Edited Transcript of APTV earnings conference call or presentation 5-May-20 12:00pm GMT

Turning to Slide 4. The deliberate actions we’ve taken over the last few years to transform Aptiv into a global technology company have better positioned us to respond and adapt in this more fluid environment. These actions include optimizing our portfolio of market-relevant technologies to enable a safer, greener and more connected future mobility; exiting lower growth commodity product lines, including thermal and mechatronics and further increasing our focus on the brain and nervous system of the vehicle; continuing to improve our industry-leading cost structure; generating roughly $350 million in overhead savings over the last 5 years and reinvesting those savings to further strengthen our capabilities in high-growth areas, including active safety, high-voltage electrification and vehicle connectivity.

We deliberately improved our revenue diversification across regions, across our customers, vehicle platforms and end markets. As we’ve executed on our strategic initiatives, we’ve improved our ability to perform through-cycle with more sustainable cash flows, which has translated into a stronger balance sheet and a solid investment-grade credit rating. These actions better position Aptiv to navigate the significant uncertainty we’re now facing.

Moving to Slide 5. The first quarter proved to be much more challenging than we anticipated coming into the year. Revenues decreased 7% to $3.2 billion in a market that was down 24% overall or 20% on an active weighted market basis. EBITDA and operating income totaled $411 million and $231 million, respectively, and earnings per share totaled $0.68, after adjusting out the gain associated with the completion of the automated driving joint venture with Hyundai. Looking at the regions, vehicle production was down 48% in China during the quarter, reflecting year-over-year declines of 80% in February and 50% in March. As China’s economic activity continues to improve, the recovery in vehicle production has been relatively slow as dealer inventories remain high and retail demand is slowly improving. Vehicle production declined 11% in North America and 20% in Europe, reflecting the early impact of customer shutdowns beginning in mid-March.

While COVID-19 had a significant impact on global vehicle production in the first quarter, the complete shutdown of OEM operations in both North America and Europe, and the current time table for the restart and ramp-up activities means the impact on the second quarter will be much more severe and is now estimated to be down over 50% from the prior year. All active sites in China are currently operating, albeit at levels which are below normal capacity, with some sites in Europe now restarting production and a few sites in North America operating to support essential business needs. Although we currently lack clear visibility of the exact timing and pace of restarts in North America and Europe, we are prepared to safely ramp up in accordance with customer schedules and government approvals.

Moving to Slide 6. The proactive steps we’ve taken to protect our employees, deliver for our customers, reduce expenses and conserve capital has put us on an even stronger footing to deal with this current crisis. After initially seeing the effect of COVID-19 on our employees, suppliers and customers in China, we implemented robust measures.

We immediately established a global crisis management team with regional and functional representatives across our businesses that continue to meet daily to monitor the situation, exchange information and manage every aspect related to this crisis. We halted all global travel and restricted visitors from entering our facilities. In response to customer shutdowns and government restrictions, we closed manufacturing facilities, technical centers and administrative offices. We implemented austerity measures to further reduce our cost structure and preserve our financial health, including significant cuts in executive pay, suspended 401(k) matches in the U.S. as well as planned salary wage increases globally; implemented furloughs and temporary layoffs for our salaries and hourly employees, in line with customer closures and reduced capital expenditures and investment in working capital while eliminating all discretionary spending.

We also took a series of actions to further enhance the company’s liquidity. These included drawing down all remaining amounts on our $2 billion revolving credit facility and suspending our $225 million annual dividend. These actions represent an incremental $600 million of annualized cash generation actions that allow us to continue our planned investments in advanced technologies, enhancing the long-term opportunities for our employees, our customers and our shareholders.

Further, while our sites have always had robust safety measures in place in light of COVID-19, we’ve implemented additional safety protocols to ensure we protect our employees and deliver for our customers as operations resume. We’ve deployed these safe operation protocols across all of our facilities, which I’ll highlight in greater detail on the next slide.

Moving to Slide 7. Protecting the health and well-being of Aptiv employees, customers, suppliers and the communities where we operate is our top priority. We work closely with medical and employee health and safety experts, government and union representatives and our OEM customers and supplier partners to expand and build upon the Aptiv safe operations protocols to minimize risk to our workforce. These protocols are based on information and guidance from the World Health Organization, the Centers for Disease Control and Prevention and various other government agencies, and are now up and running in all of our facilities.

Aptiv’s strict safety measures include the cleaning and disinfections of sites multiple times per shift, conducting daily health and risk screenings for all employees and visitors, checking employee temperatures prior to entering buses and facilities, ensuring social distancing at all work areas, providing personal protective equipment for all employees and visitors as well as utilizing physical barriers where necessary and executing immediate response plans for suspected COVID-19 cases.

As we’ve implemented the global COVID-19 pandemic plan across our business, we’re also sharing our learnings with the entire ecosystem, which has been made available on our website.

Additionally, as one of the largest employers in the communities in which we operate, we’re doing our part in supporting local hospitals by supplying personal protective equipment, and we’re helping our customers produce critical equipment with components for ambulances, diagnostic equipment and ventilators. These are just a few of the many initiatives our team has undertaken to combat this crisis. Collaboration at all levels is more important than ever. We must come together to ensure consistent coordination, communication and execution and transform how we work day-to-day.

Turning to Slide 8. As I mentioned previously, the impact of COVID-19 on global vehicle production has been more sudden and severe than any recession scenario we’ve previously planned for. What started as extended production downtime in China after January’s Lunar New Year evolved into complete shutdowns in Europe and the Americas beginning in mid-March. As we sit here today, the situation is very fluid. Visibility into the timing and pace of restarts remains very low. We’re also concerned about underlying consumer demand, taking into account the record unemployment levels, decreased personal income and declining consumer sentiment.

As a result of these factors, we expect vehicle production to decline in the range of 20% to 30% in 2020, with a view that the current list of puts and takes tilts the scale closer to 30% than 20%. Our outlook reflects a trough in the second quarter, with production declining over 50% and a slow ramp-up in the second half of the year.

With extensive learnings from China and now some restarts in Europe and the Americas, we’ve gained meaningful experience in operating with our safe start protocols at low volumes. More meaningful production restarts in Europe and North America are expected to begin in mid-May and will be slow and phased. We believe the impact of COVID-19 will be with us for some time. And as a result, we anticipate operational inefficiencies to continue from the implementation of the incremental safety measures and supply chain disruptions given the breadth of customer and supplier shutdowns globally. As such, we’re not expecting a rapid recovery in global vehicle production and remain cautious as we begin our planning for post-2020.

Turning to Slide 9. It’s in our culture to proactively manage change, innovate through disruption and be resilient in the face of challenges. We believe that the secular megatrends are now as important as ever. And as a result, we continue to fully fund investments in strategic growth initiatives, including advanced technology, enabling safer, greener and more connected mobility. These include investments in active safety, high-voltage electrification, smart vehicle architecture and vehicle connectivity. In the first quarter, we continued to see important validation that our competitive moat is expanding, and the long-term trends remain intact. New business bookings totaled $2.8 billion, reflecting the near-term global impact of COVID-19. We continue to expect rapid growth in electrified vehicle platforms, driven by more stringent CO2 regulations and the declining total cost of ownership. We had over $500 million of high-voltage bookings in the first quarter, including one with a major European OEM for an innovative long-range EV launching in 2022.

We also saw continued strong launch activity in the quarter. Our approach to flexible satellite architecture has been a game changer for the industry and our recent launch of an L2+ scalable ADAS solution with an industry-leading customer in China marks the first in a series of launches with 4 other OEMs over the next 18 months. We also launched our best-in-class integrated cockpit controller with a major global OEM, which will be launched across all of their premium brands. This high-performance controller, which is fully OTA-capable, provides a fully reconfigurable cockpit, managing up to 4 high-definition displays. Lastly, in March, we completed the formation of the Aptiv-Hyundai autonomous driving joint venture, advancing our shared vision of making mobility more safe, green, connected and accessible. As a reminder, Hyundai contributed $1.6 billion of cash at the close, funding the operations of the joint venture for the next few years and is providing $400 million of engineering and R&D services, making them a close technical partner and strengthening Aptiv’s existing foundation in automated driving solutions.

Before I hand the call over to Joe, I’ll wrap up on Slide 10. As we’ve all seen, the impact of COVID-19 has been significant. To manage through the crisis, we remain laser-focused on 3 key priorities: first, keeping our employees, their families and the communities we operate in safe; second, thoughtfully executing our current and future customer programs, while at the same time, further differentiating our capabilities in safe, green and connected advanced technologies; and third, running our business efficiently and effectively to minimize expenses and maximize cash conservation.

These priorities will preserve our financial health, improve the sustainability of our business and create value for our shareholders. While the way we operate day-to-day may not go back to normal as we knew it, we are committed to finding new ways of working that allow us to survive and thrive in this future.

With that, I’ll hand the call over to Joe to take us through the first quarter results in more detail.

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [4]

——————————————————————————–

Thanks, Kevin. Good morning, everyone. Starting with a recap of the first quarter financials on Slide 11. As Kevin highlighted earlier, it was a very difficult start to the year. We began to see the impact of the COVID-19 outbreak at the time government restrictions were imposed across China in late January, lasting into March, at which time the customer shutdowns began across Europe and the Americas. Despite the volatility in the quarter, we had strong execution across our businesses. Revenues of $3.2 billion were down 7%, totaling 13% growth over market as vehicle production declined 20%. Adjusted EBITDA and operating income were $411 million and $231 million, respectively, with adjusted earnings per share of $0.68, which excludes the $1.4 billion gain associated with the closing of the autonomous driving joint venture with Hyundai. Lastly, operating cash flow was $161 million, including a net positive contribution from working capital and lower CapEx in the quarter.

Looking at the first quarter revenues in more detail on Slide 12, content gains globally were more than offset by volume declines, largely associated with the adverse impact of the pandemic, price down to approximately 1% and the unfavorable impact of FX and commodities. Excluding acquisitions, organic growth was down 8%, reflecting 12% growth over market. From a regional perspective, North America revenues were down 8%, representing 3 points of growth over market. We continue to see strength in Europe outgrowth, with revenues up 2%, representing 22 points of growth over market driven by the continued uptick of several active safety and high-voltage electrification programs. And lastly, in China, revenues declined 31%, reflecting 17 points of growth over market.

Turning to Slide 13. First quarter earnings reflect the lower sales volumes we saw in the quarter as well as the operational inefficiencies associated with our facility shutdowns primarily in China. As a result, adjusted EBITDA and operating income margins declined 180 and 250 basis points, respectively, in the quarter, and EPS declined 35%.

It is worth pointing out here that the majority of our costs are highly variable, the largest being material at roughly 50% of sales, which flexes quickly. While direct labor is also variable, it is more difficult to flex in the short term when production comes to an abrupt halt and restart schedules remain uncertain, as employees are put on temporary layoffs or furloughs. To that end, we have implemented a number of short-term austerity measures to preserve liquidity and control costs, as Kevin highlighted earlier.

Moving to the segments on the next slide. For the quarter, Advanced Safety and User Experience revenues declined 9%, reflecting 11 points of growth over market driven primarily by growth in active safety, up 3% in the quarter. As a reminder, Q1 was the last quarter the automated driving spend consolidated in the ASUEX segment. And going forward, we will recognize 50% of the joint venture’s operating results in the equity income line. Excluding automated driving, ASUEX EBITDA declined 42%, driven by the decline in vehicle production and the continued growth-related investments in the business.

Consistent with prior communications, ASUEX continues to make the necessary engineering investments to support the pipeline of new business pursuits and the volume of new program launches in 2020 and beyond. We will continue to evaluate this spend throughout the year as we gain more clarity on the timing of product launches and any potential for launch delays.

Turning to Signal and Power Solutions. Revenues were down 7% adjusted, reflecting 13 points of growth over market driven by strong growth in our high-voltage electrification product lines and a favorable benefit of Falmat, gabocom acquisitions, partially offset by the unfavorable impact of customer shutdowns in the quarter. EBITDA declined 12% driven by the decline in global vehicle production, with an additional $12 million headwind from FX and commodities, primarily driven by the euro and RMB.

Turning to Slide 15. Beginning in Q1, as we saw the impact of COVID-19 shutdowns on our Chinese operations, we began to take meaningful actions to preserve our liquidity and introduce certain interim austerity measures globally. As you’ll see on the left side of the slide, we ended the first quarter with approximately $2.2 billion in total liquidity, which reflects the full drawdown of our revolver in March, ensuring we have ample cash on hand to manage through this crisis. This, coupled with the actions we have taken in the last few years to strengthen our capital structure, maintain conservative leverage and extend the weighted average tenor of our debt, ensures we have sufficient liquidity into 2021. The austerity measures we implemented in the first quarter, which totaled over $600 million in annualized cash savings, preserve our liquidity and enhance our financial health.

In addition, we recently completed a 1-year extension of our credit facility, deferring the maturity date from August of 2021 to August of 2022 for both the revolver and the term loan, with approximately 90% of the banking group participating. As part of the extension, we also negotiated an amendment to the agreement, which includes a covenant relief period that increases our financial leverage covenant to 4.5x debt to EBITDA, up from 3.5x through the second quarter of 2021 and includes certain restrictions with respect to capital allocation during this period.

As we look forward, given the steepness of vehicle production declines expected in the second quarter, down over 50%, we expect adjusted EBITDA losses that are order of magnitude in the range of $150 million to $200 million in the second quarter. We continue to take the necessary actions to minimize the impact of the 8 to 9 weeks of lost vehicle production in Europe and North America, and we believe we are well positioned to navigate the uncertain environment once operations restart. We will resume providing forward-looking guidance when we have improved visibility on the pace of vehicle production restarts, capacity utilization and consumer demand.

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

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [5]

——————————————————————————–

Thanks, Joe. Let me wrap up on Slide 16 before opening up for Q&A. The first quarter of 2020 proved very challenging as the industry was met with unprecedented declines in vehicle production, namely in China. Now with Europe and North America shutdowns continuing into May, we expect the second quarter to be even more difficult, as Joe just highlighted. Fortunately, we entered this crisis with a market-relevant product portfolio, a flexible business model and a strong balance sheet, and as a result, we’re in a strong position to weather this storm. The additional actions we’re taking puts us on an even stronger footing when we exit this crisis. My confidence in Aptiv and our ability to deliver sustainable value creation is underpinned by the dedication and commitment of our people, our greatest asset. I’d like to restate how proud I am of our 160,000 employees, who through all of these challenges, have continued to think and act like owners and operate as one team to deliver safely for our customers and our shareholders. Looking ahead, I’m confident we’ll emerge from this crisis more unified in our mission, in a stronger competitive position and financially more resilient.

With that, let’s open up the line for Q&A.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) And we can take our first question from Itay Michaeli of Citigroup.

——————————————————————————–

Itay Michaeli, Citigroup Inc, Research Division – Director & Global Head of Autos Sector [2]

——————————————————————————–

Joe, I was just hoping you could speak a bit more about — thanks for the color on the EBITDA on Q2. I was hoping you could give us a few more parameters on the cash flow side, particularly around CapEx and the working capital. And I’m thinking prospectively in the second half of the year, if you can maybe talk about at various breakeven levels, maybe where you are in China right now as well as the — just components of the cash savings that you announced today that are incremental to Q1.

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [3]

——————————————————————————–

Yes. I won’t be giving a lot of specifics, Itay, just given the lack of visibility. As I said in my prepared remarks, we’re comfortable. We’ve looked at a number of scenarios and are comfortable, certainly from a liquidity perspective, we’re well positioned into 2021. And as it relates to Q2, I think you could think of the sort of the — will be negative cash flow. It’s certainly within the EBITDA range that I talked about. And then what I’d call almost maybe a like amount as it relates to investment in working capital.

We had a very favorable working capital quarter in Q1. As the plants came down, we started shutting things off fairly quickly. The team did a good job on that. I would expect that to ramp up and be a net investment in Q2.

——————————————————————————–

Itay Michaeli, Citigroup Inc, Research Division – Director & Global Head of Autos Sector [4]

——————————————————————————–

Great. That’s helpful, Joe. And then maybe going back to bookings, maybe for Kevin, can you just talk about how much of Q1 was tied to timing? Where you’re seeing your win rates? And are you seeing potential market share gain opportunities across the supply chain? Yes, if you can comment there, that would be helpful.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [5]

——————————————————————————–

Yes, Itay. I think Q1 bookings, just given the amount of uncertainty and the amount of activity from an OEM standpoint, quite frankly, the number of people who were working from home or were on TLO or furlough across our customer base and the supply base, I think Q1 isn’t really a normal quarter. We’ll see how Q2 and the balance of the year plays out. As it relates to opportunity to pick up market share, our view is, and we’ll look at timing, just — that’s our rationale for continuing to invest in some of the advanced technologies that we talked about, whether it’s active safety, smart vehicle architecture, so on and so forth. So we believe there could be an opportunity there. But near term, just given the lack of visibility and what the industry is going through, it’s hard to be precise.

——————————————————————————–

Operator [6]

——————————————————————————–

And we can now take our next question from Joseph Spak, RBC Capital Markets.

——————————————————————————–

Joseph Robert Spak, RBC Capital Markets, Research Division – Analyst [7]

——————————————————————————–

Joe, I was wondering if you could give us an update on just your Mexico operations, some of the shelter-in-place policies there and how you’re dealing with that as sort of North America production looks to restart and how it will impact your operations in the second quarter.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [8]

——————————————————————————–

Yes. Maybe I’ll start, Joe, and you can comment. So we have close to 30 manufacturing facilities in Mexico. For all intents and purposes since mid-March, they’ve been shut down. There have been a few facilities that have been operating to provide product to essential businesses or businesses deemed essential by the Mexican government.

We now have employees in all of those facilities prepping for relaunch of the product, a relaunch of production for our North American or U.S. customers. So all of those locations have people in place, implementing the safe start — the safe restart protocols as well as ensuring we’re ready to start production once schedules start — vehicle production schedules start to increase. There are a few of those facilities that are running, at I would say, real, very, very low capacity levels that again, have been providing product to essential businesses and are starting to provide product to some of the OEMs in North America, Joe.

——————————————————————————–

Joseph Robert Spak, RBC Capital Markets, Research Division – Analyst [9]

——————————————————————————–

Okay. The second question, I guess, Kevin, one of the things we’ve heard from some other companies is that there may have been some element of a little bit of a prebuy or inventory build towards the end of the first quarter as you were — kept shipping product, but maybe the production didn’t occur. Did you see any evidence of that in your business?

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [10]

——————————————————————————–

Joe, it’s Joe. We didn’t. I mean we worked very hard to be aligned with our customers when they started winding down production or shut down. We got out quick, didn’t want to be running facilities that obviously had no place to ship to. So we did not see that, to be honest with you. Have heard that as others reported, but we have not experienced that in any meaningful way in the business.

——————————————————————————–

Operator [11]

——————————————————————————–

And we can now take our next question from Armintas Sinkevicius of Morgan Stanley.

——————————————————————————–

Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [12]

——————————————————————————–

I wanted to drill in a little bit into the 13% growth over market at Signal and Power. When we look at the CV and Industrial end market, that’s sort of in line with last quarter. The high voltage performed better, but it really looks like a lot of the benefit came from engineered components and electrical distribution systems. Maybe you could talk about what drove some of that strength here in the quarter.

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [13]

——————————————————————————–

Yes. There was — it’s a good question. Obviously, within that engineered component, we have HellermannTyton, which is about 50% auto. So you’ve got their industrial business as well as Winchester and the Mil-Aero that effectively stayed operating throughout the balance of the quarter. And actually, in some cases, actually saw some uptick in revenue around certain industries. So that helped drive the — that really helped drive the outgrowth in Signal and Power at this point.

Again, I think on top of what are the normal trends that Kevin referenced of increased high voltage. And just overall, that business has continued to see strong content growth just given its size and scale.

——————————————————————————–

Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [14]

——————————————————————————–

Got it. And then around your comments for China, the weekly data seems to suggest that sales in April were down about 4% year-over-year. So the recovery appears to be pretty decent on the demand side. What are you seeing that’s perhaps different?

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [15]

——————————————————————————–

Yes. Maybe we’re looking at different data. The data — our data on April through the end of April is retail sales down 18%. Listen, the market in China is improving. We would agree that we’re seeing that. However, from our perspective, consumer demand and certainly, vehicle production isn’t at levels that it was at last year. So from a year-over-year standpoint, vehicle production continues to be down. So it’s something we monitor closely. It is something that we hope we see continued strengthening. We’ve not seen any sort of significant government incentive plans put in place to really drive incremental demand, but it is something that we’ll watch very, very closely.

——————————————————————————–

Operator [16]

——————————————————————————–

And we can now take our next question from Brian Johnson of Barclays.

——————————————————————————–

Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [17]

——————————————————————————–

Yes, two questions. Just a quick housekeeping and then kind of more midterm outlook. Decremental margins were obviously higher in ASUEX than SPS. You mentioned engineering spend. Any way to think about decremental margins going into 2Q?

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [18]

——————————————————————————–

Brian, I would — we’ve talked really since the beginning of all of this that there, we’re running a little higher than our normal, which — that sort of 25% to 30%, 35% range is a little bit over 40%. So I’d continue to use that sort of 40% plus as I thought about Q2, partly — and it’s from my prepared comments, the balance at the moment is you send people out on TLO or furlough, there’s still some costs associated with those employees as we wait to gauge the timing of the restart and the level of the restarts, and that’s — in order to carry that workforce is really why we went in very hard at the other austerity measures. But that does wind up in a higher decremental in the short term.

——————————————————————————–

Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [19]

——————————————————————————–

Okay. Second question is, what are your thinking about launch activity as we go into second half and even 2021? I don’t know if you’ve had good conversations with your OEMs or they’re just scrambling to restart and they’re not ready for those conversations yet. But we have heard some talk of at least some of the 2021 launches being pushed out, some of the 2020 launches having multiple week delays. I’m just wondering how you think about that, a, that risk and b, what it would do to your growth over market in each division?

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [20]

——————————————————————————–

Yes. No, it’s a good question, Brian. I’d say that the dialogue with customers has been extensive, I think, quite frankly, from an industry standpoint, both from a customer and down to supply base, there’s been a lot of communication over communication. We’ve seen some shifting of launch timing based on some of the government requirements with respect to stay in place and other issues, whether it’s in the U.S., Europe or China. So some shifting, nothing major. Some programs will shift out of ’20 into 2021, but that will be based off of what they were — when they were originally scheduled to be launched in 2020. Have not seen any real cancellation of programs at this point in time. Have seen shifting schedules. So I would say from a schedule standpoint, it has been very fluid. I think there was a desire for OEMs in Europe and the U.S. to be launching late April or earlier in May, and we’ve seen those schedule shift out, but the supply chain is adjusting to it. And again, nothing major.

From an overall launch activity, back half, we have even adjusted for the shifting schedule, a significant amount of activity. It’s especially true in the ASUEX business. I think critical launch activity is up over 50% back half of this year versus the same period last year. A number of those programs relate to the advanced ADAS programs that we just launched in China. So it’s — they’re programs that we’re watching very, very closely and making sure we’re in a position to execute flawlessly. I think that’s one of the reasons when you talk about decrementals and ASUEX, you’re seeing that the decremental levels of the investment in the technology, but also making sure we’re positioned to launch well. But again, a lot of activity, a lot of shifting, nothing major, Brian, at this point in time, and no cancellation of programs.

——————————————————————————–

Operator [21]

——————————————————————————–

We can now take our next question from Emmanuel Rosner of Deutsche Bank.

——————————————————————————–

Emmanuel Rosner, Deutsche Bank AG, Research Division – Director & Research Analyst [22]

——————————————————————————–

In your prepared remarks about AS and UEX, I think you indicated that you’ll continue to evaluate, I think, engineering spending for potential launch delays and other activities. I know you just addressed the idea of delays. Can you just elaborate a little bit more about how you’re thinking about the spending? And what sort of like bogies would you be looking for to decide whether to dial this back or sort of like maintain at the current levels? Obviously, this is a big factor in the magnitude of the decremental margin.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [23]

——————————————————————————–

Yes. No. Listen, I mean, it’s a very fluid situation. So again, very limited visibility. We think there are a number of areas that we have a competitive advantage. We think it’s important that we can continue to invest in those areas. We have a number of those programs that we’re launching over the next few quarters, so executing those launches flawlessly is absolutely critical.

We’ll continue to evaluate the market and see what sort of — or if there is any sort of rebound in what the back half of this year looks like and what 2021 looks like. And to the extent, we need to calibrate or adjust, we will calibrate or adjust.

I will tell you, dialogues with several customers where we’re either on some of these advanced programs or we’re doing advanced development programs with — in areas like smart vehicle, architecture or active safety, a real push from those OEM customers to continue to invest because they’re looking for opportunities down the line to reduce manufacturing costs, right, to enable more technology in the car, more cost effectively, among other things. So certainly, a push from the customer base will continue to invest. But that’s something that we’ll, again, we’ll continue to look at based on our outlook for vehicle production.

——————————————————————————–

Emmanuel Rosner, Deutsche Bank AG, Research Division – Director & Research Analyst [24]

——————————————————————————–

That’s helpful. And then sort of expound on the topics of looking at your megatrends. I was curious if you could share some of your longer-term thoughts on the potential for some of these trends to maybe slow down a bit. So as I’m looking to your Slide 9, you have active safety, user experience, high voltage, automated driving.

I’m particularly curious about high-power voltage in regions where it’s not mandated, like, let’s say, the U.S., for example. Is there any potential risk for some of this product rollout? And then automated driving, sort of like just globally.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [25]

——————————————————————————–

Yes. Listen, our view on the megatrends is they remain intact, that there remains a push in a demand for safer vehicles, for greener vehicles. And there may be interruptions for a quarter or 2, given macro situations. But there’s still going to be demand from a customer standpoint, both end customer as well as OEM. As it relates specific to Aptiv, when you look at bookings on — in areas like high-voltage electrification, 80% of those bookings are with European and Chinese OEMs. So there is not a significant portion of that business that is in North America. And our view has been that although there’ll be demand for electrified vehicles in North America, it was certainly going to lag Europe and China.

As it relates to active safety solutions, active safety has the highest rebuy rate of any option that’s out there. Consumers buy vehicles with safe — safety systems, they have a 95% rebuy rate. And you’ll continue to see that demand. To the extent, you have players like ourselves that can provide a platform that can integrate a number of different features, we feel that’s more cost effective. And ultimately, that positions us well for that increased demand.

As it relates to autonomous driving, we’ll see. Again, our view has always been, the autonomous driving road map has been about the broad spectrum of active safety. How do you make vehicles safer? How do you support the driver? And ultimately, how do you eliminate the driver? And our joint venture partner, Hyundai and ourselves are both of the view that we believe you’re going to see autonomous vehicles. You’re going to see them in consumer vehicles and mobility on demand that may be pushed out a year or 2. We’ll see how that plays out.

But there are all sorts of other applications where autonomy can be applied, whether it’s delivery vehicles, whether it’s warehouse vehicles. You can go through the laundry list. So developing the technology remains as important as ever. We’re positioned to basically commercially exploit the technology that’s developed there and incorporate it into our active safety solutions, which we think is important.

And we’re using, quite frankly, the slowdown, the — some of the macroeconomic challenges as an opportunity to go out and hire resources from some of the companies that are out there that maybe aren’t in the same financial position that our joint venture is in.

——————————————————————————–

Operator [26]

——————————————————————————–

And we’ll now take our next question from John Murphy of Bank of America.

——————————————————————————–

John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [27]

——————————————————————————–

It’s great to hear from you. Kevin, maybe just a follow-up on what you were getting at in the answer to that last question. Obviously, there’s been some concern that, particularly on the autonomous side, there’s a little bit of overlap between what you’re working on and what the automakers are working on. And that — for that reason might sort of limit the growth on the autonomous side of what you can provide to certain automakers. However, given the current crisis, everybody is focusing more and more on what their core competency is and trying to save money.

So it almost seems like this crisis is going to open the door for you to have greater wins with your autonomous technology and your offering there. I’m just curious, I know it’s early days. I mean what is your kind of opinion on that? And as you’re over communicating to — with your customers, is this something you can kind of pitch and we could finally get the economies of scale that you deliver to them on this technology?

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [28]

——————————————————————————–

Yes. Listen, John, I think our view on providing autonomous technology to OEMs, it remains — there’s a group of OEMs that will continue to invest in the development of their own solution, and there will be others that buy some or all of it from third parties. And our view is, is that likely continues.

If the economic challenges continue for a protracted period of time, probably those who were on the fence are more likely to buy it from someone else. So that’s something that we’ll make sure the joint venture is positioned to do.

But I would tell everybody, I mean, the big message from Joe and myself on this call is just lack of visibility. Short-term visibility right now is extremely limited, so it’s very, very difficult to draw any conclusions. And our real focus, and Joe and the team have done a great job on the cash conservation initiatives. Hey, cash is king and maintaining flexibility is critically important. And that’s what we’re really focused on doing.

And at the same time, there are a couple of areas that are really, really important. One, we have to continue to serve our customers. We need to launch flawlessly. And then two, regardless of the slowdown, we have a strong view that the world is looking for safer, greener, more connected vehicles. And based on that, those are areas, as long as the macros allow us to and as we look at areas where we can reduce cost, to invest in those technologies, we will continue to invest in those technologies. To the extent the market gets to the point where it’s a challenge for us to do that, then we’ll revisit. We’ll reprioritize.

——————————————————————————–

John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [29]

——————————————————————————–

Okay. That’s helpful. And then kind of the second question. I mean as you’re winding up in China and restarting and getting ready for the restart in Europe, I mean, I’m just curious, as you’re going through that process, if there’s any opportunities or issues with some of your suppliers. And maybe we kind of always think about the potential for M&A and integration sort of in parallel or horizontal. But is there anything you see that might be opportunistic for vertical integration as far as M&A, potentially making yourself sort of stronger and more valuable over time? More so the vertical side as opposed to horizontal?

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [30]

——————————————————————————–

Yes, John, it’s Joe. I think at the moment, the work has been really since Q1 in China and now globally, it’s the health check and the readiness on the supply base. It’s constant communication with them. There’s been — we’ve sent surveys out. We’re looking at their preparedness. We’ve shared our safe restart with them to make sure that they can operate the way we expect them to, the way our customers expect them to. So I would say it’s been a very tactical focus. And I would expect that to continue through the second quarter as things start back up. Certainly dislocation creates opportunities that’s something we’d start to look at, but down the road. Right now, we’re focused on making sure we’re staying in touch with the supply base and that we’re ready to go when things start back up.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [31]

——————————————————————————–

Yes, John. Joe and I were talking about it. Joe’s comment, it’s tough to get M&A done when there’s limited to no visibility, right? So the reality near term is — that’s a very low likelihood.

——————————————————————————–

Operator [32]

——————————————————————————–

And we can now take our next question from Ryan Brinkman of JPMorgan.

——————————————————————————–

Ryan J. Brinkman, JP Morgan Chase & Co, Research Division – Senior Equity Research Analyst [33]

——————————————————————————–

I think [automotive] is a real source of strength in the auto industry you guys are. It’s on display in 1Q, et cetera. It’s great. But I thought to ask a little bit more around whether the relative weakness of any of your customers or vendors is something you’re presently focused on or your investors should be focused on. I think it was John Murphy just asked on the Tier 2. So I guess maybe just a little bit more on the customer front. Working capital tends to be a source of cash for you when production is declining. Some automakers, though, I have to imagine, are probably struggling here with the amount of payables going out the door, particularly in early 2Q without any of the offsetting cash coming in. So without naming any customers, of course, are there any that you’re worried about their ability to pay? Or are they may be leaning into the supply base a little bit for extended terms? Is there room for Tier 1s to accommodate them? Or what are you seeing there?

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [34]

——————————————————————————–

Yes. I would say the — Ryan, by and large, the industry has acted pretty responsibly through this crisis. Based on dialogues we’re having with OEMS, I think there’s broadly an understanding that believing you can solve your problem by creating a problem for someone in the supply base is not a long-term sustainable solution.

Having said that, all of us are focused on cash. We do get calls from customers about extending, which is perfectly appropriate in this sort of an environment. We would expect that. That’s not a situation or a path that we’ve decided to go down. When we look at our customer base, we think they’re all in pretty strong financial position.

I think the question comes down to how long does this last, and how long do we go for a period with little to no production. And then what is the rebound look like in the back half of this year and into next year? And I think relative to where the industry was in ’08, ’09, it’s in a much better position. And we’ll monitor it closely.

And then lastly, I’d say, one of the things that was in my prepared remarks, we’ve been very focused on the last 5 years in terms of diversification from a region standpoint, OEM standpoint and vehicle platform standpoint. So making sure we’re in with the right customers, in the right regions and on the right vehicle platform. So our view is that impact to the extent you’d have one would be much more muted than what it would have historically been.

——————————————————————————–

Ryan J. Brinkman, JP Morgan Chase & Co, Research Division – Senior Equity Research Analyst [35]

——————————————————————————–

Great. That’s really helpful. And then just lastly for me, I’d like to ask about the sort of like rolling phased restart in different geographies. Is that going to be problematic for the final assembly plants getting going? Earlier in the call I think somebody asked Mexico, where a lot of your vehicle facilities are in North America. But I think some of these state governors, regional cooperatives, maybe that’s helpful along those lines. But are there any bottlenecks that you’re looking at? And if the industry was willing to go forth and the final assembly plants, those were in jurisdictions allowed to operate, how quickly — what kind of lag factor are you looking at maybe?

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [36]

——————————————————————————–

Well, we — so we have 65,000 employees in Mexico. As an example, we have close to 30 manufacturing facilities, right, all of whom are dependent upon Tier 2s, Tier 3s. And as Joe mentioned, as a part of our crisis management team, we have a supply chain management team that’s in daily contact with the entire supply base globally and in-region and is doing health checks, financial health checks, operational health checks, safe start protocol health checks. And I’d say we feel reasonably good about where the supply chain sits now. All of our facilities now have employees — all our manufacturing facilities in Mexico, as an example, have employees in those facilities, preparing for launch. I’d say we’re a little bit in front of launch activity to be very transparent. But just given some of the challenges in Mexico, we’ve elected to be in front of it. So we’ve been in dialogue with federal government there as well as the state governments to make sure that we can get people in. So that once our OEM customers flip the switch and begin vehicle production, we can do everything on our part to make sure that we satisfy their demand.

Having said that, just given the complete shutdown of the industry for a period of time, we’re sure there’ll be some fits and starts, that there will be some problems. But the industry has done a relatively good job given some of the global supply chain challenges we’ve had in the past with tsunamis and earthquakes, things like that, of figuring out ways around it.

The China shutdown, as an example, I’m not aware of a single OEM assembly plant shutdown that we were tied into directly or indirectly. So it’s something that the industry has done a pretty good job figuring out with OEM customers adjusting what they produce and folks in the supply chain figuring out alternatives to products where there might be a shortage.

——————————————————————————–

Operator [37]

——————————————————————————–

And we can now take our next question from Mark Delaney of Goldman Sachs.

——————————————————————————–

Mark Trevor Delaney, Goldman Sachs Group Inc., Research Division – Equity Analyst [38]

——————————————————————————–

The company mentioned that there will be operational inefficiency from COVID-19, and they could last for some time. Can you be more specific on the potential impact from the new measures related to safety equipment, social distancing and other costs to deal with COVID-19?

And help us better understand what it will mean not just for near-term margins, but perhaps more importantly, any implications to the company’s intermediate to long-term margin potential.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [39]

——————————————————————————–

Yes. I don’t know if we have exact dollars. I think, first and foremost, it just starts with inefficiencies in the supply chain and parts shortages and other items that create certain amount of supply chain inefficiencies.

The second piece is in reality, we’re operating differently, right? Today, 84% of our salaried workforce works from home. Although we’ve operated extremely well, surprisingly well better than what Joe and I would have expected, there still is some inefficiency tied into that.

Then when you overlay our protocols and the protocols of others, where you think about daily temperature checks, health assessments, PPE, the social distancing, there is a certain amount of inefficiency that gets introduced into the production process and the supply chain, some of which will get — as we learn, as we’re manufacturing at higher volumes, we’ll get better at and we’ll reduce but some of which will remain in the supply chain.

And this is an industry that’s focused on saving nickels and dimes. And to the extent every employee has a safety mask or a visor and you have 6 feet of distancing and you’re having to juggle shifts at production facilities, there is a certain amount of a negative productivity impact.

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [40]

——————————————————————————–

Yes. I think, Mark, just to add — it’s Joe. I lumped that into just that Kevin’s lack of visibility comment, right? It’s hard to quantify those things when you don’t know exactly when folks are coming back to the plants, how many plants, how many employees, how fast is ramp. I mean that’s really what we’re dealing with. As you think you go down the P&L, you go down the various cost elements, it sort of starts with when and how fast you come back. And that’s obviously going to take some time here during the course of the, hopefully, just the second quarter to sort out for not only this quarter, but the balance of the year.

——————————————————————————–

Mark Trevor Delaney, Goldman Sachs Group Inc., Research Division – Equity Analyst [41]

——————————————————————————–

For my second question, I realize this is not a near-term focus of the company, but can you help investors understand what financial metrics Aptiv will be looking to achieve before it’s willing to resume returning capital to shareholders?

——————————————————————————–

Joseph R. Massaro, Aptiv PLC – Senior VP & CFO [42]

——————————————————————————–

Yes, listen, we’re going to be in liquidity preservation mode here until we’re very comfortable that this pandemic is understood. You’ve got discussions of a potential second wave and such.

So I think you’re well into the second half of 2021 before we’d best case be able to start to talk about that. We’re — we went out I think very prudently extended the credit facility because there was an opportunity to do that. It wasn’t coming due until August of 2021. But again, there was a window of opportunity there. We took advantage to bump up, for a period of time, the debt-to-EBITDA count to 4.5x, not because we’re necessarily worried about breaching. But again, that’s the type of thing you do to maintain flexibility and optionality.

As part of that, while we’re under that covenant relief period, we will not be able to pay dividends through Q2 of 2021, dividends or buy back stock. But again, don’t — didn’t necessarily view us in a position just given from a liquidity perspective that we’d be in a position to do that. So I think that’s a longer-term look.

I think philosophically, around capital allocation, doing things like investing in the business organically and inorganically, and ultimately, returning cash to shareholders, philosophically, those views haven’t changed. But for an extended period of time, we’re going to be very much focused on liquidity first.

——————————————————————————–

Operator [43]

——————————————————————————–

And we can now take our next question; caller David Kelley of Jefferies.

——————————————————————————–

David Lee Kelley, Jefferies LLC, Research Division – Equity Analyst [44]

——————————————————————————–

A follow-up on your discussion regarding visibility to ongoing advancements and advanced solutions investments at your level and by your customers, whether it be active safety or electrification. I guess how are you thinking about RD&E spend? And why that there’s ongoing secular changes, but factoring in the weaker macro backdrop as well?

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [45]

——————————————————————————–

Yes. Sorry, you broke up a little bit. Again, we view not looking at the business quarter-to-quarter, which we do. But setting that aside, we still have a strong view, as do our customers, that consumers are looking for safer, greener, more connected vehicles. And on a couple of those trends, including safety and green, there’s a government regulation overlay as well that demand for those vehicles from our OEM customers will continue. We have specific data as it relates to consumer rebuy rates on ADAS active safety solutions as well as consumer preference or increasing preference for electric vehicles, especially in Europe and China, that basically underscore our overall view that you’re going to continue to see demand for that.

Third, when you think about areas like ADAS, ADAS is a product that helps our OEM customers sell cars. And it’s a product that allows them to sell vehicles at higher profit margins. And especially in times like these, our customers are going to be focused on selling the most profitable vehicles that they can sell, whether they’re trucks, SUVs, so on and so forth that have advanced ADAS systems on them.

Now we’ll continue to evaluate that. We’ll continue to watch it. We’ll continue to watch it closely. As I mentioned, flexibility is critically important. We’ve maintained a real flexible business model and flexible cost structure. And to the extent we see any change to that, we’ll, course-correct.

——————————————————————————–

David Lee Kelley, Jefferies LLC, Research Division – Equity Analyst [46]

——————————————————————————–

Great. I apologize, hopefully, you can hear me better now. I guess my follow-up, a longer-term question. You’ve been targeting 25% sales mix outside of light vehicle autos by 2025. Does that change given the current backdrop? And how are you thinking about greenfield opportunity and potential bolt-on acquisitions go forward, assuming the latter is on pause? Go ahead.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [47]

——————————————————————————–

Yes. Listen, Joe answered the question, right? Our philosophy from a capital allocation strategy hasn’t changed. But right now, we’re sitting in a period, again, where there is very, very limited visibility, and flexibility is key. And flexibility is measured today by cash. And we’re operating with the constraints of today. As things stabilize, we’ll return to the historical strategy. But right now, it’s about maintaining flexibility and accumulating cash to make sure that we’re in a position to do that. The reality is near term — people don’t transact when there’s lack of certainty. They don’t sell and they don’t buy. So I think in reality, it’s a good theoretical question, but it’s not a practical one. And once things settle, we’ll continue the strategy in diversifying being more balanced from a revenue standpoint. Is anyone there?

——————————————————————————–

Operator [48]

——————————————————————————–

So Kevin, I think this concludes the Q&A portion of today’s call. I’ll hand the call back over to you for your final comments.

——————————————————————————–

Kevin P. Clark, Aptiv PLC – President, CEO & Director [49]

——————————————————————————–

Okay. Listen, thank you, everyone, for your time today. We hope you’re safe, you and your families are safe and healthy. Again, we’re really focused on making sure that you understand the situation that we’re operating in from a visibility standpoint. And we’re doing everything we can to ensure that we can operate. We keep a flexible business model, and we can operate through this, and we’re confident that we’ll be able to do so. So with that, thank you very much.

——————————————————————————–

Operator [50]

——————————————————————————–

Thank you. That concludes Aptiv’s First Quarter 2020 Earnings Conference Call.