Aptiv PLC (APTV) Earnings Call Transcript & Summary

Hi, once again, I'm Ryan Brinkman. We're going to get going now with our first presentation. Very happy to have with us marquee auto parts supplier, Aptiv, including their Chair and Chief Executive Officer; to my right, Kevin Clark; and on the end, Varun Laroyia, Executive Vice President and Chief Financial Officer. Kevin and Varun, thanks so much for coming to the conference.

Thanks for having us. It's been a pleasure.

Maybe to start, coming off a strong second quarter, you commented that your reinstated 2025 outlook contains some elements of conservatism around the second half, industry builds, et cetera. You're sitting on a really strong balance sheet, $1.4 billion in cash. How do you think about capital allocation in light of your performance year-to-date, your expectations for the remainder of the year and the market backdrop that arguably remains a bit uncertain.

Sure. I'll start, and Varun can certainly chime in on it. Second quarter was very strong for us. So from a backdrop standpoint, vehicle production was stronger than what we had expected in Q2. We thought there would be some tariff impact beginning to affect vehicle production in Q2. We didn't see it. Production was much stronger. We think there may have been a little bit of pull ahead into Q2, just from a consumer demand standpoint that resulted in our OEMs increasing vehicle production. We continue to see strength in July. So it gives us incremental confidence in our Q3 outlook. As Ryan had said, we basically -- we've been presuming that we're going to see some softening at some point in time during 2025 as a result of tariffs under the presumption that at some point, OEMs would be pushing price increases through or reducing sales incentives and that ultimately would impact end consumer demand and therefore, vehicle production. Haven't seen it yet. We have baked some of that into our back half outlook. So we do see a -- our forecast assumes some slowing principally in Q4. We'll see how that plays out. If it doesn't play out, quite frankly, there'll be upside to our guidance, which is a positive. The second quarter, first half of the year, I do want to add to my response to Ryan's question. The business performed extremely well. So in addition to getting the benefit of vehicle production, when you look at what we've delivered from a manufacturing efficiency, from an engineering productivity standpoint, from an SG&A productivity standpoint, operationally, we executed extremely well. I'd say we're back to and even better than where we were pre-COVID from an overall the factory operating and connecting the full integrated supply chain. So it's translated into strong margin expansion, although we've had this year, significant FX headwinds, principally the peso, but very strong operating productivity, very strong cash flow generation. And I think to answer the last part of Ryan's question, our real focus is how do we continue to take our existing portfolio, expand into industrial markets. We've obviously made a lot of progress in our ECG business. We're making progress in our ASUX business as well as our EDS business. We'll continue to push that organically as well as inorganically in an intelligent way. Given where we sit today from a cash generation standpoint, we've made a decision we will be back in the market repurchasing stock in the back half of this year, just given where our stock sits today, which I think is important for you as investors in our view that we can quite easily do smart M&A, while at the same time, we can return cash to shareholders, especially when we're in situations like we are today where our view is our stock is significantly undervalued.

Great. And you referenced tariffs. How have you managed the direct impact on your company? And then how are you thinking about the indirect impact going forward in terms of the potential for demand destruction as automakers raise prices? Have you changed your estimate of the normalized level of U.S. light vehicle sales or North America production as a result?

Yes, that's the question. So the indirect piece is tough to give a precise answer to. I think it's implied in our back half guidance from a vehicle production standpoint that there is some impact. We haven't seen it yet, but I think it's reasonable to assume that there will be some impact over the long term. As it relates to direct impact for us, it's been de minimis. I mean, literally, it's been de minimis. Part of that is we've been very focused over the last -- really since the first Trump administration from a supply chain management standpoint, really focused on regionalizing our supply chain, so in region, for region. Our supply chain visibility on a global basis, I would say, is the best in the industry. I mean we have a digital twin of our global supply chain where we have the ability to go down multiple levels in terms of where we source and quite frankly, where we don't source from so that we have visibility for alternatives. So a long time ago, we made the decision to really push towards regionalization where we've had potential direct impacts. We've already made shifts in terms of who we're sourcing from and where that's located. There have been a few areas where we weren't able to address from a supply chain standpoint, and we've been able to pass that on to our customers with agreements -- with contractual agreements, but also with a commitment that we're going to work jointly together to find alternatives to reduce that pressure on. But that amount is relatively small. I'd say the one area that we're focused on and watching, we just don't know enough about it yet. There's not enough clarity is the potentially proposed semiconductor tariffs and how that plays out. Obviously, a big part of what we do is reliant upon advanced compute, reliant upon semiconductor chips. So that's something that we're watching closely.

And as far as how the tariff backdrop may evolve going forward, we've seen a trend of tariff rates coming down, right, with the U.K. getting a 10% rate, Japan, 12.5%, EU and Korea, 15% yet Canada and Mexico remain at 25%. How do you see that maybe evolving? And then any look ahead to the 6-year joint review of USMCA scheduled for July 2026 and the potential impact to Aptiv given your large operations in Mexico, particularly for EDS?

Yes. So 95% of what comes into U.S. for Aptiv comes in through Mexico. And of that, over 99% is USMCA compliant. So USMCA is very important. Our view based on our discussions with the administration here in the U.S. as well as in Mexico, importantly, where we have strong relationships as well, as USMCA will stay in place. The U.S. administration will be pushing for more U.S. content that their real focus is vehicle assembly in the United States when you think about the nature of those jobs and the pay associated with those jobs that when you look at it from a part standpoint other than engine parts, really, things will stay in place as they are -- as they operate today. We used to get a lot of questions, for example, about our EDS wire harness business. That's one where the administration and the industry has worked very closely together that there's no situation where that's going to move to the U.S. and there's no situation where there's -- that's going to be subject to tariffs. Between U.S., Mexico and Canada, you're going to see more driving as well, more content across the 3 countries. So those standards will go up. But we think it's going to be actually very manageable. Mexico has played this very well. They're very supportive of the U.S. administration and are willing to do, I'd say, just about anything to make sure USMCA stays in place, given the importance of USMCA and job creation in Mexico, as you can imagine. So, so far, things look like they're going to play out reasonably well. As it relates to tariffs overall tariff rates, I think it's reasonable to assume that with the exception of China, you're going to see tariffs stay in place and they're going to drift around 10% to 15% depending. And that's going to be kind of the lowest level and virtually every country will be subject to tariffs.

That's helpful. And next, I wanted to ask what your very latest outlook is for vehicle electrification, including in light of the recent changes to the regulatory backdrop, such as the elimination of the $7,500 U.S. federal consumer tax credit and the relaxed enforcement of greenhouse gas and corporate average fuel economy standards. How has your outlook evolved? And what ways might you be running the business or allocating capital any differently as a result?

Yes. So our view, maybe for people here, IHS still has a forecast where by 2030, EV penetration, which will be BEVs, plug-in hybrids, hybrids would represent basically 70% of vehicles produced globally. That's their general outlook. Our outlook is closer to 50%. Our view is you're going to continue to see very strong adoption in China. That will continue. In Europe, you'll see stronger commitment or we're seeing stronger commitment to EV and BEV adoption than what we certainly have here in the U.S. Although, as you all know, the targets have been moved out a couple of years and the EU is still working with the member countries in terms of how do they settle with a more holistic sort of CO2 targets and how do they support member states in terms of achieving those targets. As you know, a number of the OEMs are working directly with them. Here in the U.S., our view is EV adoption is basically flat. You're not going to see growth. You'll see growth in -- some growth in hybrid, plug-in hybrid. Having said that, we'd tell you virtually all of our OEM customers are working on BEV platforms. You saw the announcement from Ford as an example. And the way I would explain that to you is all of them believe that if they need -- if they're going to be competitive globally, they need an EV vehicle. So all of them are working on those sorts of solutions that it will be very low volume here in the U.S. for the foreseeable future for the reasons that the long list that Ryan went through. EVs are very beneficial to Aptiv when we talk about content opportunities, BEVs, it presents a 2.5x content opportunity relative to an ICE vehicle on plug-in hybrids, it's almost 2. So it's good for us from a growth standpoint. But our general view is where we'll see opportunity is in Europe, slower than what people were anticipating previously. It will continue to move very quickly in China and North America will be fairly flat.

Great. And the next question relates to your approach to adapting to the rapid growth of domestic Chinese automakers. At the conference last year, we asked each of the suppliers to update us on their current exposure to Chinese automakers and to outline any plans to increase that exposure going forward. And the answer that I think investors were looking for was that suppliers were doing absolutely everything and anything they could to hitch their wagon to that star. I wanted to check in a year later after Chinese automakers probably grew even more quickly than was imagined, took even more share. Yet at the same time, there are these headlines about them commanding very favorable pricing and payment terms with suppliers. The government even recently encouraged automakers to sign a pledge to please pay suppliers on time. So what's your sense of the dynamic there? And what is your approach to balancing the opportunity for growth with commercial discipline?

Yes. So I was going to say you have to define star, right, at the end of the day. For us, it's profitability. Now the China market, we've been there for almost 4 decades, and we've been in China for China. For us, it never was sourced for other countries. It's actually the perfect market as you think about technology development and advancement, it's quite frankly ideal given the pace of change. So we use that. The market is competitive. Our real focus is on the top 10 OEMs. In reality, given growth in market share, it's really the top 5 that for us really matter in terms of market share penetration and true revenue growth. So being with BYD, being with Geely, being with Changan, being with [indiscernible] and Great Wall, that's where our most significant focus is. The other is the next 5, it's a bit more opportunistic. We're really focused on those that are taking vehicles overseas. So we're working with BYD in terms of their plans in Europe, what they're doing in South America, as an example, because we can bring incremental value. So although we're making progress from a booking standpoint to match our revenues with mix of local versus nonlocal, we're not going to be a slave to it at the cost of cash flow and profitability. We're not. So we'll continue to gain in terms from a market share standpoint with that mix of customers, but our real focus is how do we continue to generate profits in China that are -- that have acceptable returns, right, quite frankly. I don't know.

No, I think that's comprehensive, Kevin.

Great. And moving to the EDS spin, could you discuss the ways in which the spin can enhance value creation through optimizing capital allocation going forward? For example, have there been or do you anticipate that there could be potential acquisitions that would be financially or strategically attractive to EDS to pursue on its own, but which might not meet the parent company's hurdle rates for margin or growth or conversely, will new Aptiv be freer now to pursue higher growth or higher margin targets that might have been deemed too dilutive to valuation inclusive of EDS? And of the various motivating factors for the acquisition, where does capital allocation optimization rank? And just how large is the opportunity do you think for value creation in this area on both the EDS and new Aptiv sides?

Yes. I guess for us, I mean, I guess, factored into capital allocation is capital returns, and I think that was the primary focus, right? I should start with the EDS business is a great business. Competitively, it's the #1 or #2 player in literally every market it operates in. It's on one of every 4 or 5 vehicles produced globally. So the market position of EDS is significant. When you look at the margin profile of EDS, it's almost 2x any of its competitors in the global wire harness business. And the reason for that is the bulk of their business is -- we refer to it as full service. They design, manufacture and supply. And in doing so, they're able to drive more value to customers and higher margins. And they operate in an industry today where there are a number of players that do build-to-print items like that, which is reflected in their margins. Our view is there's opportunity to consolidate within automotive in that space. We'll see if that plays out. But the reality is virtually everything you think about has a wire harness, right? Whether it's a drone, it's a robot, it's a humanoid, we can go through the whole list. It has a wire harness. And one of their big focus areas is going to be how do they, in an intelligent way, take the technology that they develop and deliver today in a very demanding environment and apply that to other markets in an intelligent way. And being stand-alone will give them a lot more flexibility to do it. And in fact, today, we have a customer who's taken us into satellite space, energy infrastructure, robotics as a start, and we think we can leverage that know-how. On the RemainCo side, you think about our Engineered Components business, similar to what I was talking about in terms of EDS, everything has an interconnect. So to the extent you see more cameras, more radar, more LiDAR, more sensors, you need interconnect solutions. You need high-speed cable assemblies. You need all of that. So there's tremendous opportunity that remains in automotive as more content goes on the car as well as opportunities outside of automotive. It will be a very big focus area. On the ASUX side, as you think about M&A, I would say it's more partnering, more investments with technology partners than it is straight out M&A from a software standpoint, but those will be areas of focus as well. So our view is given the focus, given the more focused portfolio, given the capital structures and businesses that generate cash flow, there's all sorts of opportunities to grow and generate returns for shareholders and quite frankly, in both businesses, at the same time, return cash to shareholders.

The benefits of the EDS spend they do seem obvious. And as a financial analyst, I also think there's a tremendous sum of parts valuation opportunity there. At the same time, I also found quite compelling the earlier proposition of there being significant benefits to supplying both the brain and the nervous system of the vehicle, perhaps that by designing them closely in conjunction under the same roof that maybe they would work more harmoniously together, enabling simplification, cost reduction by pursuing a whole systems approach. So do you see any potential for revenue dis-synergies? Or how can you mitigate that risk? And how will -- how do you plan to go to market? How would it work for highly integrated solutions such as smart vehicle architecture? Would Aptiv's ECG Group serve as a Tier 2 supplier to EDS? Or would they be officially aligned? Would they be a preferred partner? How is that going to work?

Yes. So our view is because of the transaction, there should be no revenue dyssynergies. So let me start with that. The second piece, just backdrop on how we run our businesses. Our businesses are global stand-alone P&Ls. We have very little overlap. We have no overlap from a manufacturing standpoint. We have very little overlap from a technical or engineering footprint standpoint. We have some overlap when you think about G&A overhead, right? So from a facility standpoint, not from a management standpoint. And those businesses are global. They're managed at regional levels with regional MDs. They all have P&Ls, balance sheets, cash flow statements. The relationship between our sister companies is arm's length. It's commercial. So it's not driven by tax planning in terms of where we put profits. It's truly a commercial sort of negotiation. Where we develop full system solutions is where the business leaders get together and decide we have a particular edge in an area or a relationship, you have a particular capability, how do we come together to do that. The reality is we do that with outside suppliers, too. So that's something that we'll just continue to do. In a weird way, for those of you that haven't operated in industrial companies, sometimes it's easier when you don't have a brother sister company in terms of how they get along and how do they work together. So we think there's tremendous opportunity that will continue. ECG operates today as a Tier 2 to EDS, just like TE operates as a Tier 2 to EDS, just like Molex operates or Amphenol, I can go through the list. So that will continue. And we think the separation will have really no impact on those relationships and hopefully drives accelerated revenue growth that they all can benefit from.

Okay. And you mentioned nonautomotive in response to one of the earlier questions as an opportunity on the M&A side for new Aptiv. Could you talk about the nonautomotive business more broadly? It's been rising as a percentage of sales. For a long time, you targeted getting to 20% nonautomotive revenue. Actually, new Aptiv is already at 22% or will be post spin. So I'm just curious if you might set a new target after the spin.

I'm not sure we'll establish a specific target...

38%.

I would say for investors, and we'll talk about this more at our Investor Day in late November. It needs to be meaningful, but it needs to be done in an intelligent way, right? And so that's both organic and inorganic, and we understand that from a framework standpoint. But to get a more balanced revenue mix, a view from a multiple standpoint that we have exposure to high-growth markets like A&D, like telco, like a data center like other, it needs to be certainly higher than where it is today at 22%. Now organically, our industrial market is growing north of 10% this year. It will be our fastest-growing revenue sector on a revenue base, it's roughly $1.8 billion. So the team is doing a great job. To really move the needle, we're going to have to do M&A. So that's a part of our overall plan. But we'll figure out whether we give a specific number or target.

Maybe turning to award activity. Where are you with regard to new business bookings? Are the awards that you're booking now sufficient, do you think, to support the medium-term growth you've targeted for the 2 segments? And a lot of suppliers have reported an industry-wide slowdown in request for proposals with automakers as they paused plans amidst regulatory uncertainty with regard to emissions, fuel efficiency, tariffs, et cetera. With the increased clarity that we've gotten recently around some of these factors, do you expect now that there could be a flurry of activity? How is Aptiv positioned to capitalize upon any such rebound in industry bidding?

Yes. So I think what we've talked about this previously with Ryan. I wouldn't say we've seen in the activity. We've seen an elongated award cycle. So the number of opportunities that are being presented and our OEMs are calling out, that hasn't changed at all. The time from start of the process to actual award has lengthened. And it is purely the purchasing organizations who are dealing with the weekly announcements as it relates to trade and tariff, what it means from a supply chain standpoint. So striking that balance, I think it's been difficult. Having said that, every OEM is focused on how do they put new vehicles with new content out on the road. And the only way they're able to meet their schedules or their strategic plans from a product planning standpoint is to award the business. Otherwise, suppliers, the engineering organizations within those OEMs are unable to start working on those programs and you run into issues as it relates to delay. So I think you'll see a flurry of activity in the back half of this year. We'll see how big the flurry is. But I would say every OEM is focused on introducing new solutions.

One of the products that seems you might have found particular traction with and awards recently is your Gen 6 ADAS product with 2 such awards in 2Q, including one with Leapmotor in China that utilizes a Wind River real-time operating system. You mentioned the cost pressure from tariffs as a potential catalyst for automakers seeking this product. Maybe you could just unpack that a bit for us. And then what role does Wind River have to play here? Can you explain that further?

Sure. So Leapmotor, our relationship with Leapmotor is -- originally was vis-a-vis actually Stellantis and their work with Leapmotor. So that was the initial focus. Stellantis is a large customer as it relates to ADAS for Aptiv and has been for a long period of time. When you think about our Gen 6 ADAS solution, it's really focused on -- it's an open architected platform. So it gives customers choice from a vision standpoint, from a radar standpoint, from a feature development standpoint, if you have an OEM who's developed certain features that they want to incorporate into a vehicle or another supplier, we can do that. And it's fairly chip agnostic. It's not as easy as you can just shift, but we can operate on different power sources for ADAS controllers. So it gives them a lot of flexibility. And when you look at our reference platform that is based off a StradVision vision solution, our most advanced radar solution relative to the standard comparable system, it's a 20% -- 25% cost savings at equal performance. And given everything that OEMs are going through, including tariff costs, tariff expenses being pushed on to them concerned about vehicle production and their cost structure, there's a lot of interest, especially given that it's open architected. They're not locked in by a supplier on a given solution. They have choice. They have flexibility. So we're seeing a lot of pull from both traditional legacy OEMs as well as we've had a couple of awards in China, some of the China local OEMs as well. What does Wind River play? So Wind River is RTOS and Linux layer. That allows the way Wind River is architected an easier separation between the software stack and the hardware stack. It's architected in a way where it's much more efficient than the traditional solutions used in the industry. There's an engineering tool chain that goes with it that for those OEMs who want to develop some of the software, it's fully connected with the ecosystem of suppliers that are contributing to the platform. So it's more efficient, drives productivity. You've heard us talk about in our ASUX business, roughly 80% of our programs today utilize Wind River Studio developer. We've experienced 20% productivity from an engineering standpoint, software development standpoint. It's massive from a quality standpoint, connectivity standpoint. So we're trying to bring value like that to our customers, a more holistic approach, but again, give them flexibility.

I know growth over market performance has been closely watched by investors, including after a softer performance in 2024 in which you fell short of your expectation at the start of the year, given vastly different performance at certain customers and the EV slowdown generally. This year, though, you continue to look for the same 5 points of global growth over market as at the start of the year, about 2% organic growth on minus 3% industry production. That's an improvement versus last year, both in absolute terms and versus your expectation. What have been the main drivers of the improvement? And while I understand that you haven't guided to 2026, what would you say are the high-level puts and takes on growth over market as we head into next year, including as it may relate to cycling past in 2026, the roll-off of any legacy programs or underperformance of certain customers?

So 2024 and to a certain extent, 2025; 2024, significant impact from customer mix, EV and non-EV. And the big players were a U.S.-based global EV company, a German automotive OEM with a BEV platform, a French-based global OEM who -- all of the production came down significantly, EV and non-EV. Those for us were the biggest headwinds. I would say when you look at that mix this year, it's really principally isolated to that global EV manufacturer. There is a -- and we've been talking about this now for a year and the headwind will end in the fourth quarter of this year. There's a large user experience program, legacy user experience program that has been running off for the last 2 years that has been I don't know, worth about 2 points of overall growth when you think about revenue growth. That's been the headwind. So that will go away. I think you see a more normalized sort of growth relative to vehicle production. I think the dynamics in the China market, especially today and then the mix of platforms between BEVs, plug-in hybrids, ICE vehicles make the predictability of growth over market much more difficult. I think it's a reference point that investors should look at. I think it's worth looking at it. But I think when the world was principally built on ICE platforms where there is more predictability as a guidepost, it was more useful. So it's something that we're -- from a communication standpoint, we'll continue to provide the information to investors. We'll deemphasize it as a priority. And then how do we make sure that we provide you with information where you can see where are we gaining share? How are we gaining share? Who are we gaining share with?

Okay. And I have some more questions, but why don't I pause to see if there's any in the audience. And as they're thinking of their next question, I will sneak in one on copper tariffs. Can you explain what's going on there? I think that there's not an EBITDA dollar impact apart from timing differences, right? But there is an EBITDA margin impact. Is that the way to think about it? And then also, you gave your outlook for how Section 232 automotive sectoral tariffs may evolve. How do you think the copper tariffs might evolve because the steel and the aluminum tariffs are not stackable on top of the automotive tariffs, but copper is. And that just seems sort of odd. And I'm curious if it might get addressed.

Yes. First of all, thank you for having us here. On the copper piece specifically, if you kind of go back to when we gave guidance at the start of the year, what we had thought about from a guidance perspective, revenue and then also OI, we had not anticipated the level of FX and commodities pressures. What has come through, obviously, has been stronger production, and you've kind of seen the print in the first half of the year and now some conservatism at the back half of the year. Specifically to FX, as we've called out, our single biggest exposure is the Mexican peso, where we do not have a natural hedge. And then from a commodities perspective, it's essentially copper, right? And from a copper perspective, essentially within our EDS business, the wire harness businesses where we have. With regards to the revenue side, commodity prices being higher certainly helps from a revenue perspective. But then from an OI perspective, as you rightly pointed out, Ryan, less so. The FX impact is bigger because 70% of our copper is essentially passed through, right? So that's indexed through our contracts in any case. And then the remaining, we typically hedge up to a certain point. So that one is more manageable. Again, this is more a case about risk mitigation rather than trying to make an incremental turn anything from that perspective. And then with regards to the Section 232 tariffs in terms of when the proclamation was made and as things continue to get clarified, we see that our specific exposure is de minimis. Given the digital twin that Kevin mentioned earlier, we have good insight into the level of copper content within our products. And again, from a sourcing perspective, we obviously will try and mitigate as much of that as we can, but we do not see that to be a big exposure to us.

Great. Thank you. A question in the audience, microphone on way for the webcast.

One thing, if I can just augment what Varun was talking about. So the Mexican peso, we talked about naturally. So you think about it, we have 75,000 employees in Mexico, we pay in pesos. Our business generates dollars, right? So to the extent the peso strengthens, which it has significantly, it's in the 18s at this point in time. Obviously, that's a headwind from a cash flow standpoint, from an earnings standpoint.

Neil Patel. How will your capital structure evolve post the separation?

Yes, I certainly can. Listen, so as we -- as Kevin mentioned, and one of the questions, Ryan, you'd asked was what are the kind of priorities and as to what drove the EDS separation. Apart from just the strategic and operating focus between the 2 businesses, but also resources and investments, capital allocation is also an element associated with that, just making sure that we align the right shareholder bases with the 2 separate businesses. As you think more specifically about the 2 businesses, EDS grade business, as Kevin mentioned, we're really more of a lower growth, but very steady and high cash flow generating business. So as we think about the cap structure for that business, great dynamics, but essentially, we would set it up as a high sub-investment grade cap structure. So call it 2x levered or less than that, right? That's how we're thinking about the EDS business. And then from a new Aptiv RemainCo perspective, specifically, higher margin, higher growth, investment grade, that remains a priority for us. And given the prodigious free cash flow generation from both parts of the businesses, we think it certainly aligns better from a capital allocation, but also from a cap structure perspective. So in summary, EDS, high sub-investment grade and new Aptiv RemainCo will remain investment grade.

If I can just add, I think the important thing for us is capital structure that provides us flexibility to do M&A and return cash to shareholders. That's our focus. That -- I think given the margin profile, growth profile of RemainCo, it's obviously investment grade. On the EDS side, just given the size of the business and nature of it, it's likely very high sub-investment grade, but we're very sensitive to overleveraging that business, quite frankly, so that it has the flexibility to execute on its strategy.

And that is all the time we have. So please join me in thanking Kevin and Varun for all the great color and insight.