Aptiv PLC (APTV) Earnings Call Transcript & Summary

Joined by Aptiv, a global industrial tech leader that provides advanced electrical safety, connectivity and software solutions to both the light vehicle, commercial vehicle markets and also other industrial markets as well. Key to Aptiv's story right now is the company is looking to spin off its EDS business, which I'm sure will dive into more during the conversation. From the company, very honored to be joined by Kevin Clark, Chairman and CEO; Varun Laroyia, the CFO. And we certainly look forward to diving into many of the most pressing issues facing the industry.

Great.

I wanted to start with the big one, the spin. Why is it important in your view to have the EDS spin now? And unfortunately, I'm old enough to remember they were parallels, the Delphi -- there may be some parallels with the Delphi Powertrain spin. So curious on your kind of high-level views on that and also why?

Yes. So first, thanks for having us. We welcome the opportunity to engage with you and our investors. So why now on the spin? Maybe a little bit -- I'll talk a little bit about the EDS business, and compare and contrast that to the portfolio of businesses we have within Aptiv. So EDS business, it's the #1 or #2 player across literally every market that it operates in. It's a little over $8 billion in revenues. A leader when you think about vehicle architecture as it relates to wire harness technology, roughly over 50% of that business is full-service solutions. So we're designing and optimizing vehicle architecture for the OEM. And as a result of that, over a number of years, we've developed a leading competitive position literally across the globe and much higher margins than our competitors when you look at the universe of competitors that are out there. It's a -- what we refer to as a program or platform sort of business for each vehicle program versus our other businesses that are really product business, whether that be interconnect solutions, it'd be our advanced active safety business or users experience. We've built product platforms that go across multiple vehicle lines. In the EDS line of work, it's a much more customized solution based on a particular vehicle, the features, the Powertrain, other sorts of item. So the approach -- our approach to customers, the approach to optimizing cost structure, driving profitability, it's a very different approach. When we look at the space of the EDS business plays in, it's a space where we should see consolidation within the automotive industry. That's our strong view. That business is uniquely positioned to participate in that. It's also a business that we think is pretty easily leverageable into other markets. But when you think about solutions that are out there, whether they be drones or robots or aircraft or satellites. They all have wire harness, all of them. And just given the dominant position, the technical prowess, the management capability that we have in that EDS business, combined with the margin profile which is different than the marginal profile of our interconnect or ASUX business, right? So I think mid- to high single-digit sort of operating margins versus the ECG business with close to 20% operating margins, our ASUX business with a plan and target to get the mid-teens given the software nature, growing that business is more difficult to do as a part of Aptiv versus separate stand-alone business, where that business can have its own capital allocation strategy, its own product strategy. And quite frankly, investors who are focused on that particular business and its opportunities for growth. I would say different from the Powertrain spin, Edison, going back a few years, that was 2017. Our Powertrain business, high level of technology but also a very high level of CapEx and very long-term commitments from a customer standpoint. So Powertrains go through these very lengthy life cycles, and a #3 or #4 market position versus the leaders in that industry. This particular business is much less capital intensive, it's much more cash flow generative and it has a leading position, as I mentioned, across every single market. So it's really about how do we optimize that business and position it for outsized growth.

On the RemainCo, I think myself and management, we see the value, value creation potential there. Can you talk about the profile of the company in a little more detail in terms of growth, in terms of strategy?

Sure. So that business will include our ASUX business, which is principally active safety, user experience solutions that are perception systems, advanced compute in software. That's the nature of the product portfolio there. And then our engineered components business, which are interconnects, some cable management solutions, so comparables in that space are players like Amphenol, like TE, a private company called Molex, those are the big players in that business. It's a highly engineered, so engineered in on a relative basis, tends to be lower cost solution, high cost of failure. So displacement of that technology is once you're designed in and you're part of a solution you tend to stay in. So that explains the margin profile of that business. Both of those businesses have a greater nonautomotive footprint. So within the ASUX business, it tends to be heavier weighted in A&D and telecommunications. Most of that sits with Wind River and all of it is software. On the engineered components side, I'd say it's more distributed. It includes industrial, it includes data centers, it includes telco, it includes some A&D space. Both of those businesses, we think, are uniquely positioned to continue to grow in automotive, but also grow outside of automotive, which has been one of our focus areas for the last 5 years. So while we'll continue to pursue opportunities, obviously, in the automotive space, we'll also be very, very focused on how do we diversify revenues into other markets in a real intelligent way.

You've alluded in the past M&A being a big part of it, is that very important to RemainCo coming to...

Yes. I think it's a big value creation opportunity. So at Aptiv, over the last 10 years, we've done roughly 21 M&A transactions. I think 6 divestitures. There will be 2 spins with the EDS spin. So we've been successful from an M&A standpoint. On the ECG side, that market is very fragmented. There's a number of opportunities from an M&A standpoint. It's where in the past, we've done a lot of M&A transactions and a number of our -- but quite frankly, the bulk of our transactions have been in that space as we've built that business. We'll continue to do that with bolt-on transactions. So we'll continue to do that. On the ASUX side, there are M&A opportunities, I think we'll be leaning more towards investment opportunities on the software side to grow that portfolio of products or to take our existing portfolio to bring it into other markets. So it will be a big piece of the overall strategy. And it's a business that, from a cash flow standpoint, given the margin profile of the business, will generate a significant amount of cash flow, certainly more than what we on a consolidated have.

On EDS consolidation, I think, has been talked about in some category for a while. What do you think it's taken -- or why do you think nothing bigger has happened? And I guess, did you consider selling it or at any point?

I'd say we're focused on how do we maximize value. So that's our objective. The spin we control, right? That's our timetable. That's our execution of our project plan. So that's the path we're headed down. If there's an alternative to a spin that is better for shareholder returns. That's certainly something that we would entertain. Why -- I think your question is really why hasn't there been more consolidation in automotive industry, right?

Fair.

And that supply base and OEM. And listen, I don't have a great answer. But as you all know, it takes a buyer and a seller and an agreement on value, and that's not always easy to do.

Awesome. Capital structure, so coming out of all this, obviously, it seems like the strategic priorities are a bit different between 2. How does one think about the setup?

Well, thank you. And again, I'll just echo what Kevin said earlier. Thank you for having us. It's great to see you, but also to meet with investors and potential investors. So thank you for the opportunity. With regards to capital structure for both EDS and the new active RemainCo, the first point is both businesses had a prodigious amount of free cash flow conversion, right? EDS will have north of 80% conversion of net income. RemainCo will have over 90% conversion. And so that's kind of just to kind of set the table, which is a tremendous position to be in. With regards to RemainCo, we intend to remain investment grade. We are investment grade at this point of time, and we remain very comfortable with the level of leverage we're currently running. And as you know, Edison, that we've been running the better part of almost 3 quarters ahead of our publicly committed debt pay down leverage from last summer's ASR. And then with regards to EDS, strong sub-investment grade, that's really what we're targeting. So there will be leverage, but it will be well contained. That business has a certain set of strategic imperatives, some of which that Kevin mentioned, but also to give it a good standard in terms of when they need to come and go and chart it out.

Let's shift gears a little bit more to the industry in the more near term. So it's been a volatile start to the year, I think, from a policy perspective, certainly. With some stability, I want to say, cautiously optimistic now, how are you seeing the production schedules in North America and maybe some of the imports coming in?

So Q2 -- so we gave full year guidance in February. I'll take a step back, and our overall outlook for global vehicle production was down 3%. That was our -- effectively our outlook for the calendar year. Q1 came in, in line with our expectations. I think vehicle production was down on an active average weighted market basis, down 2%. We didn't give full year guidance or update full year guidance on our Q1 earnings call. We gave guidance as it related to Q2, just given all the uncertainty that you're referring, high level of confidence in our Q2 outlook, we got vehicle production down roughly 4 points, have seen a little bit of shifting of schedules, but I'd call it puts and takes with offsets, a little bit more weakness in North America, offset with strength in China. The longer-term schedule so Q3, Q4, we've seen a little bit of shifting, I'd say a small bit of softening, but not much. We're watching it really closely. Obviously, given just the environment in kind of the uncertainty regarding trade, regarding tariffs, regarding rare earth minerals, regarding impact on vehicle production. We do have some worry that we'll see a little bit of softening in the back half. But we haven't seen anything yet to really call -- I think call that ball, right? It just -- so we're naturally in light of just being sensitive to that. There are certain areas that we're reducing investment. We're cutting costs. We're playing wait and see. Regardless, we feel like we're in a good position from an overall competitive and full year results standpoint. I don't know if there's anything else.

No. I guess just to add, we would like to get back to giving clarity to our investors. So as soon as the dust settles. And certainly, when we come out with the second quarter earnings, we will update. So I just wanted to kind of put that out there in addition to Kevin shared.

Curious on your thoughts maybe by region, North America, obviously, I think you kind of covered pretty well. Europe. Any signs you're seeing there? I know emissions has been topical. has that impacted. I know this doesn't directly impact you but indirectly.

Yes. Some slowdown in EVs offset with -- largely with increases on the internal combustion engine side. China, obviously continues to be strong. We expect that trend to continue. So I would -- we characterize it as a little softening in North America. North America and Europe, some softening on the EV front, Europe about where we expected the things to play out today. And then China, we're seeing strength.

And sorry, maybe you can dive a little bit more into what you're seeing there. And I think there's some hope that some of the foreign automakers JVs maybe seeing a little bit of bottoming down after kind of getting decimated over the last year. Are you seeing any signs of that? Maybe some of the JV stabilizing?

I don't know, you want to?

Listen, that certainly was a slightly better-than-expected Q1 from a production perspective. The question is the level of sustainability and then really where the long-term direction of those is, that direction of travel will continue towards China domestic OEM.

How do we think about your mix, I guess, for local OEMs. I know you've quantified it at various points. I know that's growing. When does that become kind of in line with the market and become kind of a tailwind?

Yes. So great question. Thank you. I'm going to go back in terms of 2024. Our China revenues were approximately 54%, China domestic. Over the past couple of years, we've been picking up the better part of 10 points a year, to a point where, based on where our current trajectory is we expect to exit 2025 at market parity, which we expect to be about 70-30, so 70% for China domestic. So that's where we will exit the year. So as you think about what has been a headwind for us over the past 3 years, that essentially will moderate or basically will kind of bottom out going into '26 with regards to China growth relative to our customer mix.

So important China market, for those of you here, traditionally when we're awarded business. So where we refer to them as bookings, new business bookings, if we're awarded business in the West, in the U.S. or the European markets is typically a 2- to 3-year launch cycle between awarded the launch of a program. The reason we're able to close that gap from a mix of our revenues versus industry production mix of China. In China, it's 9 months to 12 months. . I mean it's literally 1/3 to 1/2. So we have programs in China ADAS programs we've been awarded over the last couple of years. We're literally a program awarded at the end of March or April. We're launching a new ADAS system, a Level 2++, ADAS system within 9 months. So bookings in China have been strong in the last couple of years, especially last year, very strong. So bringing on those new programs happens very, very quickly.

In terms of the growth you're getting compared to, is that kind of the same between the RemainCo and the SpinCo or is there any noticeable difference?

It's a little bit faster on the RemainCo than it would be on the SpinCo. But both are making significant progress.

Listen, let me give a piece of kind of, when we talk about our China business and just for being with everyone here, but also those that are kind of calling in, that we do business with top 8, 10, 12, OEMs, right? And so as you think about this is even like the Chery, Geely, BYD, Great Wall. Those are the folks that we deal with. And we're happy with the business that we do with them and as they continue to grow, that certainly helps. There certainly are several, more dozens more OEMs below that threshold also. And that's activity that we have made consciously not kind of actively participated in. The price point level of quality is not something that we will be able to add value, both to them but also back to our shareholders. So I just want to kind of classify just to give that clarity in terms of who we do business with out there and as well as they grow, we're certainly there to support them, not only in China, but also for the export volume. And as now, they've been -- they've begun to move out into South America and Europe and other international markets. And given our footprint, we certainly are actively engaged with helping them get international operations up and running also.

Last thing on China. I know you mentioned getting compared with, which is very impressive. I think very few U.S. auto suppliers can say that. Does that have any implications for margins? Or in the context of -- what we've heard is, obviously, it's very cut throat on pricing. So is that something that worries you at all?

Yes. I think to the -- really good point, Varun made is, will there be an impact on margins from our standpoint, that's something we can manage through in terms of customer mix, program mix as well as cost structure. So cost structure, I'll start with that. We've been consolidating footprint. We've been rotating West. We've been rotating both our engineering and manufacturing activities. So further reducing cost to deliver solutions in China. We have gold platforms on the ASUX and ECG business that we've leverage the global aspect of product design, but it's obviously manufactured and delivered in China. And then to the point that Varun made, we're very focused on where do we bring the most value so that we're not competing just on cost, right? And we operate in areas where, in reality, the capabilities or the landscape of competitors out there are smaller, that you need to compete on systems capability, engineering capability, quality. So we run into less of that sort of price pressure. Do you need to be competitive? Absolutely. Are we able to be competitive? We are, and we're able to do that while at the same time, we maintain our margins with incremental cost actions.

Shifting to the longer term. SVA, we've obviously heard a lot about that in the last couple of years. We've seen some more activity, I guess, from some of the OEMs. How do you think about that going forward? Is that something still a huge priority? Or you think OEMs essentially will try to in source?

No, it's a huge priority that we remain uniquely positioned to do, and OEMs are headed down that path faster pace in China today, which I would refer to as kind of an SVA light with more focused on zonal controllers, less focused on taking wire harness content out of the car. So fastest moving there. A few of the European OEMs, obviously, some are continuing down that path, North America slower, EV adoption has some impact, not that you can't use SVA on an ICE platform, you can. But the aspect of redesigning vehicle architecture is easier to know when you're designing a clean sheet program for electrification gives you more flexibility to do that. As we've seen a slowdown in North America, it's impacted some of the pace of that activity, I'd say all the OEMs across the globe are focused on SVA, are headed down a path towards SVA, but at different paces. As it relates to OEMs doing things internally or externally, which is a question we get asked across our portfolio. We would say it's a mix, we'd say the trend actually is reversing. There's a number of OEMs and you all are aware of them that have spent exorbitant amounts of money trying to do things internally and those activities have not been successful. So a recognition that they need suppliers like Aptiv. We're very intentional in our approach commercially to have open architectures, where to the extent our customers wish to do some or part of a solution, they're able to do it. We've designed our ADAS stack, our user experience stack, we just opened architected from a software hardware standpoint. It's chip agnostics, so that we give our customers flexibility to partner with those that they want to partner with or do some of the activity internally.

In terms of the -- I don't know if you provided maybe order book numbers around SVA or customer account. Anything to help us kind of figure out the trajectory of that business in the long term.

Yes. So, we haven't provided a public update recently, I'd say no change since the last time that we have. I would say the amount of activity with OEMs plus -- we're working with more than 20 OEMs across the globe at this point in time. I'd say the pace of activity has picked up significantly and will continue to do so.

You mentioned some of the OEMs have tried to do this in-house and spend a lot of money to not necessarily much success. What do you think are the hardest aspects of that? Why is it so kind of difficult for them?

Well, I think it's experience and expertise principally in and around systems integration, both from a software standpoint and a hardware standpoint. And you have players like ourselves. We've done that for a number of decades, right? I mean, we have the experience of doing that. And I think that's item number one. I think item 2, where we play from a cost standpoint, if you think about it, we're developing solutions for, we do business with, I don't know, the top 50 OEMs across the globe. And we're doing things relatively consistently across that customer mix. it's hard to envision a scenario where any single OEM can bring that much experience capability leverage from an overall customer standpoint to bear and do it as cost effectively as we're able to do it. But importantly, I just want to make sure we reiterate this. Our approach to our customers is, we want to help our customers get to where they want to be. So we want to enable them. And it's important that we participate in that path from a revenue standpoint. But we're very, very -- we're very open in terms of we sell open systems where we'll work with customers or their suppliers that enable or deliver the solution that they're looking for, whether that's vehicle architecture on the wire harness side or that's what we do at ASUX from an overall ADAS or user experience system.

Another big megatrend with vehicle economy, whether it's ADAS, higher levels of ADAS, or even robotaxi. You were very early on -- Aptiv is very early on getting involved. And now we're at a point where you have Waymo, which is doing more rides than ever, tesla, obviously with the launch this month, a lot happening in China. Where does Aptiv want to truly play going forward.

So our -- we were early in autonomy, to your point, we always use it as an extension of our ADAS business, right? When you think about accidents, 95% of the accidents are human error. So ultimately, the safest vehicles ultimately will be vehicles that have limited, quite frankly, human control of the vehicle. So we have a partnership or a joint venture with Hyundai. So we launched our own autonomy group back in 2015. We ultimately, in 2020, formed a joint venture with Hyundai where they were bringing -- they brought the vehicle technology. We had the ADAS or the autonomy technology that we contributed. We've progressed the technology significantly. A couple of years ago, we looked at a path to commercializing autonomy, what I mean making money off of providing autonomous solutions to the mobility on-demand market. And our view is that was further out, in terms of doing that and making money, having that profitable, we're out beyond the end of this decade, so we sold a part of our -- an additional part of our interest to the Hyundai team. So we now own 15% of Motional versus 50% of Motional. We're very active with it. I'm on the Board of Motional. So we meet on a regular basis with the Motional team and the Hyundai team. We're firm believers in autonomy. We think it's going to take a while to bring cost down to deliver the solutions. We'll see expanded ODDs and solving some of the edge cases. And we continue to bring that into our ADAS solutions. The exposure of those learnings, those technologies, Motional is a customer of Aptiv from a hardware and software standpoint. And we're looking for more ways to partner with them.

Can't let you leave without talking a little bit about tariffs. I guess there's a couple of angles to it. In the near term, I know the idea is to pass on the cost to the OEMs, is that playing out as you expected?

Yes, I'll actually set the table a little bit differently. Given the work we've done on a couple of items. One is a mantra of in region for region. The vast majority of our operations are in region supporting, whether it be Asia, Europe or for that matter, North America. So in terms of trade flows between continents is not that significant. The second point, I'll just kind of share with the broader team out here is 95% of our trade flows into the United States are from Mexico, and 99% of our product is USMCA compliant, right? It just kind of setting that piece up to say, it's not the case when we pass everything on. The question is how do we mitigate and what is the true exposure. Said differently, our direct tariff exposure is de minimis. I think that's the kind of key piece to understand because the USMCA compliance number one, having the certificates of origin, being able to track that, having them kind of stood up for scrutiny audit as the case maybe that is kind of point number one, right? And so that holds. So it kind of leads to a de minimis direct cost exposure. In addition to that, we're working with our customers in terms of where we need to reroute certain products for the smaller element or for that matter, just kind of moving ahead in terms of seeing what's around the corner in terms what the administration is trying to get done. And in whichever way we can support our customers, we certainly are working on that front. With that, whatever is something that we are unable to mitigate, for example, on the wire harness side, the entire industry is in Mexico, right, or in Central America. So from that perspective, making sure that we don't end up becoming uncompetitive, right? So that's the other piece that we're working on and then whatever is still kind of outstanding in terms of certain products on the Aptiv safety side or on the high engineered components piece, we will get to the right answer in any case. But it's those elements that we know the industry doesn't have them here and so we're not losing competitiveness. Those are the ones that get lost through.

I'd say, Edison, for us, the most complex, Varun, talked about the direct impact is de minimis. And yes, we've been successful pushing on cost that we can't change supply chain or source them and we've been able to push that on to our customers. It's the indirect, right? What's the impact on vehicle production, does the economy slow, does decision-making slowdown within our OEM customers. And we've seen some of that, right? As they try to navigate whatever the particular issue of the day is related to changes in trade policy. So that's what we're watching most closely. That's what we're most sensitive to. Obviously, vehicle production has a big impact on our business and revenues and that gets back to our -- how do we look at the second half of the year and how much visibility that we have or don't have at this point in time.

On the recoveries -- maybe this is another question. Are you surprised at how kind of seamless it's been if we think about like the last couple of years with other types of recovery?

Well, asking our customers for money is never easy. We manage it well. And I think it's one of those from our customers, they recognize the ability to supply to -- supply chain to absorb with every one of them, though, as a part of this, our commitment is how do we alleviate this, right? In the tariff environment, what do we do from a sourcing standpoint, how do we work with them? How do we find opportunities for offset? And we're very aggressive about that. How do we get creative. Varun talked about, we -- I think if you talk to OEMs across the globe, our supply chain is world-class, I mean, end of this year, our entire global supply chain will be mapped in our digital twin down multiple levels. So we have visibility to where we source from. We have visibility where alternatives are and we can move very, very quickly, and that brings value to our customers. So most of our competitors, quite frankly, don't have.

Last question for me, growth above market. I think we're -- originally, you're kind of thinking about 5 points, any puts and take to that?

Yes. I don't know if we have any update on growth over market other than a comment for me. I think in today's dynamic environment, I think with rapid changes in customer mix, vehicle mix, especially in places like China. I think dividing revenues by global vehicle production, it's something that investors can look at. I'm not sure it's as straightforward as it was 5 or 10 years. So we'll -- obviously, our focus is on revenue growth, high-quality revenue growth, delivering margin expansion. We understand the importance of that. That's where you'll hear us talking more about, we'll obviously give you visibility what global vehicle production is in terms of actuals in our outlook. We'll probably talk about some other things to help investors measure progress that we're making. We're not sure that historical calculation is really the most useful to be transparent to investors in determining success of the business.

I think we have time to may sneak in 1 question from the audience, if anyone...

Edison, while people are thinking about questions, I was going to add to what Kevin said is we are focused on growing the business, growing top line, and as we get into -- deeper into multiple end markets outside of auto, how relevant is that specific metric become, for example, same thing with software, how relevant does it become? But top line growth is key accretive margins and then just the free cash flow conversion. That's what we believe is the key underpinnings of just running a financially successful business with kind of which rewards those that kind of support us.

Quick question?

Yes. I would actually ask 2 potentially quick ones, if I may. The first one would be slightly linked to the growth of our market question, just on SOPs and a couple of your competitors have been complaining about OEMs pushing out SOPs, and there's lower volume ramp-up than actually planned. Do you see that improving currently in the current environment across Europe and North America?

Yes. Listen, I think our -- there's always an element of that goes on with our OEMs. I wouldn't complain about our customers. It's something that we've navigated for decades and decades. And I think to the extent there's uncertainty, obviously, it's more problematic for our customers, and that tends to slow things down. So we're working with them and staying close to them as it relates to their decision production. Have we seen a significant change one way or the other, I would say, not really.

And then just a very short term follow-up. Did you already see any production stop, short ones from the rare earth export restrictions?

Nothing that we could point directly to. Nothing that we could point directly to. I know there's been some chatter about it, especially in Europe, but nothing that I would say is meaningful to raise with you.

Thank you very much.

Thank you.

Great. Thank you, everybody.