Aptiv PLC (APTV) Earnings Call Transcript & Summary

No. It's certainly not a surprise. I think -- listen, I think when you think of our Signal and Power Solutions business, we tend to take a comprehensive look at how best to distribute signal and power throughout the vehicle. And certainly -- and this was back probably about 3 or 4 years ago now. We looked at this over what would be sort of a 15-year -- we sort of thought of it as 3 meaningful model cycles. And really focused on as mass comes out of the vehicle around electrical architecture, what does that mean for overall content? Because it's going to have to be replaced with something, right? And the concepts of lightweighting, the replacement of copper with other forms, maybe aluminum along the lines of lightweighting, all that's going to take place. And in some form, has been taking place for a while now when you talk about electrical architecture because it's so much electrical content has gone into these vehicles that mass reduction and mass management has sort of been a constant. I appreciate as you get more into particularly BEV and the lightweighting discussion around BEV, it's become more front and center. But we've looked at this, the opportunity to replace longer copper runs with more robust connection systems, more robust connection systems within the battery pack itself or to the battery pack, introduction of things like ribbon circuits or flex circuitry to reduce again -- to reduce mass is really something we think about, in a lot of cases, help our customers work through. And when we did this analysis a couple of years ago, we believe it still holds our view of the vehicle between, call it, sort of 2017 and over the next 15 years, so a little bit after 2030. You were looking at sort of a -- on average about $100 of mass coming out of the vehicle or vehicle's electric architecture system. So taking $100 of electrical architecture content out around mass reduction, a lot of that being copper, obviously. What went in was about $300 of additional connectors, additional materials doing what copper used to do, again, more complex circuitry. That added about $300 over that 15-year period. So again, something we're very comfortable with, quite honestly, things like lightweighting and more efficient use of electrical architectures is really key to being successful in the high-voltage space. So it's something we've been focused on for a while now.

Okay. I appreciate the color there. Maybe if we turn the conversation back to some of the near-term costs and margin. So in the last quarter, you talked about $135 million in austerity savings, but there are also some incremental COVID costs. You guys, I think, have developed a rightful reputation as strong operators. But this seems like a particularly challenging sort of transition here where you're going from an environment last quarter, as things were -- the world really came to a stop. You had to do all these sort of temporary savings and now you've got to ramp up relatively quickly. And from your opening comments, it sounds like maybe a little bit quicker than initially planned. So how do you go about layering the cost back into support some of the growth and -- while maintaining the profitability metrics that you strive for?

Yes. No, listen, I think impart, and it seems like a long time ago, but relative, it's not. In part, the cost we focused on for austerity measures in the March, April time frame, extending a bit into May, June, those were -- that's why we called them something different, both internally and externally. We refer to them as austerity measures. Those are things like canceling company contributions to 401(k) plans, by way of example. Costs that we could turn off quickly were immediate cash savings, right? Because when you're in that March and April time frame, really large restructuring plans that would cost cash weren't necessarily -- I didn't necessarily view those as what I wanted -- the levers I wanted to pull first because it wasn't back then an element of cash conservation as well. So we did a lot of those near-term measures, canceled merits, canceled things like the 401(k), furloughs, TLOs across the board. We did protect some of the advanced development, some of the engineering, those folks continue to work even throughout the shutdown primarily because our customer personnel in those functions were continuing to work. And I think that speaks to a little bit on my earlier comment about this near-term impacts, one thing, but longer-term trajectories, we really haven't seen change. So listen, over -- so that was one muscle we used, right? What were the immediate cash and P&L savings that we could go after, realizing, at some point, those austerity measures will have to go back in, right? Well, to be a competitive employer, we'll have to turn the 401(k) match back on the back half of this year into next year. And I'm using the 401(k), by example, there's obviously similar programs globally where we did the same type of thing. So that lever gets pulled. Those muscles get used to deal with the short term of sort of Q2. And what we're looking at now is, to your point, we've got a great history of doing things more efficiently. We had been long planning for the day when volumes would come down when we go through the down part of the cycle. And we have plans to address those in terms of taking labor out of the plant, taking costs out of the manufacturing operations to adjust for the lower volumes. We continue to be and have been for a while now very hawkish on the overhead structure, both of taking costs out, but being careful of what get added in. And I think those muscles are well exercised in the company, and we're working through those plans now. Again, much like we're saying about -- we had a financial framework that we manage the business, too, that we speak a lot about. Part of it was disciplined revenue growth, driving 6% to 8% outgrowth over market. There were margin expansion targets, obviously there. And I think over the course of 2021, we'll get back into that mode. Again, we'll be working through this near-term disruption. Would expect COVID -- direct COVID costs. We were running about $35 million to $40 million a quarter in Q2. And as we've talked about publicly, we'd expect -- that's probably a pretty good quarterly number for the time being, at least for the balance of 2020 and 2021. Because it's unsure -- we're unsure when you'll be able to really pull back on things like PPE and social distancing and those types of things. So there'll be some inefficiencies. But Kevin and I are comfortable that sort of the discipline in the management team and in the processes to wean costs out are still intact and will be put into effect.

Since you've touched on '21 a little bit in that answer and not to sort of rehash as decremental or incremental margin commentary, which we've talked about in the past and have sort of brought up on other calls. But if you look at -- if you assume sort of demand can hold up and you have some of the easy production comps, if your outgrowth algorithm holds and you have this FX benefit, it doesn't seem to me to be inconceivable that '21 revenue can get back to, call it, 2019 levels. And so I guess what I'm wondering is, structurally, besides some of those costs you just mentioned, what else is different? Because it does seem like in terms of everything else, like you're getting more scale on stuff like active safety, you're getting more revenues from high voltage, which you've indicated in the past as higher margin. So what else should we be thinking about as investors start to pencil into '21 in their models a little bit more?

No, listen, I think vehicle production is going to be a big question, Joe, right? There's going to be a volume impact. Certainly, what we were looking at and talked about during our Q2 earnings call wasn't back to 2019 levels from a vehicle production perspective. So we're certainly -- my view is we're going to be dealing with lower volumes for the next couple of years. But to your point, we've been preparing for that for a period of time and have -- took a lot of cost out of the business and did a lot of refinement of how we do business, even prior to COVID. And we'll start to put those plans and processes back in place or have started with those plans and processes back in place. So again, I think the big question is going to be vehicle production levels over the next couple of years and how quickly you get back. I'm not sure you'll be back to a 90-plus million unit number in 2021 by any stretch. Our -- we were thinking much more along the lines of 77 million, 78 million. Again, to the extent 2020 stronger, I understand that could -- that number could tick up a bit. But again, I don't think longer term and whether longer term is, if you want to measure that in quarters or say by 2022, I think from an outgrowth perspective, from a business performance perspective, we really haven't seen, as Kevin and I have said a couple of times. We really haven't seen sort of those longer term -- any longer-term changes in what we think the trajectory of the business is.

Okay. Maybe we could talk a little bit about ADAS and your scalable platform. Because you mentioned a couple of things on your second quarter call. One, the bookings, which I think you said the scalable systems is going to be deployed over 10 million vehicles over the next 5 years. And then you also talked about your sort of next-gen ADAS platform. So I guess the question really is, when you say scalable, to me, what that means is you're scaling the development cost as more commonality and then the higher and higher the volume goes, the margins year after year after year should move higher. Now that's got to be balanced with OEs investing in next-generation technology, and I know this past year or in the beginning of this year, pre-COVID, which again feels like many years ago, you sort of talked about having spent a little bit more this year. But how -- I guess, I'm rambling a little bit, but I mean, the question is, I guess, is how should we think about the scalable system really helping the margin profile balanced by what could be additional investments?

Yes. No, listen, I think when we talk about scalable systems, right, we're in a number of customers where we're rolling out or will be rolling out over the next 12 to 18 months the first systems on their first platforms. That within OEs, they're going to take that system and run that across a number of platforms. So obviously, the cost to get a system on a second, third, fourth, fifth platform is less significant than the original development cost. So you're absolutely right. That's a scalable, leverageable system. We're leveraging the investment in that technology, both ourselves and our customers, leveraging the investment in that technology and the scalability of the system to grow across multiple platforms. When we talked about at Investor Day in 2019, this business hitting double-digit margins and then moving into the, what I'll call, sort of the low teens by that 2023 time frame and sort of mid-teens beyond 2025, that was really what we were looking at to come up with those estimates. Now we hit low double-digit margins in 2019 in the active safety business. To your point, you're spot on. We did make a deliberate decision to invest about $90 million of that active safety profitability back into the product line to help with growth and help with some advanced development on customers with advanced development on the next-generation system. So that's been an additional cost we've picked up. But broadly speaking, our view of that margin trajectory has not changed.

Okay. We've recently seen 2 of the world's largest carmakers, Toyota and Volkswagen set up projects that really centralize the network architecture, create the subtraction layer separate to the hardware and the software, which is just something you've been talking about with your smart vehicle architecture for a while. It's just -- now it seems more and more, and I guess you can add Daimler to that list as well, have been talking about similar constructs. And I know you don't really talk about SVA as a product per se, more a concept that you could deliver a lot of product on. But can you help us and help investors on the line understand how you can really be a partner from this development that it seems increasingly automakers are agreeing with your view of the world as to sort of how the car needs to evolve?

Yes. Listen, I think it's as simple as -- on a couple of those customers you mentioned, we've been working with a number of them for advanced development projects. Listen, I think, to take something from advanced development to a -- to deployment on a vehicle with sort of bookings and design and development sort of in between, customers have to have a certain level of internal resources to support that, right? And I often relate this. It's very similar to the way customers thought about powertrain -- internal combustion powertrain over the past 20 years, right? There was a lot -- particularly within the German OEs, there was a lot of knowledge about powertrain. There was a lot of knowledge about how to make vehicles perform better, how to make internal combustion engines perform better, that allowed the Tier 1s that were -- that specialized in that to operate more effectively with those OEs. I think things like software investment and is sort of broader holistic vehicle architecture approach at customers is doing the same thing. And what it really allows is customers to move faster. And I think you're starting to see that. We talked last year -- late last year about a large domain centralization program we won with the VW Group, where both Porsche and Audi were going to consolidate their chassis control, their body in security and their powertrain domains into a single domain that -- and we won that work. So I think part of what you're seeing is the implementation of certainly at least pre-SVA. And one of the things we've always liked about SVA, which ultimately is revenue opportunities in 2025 and beyond is that there's this sort of run-up of domain centralization and consolidation, which needs to take place before then and that's really what we're seeing. And quite honestly, started with Audi in the zFAS with the domain, the active safety domain centralization. So I'd say, it's all fairly consistent. And as you go to put increasing levels of complex technology into vehicles, the better the customers' internal capabilities are thinking through what they need, what they want, how it's going to operate across the entire vehicle architecture really allows you to do more with them. And then -- I think a couple of those names you mentioned are certainly the leaders in putting that type of technology to the vehicle as well as electrifying the powertrains at the same time, which, again, has another fairly significant technology lift going into the vehicle over the same period of time.

Yes. Maybe if I could just sneak in one more quick one. Just when you -- on the M&A environment because you did the equity raise earlier this year, so if you could update us just on sort of how you're seeing the landscape evolve? And I guess I'm curious with some of the recent valuation and some of the interest in Autotech via SPACs, whether that either limits your opportunity set or maybe sort of raised valuations that sellers are seeking?

Yes. No, fair question. On the M&A process itself, sort of as expected, have seen processes reopen. So management presentations that were canceled in February or March, we've had a couple of them open. They tend to be some of the smaller domestic opportunity or at least based in North America opportunities at the moment. They're the ones that have opened up sooner. Not a surprise, just given now, folks are dealing with some of the -- just the practicalities of getting people together and sort of travel restrictions or travel complexity. So I think those will continue to improve over the balance of 2020 and into 2020. But I mean, the M&A market has opened back up again. I think in industrials and in auto, just like you've seen it in a couple of other industries over the past couple of weeks, listen, I think the SPAC activity, particularly around high voltage, haven't seen that directly translate into valuations of deals in that space at this point and the supplier, the component space at this point. It's perhaps possible, it does, although if you -- I think it's a little bit of how -- what's the connectivity look like, right? If you believe in what's happening with these SPACs and all of these, these new OEs that are emerging and broadening of the opportunities into different types of vehicles that -- in theory, that market and that opportunity should be growing as well.

Yes. All right. Well, I know we went a little bit over, but I do appreciate your time, Joe and Elena. So thanks very much for joining us at the conference this year. And we'll be in touch. Thanks, everyone on the line for joining us as well.

All right. Thanks, Joe. We'll talk to you later. Thanks, everybody.