Aptiv PLC (APTV) Earnings Call Transcript & Summary

Thank you, everyone, as we continue the Barclays Global Automotive and Mobility Tech Conference, day 2. Very pleased to have with us Aptiv. Obviously, very well-known Tier 1 supplier leading in megatrends. And with us today is Kevin Clark, the company's Chairman and CEO. Not on stage but in the room, waving and saying hi, is Varun, Varun Laroyia, company's new CFO as well as Jane and the IR team. So thank you very much, everyone, for coming.

So let's kick it off. And Kevin, I want to start with just sort of a broad overall question. When we sort of look back at the year in perspective, it's obviously been of macro this year -- last 2 years, frankly, really slower uptake of megatrends. So when we look at where Aptiv is from a strategy standpoint today, given everything that's changed the last 2 years, is the strategy still, I'd say, maybe with some tweaks, is the opportunity ahead still there?

Yes. Let me start by thanking you for having us here. We've attended this conference for a number of years, as you and I were talking previously and from an investor standpoint, you have the chance to meet Varun in our one-on-one meetings as we go through the day. So thanks for coming. Listen, I think the last couple of years, there's been an aspect of challenges. Some of the macro, some of the customer as it relates to us, quite frankly. I think when you look at how we built our portfolio as it relates to electrification and electrification slowed it has but the outlook for global growth in electrification is a solid double-digit growth rate, right, roughly 15%. But when you think about that as an overall trend, BEV hybrid, mild hybrid, plug-in hybrid. That's a strong tailwind in any industry. When you look at the direction or the path towards software-defined vehicles, ADAS adoption, adoption of advanced compute, very, very strong tailwind on that. As you look at rearchitecting the vehicle, smart vehicle architecture that we've talked about in the past that enables the software-defined vehicle, listen, we've seen some movement from a customer standpoint. As we've talked about in the past, virtually all of our customers today are working on advanced solutions in those spaces. So I would actually, sitting here, although I'm not happy with our revenue growth numbers this year, when I look at the tailwinds that we have, when I look at how we're positioned from a product portfolio standpoint, we feel really good as a company. When you overlay how we're operating and the fact that we went through COVID, we went through supply chain disruption, we absorbed all sort of -- all sorts of costs, those are out of our system. We've been able to manage through from a manufacturing standpoint, from an engineering standpoint, from a supply chain standpoint and deliver really, really strong margin expansion, really strong earnings growth in an environment, where for us, vehicle production or revenues have declined, the business is doing really well and is set up to do really well in the future. So has our strategy changed? No, there's fine-tuning that we're always doing. We're always focused on, hey, how do we drive earnings growth but also how do we maximize shareholder value. That's something that we're constantly looking at. Are we happy with where our share price is today? No, we're not. But it's a matter of controlling what we can control and continuing to reevaluate what we do, how we do it and maybe some small pivots here and there. But no, we feel like we're really well positioned for what's -- where the world is headed.

Great. Maybe we can just for a second, go to side and made some recent announcements, obviously, Varun, who's been introduced as CFO, Joe Massaro, who was CFO, who's now the Head of Engineered Components, a very important business line. So maybe you could just talk about the moves. And does this signal any sort of a change in strategy for the company or segmentation, et cetera?

It doesn't signal any change in strategy. We had the opportunity to bring a very accomplished strong public company CFO, who brings a really great background like Joe has of operational experience as well as financial experience, a track record of being engaged with businesses as a finance exec and driving strong financial outcomes, while at the same time actually running businesses. So the understanding of what needs to happen day to day and how does the finance organization, the accounting organization, how do they align with driving operating outcomes. So that's something that a path we started earlier this year, took our time to find the perfect candidate, that is Varun. He's only been with us for a few weeks at this point in time but he's already put his fingerprint on the organization. So I'd say that's step 1. Step 2 is, listen, all of our portfolio of businesses are important. They're all good businesses. They all have great positions where they operate. They all enable the world to become safe, green and connected. Our Engineered Components business, we've built up over a number of years, both organically and through acquisitions. We've reached the scale now where there's more synergies between the businesses, just given the size. Joe has a familiarity with those businesses. Yet at one point in time actually, to his credit, [indiscernible] ran 2 of them. So it was a logical place to have Joe focused on. We think there's real opportunity in that portfolio of businesses, but we think there's real opportunity in our ASUX business. We think there's a real opportunity in our EDS business. As it relates to how we think about reporting segments, we'll work through that as a team and we'll keep you posted.

Great. Growth, obviously, a very central discussion topic this year. Again, let's just take a step back and look at the year and how it's about to close, help us decompose the growth challenges this year? Because I think the question is, you're going to have implied organic growth at sort of negative 2% but there's obviously very weak end market, customer mix has been a big problem. So help us decompose how much of customer mix issues really limited your outgrowth, which I think is sort of 2 points versus what you had done in the past of sort of mid-single digits [indiscernible]

Yes. So when you're going to paint the headwind for us from a revenue standpoint, it was, let's call it, 4 to 5 customers. So most significant, a large European-based OEM with strong brands in North America, where we talked about vehicle production in the third quarter being down globally, 23% with that customer. So huge impact on Aptiv. Second piece, we talked about mix of kind of local revenues versus multinational joint ventures in China. Headwind through -- strong headwind through the first 2 quarters of the year, balancing out in the third quarter. And net-net, as we look at the full year, they'll basically offset each other. So I think it's roughly 13% growth with the China locals. And we'll see roughly a 13% decline with the multinational. So as we head into next year, we feel like we're well positioned there and bookings back that up. Third. North American OEM, a global but North America-based, has a mix of EV as well as non-EV vehicles that have impacted us, a global BEV manufacturer that's U.S.-based, who is a large customer of ours, who we've seen on a year-over-year basis vehicle production down versus last year. I think when you sum all those up and I'm not going to go through by OEM, they're worth about 5 points of revenue growth, 4 to 5 points of revenue growth. And there's a mix of EV in there. There's a mix of non-EV in there, ICE in there. So it cuts across more or less all of the product lines depending upon the particular EV. And it's really more their vehicle production, their strategy on managing inventory, what they're dealing with, whether it's in North America or Europe.

Very perfect storm.

Perfect storm. That's where I -- when we talk about macros, we talk about trends, we talk about things like EV adoption, listen, EV growth continues. Has it slowed relative to 20% growth? Absolutely, it has. But if it ends up this year being mid-teens growth, that's strong growth. Are we benefiting from all that? We're not. But do we have bookings, do we have customer relationships where we strongly believe we will? Yes. I know you had a few OEMs here yesterday who talked about they're going to continue to invest in electrification, North America, Europe, they have to. It'll be a mix of hybrid and EVs. They're on long cycles. So we'll benefit from that. We had an element of the perfect storm this year that we're working through.

When we look at 2025, I know you're going to do your budgeting process and you'll sort of give us guidance when you report 4Q in January or February, whenever that may be. But do you have maybe some preliminary views on 2025, how to frame it, the right assumption for global LVP and customer mix dynamics? And can you grow in this market?

Can we grow in -- if this market is like this year or -- yes, listen, we can grow, you look at our product portfolio, our active safety product portfolio is growing, just south of 20% this year, as an example, that's a $3 billion business. It's difficult to envision a scenario where you see a further step-down in EV growth comparable to what you had here in 2024. And I know there's a lot of discussion about North America. For a player like us, North America from an EV penetration standpoint or EV exposure standpoint, it's 20%, maybe 25% of our total EV exposure, biggest exposure is, no surprise, Europe and Asia. So that's something that we feel like we can manage through. Don't want to get into a discussion about what's your growth over market is going to look relative to vehicle production. If we were to call the ball today, only today, we would say IHS is, I think, up roughly 1%. We would probably say flat to down 1 point or so from a vehicle production standpoint based on what we're seeing and what we're hearing from our customers.

And the customer mix dynamics, that's TBD.

Customer mix dynamics, TBD. But just given the impact this year, it should be this -- it should not -- it would be difficult to be the same next year.

Maybe just to double-click on this, 2 sort of macro or regional dynamics. One is Europe. I think one of the questions that's coming up is we have a sharp uptick in compliance requirements, this could work out to be very well for you and the industry with more BEVs. But to the extent that the industry can't meet these numbers and there's the incremental volatility, how do you plan around this? Second question, similarly, to the extent that some of your [indiscernible] customers still have inventory issues, again, how do you plan around that?

We make assumptions based on what they provide from a production schedule standpoint, what we see from an inventory standpoint, what they're saying in terms of how they're going to manage through that and we try to strike a balance between those. And we focus on making sure we put capacity and that matches what we ultimately think production will be. So there's navigation that needs to be made. Right now in Europe, the EU is not backing off the 2025 standards. The OEMs are looking for, is there a way -- how do they manage through that. At this point in time, most of them are either figuring out how do they sell more electric vehicles or how are they able to acquire credits to offset any shortfalls they have.

China. You just said sort of domestic is up 13%, multinational is down 13%. Again, when we look into 2025, what is the confidence that -- with -- you're getting the bookings with the domestics in China that you can continue to sort of grow with the industry. Maybe you can give us a sense of maybe what your win rates or your share is with domestics versus the multinational.

Yes. So we've been in China for 30 years, operating in China for China. So we don't produce an export out of. So I'd say there's an element of we're in the fabric of the automotive industry there. So I think although we're a global company, our China management team, which is, what it is viewed as a very much a local supplier. When you look at our mix of revenues this year, we'll end up being roughly 55% and this is revenues, mix of local. There's a global BEV manufacturer that has large manufacturing capabilities there, they're, call it, mid-teens, the balance would be the multinationals. Our outlook based on bookings next year for the locals as we pick up roughly 10 points improvement in mix from a revenue standpoint. And again, all that relates to the bookings that we've had over the last several years. We're a much more -- a much higher portion of our overall bookings are with the China locals. Now we focus on 10 to 12 China locals, there's 50 today. So could there be a quarter where the bottom 25 pick up some element of market share? It is. Would that impact our growth, our growth versus market? Yes. Would you want us playing in that space? No, you wouldn't, from a financial stand. But we feel really good about where we are. We're making headway with a number of those local OEMs, not only in the China market but outside of the China market. We're very excited about that opportunity over the long term and we're doing it across our broad portfolio.

And when we look at your bookings in aggregate globally. Again, I think this is something that's come up. People are looking at the bookings as a proxy for where revenue may go. You had $30 billion plus 4 consecutive years, what have you. To what extent does this give us confidence that over time, your bookings will eventually convert to revenue? What -- how should we look at the bookings in this environment?

I think you've hit the nail on the head. I think it's an indicator -- bookings are lumpy. Let's start with that. Awards can be very large. Timing of large awards can influence what happens in a given quarter. So they're very lumpy. Bookings ultimately turn into revenue for us typically 3 years from award. In China, it's 1 year from award, so just to put it into -- put that into perspective, which is why we've made so much progress in terms of changing mix. When you look back at our past, on average, let's call it, bookings leakage, so push out of programs, delay of programs, leakage has been roughly 10%. That's -- and going back multiple years, going across multiple product areas. So if you look at that 10% -- a little less than 10%, relative to where we are today at round numbers, $20 billion in revenues, there's a strong growth profile that plays out.

Great. Let's pivot to margins. And I think, again, this exercise of taking a step back, looking at the year as a whole. And I think what's interesting is that the midpoint of your guide this year, revenue is going to be down $300 million, that would normally equate to earnings being down but actually, your EBIT is tracking up like $225 million at the midpoint. So what has driven the opportunity to sort of offset these revenue pressures, maybe we could sort of break those out between pricing, reduced engineering, other items of performance.

Yes. So our outlook for the year when we planned was we were going to see a reduction in year-over-year global vehicle production. So going into the year, we are very focused on our cost structure, which we are -- typically but this is one where as we look at global vehicle production, we got in front of it. We did a 10% salary reduction in late 2023 to position us for 2024. We've been very focused on how do we become more productive in the engineering factory. As an example, the adoption of Wind River and the engineering tool chain, among other things, that's allowed us to take roughly $100 million out of engineering cost on a year-over-year basis. We talked previously through COVID and supply chain disruptions about the cost of that disruption that we are dealing with. That's out of our system, right? It's gone, it's out. So we had some last benefits associated with that. The massive material inflation that we ran into, especially from the semiconductor suppliers, it's stabilized. That environment has stabilized. So we're not experiencing the same sort of inflation and having to absorb it. So I would say it's a more normalized kind of business at this point operationally. So more flexibility, greater ability to respond to swings in production with some proactive activity to further reduce our cost structure.

And when we look at 2025, again, we don't know how the year is going to shake out. You're saying flat, down 1% but let's see, customer mix TBD. But there's a number of initiatives or opportunities, salary reduction, flexing the workforce, which I think you talked to, material cost, engineering rotation. How do we walk through, what's the opportunity on each of these? How much of this is low-hanging fruit versus it's going to take a little more effort to extract the benefit?

Yes. So I'll start with -- and [indiscernible] nothing we do is low-hanging fruit. I want -- we have a company with 200,000 employees across the globe, 140 manufacturing facilities, i.e., so go on and on. It's just constant execution and fine-tuning the muscle, right? And we try to be in front of, especially as it relates to costs, where we believe there will be areas of potential friction from our production. So am I confident, if global vehicle production is relatively flat and we have a normalized -- relatively normalized customer mix for us, do we have solid margin expansion? Absolutely. Absolutely. I think we've talked about a framework in the past of flat vehicle production, 5 points of growth relative to vehicle production and solid margin expansion, I don't know, 50 or 60 basis points. And that -- in an environment like that, that's something that we feel strongly we can execute in. We'll see how next year plays out from a production schedule.

Let me double-click on pricing because this year, I think, has been a very good year for pricing. We see that in the numbers for ASUX especially. Normally, it should be down 1% to 2% but you're actually tracking up, I think, 1% roughly. What is driving the commercial recoveries? How much of this is just recovering costs from semiconductor inflation a few years ago? And finally, you have the leverage to get recoveries on those? And how much more runway is there to get recoveries on inflation?

Yes. So as I said, inflation has come in. So some of that is related to earlier in the year, recovery related to material inflation. There's some recovery related to labor inflation in Mexico. Obviously, when we see significant reduction in production schedules and our installed capacity is at a much higher level, we go back to our customers. And we look for compensation, which is what I think you'd expect us to do. So that's a portion of it. Again, our typical -- we're in kind of the framework of typically 2% sort of price downs over the last, I don't know, 10 years, I think we probably average closer to 1% relative to our industry peers. And that's been about being very disciplined in terms of the business we pursue. And when we have the opportunity to recoup any sort of investment we've made because of changes our customers make, we do that. That's a normal -- I mean that's a normal sort of cadence, right? So our model is, as all of you know, we invest today for revenues 3 years from now. When we invest today and there's a change 3 years from now, we go back to make sure that the numbers work in a way that they worked when we first agreed to pursue and take the business.

In that vein, because you've been allocating resources, R&D CapEx in recent years towards programs that clearly haven't ramped at the pace that we're contracting. What's the process to recoup some of that?

You sit down with the customer and you have the discussion with them.

Europe, obviously, volumes are well below pre-COVID levels. I think many would say this is a structural shift. I think most people are hard pressed to ever see us going back to [ 22 million ] LVP we're sitting at [ 17 million ] today. Do you think that your European footprint matches current volume? Or is there more restructuring that's required?

No. I would say our European footprint is actually in pretty good shape. We'll continue to, especially in our EDS business, the nature of that business rotate footprint from East Europe to North Africa. But net-net, in Europe, we're very well positioned relative to current schedule levels. In North America, that's one where, when you look at costs associated with Mexican labor, if you look at the nature of what we do, for example, in our EDS business, that's when where we're more aggressively focused on consolidation and in some cases, moving out of Mexico into Central America.

All right. So you actually hit on the topic I was going to go to you next, which is obviously postelection, everyone is asking about footprint. So maybe if we could go one step further, how much opportunity is there to move from Mexico to Central America? And obviously, we don't know what's going to happen from a trade standpoint. But how do you plan around the potential variability? What steps do you have to flex on footprint, et cetera?

Well, listen, I think for us, it's less of an election sort of outcome. It's more of the activity associated with reshoring from Asia to North America, the demand for labor in places like Mexico and that -- what translated into much higher costs. The supply chain between Mexico and the U.S. for the automotive industry has been around for 30 years, is well oiled and operates extremely well. It operates extremely well. If you're in a business where you have low labor content, which is 2 of our 3 principal business, you can manage through the material, the labor inflation challenges. Our EDS business is more labor intensive. It's a bigger piece of the cost structure. So that's one where, to the extent you're seeing a few years of significant labor inflation, even with customer recoveries, you ultimately need to address that mix and you do it 2 ways. Like, item 1 is working with the customer to develop a solution that requires less labor, which is a part of the solution that we're doing. And then the second piece is rotating that footprint to somewhere where labor is lower cost. The historical model over the past 10 decades was -- or for the past 10 years was move from the border to Central Mexico. Now what you're going to see from more and more players in the areas where they have solutions that require significant amount of labor, is to move out of Mexico into various areas in Central America, whether that's Honduras, Guatemala, El Salvador, places like that.

Maybe you could just remind us when USMCA was enacted back in 2019, '20, was there any material impact [indiscernible]

No, the big question -- I'll ask the question. The big question we get asked quite frankly, is tariffs as it relates to Mexico, U.S. Listen, that's not an active issue, quite frankly. It's, I think, just under $100 billion that crosses the border from Mexico into the U.S. to support the U.S. auto industry. Meaningful tariffs would have a huge impact on that industry. There was, back in 2016, a lot of discussion about border tax and other sort of items that the administration spent a lot of time on. I think when they recognized what that means for a cost per vehicle, what needs to be passed on to consumers, that momentum died way down.

And I would imagine the same rationale. Just as much or almost all of your manufacturing is in Mexico, right, the entire EDS wire harness business for the industry is largely in Mexico for those reasons.

Sure. It's wire harness, it's seating, it's multiple aspects of the supply chain.

EVs and I think you touched on it before. You said 20% or 25% of your EV exposure is in North America. Again, how do you plan around potential shifts in EV policy that -- again, let's see what plays out but...

We have a broad portfolio. So our portfolio of high-voltage and low-voltage solutions can go on BEVs, hybrids, plug-in hybrids, mild hybrids. So we cover the whole broad area. And most of our focus is, as I mentioned, in Europe and in China, just given the nature of adoption and the pace of adoption there. We have manufacturing as well as commercial activities across each of the regions. So we're well positioned if there's any sort of mix shift. BEV is more beneficial for us from a content opportunity standpoint. So when you look at a battery electric vehicle and you consider vehicle architecture, there's roughly 2x the content on a BEV versus a vehicle with an internal combustion engine. But a plug-in hybrid is almost 2x, hybrid is roughly 1.5x. So any phase of that electrification gives us increased content opportunity and increased opportunities for growth.

And how do we think about the idea of, okay, let's say, it's a longer ICE tail. But within ICE trucks, we know trucks are obviously very high content programs for you. What is the net of that, if it's, okay, maybe it's slightly less fab but a longer ICE tail?

More truck would drive that mix of the average, I mentioned on a ICE vehicle. So that's where we get the benefit from a vehicle architecture standpoint. All of our OEMs that are talking about shifting certain platforms or certain architectures are coming back to us, whether we have existing business or future business on, vehicles always need to be enhanced. They're in a competitive marketplace and whether it's an ADAS solution, a user experience solution, that needs to be enhanced. So if you have an OEM customer who has decided, for whatever reason, they're going to delay certain things, the reality is they need support adding content in other areas. So it's not -- excuse me, a zero sum game. So there are several OEMs, for example, on the ADAS side who have looked at mix of BEV vehicles, vehicle architecture and they're shifting things around, mix as well as timing. Well, they need somebody to come in and enhance an existing ADAS solution, for example, right, enhance an existing architecture solution. And those are opportunities that we didn't have a year ago that we now have.

And when we think about sort of those extensions, it sounds like if it's an extension or an enhancement, maybe the resource outlay on your end is perhaps not as significant as a new program?

It's not as significant but we're productizing a number of our solutions. So there's an element of -- they're on our technology road maps. So listen, whether it's an extension or not, it ends up being incremental business because you can't have technology on a car that's been on a car for 3 or 4 years and then extend that technology for another 4 years as is, right? It needs to be enhanced. So in ADAS, whether that's a more robust perception system or features, more compute or it's a user experience solution that they're looking for the newer technology and better performance. So it's another opportunity for us.

[indiscernible] Any questions?

One follow-up on the technology front. If we think about potential big changes, Volkswagen's investment in Rivian and big shift they're doing away from CARIAD, leveraging the Rivian system, the narrative that, wow, that could potentially short circuit the existing supply chain going into Volkswagen. So I want a broad -- [indiscernible] be more specific but relative to your view, what's the pushback on that in terms of the OE over the next 3 to 5 years' time frame, taking a much more active role on vertical integration the things that you historically do and/or new suppliers coming in replacing suppliers like that.

Yes. No, it's a great question. I think some of this, we all need to see how it plays out. And a few years ago, the question was about, all your customers are in-sourcing all your activities. We've seen how that has gone. And in these meetings, I would say, there isn't a single one of those customers who are telling you folks that they're in-sourcing certain activities that actually we have more business opportunities today than we had previously. Part of that is because the opportunity has gotten bigger. So there's more room in certain areas for players to play. Part of it is just a recognition that if you haven't developed a skill set over multiple decades of doing certain things, if your approach is, I'm going to take what a supplier does, I'm going to do it the same way, which really doesn't address the inherent issue that needs to be addressed, ultimately, they're going to need our help. And listen, what we're focused on is, how do we bring the lowest cost, highest performing solution to our customers? How do we give them open platform so that they can take all or part, we like to sell all but they can take part. And how do we help get them where they need to get. Because, as you know, they're all having challenges, right? They are having challenges. And I would say, in reality, those who are talking about the vertical integration and those activities, most have fully recognized that doing things on their own has not worked. It's delayed program launches, it cost billions of dollars and how do they work more closely with a given set of supply base. The supply base needs to come to terms and we have with -- they need to support their customers to get to where their customers want to get, right, not get in the way. So closed systems don't work, not allowing the -- setting up solutions where the OEM can participate in certain development activities. That's not good for the OEM and it's not good for the -- ultimately, the suppliers. So that's why, like I said, over the last 3 years, 4 years, we've been very focused on productizing solutions so that we can drive reuse. And then at the same time, open platforms that give them choice, choice on cloud provider, choice on SoC provider, choice on vision provider and giving them the full flexibility that they're looking for.

I want to wrap with just one more because we do get a lot of -- and we talked about China but a 2-part question. One is, you issued -- you announced an interesting win with the largest Chinese EV manufacturer. I think we know what that is, I guess. Maybe explain the significance of that win? And then two, we hear about this idea of Chinese suppliers operating in the West. Maybe you can give us a sense of how much you're seeing that as in your bids? And maybe why this is perhaps not as much of a competitive threat because businesses where you operate, there's more of a moat.

Yes. It varies by area. So where do we see more of it is transparently in around the wire harness area which I think makes sense given the nature of that product in terms of -- it's more labor intensive. It's evolved out of China. We don't see much of it quite frankly, in the West. We're watching it very, very closely. But it reminds everyone that we need to recognize that we need to develop and deliver cost-effective solutions. We have a strong position in the China market as we sit here today and expect -- and obviously expect that to continue, where we're well -- very well differentiated as you see some of those OEMs move to Europe, whether it's export or production, different regulations. There are different quality standards. There's different testing and validation that needs to be done that provides us with meaningful opportunities.

Great. I'll leave it there. Again, Vegas in January.

All right. Sounds good. Thanks, Dan.

Thanks a lot. Thanks, everybody.