Aptiv PLC (APTV) Earnings Call Transcript & Summary

All right. I think we're going to get started here. Next up on the agenda, we have Aptiv. Very pleased to have with us Chairman and CEO, Kevin Clark; and Varun Laroyia, CFO. Gentlemen, thanks for joining us today. Always a pleasure to have you.

I guess, Kevin, I just want to start big picture. Obviously, there's been a lot going on in the industry over the past year. Maybe more than even normal when the -- there always seems to be something going on. But like -- even sort of stepping away from some of the tariffs and trade policies, and if I look at Aptiv, you've really tried to position the company to capitalize on the mega trends you identified of electrification, software-defined vehicles, active safety. Progression, I think, of those trends among your customers is, I would say, candidly been varied. And I think maybe downstream, that sort of impacted some of the nearer-term impacts for you. But I'm curious sort of as you sort of assess the industry and Aptiv's positioning, whether you've seen any sort of more structural changes there? Is this sort of just a delayed progression of some of these trends? How do you, I guess, reevaluate how you're positioning the...

It's a great question. Joe, thanks for having us here. Seriously, it's always great to be with investors and be with you. Taking a step back, listen, we're still big believers in the trends towards increased safety, increased or reduced CO2 emissions, increased fuel economy and increased connectivity. And in reality, our view is that goes across multiple markets, and that will continue. To your point, it will continue at different paces in different regions for a couple of reasons. I think, one, relative to where we were maybe 10 years ago, the world has become more regionalized, and there are geopolitics that are impacting certain things. So pace of adoption in certain regions will be faster. China on -- certainly as it relates to electrification, slower places, at least in the near future here in North America. But the general underlying trends continue, right? The world is becoming more software-defined. Digitalization is happening at a much more rapid rate. Energy transitioning is happening. It's going on as we sit here, and things are becoming much more connected. And I think there's an element of near term, there's a little bit of different paces in different regions, different execution with different customers, right? That impacts industry and maybe gives investors a sense of is this going to happen? Or is it not? Again, we're firm believers it will, but at different paces. And just making sure that we have the right technology that's cost effective, that were worth the right OEMs. And listen, that sometimes changes based on their competitive position or the market that they're operating in. And an increased focus from us. We've talked about it, how do we take our technologies into other markets? How do we take those low-cost technologies? And how do we participate in other markets that are somewhat adjacent, that are looking for similar sort of product applications, different go-to-market models, and how do we adapt to them?

Does the -- as you sort of describe it, maybe delayed time line or adoption for some of these trends and just all sort of firm believers on give you an opportunity to double down or make a larger bet or maybe a different bet on that? Like because it gave you sort of more time to execute on the opportunity?

Yes. I don't think, given those trends that I talked about, it's really a bigger bet, right? So on the electrification side, we've built out a very robust portfolio where we participate, quite frankly, in the automotive space on vehicles that have internal combustion engines, on vehicles that are mild hybrid, hybrid, plug-in hybrid electrification. So we're able to participate there, right? And again, I think it's important that you're on in regions, on platforms with OEMs that are going to be successful and going to be successful over the long term. I think those capabilities, we've leveraged into areas like space, like aerospace and defense, like industrial as well when you think about power signal data distribution. So again, we'll talk about on a go-forward basis, more progress that we've made there. I would say that's less product portfolio today. I think it's more go-to-market kind of cadence and approach.

I did want to actually go down that path and since you sort of brought it there a little bit. I mean, like you said, I think a lot of the product -- I don't want to say is it's sort of fungible, but it does seem to have additional applications in some of these other industries. So what is sort of the bottleneck or the roadblock for you to sort of get larger? And is it sales force? Is it knowing the customers? Or is it some tweaking of the product? Like where do you see the bigger challenges?

Yes. So just to put it in perspective, when you look at our business today, 80% of our revenues sit a little under 80% sit in the automotive space, broadly speaking, 20% non-automotive, and those are everything from commercial vehicle to aerospace and defense would be the biggest kind of nontransportation, telecommunications and broadly, industrial. Those products tend to be very similar. They may be in certain applications, larger or smaller. It tends to be, quite frankly, again, that go-to-market, who are you calling on? What's the value proposition that you need to present? How do you contract? I mean it's actually fairly tactical from an execution standpoint. So not that, to your point, the product automatically can come off of out of one of our connector plants in Mexico and have applications, simple applications in A&D, as an example, but with small modifications. There's a big opportunity across those various markets. On the software side, it's one of the benefits with the Wind River transaction, quite frankly. And the fact that they play across multiple markets, the bulk of their revenue is nonautomotive and the ability to bring in their RTOS, their Linux solution, their Wind River Studio into customers who actually do utilize perception systems, who actually do sensor fusion, who are actually focused on increased usage of AI at the edge, which is an overall global trend. It positions us well to exploit it.

Is there any chicken or the egg type problem in that, like, let's say, you're hypothetically again, sort of trying to win A&D business, and you can do the product, but you don't actually do it, but they want to actually see the product before they're willing to sort of commit the PO?

Yes. I think given the fact that everything we do in our traditional automotive industry is related -- is mission-critical, right? Whether it's power or data distribution or it's a perception system and an ADAS solution, it has to work. It has to work 100% of the time. That's the same requirement in telecommunications. You can't have a telecommunication system go down. It's the same application in A&D. So that tends to validate it. I think more often than that, when you look at the product, there's a certain element of the robustness of the automotive solution. Maybe it's more robust than what it even needs to be for some of those applications, right? So for us, it's slight design changes in those particular examples. But in other show, it's opportunities like -- one of the items that Joe Massaro running ECG is really working on. We've had great opportunities. How do we bundle our existing traditional automotive connector portfolio with what we saw at Winchester that goes across multiple markets because there is a tremendous amount of overlap opportunity. And it's an incremental sale, it's incremental revenue. How do we bundle that and bring that to customers? So that's our biggest change transparently. It's not the product. It's the go-to-market approach.

Definitely an area to sort of stay tuned and follow and learn more. Just -- I do want to move on and maybe sort of bring it a little bit more near term. If we go back in April when you reported, you mentioned that you weren't really seeing any underlying changes in demand. You issued the second quarter guidance. You said things were sort of tracking well. There are limited changes to production schedule. Now that where another month plus through and you will most likely have the schedules at least out through the end of the quarter, what's sort of the update there in terms of what you're seeing?

High level of confidence in the second quarter. So I would say we've seen minimal broad changes there, maybe some shifting between OEMs and platform. Over the back half of the year, I would say, slightly weaker schedules in North America, slightly stronger schedules in China.

And what you maybe anticipated prior?

That we anticipated in our initial sort of guidance back in February. Some weakening in EV schedules, principally North America overlaid on top of that. So I would say some puts and takes, in general, slight softening, but nothing that we would sit and look at and say is a significant change.

Varun Laroyia. Yes, I think it's been pretty comprehensive. Feel good about the second quarter in terms of what we had guided. And just to kind of reiterate one point that Kevin mentioned way back when we gave guidance in February, we talked about some inherent conservatism within our guide. And when we double clicked into it, we talked about EV platforms, for example. We talked about North America production, for example. And if you were to triangulate with an external market. So S&P, IHS' latest numbers, that market has largely kind of played out as we had kind of planned, right? I'd say North America is a little bit weaker. China is better what we had planned, and Europe is relatively flat. So that's just to kind of give the latest color. Will be kind of interesting to see as to -- so from the way we kind of thought about it, the market is pretty much playing out. With regards to the second quarter, specifically, Joe, as your question was, we had visibility, we have visibility. We feel comfortable with the guide that we gave.

And when you talk about the back half, are you -- I'm assuming that's based on sort of what you're seeing in terms of schedules, mainly for the third quarter at this point? Or is there already some indication that's going a little bit further out?

Yes, I'd say third and fourth, there would be schedules, lower case S, right? So we get some for most of our customers, some element of visibility.

So if we think back, Varun, and I know you definitely sort of gave some of those guardrails and I think you were even trying to express, even though that the guidance was withdrawn, that there was some good initial -- or there was a good amount of conservatism built into that initial guidance and you gave the example of how much production would have to be down, even to sort of the low end of the guidance. Are you seeing enough firming of -- or narrowing of bands of uncertainty to sort of reissue guidance when you report second quarter? Or how do you think about that? And if not, like what are you -- what do you need to see to sort of get guidance back?

Listen, great question. First of all, we would like to give guidance. We would like to give outlook to in terms of what we're seeing for the broader investment community. That's the kind of table stakes, and that's something I just want to make sure that we reiterate. Given where the situation was a few weeks ago, we certainly did not withdraw guidance. Essentially, we gave guidance for the second quarter, and we said we would get back given the levels of uncertainty for the second half of the year, given the latest in tariffs that were happening. And just kind of waiting for our larger customers as to how they thought about production strategies, dealer inventories, how they were thinking about tariffs in general. Again, if you think about tariffs per se, hard costs associated with tariffs, we are comfortable with them. We find it very manageable. And whatever we believe the small amount that needs to be passed through, we are passing through, okay? It was the softer costs associated with what happens to global vehicle production? What happens to North America production? How the OEMs thinking about strategies associated with the higher input cost that they'll be facing with? What does that do? What does it do to consumer sentiment? That would be uncertainty. And as we kind of fast forward the tape, call it, 5-plus weeks since the time we announced first quarter earnings, I think it's fair to say that uncertainty hasn't diminished, right? I mean we still have the 90-day pause on the retaliatory tariffs. We still have the China tariffs now through the initial part of August, for example. So that has not been clarified as of now. So with regards to the second half of the year, we are committed to providing clarity as soon as we have further information. But I just want to kind of share some of the moving pieces, those that we believe we have direct line of sight and we believe we have a good handle on, but the broader element is the question mark.

Yes. I think if I can just add to that. Listen, I think we have the benefit of -- we have 2 more months behind us right, and that's helpful. I think we have more clarity on strategy as it relates to USMCA. I think we have, I think, a stronger view on what the objective is there based on discussions in the U.S. and outside of the U.S. So I think we have clarity on that. I think there's an element of we have more history of how this tends to play out with Friday afternoon announcement and the -- so we have more experience. Maybe that's a better way to describe it. To Varun's point, in times like these for investors, the reality is you need more communication versus less. And we firmly believe that. And we need to make sure, though, that we're giving you information that's useful, that's very useful, right? And that's what we'll continue to do through the balance of this quarter and when we announce earnings as it relates to our Q2 results in late July or early August. And I'd say, at that point in time, I'd say we'll be in a better position to at least provide further clarity in terms of our view on the back half. You know what I mean. Maybe it's a little different than historical period of full year, but more clarity to investors. We feel really good about where we are, from a product portfolio standpoint, we're making progress as it relates to customer mix. The direct impact from tariffs for us is de minimis. And there are certain areas where we're passing that on to our OEM customers, so we can manage through that. We're continuing to rotate our supply chain to make it even less and we can do that and do it pretty painlessly. So in light of everything going on, we feel really good about where the business is. And I would say, maybe just a little bit different from the way Varun articulated, and we're complete aligned on this, hey, come Q2 earnings call, you'll get more visibility to our outlook for the year.

Are there contracts in place?

Yes. It's very -- it is steel, aluminum for us is very, very small from a purchase standpoint. So the bigger issue, Varun touched on this, for us, is how do costs like that impact OEM pricing strategies with end customers? And then what does it mean for vehicle production? And that, we're in contact with our customers. We're watching what they're doing, but we don't have perfect line of sight. Just transparent with everyone here. We don't.

I guess one of the other things that has sort of come up a little bit more recently is rare earth metals and whether that could cause any sort of disruption in supply chain. Again, I don't think any direct impact to you, but please let me know if you are doing any of that sourcing. But we've heard a little bit of noise out of Germany, maybe a little bit of noise from another company that was just on stage about some potential challenges in getting rare earths out of China, given the export controls. Have you seen anything sort of show up in the schedules yet that's overly meaningful?

No. No. No. We've not directly attributable to that, we've not. There obviously are products or sub products components that use rare earth minerals. Most -- a lot of which obviously is supplied or sourced out of China, that could be impacting either suppliers or OEMs for us, that's -- it's a small exposure.

Okay. One of the things that I think was interesting and probably candidly went a little bit under the radar given sort of the intense focus on tariffs and policy that you talked about is what seems like, if not improvement, at least sort of rate of change improvement in some of the -- your progress in China with domestic customers. And obviously, the customer mix has been -- in China has been a headwind to your business over the past year plus. Can we just dive into that a little bit? Like what's changing? What is -- is it really some of the customers that have been challenged are already at low levels, so it's less impactful? Or are you winning with some of the newer -- with the other side of the business? Is it a combination of the 2?

Yes. No, that's a great question, Joe. So for us, background, you've heard of. We've been in China for close to 4 decades actually at this point in time. And when you think about our business in China, it's truly a China business with Chinese leadership team that's been focused over the last decade really building out the China ecosystem and the China supply base. So in China, we show up as a Chinese supplier to Chinese OEMs, whether they're multinational JVs or they're the locals. I'd say historically, just given where we came, where we came from, they're tended to be more focused on the multinationals, right? Just big market for German and U.S. OEMs. And I think naturally, our team felt into the -- let's focus on those customers. I'd say over the last 5 years, that's changed. Our focus has changed. Transparently, I don't think it changed fast enough. If I were to be critical of what I did, we did as an organization. It didn't happen fast enough. Today, for us in China, Geely is our largest customer. We do business with BYD. We have opportunities in China and outside of China. We bring a unique capability, and we're having discussions with multiple local Chinese OEMs about supporting them as they move outside of China. So we feel like we're very well positioned as it relates to that activity as well as supporting them on their export programs outside the vehicles that are headed outside of China to other markets. So given our capabilities and knowledge in China as well as our experience with local regional requirements, whether they're regulatory or other, we're really well positioned. And in that area, we've been very successful in terms of winning business. And that's a place where business comes online literally. We have ADAS programs where we're awarded a program and within 12 months, we're launching an L2+ program on Chinese vehicles. So that will continue. It won't be a perfect line every quarter that will be in terms of launch cadence, things like that, but we've made tremendous progress. And I think as Varun said on the last earnings call, we'll exit this year at the -- our revenue mix will match the vehicle mix, China local versus multinational in China.

Did you -- I just want to focus on that for a second. Like did you actually have to change? Or did you change your sort of go-to-market strategy with some of those domestic players? Or was it really just sort of like, let's refocus the sales force on...

Refocus the sales force.

Okay. And then in terms of -- you mentioned growing with them as they sort of localize and expand around the world. Is that -- is that because of the relationship you've built with them in China? Or is it more a function of like you have the footprint and the capability in the regions they are expanding to or is it both?

It's quite frankly, it's both. I mean we have several of those OEMs, we've done, in effect, our version of a non-deal road show where whether it's in Eastern Europe or it's in South America or elsewhere, where we're walking them through kind of what our engineering manufacturing capabilities are, our commercial organizations, making introductions to our ecosystem of suppliers so that to the extent they make that decision, they can have locally based in market capabilities.

Maybe just on -- you mentioned earlier sort of electrification and regionally, it could play a different -- I mean, it seems like in the U.S. here, we're headed towards a direction where not that we don't continue or march along the path towards more electrified vehicles, but the pace is going to be different. And I believe most of your -- what you used to sort of reference is sort of like the high-voltage portfolio was more in Europe and in China and maybe in the U.S., so maybe not that impactful to you. But I am curious sort of how you think about that could impact the growth profile for the business here. And then somewhat related, I guess, the profitability profile because the offset to less EVs is obviously more of everything else, right? And it's not like you don't have content on those vehicles. And in some cases, maybe sort of its extension of existing programs, which could be quite profitable as well. So how do you sort of see the interplay of all those factors impacting the business?

No, Joe, I think that's a great question, and it's one of those items where we can probably do a better job communicating to investors. So as we sit here in the United States, it's easy to come to the conclusion that EVs, broadly speaking, are -- right? Our customers operate in a long-term environment where they're developing vehicles over literally decades, right? And so the concept of switching those strategies and turning them completely off, I'll start with that. That does not happen. Mix may change, so maybe less focus on BEV, more focus on plug-in hybrid or hybrid. Just reminding everybody, from an ICE to a hybrid, it's 1.5x the content. To a plug-in hybrid, it's almost 2. To a battery electric vehicle, it's over 2 from a content opportunity. So we get a benefit along the way. And so there may be some slowdown here. OEMs are still working on EV platforms. Less focused today on introducing near-term BEV, more focused on hybrid. So that's what you should assume. But still working on electrification solutions. In Europe, OEMs continue to work on electrification platforms, most being focused on platforms today that can be either BEV hybrid or internal combustion engine. That's the one piece that is has changed from a BEV platform versus a nice platform. So heading down that path. And then when you think about China, China is all in. And when you think about China and what they're exporting to Europe and focus on manufacturing in Europe, they're EV platforms. So again, that's where we come back with. We're strong believers in the energy transfer. We believe it's going to continue. There will be periods of times where it will slow, it will accelerate. There will be periods of time, given customer mix, that our revenue will be impacted. But the general trend will be very positive.

Maybe you want to move on to sort of the portfolio a little bit. And I know you've sort of announced the spin of the EDS or the wire harness business. I think on the last call, you talked about really none of the sort of policy stuff or any of the recent sort of developments to sort of change that process. Maybe you can just sort of talk -- confirm that. But also -- and I know we'll hear more about this as we sort of got later in the year. I think you're planning for some analysis. But how do you think about sort of the positioning of each side of the Aptiv businesses for success to win in the market?

Sure. So the EDS business has been around for 130 years. That's its legacy. It's #1 or #2 market position, literally across every major automotive market in the world. So very strong competitive position. 70% of the programs that they work on are, we call them full service programs. So we design and optimize whether it's a part of the harness or the whole full vehicles. So we're bringing value to our customers. Our margins in that business relative to our peer group, as you probably see, is -- reflects that value rebrand, right? It is a -- I would -- we refer to it as a program business. So although we're driving towards standardization and automation of the wire harness, so that we can automate manufacturing. And then working with several OEMs on how do they automate their installation process in the assembly plant, it's still fairly program specific. We have literally -- we produce wire harnesses for certain OEMs on a VIN-specific basis. We ship from Morocco to an assembly plant in Serbia and arrive at the assembly line 4 hours before vehicles produce, and it's installed on a VW or a Range Rover or other vehicle in Europe as, an example. So they have tremendous capabilities. That business led the whole drive for Aptiv on smart vehicle architecture, just given our historical experience there. In terms of how do we drive towards that path, and it's well positioned to participate, one, in consolidation in automotive, which needs to happen in that space. It needs to happen. And in reality, there were certain -- a few opportunities over the last couple of years that we passed on because it didn't work well for Aptiv, higher margin, lower margin. It didn't. But that wasn't what was best for that portfolio. And it's now positioned to whether it acquires or it's a part of a consolidation, to being even a stronger player in that market. And then we have significant opportunities off vehicle. Like I mentioned, whether it's aerospace and defense, it's robotics, it's energy infrastructure. Those are all areas that, that team is very, very focused on. RemainCo, listen, those are 2 product works. So our ASUX business, the margin progression you've seen in that business has been the result of 2 things. One, we've productized solutions so that we don't -- we have much higher levels of engineering reads on the software side. We are now, more often than that, quoting software separate from hardware to drive that behavior in our organization and that mentality with our customers. We are much more focused on how do we make it hardware-agnostic, especially from an SoC standpoint, and that includes China with China SoCs. So that it's well positioned for high margin, higher growth in giving our customers choice because it's open architected. On the ECG business, you are all familiar with players like TE or Amphenol, those are product businesses. And that is a business that is operated as a product business. It's an area where we'll continue to do M&A opportunities. It is high margin. It is solid growth, but it's a matter of taking our existing product portfolios, near term, bundling them to grow organically and outside of automotive, but also looking at M&A opportunities.

Yes. Sort of answer my next question a little bit, but I guess, on that ECG business, right, there are -- and you sort of alluded this to the beginning of our conversation, just alluded to now, I think there's a lot more end markets, if you will, where the product can serve. How do you balance those sort of trying to develop those organically versus sort of looking for acquisitions? And just, I guess, to sort of put it out there, right, like you mentioned Amphenol, TE, right? Obviously, the data center AI has sort of been huge growth area that seems to be actually fairly consolidated at this point, but the pie keeps getting larger and larger and larger. So is there an opportunity for a player like Aptiv, either organically or inorganically, to at least evaluate in end market?

Absolutely. Yes, we do today just transparently. We do today.

You evaluate or participate?

Well, we participate in it organically today, we evaluate opportunities today, though, as well.

Anything in the audience? Any questions? Okay. I guess maybe sticking with the capital allocation a little bit, right? Like you completed the ASR. If we go back to your original guidance, cash flow still seem sort of pretty healthy here. But one, you have some of the uncertainties you talked about; two, you do sort of have this -- the spin coming up. So should we think about things being relatively calm from a capital allocation perspective until we get through some more clarity, maybe we get through the spin? And then how do you just sort of think about maybe preliminarily some of the thresholds for each of the businesses?

Varun?

Yes, absolutely, Kevin, that's okay. Yes. So with regards to the balance sheet, we're in a good position. We talked about paying down $1 billion of debt by the end of 2025. We're running roughly about 3 quarters ahead. That prepayable debt has all been paid off as of now. As we talked about a few weeks ago, with the first quarter earnings. The ASR, the $3 billion ASR, that was done last summer. That is completed. And really, at this point of time, Joe, as you rightly pointed out, it's more about we believe it's prudent to maintain liquidity and just kind of let the dust settle, right? And so it's more of a cash build position at this point of time. So that's really where we are. And then kind of evaluate opportunities, whether it be on the M&A side, whether it be other avenues. But kind of having that liquidity, we believe, is the right thing to do at this point of time. With regards to your question about the relative levels of cash needed within the business, from an as-is basis, roughly about $600 million to $800 million is typically what we would require. We haven't kind of broken it out between the spin versus new Aptiv post-spin. But we are intensely focused on making sure that we capitalize the EDS business appropriately. As Kevin mentioned, it has a certain set of strategic priorities to continue to deliver what it has been for over a century. And then there could be some opportunities for them also. Just making sure that is appropriately set up from a cap structure perspective. But again, we will share more details in the coming months on both those pieces.

Maybe just a super high level, like are there any material working capital differences between the businesses? Or is that relatively?

No, listen, both businesses actually deliver a tremendous amount of free cash flow, right? Number one, the EDS business has been a tremendous generator of free cash. And then with regards to ECG and our AS & UX business, marginally higher, right? So if you think of the new Aptiv, that will be well into the 90s, close to 100% of adjusted net income, right? That's how you should think about that.

Excellent. Maybe just to close here in the final minutes, Kevin, I know we've spoken a lot over the years and especially, I think over the past year where there's been a number of industry challenges, right? I think there's been some frustration with the stock price and valuation. What do you think, from your perspective and meeting with investors all the time, is sort of most misunderstood about the Aptiv story and opportunity?

Yes. Listen, I think there's still opportunities that are significant within automotive. And I think there are still significant opportunities within the automotive industry overall. So let me start with that. We seem to have gone from electrification hype, to no electrification, to tariffs, to now rare earth minerals. So it seems to be one item after another. And listen, I understand investors decide where to allocate capital. And the more complicated things are, the harder is to do, and we appreciate that. We understand that, and that gets back to my point about making sure that we're communicating information more frequently that's more valuable for you guys. So you have our commitment to do that. But I think net-net, listen, transportation continues. Technology in vehicles continues. That's where we sit. That's where we apply. We have a highly competitive cost structure, a great competitive position. We have a starting position outside of automotive that we're confident we can take existing technologies. And with small tweaks and changes to the go-to-market, we can get incremental revenues. And that's where we're focused. While at the same time, we're serving our largest customer base, right, which is very important. But we feel like there's a tremendous amount of opportunity, but we understand the complexity that investors at this point in time, the lens that they're looking through and what they're hearing.

Great. Well, with that, gentlemen, Kevin, Varun, thanks for joining us at the conference. Really appreciate it.

Thank you, Joe. Appreciate it. Great questions. Always great to see you.

Thank you.