Aptiv PLC (APTV) Earnings Call Transcript & Summary

Okay. Why don't we start right in on time. Very pleased to have with us Aptiv. We're joined by Kevin Clark, President and CEO; Joe Massaro, SVP and CFO. Looking forward to a timely, but also strategic discussion. I want to turn it over -- for those of you who don't know, Aptiv is leading automotive technology supplier, strong experience against the megatrends of autonomous, connected and electric. We've been overweighed on it almost constantly forever, except the last time, China had a downturn, in which case everyone panicked then in terms of the stocks. Now the stocks are holding up better. But if we could maybe start out with CEO comments about who Aptiv is and then maybe drill right in, you did issue an 8-K on the current situation in China.

Sure. Okay. Thanks, Brian. So again, thanks for having us here, Brian. It's a great conference. So I'll start a little bit on Aptiv, and then Joe can talk about the 8-K that we issued yesterday, late afternoon, after the market closed. So Aptiv is an automotive technology company. About 85% of our revenues are actually in the automotive space. 15% are outside of automotive. Our real focus is on high-technology areas in and around making transportation safer, cleaner and more connected. So the comment Brian made, we feel like we have the wind at our back from a megatrend standpoint, and we feel like we have a product portfolio that's perfectly aligned to growing significantly over underlying market. So as an example, last year, we grew 9 points over global vehicle production. This year, our outlook is to grow 7 points over global vehicle production. So that technology and that portfolio is translating into high revenue growth and strong margins. When you think about our overall strategy, it's really about disciplined revenue growth, it's really about cost optimization. So we're very, very focused on how do we optimize our cost structure across every single line of the financial statement so that we generate strong cash flow returns, one; two, that we have the ability where appropriate -- where it is appropriate to reinvest in our business to further develop technologies. We have very strong product positions in areas like advanced ADAS where our revenue growth has been north of 40%. Our outlook for this upcoming year is 30% revenue growth. And high voltage-electrification, just as Brian had talked about, very, very strong revenue growth. Outlook is to grow 50% year-over-year this year. So benefiting from vehicle electrification. And we have also product lines in and around autonomous driving. You may have heard about the joint venture that were -- we announced with Hyundai. That joint venture will close end of the first quarter this year, provide us with the opportunity to deliver production-ready Level 4 autonomous vehicles in 2022. So very excited about that. So with that, I'll turn it over to Joe.

Sure. Real quickly, yes, last night, after the market closed, we issued an 8-K updating our outlook based on production disruptions in China from the coronavirus. That updated outlook was for an additional 3 to 4 weeks of production delays by our customers. And just to take a step back, in the original guide on January 30, we had assumed a 1-week delay, so basically pushing vehicle production start from February 3, which would have been sort of the normal start-up date after the original Chinese New Year break, back to the 10th. And from a reference perspective, China for us is worth about $50 million of revenue a week and about $20 million of OI. So the $50 million and $20 million -- first week was in the original guide. We've then increased that to take out 3 to 4 weeks or $150 million to $200 million of revenue with an additional $60 million to $80 million of OI. What we're seeing on the ground there is really a delay in customers able to start back up. We've been able to get our plants back at certain levels of capacity. They've been coming back online since really the 10th of February. But it's been a much more staggered return and driven by -- in fact a couple of things really from a structural perspective, the government's done to try to control the outbreak. And the government at this point in time is very focused on controlling the outbreak. So one thing we've seen are basically double quarantines. As many of you probably know, there's a massive migration in China of the workforce from the manufacturing centers back to their hometowns. That migration occurred before the travel restrictions were put in place in China, so it became a question of when could those folks get back. As they started to talk about bringing workers back after the extended Chinese New Year, they really -- local governments really -- and still what turned out to be 2 quarantine periods. The villages people were in, put a 14-day quarantine in before anyone could leave. But what you found, and I think caught -- and this is, I think, eventually, will go beyond auto, caught folks maybe by surprise was the fact that receiving towns then for 14-day quarantine on the people coming back in. So we've really had what is effectively a month of quarantine of the direct labor force there. So again, we have customers that are now scheduled to start production late February. We've seen a number of them push start-up production out to early March, the first week of March or so. And then, obviously, they'll ramp from there. We have seen customer schedules come down as a result of these delays. Unclear right now what gets made up at the end of the year. Customers are really focused on getting back up and running and are really focused on sort of forecasting March. We really haven't seen any extended forecast from customers yet. Would expect to see that over the course of March and early April where we'll take a look at sort of what the impact for the full year could be. We also mentioned the 8-K. The one other thing we're mindful of and to us would be sort of a second level effect here would be disruption to the North American and European supply chains from parts or manufacturing from supply chain disruptions in China. We haven't seen that yet to any large scale. We did have one customer shut down a plant in Europe for a couple of days due to part shortages. That actually didn't affect us. We weren't providing parts to that plant. But we are mindful of that as a potential secondary effect and would expect to see that. If there's any of those types of disruptions, really start to expect that to unfold in the March time frame.

And can you talk about the decrementals on the China shutdown?

Sure. So -- and we've had this situation before. GM strike was the most recent example. Obviously, when you take down a plant quickly, there's a lot of cost there, right? You've got your fixed cost, but you also have your variable cost. So we tend to run a little bit of a higher decremental. We're viewing this, at least, in Q1, at about a 40% decremental. Typical decrementals for us are more in the 25% to 30% range. But again, we're covering these costs. It's been a quick shutdown. The way the national holiday extension worked in China. The New Year -- Chinese New Year is a paid holiday. So when the government extended it from effectively the 3rd to the 10th, that was a paid holiday. So you had an extended week of basically vacation pay. So in the short term, hard to adjust the cost structure. Obviously, as we get full year schedules from customers over the course of March and April, we will as we have done in the past. And the muscle within Aptiv to do this is pretty well exercised, start to take a look at cost structures and identify potential offsets.

And I guess, a question, trying to phrase it delicately, but a question I get from investors, so I don't personalize it is to what extent are the schedules -- the OEMs giving you reschedules or they what -- to what extent are they schedules that reflect what the authorities would like to portray around the situation in China? Another way of saying, "Can you believe the schedules your OEMs give you?" And you've got extensive history of haircutting OEMs' optimism anyway.

Yes. Listen, I'll start. I think the schedules we see at this point in time as it relates to near-term schedules, a week out, 2 weeks out in China is where today are relatively real production levels. Those reflect the labor that the OEMs are able to get access to. I think going out beyond that, I think it's a little bit of the OEM estimating. And I think even in China, the reality is it's not driven by government reaction. It's driven by an OEM forecast, one. And two, there's a certain amount of situations like this. OEMs want to make sure that their supply base is in front of them in terms of installing capacity. So to the extent production does come up, there's available capacity, there's available parts, there's available product. So there's a little bit of that, that goes on. But to your point, we've been managing through that for....

Right. So fairly realistic or at least you know how to haircut them appropriately. A kind of related question is when and if or once it's contained, where does that leave China for the full year -- I guess, there's 2 questions. One, how much of the production and/or pent-up demand gets built up at retail because of obviously the showrooms are quiet? And then secondly, with the government not putting any incentives into place in 2019 as autos were seen as kind of old school industry that didn't need incenting, could this change their mind in terms of a package of things to get Chinese -- the China economy moving again, second half?

Yes. I'll start then. I would say this is -- for China, this is a much more significant situation than anything we've seen them face over the past few years, right? I mean whether it's auto or general consumer demand, you would have to expect they would come in with some fairly significant stimulus once they get this control. The government's focus, at least from our perspective at this point, has clearly been to control the outbreak. And to the extent that causes the business disruption, that takes a backseat to getting the outbreak under control. Presumably, once they feel they've done that, they'll turn to the business disruption and stimulating. I think it's too early to say what the OEMs will do from a vehicle production standpoint. Again, we've been -- and retail sales aren't usually a good barometer for us. We're much more keen to vehicle production, at least in the intermediate term. But one thing to focus on, we've been seeing reports, the last one came out last week, where you've had car dealers in China close for about a month. Inventory, the last that we looked, was about 2x the normal level. So I think the OEMs are going to need some time once they get their operations back up and running really to digest not only what consumer demand looks like or consumers willing to come back in and how quickly do they come back in, what the government incentives are, but quite honestly, what they've got from an inventory perspective. And that's why I -- at this point, we wouldn't expect the Q1 miss to, from a vehicle production standpoint, to be made up in China, certainly in the months once they come back. It's going to take some time to absorb.

Why I don't pause there because we have the more strategic direction later on and see if there's audience questions around the COVID and the China topic. Okay. Back there.

You mentioned you do expect some kind of policy response...

Hold on. There's a mic coming.

I didn't catch all your comments there. You mentioned that we might see some kind of policy response from the Chinese government. Maybe you can just talk about that a little bit.

Yes. We certainly haven't seen anything specific. We're sort of under a presumption that -- again, this is a -- this has been a significant shock to Chinese consumer demand from what we're seeing. We've been in China for 25 years. We have a fairly senior leadership team that's on the ground there, Chinese nationals. And from what we're hearing or seeing, they're more likely going to need to kick start things to get people back out and about and confident that they can sort of go out and spend and borrow. It's -- I think it's been a fairly significant personal event for folks there as well.

Are there China-related questions? Okay. Let's dive into sort of 3 related topics, and I'll put a little spin on them. They came out in some discussions yesterday. So I want to talk about your smart vehicle architecture initiative, the electronic backbone, what you're doing in the high voltage electrification, Level 2+ ADAS, and of course, what you're doing in the user experience. One way, we talked to someone in the hallway last night. You could describe that as kind of everything that was in there, I say, the 2015 Tesla Model S. At some point in our lifetimes, hopefully, the legacy industry will get to clean sheet architecture, electrified, Over-the-Air updates, some level of intelligence around driving and, of course, a great user experience. So just maybe kind of a broad question is since you have offerings in all of those, is there anything growing faster than others in particular? And then to what extent do OEMs get it in terms of the need for change? And once they get it, where does that fit into that? Or do they just want to do things on their own, as Tesla is very particular...

It's a long question. It's a very long question. Yes. For us, we -- so for us, Brian, smart vehicle architecture actually reflects what Aptiv is. And we refer our capabilities as we have both the brain as well as the nervous system of the vehicle. So we have the software capabilities. We have the networking capabilities. We have the hardware capabilities, which is unique relative to any of the -- any of our traditional competitors. And why that's really important as we move towards vehicle electrification, as we move towards more autonomy or advanced safety systems, as we move to more advanced infotainment user experience systems, the reality is how you enable that cost effectively requires that you re-architect the car. And that's from a cost standpoint. It's quite frankly from a mass standpoint, but it's also from an enablement standpoint. And we have areas within our product portfolio. We talk about the safe, green and connected megatrends. So we have advanced safety solutions all the way up to Level 4 automated driving solutions. And when you look at those advanced ADAS solutions, they're -- they've been growing at roughly 40% per year. This year, based on launch volume, they'll grow at roughly 30%. Our solution tends to be a platform approach, which we refer to as satellite architecture, which centralizes the compute power, centralizes the software, takes it out of the perception systems or takes some of the software out of the perception systems, fuses it with vision and allows the OEM to have a platform that's scalable from, quite frankly, Level 1, all the way up to Level 3 at this point in time, which is a cost-effective way of spreading this technology across their platforms. And then we take that technology and spread it across multiple OEMs. So we have 7 -- we have programs with 7 OEMs today. So active safety is certainly one of our fastest growing areas. It's a business that we've been in for a very long time, going back to -- I think, our first radar solution was 1999. So a lot of experience there. We're #3 in the market. Based on bookings, we expect to grow to #1 by kind of 2022, 2023. And again, it's based on that platform approach. So we're very much focused on how we provide technology that's leverageable and is cost-effective for our OEMs. The second is vehicle electrification. High-voltage electrification is accelerating dramatically. The biggest drivers from a market standpoint are Europe and China, given initiatives in Europe related to the requirement to achieve CO2 regulations. The reality is OEMs cannot meet it without more vehicle electrification. And more and more of them are focused on rather than doing it through hybrids, do it through high voltage, whether it's battery electric vehicles or it's plug-in hybrids where they get the real significant benefit. Most of our product portfolio in that area were -- it's software in our active safety business. In this business, it tends to be connection systems, cable management systems, some battery connectivity, wire harnesses. It's an area where we're seeing, as I said, significant growth, significant bookings. And given the fact that we have a legacy business, it's in the vehicle architecture business where we're roughly 1 of every 3 or 4 cars globally. We feel like we have a great, great place to play. And then lastly, connectivity. So vehicle connectivity, whether that's infotainment systems, whether that's user experience, so how you interact in the vehicle, whether it's in-cabin sensing activities, an area that we're very, very excited about, we have real strong growth that's well in excess of market.

And just maybe talk a bit about electrification. Has the -- it seemed like the new business wins leveled off in 2019, 2020. Did that just reflect the timing of European OEMs getting ready for the carbon -- the CO2 mandates that hit this year or were you becoming more selective?

Yes. I think it's -- well, one, I think, bookings are lumpy. The reality, I wouldn't take any specific year or quarter and read too much into it. So we did roughly $350 million of...

Of the revenue, yes.

High voltage revenue last year. We booked $2 billion worth of business.

$6 billion [indiscernible] since '16.

Yes. So we're -- it's an order of magnitude higher than our current revenue run rate. And we think there's significant opportunities to book above $2 billion as we head into 2020. So I think, one, we're being more selective. I think that's true, Brian. But two, I think it's just timing of programs.