Q4 2023 Summary
Published Jan 10, 2025, 5:10 PM UTC- Aptiv expects over 20% growth in its active safety (ADAS) business in 2024, driven by strong demand and increased take rates.
- The company has successfully penetrated Japanese OEMs with its ADAS solutions for the first time, opening new opportunities across ADAS, user experience, and vehicle architecture segments.
- Aptiv plans to return up to an additional $750 million to shareholders through share repurchases in 2024, demonstrating confidence in its business and commitment to delivering shareholder value.
- High R&D spending may be impacting margins and cash flow, with concerns that Aptiv is "spending too much on R&D and getting too far out in front of the growth curve," possibly limiting returns to shareholders.
- Uncertainty surrounding the Motional joint venture as Aptiv has decided not to participate in future funding and is exploring options to reduce its ownership, which could present risks due to unclear timing and potential impacts.
- Despite holding $1.6 billion of cash on hand and generating $1.2 billion in free cash flow, Aptiv has not clearly defined its capital allocation plans, leading to questions about the efficient use of resources and returns to shareholders.
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Motional Funding Decision
Q: Why are you ceasing funding for the Motional joint venture?
A: Aptiv has decided to stop funding Motional because the commercialization of Level 4 autonomous technology is being pushed too far out to make financial sense, given other investment opportunities that will deliver profitable growth sooner. While Motional is on track with its technology roadmap, the costs related to delivering the tech, particularly hardware, make adoption challenging in the mobility on-demand market. Aptiv's intention is to reduce its holdings in the joint venture and is working through this process. There will be no breakup or walk-away fees associated with this decision. -
Margin Outlook Lowered
Q: How is reduced growth affecting your long-term margin goals?
A: The reduced growth, especially in high-voltage electrification, along with higher labor costs and a stronger peso, is causing a 100 to 150 basis point headwind to our 2025 margin target of 14%. As a result, we are pushing out these margin targets by about a year, to 2026. We are working to update our margins appropriately over the course of this year. -
Slowing EV Growth Impact
Q: How is slowing EV growth affecting your high-voltage business?
A: EV growth is slowing from about 30% to around 20% in 2024, consistent with 2023. This impacts our high-voltage business, which is concentrated in China and Europe. New program launches and customer schedules suggest continued growth, but at a lower rate. We have always assumed lower EV penetration rates than others, estimating around 10% to 15% over the next few years. -
China Market Dynamics
Q: How will changes in China affect your growth over market?
A: In 2023, local Chinese OEMs saw significant growth, but we expect this to level off in 2024 as they lap high comps. Multinational OEMs are launching new platforms, which will balance out production and our content. Our revenue mix is shifting towards local OEMs, moving from 40% domestic in 2023 to 50% in 2024, and potentially up to 60%-70% in coming years. We expect the magnitude of share shift to local OEMs to be less in 2024 than in 2023. -
R&D Spending Levels
Q: Are you spending too much on R&D ahead of the growth curve?
A: While our advanced development spending as a percent of total engineering was higher in 2023, this investment is crucial for productizing our portfolio and driving reuse of existing technology. This allows us to be more efficient and deliver higher-margin solutions at lower costs. We are focused on making engineering more efficient and believe continued investment positions us for growth. -
Strong Bookings Despite OEM Challenges
Q: How are you maintaining strong bookings despite OEM challenges?
A: OEMs face challenges in executing megatrends like EVs and software-defined vehicles, but this creates opportunities for us. We offer full platform solutions that are open, scalable, and cost-effective, addressing their needs for flexibility and lower costs. Our value proposition makes economic sense for customers and contributes to strong bookings. -
ADAS Growth and Japanese OEM Wins
Q: What growth are you expecting in ADAS, and how do Japanese OEM wins impact this?
A: We expect our active safety business to grow over 20% in 2024, consistent with this year. We secured global radar wins with Japanese OEMs, marking the first time we've meaningfully penetrated this customer base with our ADAS solutions. This opens up incremental opportunities in ADAS, user experience, and vehicle architecture with these OEMs. -
Content Opportunity with Hybrids
Q: How are hybrids affecting your content opportunity?
A: Hybrid and plug-in hybrid vehicles present significant content opportunities. Battery electric vehicles offer about three times the content of internal combustion engine vehicles, while plug-in hybrids offer about two times. Approximately 25% to 30% of our high-voltage bookings and revenue relate to plug-in hybrids, positioning us well regardless of OEMs' electrification strategies. -
Margin Leverage and Pricing Visibility
Q: How confident are you in achieving higher margin leverage in 2024?
A: We anticipate incremental EBIT margins in the mid-20% range for 2024, aided by a reduction in supply chain disruption costs. While there are ongoing discussions with customers, we believe we're in a relatively good place regarding pricing, consistent with historical expectations. -
Capital Allocation and Cash Position
Q: How do you plan to use your substantial cash on hand?
A: While our primary focus is investing in the business for profitable growth, we acknowledge the significant cash on hand. We aim to maintain flexibility for potential acquisitions that can widen our competitive moat. If such opportunities don't arise, we'll consider returning incremental cash to shareholders. We feel our balance sheet is strong and we're well-positioned for potential M&A.