Aptiv PLC (APTV) Earnings Call Transcript & Summary

Kevin Clark and Joe Massaro. So I think first -- and I'm Sierra Homer, the industrial specialist for Citi, filling in here for Itay this morning. So I think first off, we're going to go ahead and start kind of with the macro and broad industry. And maybe you guys can just kind of provide the latest with your 8-K kind of on Q1 and kind of just talk about China?

Sure. Yes. No. So on a Tuesday evening ahead of the conferences, we issued an 8-K updating our guidance for Chinese vehicle production and the impact on our Q1 results. So in our original guide on January 30, we actually talked about losing a week of production. At that point, our customers had delayed the restart from sort of the original Lunar New Year from February 3 to February 10. And roughly speaking, each week of production in China is worth about $50 million of revenue for us and about $20 million of OI. Based on really the events over the last couple of weeks, our customers have pushed out restart of production about 3 to 4 weeks. So we've got customers that are going to start to come back. A few have tried to come back this week but in earnest, they come back the 24th of February and then push into the -- that first week of March, so the week of the 2nd sort of through March 2 through March 7. So we have updated that we'd expect to lose from a vehicle production perspective about 1.5 million to 2 million additional units coming out of the quarter in China, which is roughly $150 million to $200 million of incremental revenue to us out of the quarter and $60 million to $80 million of operating income out of the quarter. At this point, our customers are really focused on getting back up and running. And really what drove the delay, I think the situation on the ground there is tough obviously from all aspects of sort of normal everyday life. But what we saw happen because many folks know the sort of the largest -- it's one of these China things. One of the largest migration in human history reoccurs every year. It's around the Chinese New Year where the migratory workers leave the industrial areas, go back to where they're from, more rural areas. That movement out took place before the travel restrictions were put in place in China. So you then needed all of those workers to come back, and there was an infrastructure question about getting the trains, getting the buses up and running. But what ultimately ended up happening was you saw quarantine periods in -- hit in the local towns where folks were. And those tended to be 14 days. When they started to allow folks back, the receiving jurisdictions, the cities where the plants were, started to impose additional quarantines before they let the plants open. So you basically saw almost another 14-day quarantine in places like Shanghai and the more of the Anting, the more of the manufacturing areas. And this is really sort of a pan-China event at this point. So it took time to get those workers back. In addition, local government started to put in basically fairly rigorous audit requirements and literally visiting each plant that was asking permission to reopen where you needed to have an inventory of medical masks, basically one mask per employee per day of operation, and you needed to have an inventory of those. You needed to have it on hand. You needed to show the government inspector. They required you to go through sanitation process on a regular basis and also have the means to put employee temperature checks in at 2 -- depending on where you are, 2 to 3 times a day, you're literally checking employees' temperatures. And when you think of plants like ours or our customers' plants, you're talking thousands of people in a plant on a given shift. So that has really delayed the restart of production. Our expectation over the course of the next week or 2 as we get March schedules from customers and really think it's going to be into April until we get schedules for the balance of the year. At this point, we would not expect China to make up that 1.5 million to 2 million lost vehicles in this current year. We think that would be a little ambitious. Obviously, we'd wait to see what our customers tell us. But there is a factor of -- you had a high level of inventory going into what they thought would be a normal new year selling season. That never happened. Obviously, that selling season never occurred. And from what our customers are telling us, the dealership networks have been closed for over a month at this point. So we typically see Chinese inventory, retail inventory at maybe sort of 1 month of inventory. The last numbers we saw, which are a little bit dated at this point but were over 2 months of inventory on hand. So we do think it's going to take time for folks to adjust production schedules, wouldn't anticipate those coming back. Now the one other thing we did mention in the 8-K, and this would sort of be a secondary effect, have not seen it in any material way at this point. But obviously as an industry, and again not just Aptiv but as an industry, very mindful of secondary effects of -- on the supply chain feeding North American and European production. At this point, given that most of us were planning for a normal sort of 3-week China shutdown, the inventory, the supply chain was fairly robust at this point of the year into the North American and European plants out of China. But clearly, that inventory is being depleted, and it's going to be a question of how quickly those supply chains can get replenished and to what, if any, impact on western production takes place. I would call it towards the end of Q1, if it was going to happen. Kevin, any other?

No. You covered it all, Joe.

Yes. That was great. And then just one clarification on the lost revenue, is that solely just in China? Or was that including, say, the knock-on effects from other parts of the globe?

No. That's a good question. No, it's strictly at this point we're -- we sort of are forecasting to what we're seeing from customers. China schedules have been all that's impacted. So it's really just the China impact at this point.

Okay. Perfect. And I know you talked on the supply chain. But maybe just touch on how it's impacting the RFQ bookings and then customer price discussions at this point?

Yes. We really have not seen -- obviously our China customers have been closed and at this point are focused on getting their operations back up and running. So that business is not normal at this point with customer interactions in China. But at this point, haven't seen -- go the next step with sort of any of the global OEs talking about impacting longer-term plans.

Okay. Great. And then maybe just kind of looking out broadly about global auto production, maybe through 2022 kind of how are you thinking about that on a longer term?

Yes. Listen, we had another down year this year, global down -- sorry?

3%.

3%, yes sorry, global down 3%. We for a long time have -- even if you go back to our investor days in '17 and '19, we've assumed a flattish market. We're not assuming any long-term help from vehicle production. We continue to see great content growth at areas like active safety, high voltage, our connector business but would expect a flattish market assuming we clear on coronavirus this year. Obviously, down this year, and then I'd say go back to sort of flattish over the next couple of years. We wouldn't expect any big help from vehicle production.

Yes. Sierra, I think maybe I'd just add one thing. So our -- the market has been down a couple of points the last few years, and to Joe's point, planning a flat market, which we think is reasonable based on what we see today but we've been really focused on having a product portfolio that's in the areas where you see content per vehicle growing, right? So we've significantly outgrown vehicle production. So last year outlook revenue -- last year, revenue outgrew market by 9 points. So market was down 5 globally, our revenue growth was 4. This year based on some launch timing and some annualization of some programs last year, growth over market is 7 and kind of a long-term framework that Joe talks about to investors, 6 to 8 points over market. So that's, from our standpoint where it's really important. It's a real competitive advantage that we sit in the right points in and around the car.

Great. That's actually a great segue. I was just going to bring up growth over market guidance. How much is that split between new launches and backlog versus penetration of Aptiv content on existing programs?

Yes. I don't know if I would have a precise number. It's a mix of both. So it's a mix of penetration, so new programs ramping up of launch programs. And then it's increased penetration in areas around ADAS systems, expanding Level 1, Level 2, Level 2+ systems. So I wouldn't have an exact number. Joe, I don't know if...

Yes. I think for us, it's actually -- it's mixed for another reason, right? A lot of the new technology we're launching whether you think of high-voltage platforms in Europe, we have a $350 million high-voltage business that's growing at 50% per year. That's new content going on vehicles. And to Kevin's point, a lot of the 2+ systems that we're launching this year and into next year, have never been on vehicles before. So it depends on how you sort of want to count it. But it's new content going in really around sort of some of the technologies that you're now seeing in lot of vehicles.

Okay. And then over time, maybe how should investors think about the revenue growth of our market from like a regional contribution perspective?

It's -- we're actually incredibly well balanced in the region. We're not quite 1/3, 1/3, 1/3 between the 3 big regions but we're getting closer. And growth over market -- in a given year depending on what's launching where, you may see some differences. But overall, the sort of higher content growth strategy that we use really applies to all regions. This year in particular, Europe will be a little higher, just given where we're seeing high-voltage and active safety. Pre-virus, China was lower, only because we had so much launch activity last year. So you may see some interim mix just in a given quarter or given year. But as a matter of strategy, our growth is pretty consistent across all regions. Those project -- products are really in high demand across all regions.

Okay. Great. And then switching to kind of margin performance, has your medium- to long-term view changed, given the current situation we're facing?

No.

No. I mean we communicated a framework in 2017 at our Investor Day about margin expansion in total and across our 2 segments. You're going to have some variation quarter-to-quarter. You're going to have impact of things like coronavirus this year that we'll muddle through. This year, we made the conscious decision to invest in incremental dollars in some active safety technologies and opportunities that will affect margins near term for the benefit of higher growth, stronger competitive position and better margins in the future. But it really hasn't changed. I don't know if you want to walk through the framework, Joe?

Yes. We've talked about some 20 to 40 basis points of margin expansion in both segments. And again, I won't -- it doesn't necessarily shoot straight every quarter but we're -- we have been on target for that. I think one of the things we focus on and have talked to folks about, there's sort of 2 parts to the margin expansion, right? At this point, there was the core underlying growth in the product lines: active safety, high voltage, are they hitting the marks we expected at the product line level? So when we introduced Aptiv to the world in 2017 following the spin-off of the powertrain business, active safety was a $300 million business that hadn't broken even yet. We finished 2019 with $1.3 billion in active safety revenues, and we were printing in low double-digit EBIT margins. We saw the benefit of the increased scale in that business, the material savings, the manufacturing performance, the introduction of the more complex systems that are, quite honestly, higher margin. Product line behaving very well, very similar story for high voltage. What we have been dealing with over the last couple of years are things like tariffs, some of the FX impacts from a weakening RMB. So again, putting margin on -- putting pressure on the margins, we're working through ways to offset those. But when you look through it, what the actual product lines are doing, they're very much hitting their marks. The SPS business as a segment, which is close to $11 billion of our total revenues, hitting its marks on margin expansion. And AS & UX obviously the margin expansion slowed given the increased investment in engineering Kevin just referenced but would certainly expect -- continue to expect us to be where we targeted in 2022, albeit with a bigger active safety business.

Great. Thank you so much. And taking a look back at your 2019 Investor Day, you mentioned you guys were in pursuit of some new addressable markets. Can you just give an update on kind of how that's progressing and then as well as how your 2025 plans are progressing in that regard?

Sure. So over the last several years, we've been really focused on how we diversify our revenue base. And that actually started within the automotive industry. So geographic representation, so we're effectively -- we're almost at 1/3 of revenues in Asia Pacific, 1/3 in Europe, 1/3 in North America with the balance kind of rest of world. Second, from a customer standpoint, so we finished last year with really no customer greater than 10% of revenue. So it gives us customer diversification. We've been very focused on, in addition, which customers we win with, what platforms we win on, so mix between SUVs, crossovers, and North America pickup trucks relative to traditional sedans, that sort of mix. So that's been the initial primary focus. And then we've really, a couple of years ago, focused on taking our capabilities in and around principally engineered components and bringing those products, those manufacturing, those supply chain capabilities into the industrial market, the commercial vehicle market, areas where we felt like we have a right to play. So over the last couple of years, we've doubled our nonauto revenues from roughly 7% or 8% of revenues to roughly 15% of revenues, 14% last year. We'll be over 15% this year. We have a target out there to be at 25% of revenues by 2025. We'll get close to 20% organically when you think about regular market growth rate. So if it gets to 25%, we'll have to continue to do a few acquisitions in and around the engineered component space, which we've been successful doing over the last several years. So a real focus on how do we identify opportunities in high-margin kind of a highly engineered products where we have a right to play in other markets and doing it in a real sensible way. And all of it with the ultimate goal of how do we build a sustainable business that grows strong revenue growth rates, grow well over vehicle production, strong margin expansion opportunities and just much more sustainable business overall.

Okay. I'm going to take a shift now to kind of ADAS and L2+ trends. But if you have any questions in the room, just feel free to raise your hand or jump in to keep this interactive. So on that, do you guys see the adoption of Level 2+ and Level 2++ being accelerated by automakers kind of shifting to a more advanced electrical architecture in autos?

The more advanced electrical architecture allows them certainly to introduce it more easily, more efficiently. I -- we would say that what's really -- so yes, we're seeing more demand for Level 2, Level 2+, Level 3-, advanced ADAS systems. And it's really consumer demand driving that. Active safety sells. You look at some of the studies have been done about consumers who've purchased vehicles with active safety systems, and the rebuy rate is 95%. Any of you that have driven in a car or have a car that has an advanced ADAS system, it's hard to envision a scenario where you're going to drive in a car and purchase a car without it. For the OEMs now, we just allow them to sell an incremental unit. The reality is the margin opportunity for them is pretty significant. It's on an L2, L2+ program. And cost from a supplier like Aptiv is call it round numbers, $1,000. When you look at what that is sold from an MSRP standpoint, it can be upwards of $4,000. So from a mix standpoint, it's a real opportunity for the OEM as well. So safety certainly sells. We've been very focused over the last couple of years about how do we architect more and more system or platform solutions in and around areas like active safety. So we have a satellite architecture approach, for instance, which allows OEMs to scale from Level 1 sort of solutions up to level 3 sort of solutions, which provides them with flexibility. It saves them money. It saves them mass and allows them to select a solution and bring that solution across their entire product portfolio, right? All their vehicle platforms. And over the last few years, 2 years or so, 3 years, and we've won 7 of those satellite architecture programs, which again is beneficial for us because it's a huge penetration opportunity. It's a huge revenue opportunity. It allows us to scale the underlying capability across in OEM's vehicles and then across OEMs so you're getting a significant amount of reuse. And then just given the nature of the product and how tightly embedded it is, how tightly embedded you end up being, we feel really high level of confidence in our ability to win or earn repeat business.

Great. You kind of touched on it briefly but on that penetration, where do you kind of see that coming in the next couple of years, like the rate of penetration of these advanced electrical architectures?

It's -- at the end of the day, it's consumer demand. And that's really what's driving it. There's some end cap and other regulatory items that are driving the broad-based adoption of lower levels of active safety that are certainly helpful. But at the end of the day, it's really consumer adoption.

Okay. Great. There is a question on the floor.

You're up.

Actually, coming back to the non-auto piece, you talked about 15% revenue [indiscernible], is that all on SPS, basically?

Yes. The bulk of that is in SPS. There's a portion of it that is in and around AS & UX as well. As you know, safety solutions for example like the commercial vehicle market, driver monitoring or in-cabin monitoring in the commercial vehicle market, those are opportunities as well. But most of our quite frankly resources and focus have been in and around the engineered component space.

Okay. Are there bigger opportunities like in active safety? I mean it seems like there's potentially a lot of green space, commercial vehicles, public transit, those kinds of situations. Is there a right time frame to think about when that could be a bigger opportunity?

Yes. We'd answer it a couple of different ways. So one, the number of opportunities that we have within the automotive space in the framework of investment that we're making today is significant. Second, to the extent we take whether it's our perception systems or it's our automated driving or active safety controllers or algorithms and applying them whether it's to commercial vehicle, let's start with that. Smaller market. Big demand but smaller market. And it requires some adjustments to what we're doing from a perception system standpoint and algorithm standpoint. So it's incremental investment relative to rob the incremental investment to go across a broader base of our traditional automotive customers, right? So it's incrementally more dollars. Not that it isn't an opportunity but it's incrementally more. When we compare that to what we can do on an engineered component space and the investment required and our ability to take what we make today and translate it over to what's -- what people are looking for consumer -- customers are looking for in those markets, it's a better financial equation at this point in time, better economic return. Joe?