Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Aptiv PLC (APTV, Financial) delivered record earnings and EPS, reflecting solid execution and lower supply chain disruption costs.
- The company announced a new $5 billion share repurchase authorization, including an accelerated share repurchase plan.
- Aptiv PLC (APTV) booked $4.3 billion of new business awards in Q2, bringing the year-to-date total to over $17 billion.
- The Advanced Safety and User Experience segment achieved record revenues and earnings, driven by strong product portfolio and operational efficiency.
- The company reported strong cash flow, positioning it to repurchase over $100 billion of stock during the quarter.
Negative Points
- Revenue was down 2% year-over-year, impacted by lower production volumes at select customers.
- The Signal and Power Solutions segment saw a 3% decline in revenues, primarily due to reduced production schedules by select customers.
- The company lowered its full-year revenue outlook due to continued pressure on vehicle production.
- High voltage revenues were down 19% in the quarter, impacting overall segment performance.
- Aptiv PLC (APTV) faces significant revenue headwinds from smaller customers, particularly in the Chinese market.
Q & A Highlights
Q: Kevin, just to start off on the buyback. Clearly a strong signal from you and the management team. Can you talk a little bit more about how you came to this decision to lever up versus maybe some other options? And on the debt, I know historically you've been pretty conservative. Is this confidence in the next few years' cash flow to bring this down? Are there potential ways to get some cash out of the business by looking at slower growth assets?
A: Yes, thanks, Joe. Our general view from a management standpoint is we remain conservative on our outlook. We've gotten through the transition from COVID to supply chain disruptions, and our results reflect strong operating performance. Given the opportunities in front of us, whether it's electrification or active safety, our share price is clearly undervalued. We believe repurchasing our stock is the most attractive investment. We can do this while continuing to invest in the business. As for other opportunities to increase value, we'll continue to evaluate and adjust our portfolio as needed.
Q: Just the second question on China. The growth over market now of 4% for the year doesn't seem like the dynamics of some of those foreign players are changing anytime soon. How much of that should investors think is at risk?
A: Our revenues are over 50% with local Chinese OEMs and growing quickly. Our bookings are 60 plus percent with Chinese locals and have been for the last couple of years. This isn't something we just started doing; it's been a priority for the last three years. The challenge is with a couple of multinationals dropping off more than expected. We're working closely with those customers and watching the situation closely.
Q: Kevin, just maybe in Joe, maybe give a sort of a strategy and philosophical follow-up to the capital reallocation. Does this suggest a potential slowdown in R&D and product development?
A: Our stock price is significantly undervalued. We remain focused on positioning ourselves for industry trends and customer challenges. While some areas have slowed, we've scaled back investment in certain areas like high-voltage electrification and smart vehicle architecture. This has freed up additional engineering dollars. Our engineering factory is executing extremely well, and we've seen significant productivity improvements. We're reducing engineering spend year over year by 75 to $100 million.
Q: Can you talk about the company's organic growth, growth over the market, and the incremental margin path from here?
A: We're on track for the $35 billion in bookings. As for revenue, we're targeting mid-single-digit growth next year, assuming no help from the market. It's important to note that the second quarter impact was due to four customers. We believe they'll have consistent impacts for the balance of the year, but we'll see how that plays out. The broader mix of regions shows some are up, some are down, but the net impact is from those four customers.
Q: Do you expect to see your OEM customers fit in more advanced L2+ systems on non-software-defined vehicles with any material volume?
A: OEMs need to constantly upgrade and enhance vehicles to meet consumer demands. We've seen incremental bridge programs related to legacy ADAS or user experience solutions in the billions of dollars. These opportunities are designed to enhance technology and put more technology in the car, regardless of whether they're adopting SVA or launching EV platforms.
Q: Can you talk about the margin trajectory and how much is inflation dissipation playing a role here versus other factors like engineering or footprint reductions?
A: It's fairly balanced. We're seeing strong manufacturing performance, elimination of COVID and supply chain disruption costs, and engineering coming back in line. Price and commodities continue to be a contributor, but not as large as a couple of years ago. The vast majority of price recoveries from customers have been included over the past four plus quarters.
Q: Can you provide an update on where Wind River revenue is tracking and the momentum with customers, especially in the automotive space?
A: Wind River is second-half weighted from an overall growth rate. We're seeing strong opportunities and launches in aerospace, defense, telecommunications, industrial, and automotive. In the automotive space, we've had significant success in the China market. We're gaining traction with Wind River Studio Developer, especially in the automotive space, across regions. The growth profile remains intact, with most progress in the automotive space being in China.
Q: Can you provide more details on some of the cost tailwinds in the quarter? Are you achieving something closer to $175 million in net performance and productivity?
A: It's fairly balanced. We're seeing strong manufacturing performance, elimination of supply chain and COVID costs, and engineering coming back in line. Our run rate margin for the back half of the year will be mid-twelves, setting us up well for the 12.5% we talked about for 2025.
Q: Can you talk about the trade-off between the reduction in SVA architectures in terms of wiring content and the positives that are still there?
A: In SVA versus traditional architecture, $3 would go in and roughly $1.50 would go out, mostly in the wire harness assets. There are incremental opportunities in vehicle architecture, like high-speed cable assemblies, that reduce weight and improve performance. These opportunities are in both ICE and EV platforms, especially in areas like active safety and user experience.
Q: What level of cash do you need for operations, and what will the leverage be after the ASR?
A: Cash from operations is $600 to $800 million. We finished the quarter with $1 billion in cash and another EUR700 million in marketable equity securities. We ended the quarter with adjusted debt to EBITDA around two times. We're in a good position to do the ASR and maintain investment grade. Our intent is to get back to our current leverage by the end of next year or early 2026.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
