Aptiv PLC (APTV) Earnings Call Transcript & Summary

So we're live. Thank you, everyone, for joining Day 1 of the Barclays Industrial Select Conference, the autos track here. I'm Dan Levy. I'm lead U.S. autos and mobility coverage at Barclays. I'm very pleased to have with us Aptiv, who is a mainstay at this conference. Very pleased to have with us Kevin Clark, the company's Chairman and CEO; Joe Massaro, the company's CFO. So we're going to actually kick off with a couple of the audience response questions. And then we'll go through the set of prepared fireside chat questions.

I'm going to kick off with question 1 because they own the stock. Waiting for your response. Question one, please?

Yes, we own stock.

All right. So a lot of opportunity here. Okay. Why don't we pull up question 2? What's your general bias towards the stock right now? Okay. So some [indiscernible] people like it, but I think there is an opportunity to convert some of the nonowners. And then why don't we go to question 5? What's the right multiple perhaps? I think -- and maybe we could just start here because I think this is really the key investor question is, what is the right multiple for Aptiv? [ Mind ] the clock, please. Okay. So it's a pretty good multiple for an auto supplier and actually probably in line with the industrial universe. So maybe I just want to start with a question for you. Obviously, we've seen the narrative as a whole has changed. Investor sentiment has gone through a bit of a roller coaster. Maybe let's frame this in terms of the industry and frame how things have changed in terms of how you're responding to shifts in the industry. One, from a cycle perspective, you've moved from a supply-constrained environment to a demand-constrained environment. How does that change the way you're running the business? And the other piece is on the megatrends side is we went through a period of the last 3 years where there was maybe an accelerated push on megatrends. Now there's a bit of a pullback. How does this change the way you're running the business? And what are investors missing?

Yes. Thanks for having us here. We're a mainstay here because it's a great conference, so yes, really appreciate it, and thanks, everybody, for your time and your feedback. Listen, I would say, as we sit here as a management team and get an investor perspective, really, our narrative hasn't changed. Our approach to managing the business, quite frankly, hasn't changed. You've heard us talk about the megatrends of safe, green and connected. And you've heard us talk about those for roughly a decade, right? And those megatrends continue in automotive. They continue in other markets. And our focus from a product portfolio standpoint and from a solution standpoint is being a focus on supplier in those spaces for automotive. And those are the areas that we've invested. Those are the areas where we've seen significant growth. Those are areas where we have a strong view that we're going to continue to see significant growth. We've been very well aware that the 80% of our revenues sit in light vehicle production. That's a customer base that is very focused on how do they have cost-effective, low-cost solutions that enable them to meet the demands of consumers in that safe, green and connected space. And that's where our focus is then, and that's where it will continue to be. It feels a bit like -- and I'll just use electrification as an example, there was a period of time where there was a lot of hype as it related to electrification. It feels like that pendulum has swung to the other end with respect to there's going to be no trend towards electrification. And the reality is our view in terms of penetration rates, just round numbers, our view on how we build our business, business model, pursue business was that penetration would grow at a rate that's about half of what a lot of the industry experts were talking about. The big reason for that was our view on the cost of that transition, either that transition. And on electrification, we're really focused on how do we build whole system solutions, but the [ IM ] cost is anywhere between 10% to 20% lower than what a traditional approach that an OEM would take by purchasing a portion of the solution. From an active safety standpoint, a very similar approach: how do we provide them with solutions that are performed at maximum level at minimum cost? And how do we drive active safety adoption? So that's been our -- from a product portfolio standpoint, from a business model standpoint, very, very focused on how do we minimize our overhead costs so that we can invest in areas that benefit our customers. From a long-term business model standpoint, you've heard us talk about smart vehicle architecture enabling software-defined vehicles. The most -- the fastest-growing area within automotive like other industries is software going into a car to enable things like active safety, to enable things like battery management solutions like that, how do we enable our customers to do that. And we're starting to see a lot of [ customers ] for that. The last 3 years, we've booked north of $30 billion in new business bookings. Last year, it's $34 billion. This year, our view is we're on target to book $34 billion or more in those growth areas. And that's on a business that, last year, did roughly $20 billion in revenues. So we feel really well positioned. Your comment about the market, to answer your other question, listen, we went through 2021 and '22, where it was from an operational standpoint, supply disruption standpoint was nothing but a challenge. Day to day was a challenge. Keeping our customers connected was a challenge. 2023, certainly in the back half, that's stabilized. So as we sit here today, it's certainly not reflected in our stock price, we're very well aware of that. I would say we've never felt better about the business. We've never felt better about the operational capabilities, and we certainly feel a lot better about the supply chain than what we did back in '21 and '22. So net-net, the environment is strong. High voltage adoption may be a little bit slower than what the industry anticipated. But for us, that's a 1- or 2-point headwind on a business that, last year, grew 12%. This year, our guidance was roughly 7%.

[ There's ] probably more noise than the reality. [ And so ] staying the course.

Listen, it feels like we've had the right strategy, and again, it's about enabling our customers to bring technology into the car that makes them more safe, green and connected.

Yes. Why don't we -- I want to unpack some of your comments about the focus, maybe you can start. I know there's -- the market is assessed with this growth over market metric. Growth as a whole has been a key focus. You guided 6 to 8 points. Your bookings, which have been accelerating, you said $35 billion for this year. So what is the confidence that this can underpin a 6- to 8-point growth over market or even putting aside the growth over market, just a healthy growth profile in the future?

Extremely high. Yes, extremely high. Based on -- we're selective about the programs we pursue. We focus on OEMs and, within OEMs, platforms within regions, particular products where we have a high level of confidence that our customer is going to build the car and build a number of cars, right? You think about our business model, there's an element of you're awarded business, you invest in launching that business, and then volume comes. So you need a high level of certainty that you're partnering with OEMs that are going to deliver on their volume. So very high. Joe, if you want to add to that?

No, I think -- I would agree with that, obviously and I think if you look -- when you look at the components of that growth, what's underlying the bookings, we have an active safety business last year finished $2.5 billion in revenue. We'll still grow well above 20% for the next couple of years just based on what we booked in take rates and deployment of existing programs. High voltage business, again, we're talking about a growth rate that has slowed from almost 30% to a little above 20%, right? So there's clearly been a slowing there. But that's now almost a $2 billion business. And then we don't talk about it necessarily as much within Aptiv within the SPS segment, we now have a $6 billion plus engineered components business. So I think interconnect, connectors, AD connector. That business is growing north of 6%. So those are real strong fundamental product lines. Everything we have from a product line perspective grows above vehicle production, some a little bit closer because it's law of large numbers. But no, the business from a growth perspective is very strong. I think [ that's the point ]. We feel very good about it. I do think we had a comment on growth over market. We do have this challenge, I think, which, to be honest, it caught us a little bit by surprise, the conflating of the 2 over the years. Growth over market is much different from growth, right? We drive growth. We book revenue. We drive growth. Growth over market is impacted by a lot of factors in the market sometimes. And we've always said that that's lumpy and it's not necessarily going to shoot through it. So -- but from a growth perspective, very confident, and it's supported by what we're seeing in the business.

Let's unpack those comment if you can. First of all, from maybe -- from a near-term perspective, obviously, this growth over market piece, I know the growth itself is healthy, but maybe you could just talk about the underlying China dynamics first half. Second, what's the confidence that this reverses, right?

Listen, we're very confident we will grow in China. We grew 12% in Q4 of last year, right? We had a very, very strong growth. Growth over market, there's going to be dependent in China, we've got a couple of things, right? One, our business today is about 60% with the multinational, 40% with the local OEMs who we target. We target the top 15 local Chinese OEMs to do business with. By some accounts, it's over 120 Chinese OEMs in China, right? So we're certainly targeting the top group amongst those and will not target all 120 Chinese OEMs. There's a lot of those folks that it does not make sense for us to do business with. So we've -- we're managing through a point where a fast growing -- our faster-growing customers who are a smaller 40% of revenue are growing very well. We grew 30% with the top 15 OEMs [indiscernible], right, huge growth. They grew about 20%. We were kind of 11 points above that customer group. But the multinationals are struggling in China. So a big part of our business, they are slowing. They have launched models that are not successful in the market. So we're working through that transition point. Very comfortable at some point, we'll have a business at 50-50 revenue and, at some point, a business that's larger with those local OEMs, and we've demonstrated that. If we're having this conversation in 2018, our revenue would be 75% multinational, 20% Chinese OEMs. As I said today, it's 60-40. Our bookings for the past couple of years have been 50-50 and a couple of times this -- a couple of quarters in the past few years, we've actually booked more with local Chinese OEMs than we have with multinationals. So I think that trend is moving in the right direction, very strong growth with the Chinese players we should be playing with. But you are going to see, and we'll obviously have to be clear about this when it happens and talk about it. It's an after the fact. We don't forecast growth over market because we don't have content on every car. We're not building to the market. We're building to our customers. But if those 100-plus OEMs that we're not doing business with in China outflow the market in a particular quarter, it's going to affect that growth over market calculation. But again, to us, it's important that when we're growing well in China and that we're growing well with our customers. So again, I think for a long time, on a relative basis, that growth over market shot straight enough, but it looked a lot like adjusted growth. There are different impacts.

Yes, 2 things I'd add to Joe's point. So Joe's point on the top 15, we really focus on the OEMs in China that are relevant in the China market and, ultimately, are positioned to be relevant globally, right? When you think about value we bring, certainly, we've been in China for 3 decades and have full system capabilities across our portfolio. But it's also how can we help them transition to Europe? How can we help them transition to North America? That's where we can really differentiate [ how we ] bring value. And the other thing just to be more specific in our numbers. So China this year will launch just north of [ 900 ] programs. Those 500 programs have lifetime revenues for our OEM customers of roughly $3.5 billion. 65% of those programs are with the local Chinese OEM in [indiscernible] talked about. So I think that transition to relevant locals versus multinationals over the next couple of years, you're going to see change pretty significantly.

Great. Let's talk to another dynamic within growth. And obviously, we've heard a lot about the EV slowdown. But maybe you can -- and I think that's already well understood at this point. But maybe you could talk about the -- maybe second quarter impact of the EV slowdown and that this idea that the premium content that was being reserved for EV. So if you see a slowdown in EVs, that affects another premium content that's technically powertrain-agnostic or even if some of your growth is linked in new vehicle launches and if we're hearing about certain ICE programs that are now getting extended and delayed on some launches. What's the confidence that some of these more powertrain-agnostic companies [indiscernible]?

So the reality of the bulk of our business, right? Certainly from an active safety standpoint, our active safety programs speaking across high-voltage and vehicles with internal combustion engine. [indiscernible] high voltage portfolio, we have battery electric vehicles, plugging hybrid, down to mild-hybrid exposure. So to the extent there's some rotation, the impact's minimum. We talked about it. The slowdown in electrification is good for us with 1 or 2 points of revenue growth. From a content standpoint outside of high voltage, listen, the last couple of years of semiconductor shortages, our customers were trying to put as much content on the vehicles that were available that could be manufactured, and so that was their objective. When you think about -- when you talk about battery electric vehicles today, and I were talking before we [indiscernible] comments about Carlos Tavares and the others, they're really focused on low-cost BEVs [indiscernible] with us battery electric solutions so that consumers can afford. And we build solutions like ADAS solutions that scale from Level 1 all the way up to Level 2+, to Level 3 so that they have the ability to choose how do they want to fit out the vehicle and how do we make sure that the technology we give them is relevant for a particular vehicle class and is cost-effective or low-cost. So any sort of mix headwind related to that, minimal, certainly absorbed and included in the guidance that we've given you. In terms of delays in programs, things like that, we've not experienced anything directly. In terms of kind of high voltage and the narrative around it, to be transparent, China is growing very strong, and our view is we'll continue to grow very strong, I mean, in the high voltage area, partly the desire to own the technology, [ tackling ] national security. In Europe, we still see relatively strong demand with a few exceptions with a few OEMs. In our view, it's less about whether it's BEV or electric or not. And then North America, where we all sit, we read a lot of news about a slowdown in the adoption, which is largely in around a vehicle base where it's a pickup truck that has also an internal combustion engine platform with the battery. We've always been somewhat, to be transparent, cynical about are those the right vehicles you're launching those platforms on and just giving battery [ range ] in each of those vehicles. And to a certain extent, it's played out as we expected.

Let's pivot to margin. And I want to touch on one of the comments you made a second ago. And obviously, the automakers are feeling an immense amount of pressure to roll out BEV. And [ 2 parts ], this is more a cost issue for them. And so how do they address cost? There's collaboration or discussions -- intense discussions with suppliers. So let me just start on the cost side of things. Maybe you can tell us that you're doing from your cost structure to make sure that you're evolving and that when you're partnering with your customers that you can provide them with cost-effective solutions. What are you doing from a cost perspective?

Well, from our cost structure standpoint, we are constantly focused on reducing and making our cost structure more efficient. That's obviously reflected in our manufacturing operations and our engineering activity. In our SG&A over the last few years, we've reduced engineering to sales by 200 to 300 basis points, while increasing our overall percentage of that investment in advanced engineering. Our products are equally focused on how do we deliver cost-effective solutions. So you look at our electrification platform, our full BEV capabilities portfolio, we can deliver solutions, and we're delivering solutions to customers where if they're buying the whole platform from vehicle architecture, which include connectors, wire harnesses, connectors, cable management [indiscernible], power electronics, battery management system, that reduce the overall cost by up to 20%, 25%. When you look at our Gen 6 ADAS solution, significant reduction in compute requirements, head-to-head versus competitors, [ I mean ] cost is somewhere between 20% and 25% lower than our competitors'. So we are very focused on and we understand the challenge that they're facing, how do they bring technology into the car, how do they go through the transformation. And we're really focused on how do we enable them to do that. And it's a platform approach, an open approach. We give them the flexibility to choose what they want, but a value proposition that really drives [indiscernible].

Maybe you could talk about some of the initiatives you addressed on your fourth quarter call. Want to talk about, one, is the reuse of technology for new platforms. Give us a sense of what is the magnitude of opportunity? Is there any -- what's the difficulty in executing this? And what's -- how much could it lead to in R&D [ state ]?

Yes. So we've really focused and transitioned our business to be much more of a product. So the advanced development activity that I talked about being more of a product organization. So standardizing solutions for our customers with some element of flexibility, and we try to provide flexibility as it relates to a portion of the software stack and as it relates to the hardware stack, selection of, for example, semiconductor for that, so giving OEMs choice there. The historical model, whether it was [ intentional ] and are oftentimes resulted in solutions that were somewhat overcustomized for an OEM. So repeat, reuse even with an existing customer with an existing program tended to be low. And starting, I don't know, about 4 or 5 years ago, we've been really focused on how we design and engineer solutions that are as productized as they can be, software stack, hardware staff, align flexibility to our customers. We provide some element of flexibility in terms of modification of some of the activities that we do, but it's minimal. The old model was not an effective model. And that reuse, that productization approach is reflected in what I mentioned, for example, about our Gen 6 ADAS solution being 20% to 25% lower effective cost. We have the comparable alternatives that are out there.

Let's address another point on the cost side and chips. So first of all, I think you've said that you don't see much in the way on chip cost improvements this year. Maybe you can talk about some of your initiatives. And I believe you mentioned on the call you're working -- you've highlighted partnerships with the [ government ], chip suppliers in China and non-China application. What are you doing on your front to maybe mitigate some of the elevated chip costs that you've experienced last year?

Let me start, and then Kevin can jump in. So yes, I think from an automotive chip perspective, we are not expecting any price decreases this year. We think, for the most part, the increase, [ there's a stop ]. We do have a couple of suppliers that are talking about midyear price increases based on issues in their supply chain, and we're obviously pushing back and would need to reengage with our customers if that would be the case, but we'll hold the line as best we can because I think you're in an area where these -- the semiconductor suppliers to automotive waited for a long time to be able to capture price and took full advantage of the supply chain constraints they caused, right? They had an issue with supply chain constraints, took full advantage of it and raise prices 25% to 30%. Our view is that, that is not a healthy market. There's a couple of Western suppliers that really have dominant positions there from an automotive perspective. And this is all sizes, 60-plus, 60-below. There's real -- it's just not a healthy market. Where we see an opportunity and there is a big push in China to get, and that's beyond automotive. I think there's a view of its national security sort of longer-term industrial policy kind of to have a strong semiconductor supply base. We're seeing amazing progress there. So we demonstrated a lot of it at CES. We think from an analog perspective, by the time you get to '25, '26, we're going to have pin-for-pin replacements on a lot of analog license that are used by automotives. So the next time there's a constraint or the next time there's price pressure, it's not going to be a 2-year let's go test and validate a new chip. It will be a pin-for-pin replacement, for analog devices in China that are on automotives in -- on vehicles in China. So it should be easier for the OEMs. And we've been working very hard to support that supply base. I think the other thing we're starting to see -- and we talked about this the last couple of years, right? It's very hard for the supply base, whether it's ourselves or one of our competitors to really push our customers to qualify multiple semiconductors for a particular application. It is expensive. It is an investment in resiliency that despite what we've been through the last couple of years, a lot of OEMs are hesitant to make. There's a bit of an advantage in China where there's a lot of pressure within China to use Chinese chips on vehicles manufactured in China. And the Chinese government is going to be more effective at having OEMs qualify Chinese chips than a supplier everywhere, right? That's going to be a -- whether it's a soft mandate as it is now or becomes a more firm mandate. And we're starting to see, and there was a development over the last couple of months where a major European OEM for a great global platform went to a Chinese semiconductor for the active safety [indiscernible] production. That's going to be a big breakthrough because the OEMs are going to have to qualify those chips in China. Once those chips are reliable and production in China in the vehicles, it's going to be much easier to pull those chips into Western productions. And again, we think that takes a couple of years, but that it's really going to be, in our view, what sort of breaks this price lock that we're currently dealing with, with the Western semiconductor providers.

Yes, I mean, Joe and his team have done a great job. I think all of our entire supply chain [ now ] by the end of this year. Semiconductors we completely mapped last year down to -- on the semiconductor side down 8 levels. On other product areas, it's between kind of [ 4 and 10 ]. So very strong visibility. It's value add to our -- it's something we share with our customers. Joe made a comment about China. Chinese customers are looking for China -- just they're looking for what they view as a [ brilliant ] supply chain, which are Chinese [ solutions ]. So we're following our customers and kind of enjoying that. As it relates to European and North American customers, listen, we're trying to provide them with choice. Our real focus is flexibility, and there's a portion of our competitive base, whether they be hardware providers or software providers, they're really focused on locking in and limiting OEM flexibility, which we think ultimately works against the OEMs. So we're really focused on opening up [indiscernible].

Why don't we wrap up with the last of the audience response questions, and I'll have a final question. We pull up question 3, the recycle EPS growth. I think this is actually technically relative to broader industrial group. But I think we all know generally relative to autos, you should be on the higher side. Question 4, please. Excess cash, maybe while people are teeing this up, just a comment, how aggressive are you going to [indiscernible] share buybacks [ against ] the clock?

Yes. Listen, I think we've got a great track record. We obviously slowed down or stopped during COVID, just given uncertainties. Prior to the COVID hitting March of '20, we had bought back or returned $6 billion of capital to shareholders between the IPO and the start of COVID. From a long-term philosophy perspective, we do not have use of -- good use of cash, it belongs back to shareholders. We've started that last year. We bought back $400 million worth of stock committed to, and this is a little bit of just managing expectations, putting out a number that people can sort of have. We've committed to at least $750 million of buyback this year. As Kevin said on the earnings call, to the extent we get [ this through ] the end of the year and don't have a use for that cash, we're going to generate a lot of cash over the next couple of years. And buyback numbers could certainly be higher.

The question, please. What are you thinking this multiple up again?

Yes. Listen, I think the guidance we've given for 2024, obviously, we have high confidence in the guidance otherwise. Last year, we had strong growth. I think part of it, we think, is obviously a communication with investors, but it's delivering. It's delivering. And there seems to be an overhang on automotive. Part of that is in and around the growth, the historical growth areas of automotive. And we just need to make sure it plays out, and we're confident that it will, and we need to be -- to make sure that we're -- regular dialogue, communication with our investor base.

Great. Right, we'll leave it there. Kevin, Joe, thank you so much.

Thanks, Dan. Thanks, everybody.