Aptiv Q4 2024 Earnings Call Transcript

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Provided by Quartr
February 6, 2025
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Operator

Good day and welcome to the Aptiv Q4 twenty twenty four Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jane Wu, Vice President of Investor Relations and Corporate Development. Please go ahead.

Jane Wu
Jane Wu
VP of Investor Relations & Corporate Development at Aptiv

Thank you, Jeff. Good morning, and thank you for joining Aptiv's fourth quarter twenty twenty four 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 will address the continuing operations of Aptiv. The reconciliations between GAAP and non GAAP measures for our fourth quarter and full year twenty twenty four results as well as our first quarter and full year twenty twenty five outlook are included at the back of the slide presentation and the earnings press release.

Jane Wu
Jane Wu
VP of Investor Relations & Corporate Development at Aptiv

During today's call, we will be providing certain forward looking information that 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. Joining us today will be Kevin Clark, Aptiv's Chair and CEO and Varun Larolla, Executive Vice President and Chief Financial Officer. Kevin will provide a strategic update on the business and Varun will cover the financial results in more detail before we open the call to Q and A. With that, I'll let's turn the call over to

Jane Wu
Jane Wu
VP of Investor Relations & Corporate Development at Aptiv

Kevin Clark.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Thanks, Jane, and thanks, everyone, for joining us this morning. Let's begin on Slide three. Aptiv 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 $10,100,000,000 reflecting the strength of our portfolio of industry leading advanced technologies.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Revenue totaled $4,900,000,000 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 operating income reached $623,000,000 reflecting strong operating performance and ongoing cost reduction initiatives, which also along with share repurchases and the restructuring of Aptis ownership interest in the Motional joint venture drove earnings per share growth of 25%. Lastly, operating cash flow totaled a record $1,100,000,000 dollars 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. Turning to the next slide to cover our major achievements during 2024.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Appsys continue to capitalize on the safe, green and connected megatrends reaching numerous technology milestones during the year, including two awards for full system Gen six ADAS platforms, one of which is from an EMEA based OEM that also includes 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 ECUs 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 the increasing demand from OEMs. We're also capitalizing on strong commercial traction with the local Chinese OEMs leading the transition to software defined vehicles reflected in 16% revenue growth with the domestic OEMs and our recent SVA Zonal Controller Award from Cherry that includes both Wind River and Aptiv software. And lastly, Wind River's launch of Elixir Pro, which has generated significant interest from the broader enterprise Linux ecosystem with launch partners including AWS, Capgemini, Intel, SEIC and Supermicro.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

These notable achievements during 2024 validate the strength of our industry leading portfolio and have resulted in new business bookings of $31,000,000,000 including record bookings for Signal and Power Solutions, record operating income and earnings per share, reflecting our strong operating performance and optimized 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. 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. We're extremely proud of our accomplishments in 2024 and the performance of the Aptiv team. 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 $31,000,000,000 of new business awards during the year.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Advanced safety and user experience bookings totaled $4,400,000,000 driven by active safety bookings of $2,700,000,000 including the two Gen six ADAS platform awards I mentioned earlier as well as Gen six radar awards with a German luxury OEM and two large Japanese OEMs. Signal and Power Power Solutions bookings reached $26,400,000,000 including $8,000,000,000 in the Engineered Components Group across the full product portfolio in multiple end markets and a record $18,400,000,000 in the Electrical Distribution Systems business. And lastly, across all product lines, a record $7,000,000,000 of new business in China, of which over $5,000,000,000 was with top local Chinese OEMs and a U. S. Based global electric vehicle OEM.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

With a broad portfolio of advanced technologies that provides OEMs with increased flexibility at a competitive cost, we have clear line of sight to over $31,000,000,000 of new business awards in 2025. Turning to Slide six to review the highlights for Advanced Safety and User Experience segment, which achieved record revenue and earnings in 2024 underscoring the competitiveness of our product portfolio and the strength of our operating capabilities. 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. Active safety revenues increased mid teens, partially offset by a decline in user experience revenues due to the roll off of legacy programs. Operating margins were over 12%.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

The benefit of the continued rotation of our engineering footprint to India and our ongoing adoption of Wind River's DevSecOps tools, which have improved the productivity of our software developers by over 20%. Wind River 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 five gs infrastructure in telco, impacting closure rates on commercial opportunities and a longer selling cycle for studio developer in the automotive and industrial markets. Increased investment in Wind River's commercial and product organization during the year to enhance our existing portfolio of products including VxWorks, operator and developer and also build new products such as the Alixir Pro which we're confident will drive strong revenue growth in 2025. In addition, the advancements in AI is providing Wind River with incremental growth opportunities as customers look to reduce costs by moving AI workloads to the edge. Overall, advanced safety and user experience provide solutions that increase flexibility while lower cost making us a partner of choice for our customers.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

This is reflected in our recent awards including a central computer award for active safety and user experience applications across multiple Geely brands, an award for an integrated cockpit controller from a major global truck manufacturer, Additional awards with leading Japanese OEMs for Gen six radar solution. And an award with Boost Mobile to provide core to edge cloud infrastructure for the world's largest Open RAN deployment, which demonstrates Wind River's leadership position in the telco industry. Turning to the Signal and Power Solutions segment on Slide seven, 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 two multinational JVs in China. And Engineered Components Group benefiting from growth in non auto markets offset by lower high voltage revenue. To drive 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 02/1930 as we've discussed previously.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

We've also demonstrated strong commercial momentum across all regions as reflected in fourth quarter bookings including a significant electrical architectural award with a major North American OEM for their light and heavy duty truck platforms. Over 1,000,000,000 of new business awards with leading local OEMs in China and several customer awards for interconnect solutions in the aerospace and defense, space and industrial markets. Moving to Slide eight, I wanted to touch on our recent announcement to separate the Electrical Distribution Systems business from Aptiv creating two 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 capital allocation strategies. By enhancing strategic and operational focus, we're positioning both Aptiv and EDS 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. We're targeting the completion of the separation by 03/31/2026, subject to final approval by Aptiv's Board of Directors and customary conditions.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

In the meantime, we'll continue to keep investors updated as the separation progresses and we'll host investor days for both Aptiv and EDS in the fall of this year. Moving to Slide nine and our outlook for 2025. We remain confident that the trend towards greater levels of electrification, automation, digitalization and connectivity will continue. With our portfolio of advanced technologies, Aptiv is well positioned to address the evolving needs of our customers and to further capitalize on market opportunities across multiple industries. The market remains dynamic and the recent announcements regarding trade policy has created incremental uncertainty, which could impact supply chains and vehicle production.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

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. But to be clear, our outlook has not factored in changes in tax, trade or tariff policy by the new administration. We'll 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 growth with the leading local Chinese OEMs. And we'll continue to optimize our cost structure, pursue strategic capital deployment opportunities, including further debt pay down, bolt on M and A and the opportunistic return of cash to shareholders and falsely execute the EDS separation targeted for the first quarter of twenty twenty six. I'll now turn the call over to Varun to go through the numbers in more detail.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Thanks Kevin and good morning everyone. Kevin shared an overview of the quarter and I'll share further details including insight into segment performance. Additionally, in connection with the previously announced planned spin off of our Electrical Distribution Systems business effective first quarter twenty twenty five, we are realigning our business into three reportable segments EDS, ECG and ASUx. To reflect this change, we are furnishing supplemental recast quarterly financial information for 2024 and 2023. Starting with Slide 10, Aptiv delivered strong earnings growth in the quarter despite revenues down 1% as we continue to drive operating performance improvements across the business.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Consistent with the third quarter, revenue growth was impacted by lower vehicle production at select customers. Fourth quarter adjusted EBITDA and operating income were $811,000,000 and $623,000,000 respectively, with performance more than offsetting labor economics which contributed to an increase in operating margin by 50 basis points over the prior year. FX and commodities were a $26,000,000 tailwind in the quarter primarily the favorable impact of the Mexican peso. 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 motional joint venture. Operating cash flow for the quarter totaled a record $1,100,000,000 and capital expenditures were $166,000,000 Finally, during the quarter we paid down $1,100,000,000 of outstanding debt including the 1.5% euro notes that were due in 2025 as well as $350,000,000 or over half of the term loan A due in 2027.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Moving to Slide 11, 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. Net price and commodities were positive in the quarter partially offset by foreign exchange. 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 25%.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Bringing full year 2024 revenue mix in China to 53% with local OEMs, 34% with multinational joint ventures and the balance with a large global EV manufacturer. Moving to the ASU X 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. And the Smart Vehicle Compute and Software product line grew 13% in line with expectations offset by the user experience product line down 12% in the quarter reflecting roll offs of legacy programs as well as lower multinational JV vehicle production in China. Fourth Quarter adjusted operating income and margin were $193,000,000 and 14% respectively resulting from significant year over year improvement in operating performance and our continued focus on cost improvement initiatives.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

For the full year, revenue grew 2% with strong active safety growth of 16% offset by user experience down 12%. Full year operating income and margins were up 58% to $714,000,000 with four forty basis points of margin expansion. Turning to Signal and Power on Slide 13. Revenue in the fourth quarter was $3,500,000,000 down 2% due to lower volumes, partially offset by 5% growth in non auto end markets. Fourth quarter adjusted operating income was $430,000,000 dollars or 12.1% impacted by the lower volume flow through.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

For the full year, 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 on electrified platforms was down 16%. Full year segment adjusted operating income was $1,700,000,000 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. Turning now to Slide 14 and macro expectations for 2025. As Kevin mentioned, we remain cautious about the impact of geopolitical factors including uncertainty around tariffs. 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.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

We are forecasting active weighted global vehicle production to be down 3% for the year, reflecting approximately 92,000,000 units. Regionally, we expect strong full year revenue growth in North America despite production down 5% driven by content growth with key customers including the D3 which represent over half our revenue in the region. Europe production down as major European OEMs transition from ICE to electrified vehicle platforms, which are expected to grow approximately 20% year over year. And China production flat with local China OEMs continuing to win share from multinational joint ventures. Given the dynamics as well as our accelerating traction with local players, we are on track to exit the year approaching market parity on China revenue.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Moving to Slide 15 and our full year 2025 full year 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. Given the volatility in production schedules last year, we also want to provide guidance on our expectations for the first quarter. First quarter revenue is expected to be in the range of $4,600,000,000 to $4,800,000,000 down 3% at the midpoint. Operating income and adjusted EPS are expected to be $520,000,000 and $1.5 at the midpoint of the range respectively.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Our full year outlook for revenue is in the range of $19,600,000,000 to $20,400,000,000 up 2% at the midpoint year over year reflecting ASUx up mid single digit, ECG up low single digits and EDS flat. EBITDA and operating income are expected to be approximately $3,190,000,000 and $2,420,000,000 at the midpoint reflecting flow through on sales growth and performance and cost reduction initiatives offsetting labor headwinds. Adjusted earnings per share is estimated to be in the range of $7 and $7.6 up 17% at the midpoint with operating cash flow of $2,100,000,000 and capital expenditures at approximately 4.5% of revenue. On Slide 16, we provide a bridge of 2025 revenue and operating income guidance as compared to 2024. Starting with revenue, sales growth of over $500,000,000 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.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

We expect annual price declines within the historical range of down 1.5% to 2% offset by commodities and recoveries. And FX is estimated to be a headwind of $200,000,000 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, while performance initiatives are expected to offset incremental labor inflation. Slide 17 provides further detail on adjusted EPS. 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 our reduced equity holdings in Motional. Before handing the call back to Kevin, I would like to touch upon our cash flow outlook.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

While we generated a record $2,400,000,000 in operating cash flow in 2024, we expect 2025 to be impacted by a return to growth and a strategic inventory build of semiconductors in anticipation of possible shortages in late twenty twenty five and early twenty twenty six, which we will calibrate based on availability and demand forecasts. We will also continue to maintain a balanced approach to capital allocation, including investing in the business to drive innovation that will deliver sustainable profitable growth. And while we increased leverage last year to return capital to shareholders, including the $3,000,000,000 ESR, we are ahead of our commitment to delever our balance sheet. Building on our debt pay down in the fourth quarter, as I mentioned earlier and stronger performance in cash, we have retired an additional $250,000,000 year to date, thereby extinguishing the term Loan A in its entirety and bringing our total debt pay down in the last two months to $1,400,000,000 We also plan to accelerate further debt pay down into the first half of twenty twenty five. We will consider utilizing excess cash to explore bolt on M and A opportunities and opportunistically return capital to shareholders all within the parameters of investment grade ratings.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

With that, I'd now like to hand the call back to Kevin for his closing remarks.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Thanks, Varun. I'll wrap up on Slide 19 before opening the line for questions. 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. 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. We purpose built our technology portfolio to deliver flexible, high performance and cost effective solutions that address our customers' needs all on a global scale And at the same time, we remain committed to flawlessly executing and delivering a strong operational performance, enabling us to unlock incremental profitability and deliver long term value to our shareholders.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

In closing, I'm proud of what the Aptiv team accomplished during 2024 and I'm excited about what we'll deliver in the years ahead. Operator, let's now open the line for questions.

Operator

Thank you. We will now take our first question from John Murphy at Bank of America.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

Good morning, guys. Kevin, just a first question on 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 when you look at that down 5% in North America, if we said that was closer to flat, it seems like it would add, I don't know, $360,000,000 3 70 million dollars more of sales roughly.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

If that were to occur, what kind of incremental margin and I'm saying if, right, I mean, it's a big if, what kind of incremental margin do you think you would get on those incremental sales that were to occur?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. So John, let me start with just a preface on it. I just in light of a couple of things, one, just the dynamics from from a geopolitical standpoint, the dynamics as it relates to policy, whether that be trade, whether it be tariff, whether it be tax, we think it's very, very important at this point in time to be more conservative, quite frankly. And then when you overlay on top of that, the fact that inventories in North America are still relatively high, especially for the D3, where we have a fair amount of exposure. That's something that we're watching closely as well.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

As we look at the first quarter and the early part of this year, a lot of progress have been made reducing that during the fourth quarter of last year, but inventory still remained 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 viewing it through. As it relates to vehicle production in North America being stronger in the first quarter, it's a possibility. 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% sort of flow through range on volume.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

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
John Murphy
Managing Director at Bank of America Merrill Lynch

Okay. And then just a second follow-up on Slide five of the $31,000,000,000 of gross bookings is another big year for you. As you kind of walk forward two to three years out, has anything changed in sort of the mix of customers in China? And are you shifting more quickly towards the domestics than you were previously? Just curious if there are any updated thoughts there?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Well, I'm not sure if it's more rapid. It's been rapid the last twelve or twenty four months. I think we picked up roughly 10 points of share of mix with local Chinese OEMs during 2024, maybe a little bit less than that. I think our outlook for 2025 is a full 10 increase. So at the end of twenty twenty five, early '20 '20 '6, we should be at parity with market mix in terms of vehicle production of locals versus the multinationals.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

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's some of the pickup in revenue that we're seeing now and we expect to continue to the balance of 2025.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

Great. Very helpful. Thank you very much.

Operator

We'll move next to Joe Spak with UBS.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Good morning, everyone. Kevin, maybe 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 adjustment to North American production? And somewhat related, I mean, just the growth over market, which I know is not sort of an official metric anymore, but implied in North America, maybe just some commentary on what's driving that for the year?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. Again, as it relates to conservatism overall, the bulk of it sits in North America. I would say Europe and U. S, we have a more conservative outlook for EV growth market right now. I believe IHS is forecasting roughly 20% growth in EV production.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Our outlook from a revenue standpoint is roughly 10% plus, so mid single digits. So we've taken a more conservative approach for revenue outlook given our experience last year. As you look at growth over market in North America, I would say it's really a couple of things. It's a pace of launch cadence back half of this year and into the start of next year. So new program launches were up roughly 10% last year versus the prior year.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

A lot of that was really starting in Q2 through Q3 and Q4 and will benefit from that. And then I would say, Joe, there's a little bit of a normalization as it relates to a couple of the OEMs where we saw significant corrections or reductions in their vehicle production schedules in 2024, especially in the third and fourth quarters. We expect that to effectively normalize and not see the same level of decline. So I'd refer to it as stability basically in schedules.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Okay. Thank you for that. I guess just as a second question, this is I know bigger picture because there's obviously a lot going on, but it sounds like the automakers, as they, I guess, should be at least have some contingency planning scenarios if they have to react to tariffs even if my impression is that still might be a lower probability. But I guess I'm sure you're doing something similar from a contingency plan perspective. I am curious though if any of those OEM conversations have cascaded down to you because if anything like this were to need to occur, there would obviously need to be some pretty meaningful coordination and time and validation and ramp up.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

So I guess I just want to understand how you guys are internally planning for this and the level of coordination across the value chain?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. I would say the level of coordination is pretty good. I think the magnitude of what was initially proposed regarding tariffs within North America from an industry standpoint was a bit surprising. But I would say we've been working with our OEM customers late last year, early this year as it relates to where possible for deploying inventory. As we've talked about 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 globally on.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

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, at least near term plans in terms of addressing some of the challenges that if there was a flip of a switch, how we would deal with that, including investments in inventory, including areas where we have duplicate manufacturing in North America and other regions. And then some discussion, 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 produce products in certain areas where it's a little bit more complicated to do, for example, wire harnesses, products like that. So I would say we're reasonably coordinated to the extent this gets implemented, but ultimately obviously it would be somewhat disruptive.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Yes. Okay.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Appreciate that. Thank you.

Operator

We'll move to Chris McNally with Evercore.

Chris Mcnally
Head of Global Auto & Mobility Research at Evercore

Thanks so much, Steve. Just you can see the tone of everyone's questions is around the conservatism in the guidance in Q1, Kevin, particularly around the volatility we've seen in mix over the last two years. And I think one of the things that we all struggle with is the discussion of production that you give for Q1 and for you, you look below IHS minus 5%, minus 3%, but that's probably on a active regionally adjusted basis. Have you looked at those numbers for top customers, where your top customers are for Q1 and full year, just so we can have a sense of how much the conservatism is built in?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. Listen, we're not going to provide kind of specific customer sort of production schedules, right, Chris? I mean, you understand that. Is our estimate for production lower than what customers' schedules currently show? Yes, they are.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

They are. And in our forecasting process and guidance process and planning process, we've gone through customer by customer, platform by platform, region by region. So we've gone through it in detail. Have those been haircut? Yes.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Have they been haircut more than they typically are for the first quarter? Yes. Last year was volatile. As you said, we don't want to go through that again. But then overlaid on top of that, what we do worry about is just given some of the announcements regarding trade policy and tariffs that does introduce a certain amount of uncertainty into the system, which in our view will affect supply chains.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

And when it affects supply chains, it will affect production. It's tough to predict exactly how much, 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. I know that's not a detailed answer, but we try to be very thoughtful about it.

Chris Mcnally
Head of Global Auto & Mobility Research at Evercore

Yes. And Kevin, I would say, I mean, look, I think trying to figure out March depending upon how tariffs play up is sort of across the street no one has really done. So that's actually super helpful. And you did call out North America, I think, which is where the concern lies, particularly when we've seen two of the three OEMs who had good years sort of last year already being cautious in Q1 and you mentioned the third who's going to rebound. Just a simple one for me.

Chris Mcnally
Head of Global Auto & Mobility Research at Evercore

I don't know if this has been answered yet. I apologize if it has. Just sort of peso benefit, year over year, We've been sort of waiting for it. We got a little bit of help in second half. But with peso at '21, should this be a tailwind of material form to margin in 2025?

Chris Mcnally
Head of Global Auto & Mobility Research at Evercore

Thanks so much.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Hey, Chris, it's Varun out here. Listen, it's all about managing risk, right? And so we tend to take out hedges and that basically is what it is. So we don't really expect it to you kind of cover that risk for 2025.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. So no big tailwind as it relates to peso weakening if that continues to happen.

Chris Mcnally
Head of Global Auto & Mobility Research at Evercore

Excellent. Thanks so much, Steve.

Operator

We'll move next to Dan Levy with Barclays.

Dan Lévy
Dan Lévy
Senior Equity Research Analyst at Barclays

Hi, good morning. Thanks for taking the questions. Wanted to ask about the China commentary, which shows that you're expecting some underperformance versus the China market. Is this just a continuation of what we saw in 2025 or 2024 where it was just a couple of key customers that were dragging down results, but you're still growing with the domestic. Maybe you could just provide a little more color on the expectations within China and the domestic versus multinational split?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. We expect China locals to continue to take significant share, not to the extent that they did in 2024, but they'll continue to take significant share. We expect the multinationals global multinational traditional OEMs to continue to lose fairly significant share. That's factored into our outlook. I think the net impact for us is our revenue growth versus vehicle production in China is basically our growth over vehicle production is down 1% versus what it was in 2024.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

So we're closing that gap. We have internally a more, I'd say aggressive outlook for China local share gain relative to what IHS has. I mean, we're north of 75% share gain in 2025. So we expect them to continue to take some share. And as I mentioned, we'll reduce the differential in growth versus market down to about roughly one point.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

And then in 2026, as I mentioned, we're at parity.

Dan Lévy
Dan Lévy
Senior Equity Research Analyst at Barclays

Okay. And the underlying domestic growth that's in line with sort of where the market is?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

The underlying outlook for domestic growth, our outlook is slightly higher than what IHS would have for vehicle production growth. And our growth with those customers is over their market share growth rate. So we're growing over market with the local OEMs in China.

Dan Lévy
Dan Lévy
Senior Equity Research Analyst at Barclays

Okay, great. Thank you.

Dan Lévy
Dan Lévy
Senior Equity Research Analyst at Barclays

As a

Dan Lévy
Dan Lévy
Senior Equity Research Analyst at Barclays

follow-up, wanted to ask about some of the cost actions, which you had talked about on the third quarter call. I think there are a number of things you talked about, salary reductions and flexing the work force, material cost, manufacturing, pricing. I see in your bridge that you're assuming some positive performance, but maybe you could just double click on the extent to which you're seeing benefits on the cost actions, what's low hanging fruit versus what's going to take a little more effort to achieve on the cost side?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Maybe I'll start at a high level and Varun can answer in more detail, if that's okay. The last couple of years the last several years have been very focused on reducing overhead. You've heard us talk about that. Last year, we had roughly a 10% reduction in salaried workforce this year within our plan. We were targeting mid single digits.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Given what we're hearing regarding trade policy, we'll be increasing that to some extent just to provide additional room and offset any incremental risk that's out there. So those are 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 effort, but it's 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.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

I think the mapping of our supply chain, building our digital twin and significantly increasing visibility to bond costs and where there's leverage that's paying dividends, although it requires negotiation, it requires effort, negotiate 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 the group or the team has been doing for the last couple of years. And a big portion of our year over year material performance in 2025 will be the result of that. It's important to note though that to do that it requires support from our OEM customers. And at times, customers giving constraints on resources are less focused on it.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

But that's an area that

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

we've made a lot of progress.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

No, Kevin, I think that's comprehensive.

Dan Lévy
Dan Lévy
Senior Equity Research Analyst at Barclays

Great. Thank you. That's very helpful.

Operator

We'll move next to Emmanuel Razner with Wolfe Research.

Emmanuel Rosner
Analyst at Wolfe Research

Thanks. Good morning. My first question is around the outlook for EDS. I wanted to zoom in to it because it will obviously be its own stock soon soon enough and investors need to understand how to value it. So basically looks like revenues was down 6% in 2024.

Emmanuel Rosner
Analyst at Wolfe Research

In your guidance for 2025, you assume stable revenue in EDS. And then obviously, when you announced the future spin off, mid single digit is sort of like the midterm target in terms of growth for it. So can you maybe just give a little bit of color on what do you expect for this year? Why just stable if electrification accelerates a little bit maybe in Europe? And then what will drive this acceleration to mid single digit through 2028?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. Emmanuel, so adjusted growth for EDS in 2024 was down 5%. A big driver of that were the customers we mentioned, but then an incremental overlay on as it relates to high voltage or EV exposure. So put it in perspective, high voltage revenues for that for the EDS business were down just shy of 20% in 2024. So significant impact throughout the year.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Our outlook for growth in 2025 is basically flat growth. So about three points over global vehicle production in terms of our outlook for average weighted market growth. When you look at our view for EV penetration adoption and the impact on overall growth rate, we would expect roughly mid double digit growth in EDS in the EV space to be a driver as well as strong growth with commercial vehicle OEMs who we've had a concerted effort over the last couple of years to diversify revenues more broadly in transportation, so those benefit there. So we would say as we look at 2025, those are the primary drivers. As we look at beyond 2025, it's the continued pace of EV adoption.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

It's continued market share gains. We talked about our bookings in EDS in 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 and the roll on of those new programs that will drive growth in the out years beyond 2025.

Emmanuel Rosner
Analyst at Wolfe Research

Got it. Thanks for the color. And then I wanted to come back on the potential for cost reductions. So in this year's guidance, you have about $400,000,000 of performance offsetting essentially labor economics and increased depreciation. What is the potential for Aptiv to take further cost actions or the appetite for it beyond just sort of like performance and efficiencies?

Emmanuel Rosner
Analyst at Wolfe Research

We've seen some other suppliers meaningfully scale back maybe RD and E based on maybe a slower pace of electrification than previously anticipated. Is there room to do something that is sort of like more structural or have those actions already been taken and now it's really about offsetting the economics?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. Listen, there's always an opportunity, Emmanuel. So we're always focused on it. I mentioned to you what we're doing from payroll reduction. So that will continue.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Footprint rotation, especially within the EDS business has been accelerated. So we'll get benefits there as well. Material cost is a big piece of what we a big piece of our cost structure in the BOM for BOM as it relates to a build material for OEM. So that's an area that we're really focused. From an engineering standpoint, we had a lot of productivity out of engineering in 2024, I mean a lot.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

And we did that principally by it wasn't about reducing advanced engineering or R and D, it was more about operating engineering, so program launch, manufacturing engineering within our facilities, software development engineering within ASU X. 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. Transparently, it won't be as significant as it was in 2024, just given the size of the change in 2024.

Emmanuel Rosner
Analyst at Wolfe Research

Great. Thank you.

Operator

We'll move to Adam Jonas with Morgan Stanley.

Adam Jonas
Adam Jonas
Analyst at Morgan Stanley

Hey, everybody. A bit longer term question, if I may. You mentioned aerospace and defense in the SP and S and also like diversifying your TAM within Wind River as well. I'm curious, who are you winning business with? How significant is the aerospace and defense contribution today?

Adam Jonas
Adam Jonas
Analyst at Morgan Stanley

And I'm curious how big this could be? And any other TAM that you might describe here? Because your customers, I believe, especially post spin, 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 and many of them won't exist. So if I even see kind of a gold standard of Western EV Tesla, they're effectively they're pillaging resources, getting resources out of the traditional electric vehicle market into other markets, even humanoids and things. That gives you a very unique perspective, I think, of those next TAMs.

Adam Jonas
Adam Jonas
Analyst at Morgan Stanley

I didn't know if you and the board are kind of actively tracking this and any messages that you had for investors today thinking longer term of the surface area between what you do and other expressions of smart machines beyond just cars? Thanks.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. No, Adam, it's a great it is a great question. And I would say it's one of the big pillars of our strategy that the board has us focused on in terms of diversification into adjacent markets accelerating that, making sure that's a priority from a business plan, a strategy and quite frankly from a compensation standpoint. Aerospace and defense is one of those priority markets. There are applications, as you mentioned, from what we do now in those markets.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Today within the A and D space, when you consider what we have within the SPS business and ASUx business, it's probably about 400,000,000 in revenues growing fast. It's a higher margin profile. It is a longer selling cycle, but we have strong relationships with all of the primes in the A and D space as well as the various parts of the armed forces. So they're existing customers today and we're looking to leverage the position that Wind River has and that our portfolio businesses within Winchester have to continue to penetrate that market. And obviously, it's going to be a high growth market.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

I'd say the second area outside of Aerospace and Defense is in around energy and energy distribution. There's a relationship that we have with a global EV OEM where that's one of the areas where we've been awarded business and we expect to continue to be awarded business and participate in that. So that is an exciting area. And then lastly, your point on robots, humanoids, others, whether it be the Edge software or it be from Wind River or it be the perception systems for ASU X or it be the vehicle architecture solutions or the wire harnesses and connectors from SPS. Those are all opportunities.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

And again, with there are a couple of customers that we're actually working on that specific area now. Those revenues aren't quite as significant at this point though to be transparent.

Adam Jonas
Adam Jonas
Analyst at Morgan Stanley

Thanks, Kevin. You guys made our humanoid 100 by the way, so congratulations, but look forward to continuing the discussion. That's all I got.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Thank you.

Operator

We'll go to Colin Langan with Wells Fargo.

Colin Langan
Colin Langan
Automotive & Mobility Analyst at Wells Fargo

Great. Thanks for taking my questions. Just wanted to follow-up on if I go through the margin walk on Slide 16, you talked about the pace is not an issue this year. If I translate the FX, it would be smaller than $100,000,000 drag. What is driving that headwinds for FX on margin?

Colin Langan
Colin Langan
Automotive & Mobility Analyst at Wells Fargo

And also, what is the net pricing commodity? Is there commodity headwind we should be thinking about too?

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Yes. Colin, it's Faran Arteil. Listen, as I mentioned earlier, with regard to the Mexican peso, we are largely hedged. So even a weakening of that currency really doesn't bring us any tailwinds. And then with regards to the other commodity where we actively participate from a hedging perspective is copper.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

And then that's the other area where we essentially are hedged also. So again, it's all about managing risk for us within the FX and the commodity side of it. Clearly, there are some elements with regards to what create policy and stuff is coming through. And with the U. S.

Varun Laroyia
Varun Laroyia
Executive VP & Chief Financial Officer at Aptiv

Dollar, we're still seeing some fluctuations out there. And while we are largely hedged for some of the major currencies, we do see some risk out there.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. Maybe if I can add to it, just so I think, Colin, the headwinds on FX are largely euro and RMB related, okay, when you think about '24 to 2025. So just that sort of walk. As Varun said from a copper standpoint, that's largely indexed with our customers. So that hedge remains in place.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

We hedge incremental amounts above what's not been what's not indexed, but that's not a huge amount. Those are the big pieces of that. As it relates to price and price recoveries, our expectation, I think we've talked about it is pricing to be somewhere between 1.52%. Historically, we've done a good job managing through that as you know. We have some element of price recoveries in our plan, not remotely close to what we've had in historical periods.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

But there still is some element of labor recovery, especially as it relates to Mexico and still a few items related to material inflation from prior periods that we need to close out on.

Colin Langan
Colin Langan
Automotive & Mobility Analyst at Wells Fargo

Got it. And we talk a lot about trying to catch up with the mix with locals in China. There is growing concern about the profitability on that business because the product cycle is so short, it's kind of hard to sort of get your costs back from all the upfront investment. 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?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. So, first, we're very selective in terms of those programs and customers we're pursuing. As we've mentioned you've heard us mentioned previously, we're really focused on those that want to either export or expand manufacturing outside of China. We feel like we can bring more value in those programs quite frankly, have less price pressure. On average, you do see lower margins on those programs.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

We've been able to balance it to date or I should say lower pricing on those programs. We've been able to balance it to date with further cost reductions. So our China team is has been consolidating footprint as an example to the extent we're investing in the development of new technologies. We're getting support from the Chinese government to the extent we're investing in engineering. We've used the opportunity to shift footprint out of, for instance, Shanghai into other locations west to lower our overall costs.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

And again, not only the hourly cost differential lower, but we've been able to get pretty good support from the Chinese government in terms of enabling that, both from setting up facility standpoint as well as subsidizing the employees.

Colin Langan
Colin Langan
Automotive & Mobility Analyst at Wells Fargo

Got it. All right. Thanks for taking my questions.

Operator

We'll move to our final question from Tom Narayan with RBC Capital Markets.

Tom Narayan
Tom Narayan
Lead Equity Analyst at RBC Capital Markets

Thanks for taking my question. The first question is on ASC UX. We heard from one of the D3s last night that they're at a critical point in deciding on what to do with advanced autonomy, whether they work in house or do more partnerships with others. And we've experienced your guys' level two plus demo at CES, quite impressive, not overly costly. Just curious, in recent months, you've experienced an increase in interest for advanced autonomy.

Tom Narayan
Tom Narayan
Lead Equity Analyst at RBC Capital Markets

And on the flip side, 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 could do to reverse any structural issues there?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. Tom, good questions on both. So I would we would say that we're in more discussions with more OEMs as it relates to advanced ADAS. They like our cost effective solution. I think several of them are dealing with kind of vehicle architecture decisions, platform mix decisions, which is making that decision and that process play out over a longer period of time.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

There's a lot of interest, lots of interest in our solution given its cost. I think fewer of the OEMs are now of the view that there are certain aspects of this that are religion and they need to own that there's 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 to contribute to the platform to do more, to do less, and even supplier alternatives, whether it be on the SoC or it be on the perception system. So we're trying to present them with the flexibility that flexibility. So we're in the midst of negotiationsdiscussions with multiple OEMs across the globe now. I feel like that will translate into significant bookings during 2025.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

I'd say a few of the decisions dragged out of 2024 into 2025, but we keep working at it. As it relates to UX, we have some programs that we're working on now that we expect will translate into awards. You're right, the traditional infotainment model that operated within automotive five years ago, it's very different today. Our focus is in and around the software or the cockpit controller with end user experience, especially given the trend to see the up integration of the user experience domain controller into the ADAS controller. So that's a place that we continue to play.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

There's a couple large pursuits that we're in the midst of at this point in time, awards that will position that business for stronger growth. And listen, we continue to evaluate our entire product portfolio in terms of where it sits, what it's enabling for our customers, what the return is and how do we maximize value for shareholders. So that's one of the areas that we consistently just given some of the changes we're consistently evaluating.

Tom Narayan
Tom Narayan
Lead Equity Analyst at RBC Capital Markets

Okay. And then a quick follow-up on that semi's topic, the shortfall you see. Is that is this company specific or is it like an industry wide dynamic or something you were always expecting?

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Yes. Our concern is it's an industry wide dynamic with the advancements in AI and the need for more compute that you're going to see more pull into computers, into laptops, into other areas. 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. Varun is all over this.

Kevin Clark
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

And to the extent we start seeing extended kind of periods in terms of order and delivery of product, we'll start ramping up investment in inventory. If we don't see it, we won't make the investment, but we thought it prudent to include in our outlook for free cash flow.

Tom Narayan
Tom Narayan
Lead Equity Analyst at RBC Capital Markets

Got it. Thank you.

Operator

And that will wrap up the Q and 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
Kevin Clark
Chairman and Chief Executive Officer at Aptiv

Thank you everyone for participating in our call. We appreciate you joining us and look forward to seeing all of you in the upcoming NDRs and other conferences that we'll be attending. So thank you very much and have a great day.

Operator

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.

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