilities around the brain and nervous system of the vehicle positions us to serve as a natural consolidator and integrator, efficiently offering the most advanced hardware and software solutions. Customer feedback validated the significant progress we made in 2019, developing the technology stack and feature roadmap for continued SVA development. With that, I'll hand the call over to Joe to take us through the fourth quarter and full year results and review our outlook for 2020.