Aptiv PLC (APTV) Earnings Call Transcript & Summary

Sure. Sure. And if you really look at sort of particularly that one of the core competencies of that Advanced Safety and User Experience business, it's grown up around software. It's grown up around perception systems, and it's really developed into expertise around complex multi-domain controllers. So big compute platforms that need to go into vehicles. And active safety was really the first area where we applied that expertise to the consolidation of various safety domains or safety compute platforms into larger, more centralized, effectively computers in the vehicle. And our first one we really launched that we viewed as a very broad-based multi-domain controller was the Audi zFAS controller for the Audi A8 that we launched in 2016 with Audi, at the time, the largest, most complicated computer that has an active safety computer that had gone into a vehicle. And that has -- that expertise and the experience we've gotten from things like the Audi zFAS has really allowed us to take a fairly dominant position in large, complex active safety systems. We had -- if you looked at the sort of towards the end of 2019, we'll obviously be updating these numbers as we go through 2020, but if you look through 2019, commonly viewed in the industry is there were 11 large satellite or multi-domain active safety awards given out. We had won 7 of those 11. So very strong position. Bosch had taken the other 3, they're -- or had taken 3 of the remaining 4. They're really our largest competitor in the space. And then another supplier happened to win 1 of the 11. So that's allowed us to develop a very strong position and large, commonly referred to as Level 2 or Level 2+ active safety systems. And that clearly has a benefit. Our active safety business, at this point, it's about $1.3 billion in revenue, strong double-digit growth. As we exit 2020 and go into 2021, we'll have active safety content with over 20 OEs. So it's a very broad-based business. The other thing, Adam, you referred to the Smart Vehicle Architecture, which is down the road a bit. But the thing we're seeing now that's really exciting is as OEs work to get more and more technology into the vehicles, including electrification, right, and making room for the batteries, making room for the new tech and additional kit, we're seeing other domains start to consolidate. So last year, we won an award with Porsche and Audi to actually consolidate the chassis, the body security domains as well as the powertrain domains into one large multi-domain. And we didn't necessarily win that because we were a body and security expert or because of our chassis expertise. We won that because of our history with that particular customer, being really good at taking complex smaller domains and integrating into a single. So those are 3 big domains that are effectively coming into a single controller, and that's a start of production in 2022, so sort of additional near-term opportunities to consolidate domains. You then fast forward to what we referred to as Smart Vehicle Architecture, which we think sort of revenue 2025 and beyond. We've got a couple of early advanced development programs with a couple of key customers but really view that as revenue a few years down the road. That would be -- Smart Vehicle Architecture is really a term we use to describe the much more broad consolidation of domain controllers into a couple of, what I'll call, key network compute platforms within the vehicle. And then a series of -- and if you wanted to use sort of traditional network, nomenclature, a series of routers and hubs that allow for both signal and power to be distributed in the vehicle safely, reliably, consistently. And that really is the ultimate next step to ensuring OEs can get all of the technology that's coming down the road into vehicles and into what I'll call sort of mass market vehicles, right? To some extent, when you're engineering a Cadillac SUV or a large Mercedes or a large BMW vehicle, you tend to have a lot more real estate to work with to get the tech in the vehicles. But as you start to think about a mass market vehicle with an electrified powertrain, with a Level 2 active safety system, with a full integrated digital cockpit with over-the-air updating, that really requires a new way of thinking about how the car's networked. And our expertise in domain centralization for active safety is leading us into helping our customers consolidate other domains, and we believe will eventually extend to a very strong leadership position in the new vehicle or new Smart Vehicle Architecture.

That's great. I want to actually layer in a question I'm getting from the webcast on this. Ford and GM both talked very openly about the need for central compute and their own iterations or ideations of Smart Vehicle Architecture. It does seem to play into some of Aptiv's core strengths and areas of focus. How do you see that kind of consolidation from taking these over-engineered sensors and then stripping out the processing where not needed, lowering the cost of the sensor and having them in a centralized and multi-domain controller? How does that change the TAM as the market migrates towards that? And I'm wondering when you guys use the term protect incumbency, does that -- is there a sacrifice of margin when doing that? Like do you kind of, in a way, help an OEM get a lower content per unit, maybe possibly a lower-margin system that upfront for a few years to then give you that stickiness relationship, so that 3 to 5, 5 to 10 years down the road, you can then layer on a more sophisticated software-enabled systems? Am I thinking about that the right way, or tell me how you think...

Yes. Let me start with that one, and then I'll come back to the sort of the decoupling of the compute and sensor. For a number of our active safety customers, the 7 awards I've talked about, and Ford is actually one of those. So we're Ford's active safety -- Level 2 active safety system provider, their new systems that will be coming out, really, the opportunity for cost leverage, and I think this is a -- listen, you still got to execute. You still got to deliver for your customers. But there is some sort of incumbency protection with these types of systems. What we've really focused on with our satellite system is a system that can go across all platforms at an OE, right? So what that really allows the OE to do is, okay, you're going to develop your Level 2 active safety system. And not a surprise, they tend to be developed first for some of their most popular best-selling models, right, because that's really what consumers want. But we're then architecting those systems in such a way that they are scalable from a capability perspective, what the system can do, but they also go across all of the platforms or the full portfolio of vehicles at an OE. So the cost savings and the efficiency really comes from amortizing that initial investment in the system over many more models and over a longer period of time. And it has the benefit of tying us more closely to the customer but also for both ourselves as the Tier 1 supplier and developer of the technology as well as the customer. It allows you to amortize that investment over a greater number of vehicles in a longer period of time. And these systems are expensive to develop. And I think that's really where the opportunity is. And quite honestly, all 7 of our satellite active safety system wins that I mentioned, really, that's a key part of the strategy with all of those OEs, how to take it across multiple platforms over a longer period of time, allow for enhancement as time goes on. But not a situation where you need a completely different system. And we've got some good examples now of those systems moving across platforms. And in a lot of cases, actually moving down into the mass market even sooner than we expected. So Kevin, our CEO, often references the democratization of active safety, but really pulling those systems into more mass model -- mass market models to meet consumer demands. Clearly -- just going back to the first part of your question, clearly, part of domain centralization is exactly what it sounds like, centralizing where the compute takes place. That allows for more efficient systems, more cost-effective systems. It also provides for a more reliable sort of signal traffic and particularly when you get into these complex Level 2 and Level 3 systems that are starting to not only alert the driver to something happening but are starting to control the vehicle or, in certain cases, take control of the vehicle. The signal reliability and the signal processing becomes all that more important because you've got to complete sort of the full route of the signal. The cars got to see what's happening. It's going to send the signal to the central compute, and then the car is going to decide what it wants to do and then act upon it. It's no longer a case of simply notifying the driver with a flashing light or steering wheel shake that something is going on. The car is actually starting to make some decisions on its own. So the signal processing becomes very important. As part of that, there's clearly compute coming off of the sensors at the periphery and coming back in. Listen, I think for -- in certain cases, the types of sensors we develop, the radars, the cameras, we're kind of capturing that compute anyway. We're moving it off our radar maybe and pulling it back to the centralized domain controller. So for us, it's not a significant margin impact or a significant loss of TAM. But yes, I do think as you get into over time, could you be in a situation where certain sensors are less expensive because they have less compute at the periphery, I certainly think that's a possibility. It doesn't particularly affect our product lines at this point, but that's a natural outcome of that sort of pulling in the compute platform -- the compute part.

Right. Right. I want to move to -- let's move to power and signal here. As you mentioned, the business actually grew in the second quarter, which is just crazy when you consider down 50% for the market, basically, right, from a base of around -- last year, I guess, you were around $400 million of revenues for the year. Walk us through what you're seeing in terms of wins, quoting activity there, kind of -- I think your quoted growth over markets at least as strong as what you have for active safety. And then as a follow-up on power and signal, I'd love you to comment on the GM Ultium announcement of not just doing batteries but full powertrains kind of skateboards, if you will. It's raised a lot of investor questions around the risk of some OEM in-sourcing, which would be a reversal of a multi-decade trend of outsourcing high-value components to suppliers like yourself. Look, curious how you -- how Aptiv, how your suite of technologies and high-voltage power and signal could be part of that -- of the Ultium platform, for example, if you haven't disclosed that specifically already.

Sure. Yes, I haven't specifically talked about different customers at this point, but our connector technology, the cable management and fastening products that come out of HellermannTyton do have a meaningful place in within the skateboards themselves, and don't think of that as an inherent threat. And I can come back to that. The high-voltage business, as I mentioned, $400 million in revenue, growing at about 40% per year, bookings activity has continued strong. And it really is -- the way I would think about the high-voltage bookings or our high-voltage system, it really is a system. We tend to see more of complete systems being sourced. And this system would be the high-voltage system that effectively connects the batteries to the various motors. Size and complexity of system, like a lot of things with electrical architecture depends on the size and complexity of the vehicle, are there 2 motors, are there 4 motors, that type of thing. The systems tend to be more connector-heavy than cabling, which is good from a margin perspective for us. So a typical low-voltage system is about 70% cabling, 30% connectors. High voltage is 50-50. Some of that is the fact that there's just less cabling in a high-voltage system. You're not running throughout the vehicle multiple times, right? The runs tend to be from the batteries to the motors with some stops along the way at the various inverter technology or whatever, depending on that particular architecture. But you also have a much more robust connection system. So as you get into the high-voltage systems, there are additional safety considerations, just given the amount of current that's running through those systems. So you wind up with additional safety connections or disconnect capabilities for first responders or for technicians. There's a fair amount of connector technology not -- that not only resides within the batteries themselves but also connecting to the sort of what we call the battery management technology. So that -- those systems run about 50% connector, 50% cabling. And when you think of our connector margins are almost 2x the legacy cable margins, that tends to be a more margin-accretive system overall. One of the questions, Adam, we get a lot, which I think sort of around some of the GM comments around their skateboard and the various battery packs, we do expect -- and quite honestly, we've worked with Tesla extensively over the last few years. We do expect mass to come out of electrical architecture systems over time, right? And that's -- and by mass, in most cases, we're talking about copper. These systems will certainly, over time, be more connector-heavy, have less cabling, less copper. Some of that is just from the requirements around lightweighting. Some of that's just the designs of these systems. What we're seeing is a lot of early work to replace copper, particularly even in the low-voltage system around signal traffic, in particular, with more complicated or more sophisticated materials: flex circuitry, ribbon cable, again, driving home the sort of importance of enhancing the reliability of the signal traffic. So we do expect mass to come out. We, a couple of years ago, took a sort of a 15-year look at what we thought was going to happen with electrical architectures over 15 years. And the way we were thinking about that was that is -- if you think of a model generally being around for 5 years before the next one is designed, that gives us sort of 3 models over that -- 3 platforms, 3 generations of platforms over that 15-year period. And we saw about a -- on average, about $100 reduction in the electrical -- content per vehicle of the electrical architecture as it related to mass coming out. We saw about a $300 add as it related to additional connector content, things like high-speed cable assemblies and the introduction of some of these more complex or sophisticated materials. So net-net, it was sort of $200 up, $300 in, $100 out. So we still see a lot of opportunity for content growth over the next number of years. With copper being the majority of what's coming out, copper for us is a pass-through. So it's in the revenue line, but it's not a -- it's not something we make money on. So again, over time, we think it's an up in content and a margin positive up in content at that.

All right. That's really good color of that nuance there of the net versus gross on content. And you're still adding value to the OEM through weight reduction, fuel efficiency, just ease of manufacturing, et cetera. So you're getting -- it's a win-win, it sounds like, Joe. Joe, we're coming on a half hour here. So I'm just going to squeeze in one other question. On my math, when you add up -- if I were, like -- and I'm being unfair, I'm sure, to some other divisions. But if I throw in active safety specifically, power and signal for high voltage and the connected services, call it, your mobility and services, which I know is a rather small business, $700 million of revenue, those businesses combine around 16% of your revenues, right, and growing crazy high, growing, what, 5x global production or something, more like 20% to 30% depending on how you're measuring it. And I'm just wondering, at some point in the next couple of years, that percentage of revenue is going to start getting a 20%, 30%, 30%, 40%. If you look at other examples in tech, Apple, Amazon, others, when their web services business at Amazon and Apple services business and some of these other higher-growth businesses get to a certain point where they are just moving the needle significantly, it puts you in a position to maybe change your reporting structure. Now you got these 2 divisions. But am I wrong in thinking that active safety and user experience and then P&S, it's been great up to this point, but am I crazy in thinking that sometime -- I'm not asking to make an announcement here, but I just conceptually at some point in the future, you might have some new divisions or reporting or transparency that might be more appropriate.

Listen, it's a fair question, right? As things change, you'd expect reporting to evolve. At this point, though, don't see that in the foreseeable future. And really, what we're focused on now -- and this is sort of the concept of the brain and nervous system: ASUX being the brain, SPS being the nervous system, fits how we run the business well, fits how we go to market with our customers. And to some extent is in part what drives the reporting. I think what you'll hear from us, and you really have over the last couple of years, if you compare sort of the discussions of the business the last 2 capital market days versus maybe when the company first became public in '11 and '12, there's more of a product line discussion within each of the segments. And to us, that's sort of how we've been, I think, bridging the gap and providing the transparency because the segments are really how we run the business. We have segment presidents. Those businesses go to market that way. But we've added the color around the product lines and what the product lines are doing, where the product lines reside in the segments. And Adam, I would think that is what you'll see us doing over the next few years. More of that as a means of providing the transparency and the understanding of what's going on in the business, but remaining sort of structured in a way of how we go to market because that's how our customers buy from us. That's an important part of being successful selling to the OEs is matching up well as to how they buy.

Got it, Joe. That makes a lot of sense. We're going to wrap there. Joe and Elena, thank you so much for your time. It's a super interesting time for your business. I can't wait to see how it evolves over the coming months and quarters as we see more of these wins come into your revenue line. And with that, thank you very much, stay safe, and this concludes the webcast.

All right. Thanks for hosting, Adam. Take care.

Got it.