Aptiv PLC (APTV) Earnings Call Transcript & Summary

All right. Good morning, everyone. And welcome back to Jefferies Virtual Industrials Conference. Again, this is David Kelley, auto tech supplier analyst at Jefferies. And next [Audio Gap] AC and hardware, software systems solutions. Joining me this morning are Aptiv's SVP and CFO, Joe Massaro; and VP of IR, Elena Rosman. And for those listening, if you do have questions, please text across. We'll be addressing those at the end. So Joe, just to [Audio Gap] things but one of the recent industry themes is this idea of the industry pushing out aggressively out of the gates to build production and now maybe pulling back a bit. Aptiv has broad exposure across regions. So maybe if you could talk about what you've seen in July [Audio Gap]

Thank you, David. Appreciate your hosting. Yes, I think there's actually some regional consistency in that trend albeit staged differently. China restarted sooner than the other 2 regions, followed by Europe, followed by North America. But what we've clearly seen in China and Europe, and I believe we're starting to see it in North America in customer schedules, was really a sort of atypical start. And if you think about the cycle, the down cycle really started with a supply constraint, with a supply issue. And clearly, upon restart in all regions, there was a big push to fix the supply issue, to get inventory back out into the system, onto dealers' lots. There was clearly prioritization of things, like in North America, of the more popular trucks and SUVs. We saw that start in China through May and June, we saw it in Europe. Followed, call it, 6 -- round numbers, 6 to 8 weeks later by what was a -- backed out of schedules. And our view where, for the back half of the year, we're on customer schedules at this point, including North America, and we're starting to see some of the same trends. And I think what you've got is a reaction to restart the plants. And obviously, it's important to get the plants running from a cash perspective, from a cost perspective and obviously to build product, an addressing of the supply issue, and now I think a bit of waiting to see what ultimately happens with demand. And again, I think that each region will be different, ultimately, but we're seeing very similar behavior. And as we look through customer schedules and -- unlike when we were on the phone for the -- post the Q1 earnings, in a lot of cases, we didn't have customer schedules, current customer schedules for the back half of the year, just given the shutdown and how everything was operating. At this point, we do. I would say the schedules are more fluid than they've been in the past, certainly than they were last year or the year before, meaning they're subject to more short-term changes than we would typically expect. But we do have customer schedules, and that's how we've arrived at our estimate of about 25% down global vehicle production for the year, which puts the back half of the year at about 10% to 15% depending on regional mix. And that, again, is really based on schedules. Now again, schedules are subject to change, and in theory, that change could go either way, but that's really what we're seeing sort of as of today.

No, that's great, Joe. Appreciate it. And just to follow up, you referenced kind of the schedules being more fluid. How do you think about timing to when we might get a sense from when that fluid nature becomes more firm and a feel for what real underlying demand is? Is this an October event? Just curious as to your thoughts on when we feel better about where the market ultimately lies post the inventory restock phase?

Look, I think that's a tougher question to answer because there's a number of factors. Clearly, you've got -- North America is a good example. Although I think the supply is really -- to all regions, pace of reopening, overall level of consumer confidence. I think you'll probably see continued regional mix within the U.S. as some places start back up, some places hunker down a bit. Presuming you don't have no long -- larger lockdown, i.e., March and April, our assumption is you start to see this solidify really over the course of the rest of the year. Some of the schedule fluidity, though, is also on the supply side, although there's been no major supply disruptions. I think just the industry has done a very -- ourselves, but our customers, and quite honestly, the broader supply base have done a really good job of work -- of trying to figure out how to operate safely with COVID in the environment. We haven't seen any major supply disruptions. Some of the schedule changes are -- can be related to just OE capacity and that's creating some fluidity in the schedules as well. So I think it's, broadly speaking, just pace of reopening and risks or realities around how big spikes are, realized cases are going to go up as you reopen, but do you really see significant increases to the point where you've got sort of lockdown 2.0s happening? I think all [Audio Gap]

Okay. Great. That's helpful, Joe. And then maybe moving to your outgrowth relative to the production setup. It was strong double digits in the first half. You target 6% to 8% long term and expect to be in that range in 2020. Can you walk us through some of the incremental headwinds approaching in the back half of the year?

Yes. That's primarily -- there's a big part of our outgrowth pre-COVID, outside of the current situation, where we would always talk about that number being somewhat lumpy. And our growth is a -- our outgrowth metric I think is a very good measure of -- longer-term measure, over a year, over a couple of years, of how well our technology portfolio is doing, of how well the SPS business with the connection systems and the cable management does in terms of outpacing market growth. But we've always cautioned that it doesn't shoot perfectly straight in any given quarter. That has historically been driven primarily by launch cadence, right? So as we're launching on a big platform -- and we tend to be on bigger, more robust platforms like the T1XX, the GMC truck and SUV platform. Depending on launch cadence, you can see that number move a little bit. And what we have in the back half of 2020, again, apart from COVID, is we're coming up and lapping very strong launch volume in 2019. And Elena can give -- in a minute, can give some indication of just the deltas and the launch volume. But launches are lumpy, therefore, that translates into some lumpy outgrowth. And again, very typical and something we talk about ex COVID or pre-COVID. The other thing where COVID is complicating that calculation a little more, and we cautioned on this in Q1, and again, I think it's very short term, within a quarter, sort of the calculation of the number is a little messier. It's the denominator, right? It's what's in the denominator. So as you shut down production and restart production, particularly at the scale at which this has happened over the past 6 months, first in China, then Europe and North America, our growth over market for a long time was on a relatively balanced mix of total vehicle production. But a good example is, if you think about just June in North America where OEs really focused on trucks and SUVs, and trucks and SUVs were a higher percent of what was produced that month, and we're on a lot of truck and SUV. Come July, as passenger car and other model -- production of other models starts to come up and ramp up and become a larger mix of total production, we don't necessarily have content on lower-end pass cars. We've really shifted the business to the higher -- content to trucks and SUVs. So our share of, our portion of total vehicle production will go down, but we'll still be manufacturing and on the same platforms of SUVs that we're on in June, but the July number is going to look a little different because of actual production mix. So that's a nuance that's more COVID-related. I would expect that to continue as well for the next few quarters. And we'll certainly be talking about that in 2021 on a quarterly basis, just think about sort of lapping -- in Q2 '21, sort of lapping the Q2 production shutdown. So it's more of a discrete calculation, lumpiness as it relates to COVID, launching lumpiness that we've historically had. But again, we're very confident that, that 6% to 8% outgrowth occurs in 2020 and continues to grow and the -- and continues to be within that range in out-years. And we've got some bright spots. Active safety continue to be very strong. Our high-voltage business in Q2 actually grew. So we had positive growth in high voltage of about what, about 3%, Elena?

That's right. That's right.

In a market that's down mid-40%. So we've cut the very positive, very strong -- outgrowth trends continue. It's just they're somewhat masked a bit by just the significant production disruption. Elena, do you want to give a sense of launch activity?

Sure, Joe. On the launches, I think really, specific to China, right, we saw about 40% increase in new launches in the back half of last year. And that was followed up by an increase of 120% in the first half of this year. So even with the disruptions associated with COVID, right, we've had significant launch activity. And I would just add, we've had 4 out of 5 consecutive quarters of double-digit outgrowth in China, in part because of that launch activity. And that's also complemented by 6 consecutive quarters of double-digit outgrowth in Europe. So we are just running up against some tough comps at some level.

Yes. That's fair and super helpful color from you both. Appreciate it. And maybe just to drill down into that bright spot, the high voltage year-to-date growth has been phenomenal or outgrowth, particularly. We're seeing ramping EV adoption in Europe. Just wondering, a, if you could size up that business for you today. And then also, in context of kind of the back half outgrowth, the delta shrinking a bit, your customers are facing increasingly stringent emissions regulations. Can you talk about the timing impact that has on your high-voltage business? And is this also a segment where maybe the outgrowth pulls back a bit into the second half?

Sure. Let me start, then Elena can chime in on the second half and the outgrowth. But our high-voltage business, again, we specialize in, within SPS, the Signal and Power Solutions business, really harsh environmental electronic distribution systems, electrical distribution systems, huge, huge player in low-voltage systems. That business has content on about 1 out of every 3.5 vehicles manufactured globally. So as you think about high-voltage systems being added to vehicles, whether they're hybridized powertrains or full BEVs, we got a natural right to play in that space, just given our size on low voltage. And electrified, even a Tesla will have a low-voltage and a high-voltage system. So the high-voltage system connects the batteries to the motors with a couple of stops in between. The low-voltage system, the 12-volt system is what powers all the peripheral devices, the infotainment system, the lights, the dashboard and such, right? So cars have both systems. We're a leader in low voltage and have really established ourselves as a partner of choice for high-volume, high-voltage systems. So as EVs have started to go, what I'll say, more mainstream, they're no longer these niche, let's make 25,000 units a year, but let's really focus on hybridizing some of [Audio Gap] the [ C ] in China. I think North American is a -- North America is a bit of a laggard with electrification, but certainly, you see the OEs now start to make efforts around some new platforms. So we're a very strong player in that high-voltage electrical distribution system. Revenue is a little less than $400 million this year. That business has been growing 40% per year through 2019. We previously expected that rate of growth to continue for the next several years. We're obviously recalibrating, in the process of recalibrating that now with COVID. But I think the reality is COVID will be, just with the down vehicle production, more of a pause in that trajectory than any type of permanent reset. We see this business continuing to go strong. As a matter of fact, even though the first half of 2020 was a slow bookings year, we've already booked $700 million of high-voltage business in 2020. And again, that's a revenue line today that's a little less than $400 million. Business is very profitable for us because we're able to leverage our presence in low voltage. We use the same plant, the same engineers, the same supply chain, the same equipment. So it allows us to [Audio Gap] while still offering a very strong value proposition for the customer. So it's a [Audio Gap] really well into an important suite. [Audio Gap]

And with -- David, with your question, yes, we do not expect to see -- continue to see 57 points of market outgrowth. We will see double-digit revenue growth in the back half of the year in high voltage, but that's going to get you closer to the 35%, 40% market outgrowth that we would typically expect from this business on a more normalized basis.

Okay. Perfect. Thank you. And just one follow-up before shifting gears. Joe, that was a really interesting point on kind of scale, shifting, yes, the go-to-market strategy, the industry and the supply chain. Do you find, as we're scaling up high voltage, are you providing more of a systems-based solution, meaning the cables, connections, connectors are all sold as a package? And just curious like how that's changing the competitive landscape, given your connector competitors are a bit different than your legacy cable competitors.

Yes. No, it's -- we compete on a couple of fronts. So we're #1 or #2 to TEL in auto connectors, depending on how you sort of size up by region. But we're right there with them. Competed with them effectively for years on low voltage and don't see any change to that in the high-voltage space. So our connection systems business, the cable management business, they'll go-to-market as stand-alone businesses, and they'll sell their high-voltage products to OEs and other Tier 1s, very consistent with the low-voltage business. I think as -- that's part of the business. When you really take a step back, and again, you think of the Electric Distribution Systems business, EDS, we're really #1 in the world. I think Yazaki sometimes is -- we share #1 or 2 with Yazaki, depending on who's launching what. That business tends to provide complete systems. And again, we are on that electrical distribution business, we do very little, what I'll call, build-to-print where an OE says here build -- we've designed the electrical distribution system, build this exactly. We tend to be far more involved with our customers, tend to be involved in the design phase, having a lot of cases. And the high voltage is really no different than the low voltage. But if you go to our customers, we tend to have a lot of embedded engineers within those customers, helping the design and helping -- taking their needs and designing that system. And that will be -- that's very similar with the high-voltage business. And again, I think the ability we have to meet the needs at volume is I actually think going to provide -- as OEs focus on let's build more of these vehicles and let's hybridize or electrify the more popular brands versus sort of niche electric vehicles, that tends to be a tailwind to us. Because when somebody 5 years ago, say, hey, we're going to make 15,000 all-electric cars, would you -- do you want to do the electrical architecture? Our tendency tended to be to stay away from that work. Because quite honestly, we're not -- given our volume, we do the T1XX, we do the S-Class, we do the Audi Q7. We do some of the most complex electrical distribution systems in the industry, and we do them at volume. Bringing in a small niche one-off product isn't -- we're not necessarily the most effective from a cost perspective. But as -- so those tended to go to some of the smaller players and they tended to be build-to-print-type arrangements with the OEs. Now that they're talking about building electric vehicles in volume, that tends to be when our value proposition lines up much better. And quite honestly, it's what we've seen with Tesla. Our relationship with Tesla has grown considerably as their volumes have grown. Whereas in the early days, they didn't necessarily need the horsepower or the capabilities of our production facilities in Mexico. Now we're -- they've always been an important customer, but now they're a customer, much higher volumes, and we, as we've talked about over the last couple of quarters, continue to see wins and content growth with those guys. Just -- again, it's very much capability-driven on our part.

Okay. Great, great. Thank you. And I wanted to discuss your active safety business a bit. You made a reference in the earnings call to your second-generation ADAS solution. Believe you're launching satellite architecture with 5 OEMs between this year and next. And I believe you've talked about launch across 10 million vehicles over the next 5 years. So just curious to, a, the functions you're providing for your customers in this satellite architecture; and b, how you are thinking about the dollar content contribution as ADAS shifts from kind of Level 1 base systems to more of the integrated L2, L2+ approaches of the future.

Sure. Let me -- I'll go through what we're providing, and Elena can cover the content. From a -- when you -- particularly when you talk about satellite architecture systems, we are providing the whole system. So domain controllers, the software around sensor fusion, which brings the radar, the cameras together, that tends to be our system. Those are our systems. So think of it as sort of the continuation of that zFAS business when we launched the first large-scale, multi-domain controller for active safety with Audi back in 2017. So they are the full systems. The scalable systems are important because they're really a system that is scalable across, a particular OE's -- all of their platforms. So we'll typically launch on one of the more popular models, and then over the coming years, bring that system into all subsequent models. And that allows, from both the OE perspective as well as our own, quite honestly, much higher degree of leveragability of the initial investments in those systems versus starting from scratch or near-scratch every time you want to add an active safety -- a Level 2 system to a different platform. That also allows take -- they're also scalable within the realm of active safety. So that also allows a system to be architected such that on the base models, you can have basic Level 1 functionality. But as we see greater levels of take rates and they want consumer demand, you can incorporate the Level 2 system into that same platform quite easily. It's scalable within platforms. And we -- Kevin, who's our CEO, has talked really, for the past 1.5 years, 2 years about the trend towards what we call democratization of active safety, pushing active safety functionality into lower-end vehicles and this satellite -- scalable satellite architecture system that's, again, the cost, the engineering efforts are leverageable across multiple platforms, really provides the OEs with the ability to put these systems, maybe not with the exact same functionality as the luxury models, but really hard -- really core basic functionality and to the lower-end models at a much more cost-effective price point. Elena, do you want to cover content real quick?

Sure. So starting with a Level 0 or Level 1, which is really a function-specific level of automation with 1 type of control function. The content for us is around $300, and that's primarily -- it's kind of half the sensor configuration and half the compute configuration, and there is an embedded software. That steps up to about $500 for a Level 2 system, which combines a function of 2 or more control functions. And again, you're getting a little bit more from a sensor configuration, more radars, cameras as well as the compute. If you step up to a Level 2+, you're talking somewhere in the range of, call it, $750 to, call it, $1,200, depending upon the functionality. And there is obviously a few more sensors, but you're also getting a much bigger step-up in compute between Level 2 and Level 2+ plus obviously a lot of that multi-domain sensor-fusion capability that we provide in that satellite architecture, along with a number of the control algorithms and all of the validation and integration capabilities. A full Level 3, which doesn't obviously exist at this point, with some type of conditional automation where the driver is able to fully disengage under a specified set of conditions, right, is a now a really monumental step up into the, call it, $4,000 to $5,000 on cost to an OEM. And that's -- in that range is -- the compute alone is roughly half of that. And there's some -- obviously some additional sensors, LiDAR that gets added to a full Level 3 configuration in addition to the software, the policy and path-planning control algorithms which would be sort of incremental to that.

Okay. Got it. Now thank you both. And we've got about 3 to 4 minutes left. So I just wanted to drill down quickly into a couple of cost-structure questions here. Maybe, Joe, if you could talk about COVID-related expense, how sticky that will be in the second half. And then you discussed on the earnings call, Aptiv's taken out $300 million to $400 million overhead in the last few years, really done a solid job of cutting around the edges, so to speak. How should we think about incremental margin set up if we do see some 2021 market recovery as you've laid out and removing the COVID-backed impact obviously as well.

Yes, listen, David. We're obviously not providing any type of formal guidance for 2021. There's just so many moving pieces at this point. But I can certainly walk through a couple of them. In Q2, direct costs of operating with COVID, PPE-type costs were right around $35 million to $40 million in the quarter. Significant number. And that was not with a -- obviously, we were back in -- from a workforce perspective, but we certainly weren't at full tilt for the same quarter. So my view is you sort of got that $40 million, maybe plus a little bit, as we bring back additional workforce in Q3, Q4. And listen, I think it's -- this is hard, and I know there's differing views. I think you'd have to assume we're operating with COVID in the environment in 2021. I just -- particularly just somewhere in the world, so if you think of how regional we are and where our workforce is. So I think it's that level for what I'll call the foreseeable future, including 2021. [Audio Gap] costs incurred related to the various shutdowns, and you saw that in the higher decrementals. Clearly, as we get into subsequent quarters in 2021, Q2, for example, if we're not shut down for 9 weeks in Q2 of 2021, obviously we're going to have better performance, right? That's, again, not at this point framing that, just given all the number of pieces. But really, if you think about the higher decrementals we experienced, they really were shutdown-related beyond our sort of normal decremental range. As it relates to cost, yes -- and Kevin made this comment on the earnings call, we've really worked hard to get excess costs out of the business and become more efficient over the past 3 or 4 years. I think you saw that in the Q2 results where we were down effectively 43% revenue and effectively broke even at the EBITDA line. We will continue to apply those skills, that management focus on maintaining and reducing costs to the business. We're obviously working with our customers over the course of the next few months to get a sense on just not what's total vehicle production in 2021, but we need to understand it by region, by platform, what customers are doing. Because costs, longer-term cost reductions from what I'll say sort of the extended impact of COVID and operating at lower production -- lower vehicle production volumes for what will be a couple of years, right? I don't think anyone expects vehicle production in 2020 to get back to the 2019 or 2018 levels right away. That will really be around footprint, about how do we consolidate and become more efficient in the various regions and how those [ 8 ] regions are impacted by changes the OEs make in overall production, platform, schedules and such. So I'm confident we know how to do that. To Kevin's point on the call, we've done a very good job of it over the last few years. And I'm confident we will work through it. Now there'll be cases where savings come quicker, right? If it's personnel staffing and there's an ability to get the heads out more quickly, that's a plan where you can start at the [Audio Gap] consolidations. Those would take a little longer. But again, things that we're very good at that the business has a very good process for addressing. And as we think about this, our business, I think this is probably the most important takeaway. And I know there's been a lot of questions around sort of specific numbers up and down since the earnings call as it relates to '21. But I think what's really important, and I think you saw it in the Q2 results, this business has performed reasonably well through an incredibly difficult quarter, even better than reasonably well. And we haven't seen any indications that, post COVID and coming out of this, the key drivers of the business have changed [Audio Gap] strong. The margin profile in those businesses are where we expect it to be and should improve with higher levels of volume. The operating processes within the company around cost containment and intelligent capital deployment remain in place. So again, I think you're going to have a year of 2021 where you still see some COVID-related disruption, just not to Aptiv, but to the industry. I hope for everyone's sake, it's less than the disruption we saw in 2020. But the underlying fundamentals of the business, what drove our outgrowth, what drove our margin expansion, what drove our cash flow improvements, those are all intact. And I think as we start to clear the significant disruptions from COVID, that will come back into the business and into the results.

Got it. Thanks for the thoughtful response, Joe. It looks like, unfortunately, we are out of time. So Joe and Elena, I really appreciate you taking the time this morning. And for those listening in and dialing in, I appreciate you joining us as well. Thanks, everybody.

Right. Thanks, David. Take care, everyone.

Thanks.