Aptiv PLC (APTV) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. I'm Luke Junk, and I cover vehicle technology and mobility for Baird. We're very pleased to have Aptiv with us this morning, $30 billion market cap. Aptiv is at the forefront of bringing smart mobility solutions to market, including next-gen vehicle architecture, active safety and autonomous driving. 2020 sales should be around $13.5 billion for the company. Joining us, we have CEO, Kevin Clark; CFO, Joe Massaro; and Elena Rosman from Investor Relations. There will be plenty of time for questions today. [Operator Instructions] With that, let's jump right into the Q&A.

So Kevin or Joe, to start here, maybe it makes sense just to address the cycle because I know it's probably on the top of everyone's minds. If we just talk about the state of the market as we head into 2021, and specifically, how you handicap some of the risks on the downside. Maybe if you could address what you're seeing in Europe specifically right now related to COVID-related shutdowns and whatnot versus the potential alternatively for a steeper-than-expected recovery as we go into next year.

Sure, Luke. Thanks. It's Joe. I'll start, and Kevin can certainly weigh in. Obviously, we had our earnings call 2 weeks ago now and provided guidance. Haven't -- guidance for the fourth quarter. Have not seen any significant changes and production schedules from customers as a result of increased lockdowns in Europe in particular. If you go through just sort of where we think Q4 will be, we have vehicle production down about 3% in North America with our growth of 6%, a positive 6%, China -- I'm sorry, Europe, down 4%, positive growth of 6%; and then China, where we've got the market up to -- and we're down a bit, more so as we lap some launches from prior years. But see China strengthening, had a strong build in Q3, see that continuing in Q4. Listen, as we thought about giving guidance for the fourth quarter, we -- you have to sort of work to make some assumptions around COVID. And our running assumption is no major shutdowns of OE production facilities. And that you continue to see OEs, and this is really happening globally, react to either consumer demand and/or interest from the OEs to make sure they have inventory on the lots as we head into the first quarter of the year. So guidance does not assume any major shutdowns. Certainly, as we talked about on the earnings call, we are seeing some, what I'll call some interim supply chain disruption, primarily coming out of the Tier 2s, Tier 3s, combination of some product constraints as volumes have ramped beyond maybe some folks' expectations from a couple of months back as well as some labor disruption. There are certainly COVID hotspots that pop up that can disrupt production for a couple of days. I'd say what we're seeing so far is being addressed by the industry, either ourselves if it's our supply chain or our customers if it's somewhere else in their supply chain. It's disruptive for just very discrete periods of time but certainly something that we're watching. And our sense is that's really what 2021 looks like. We provided some very early guardrails around our views of vehicle production for 2021. We think vehicle production is up 10%, which is effectively no shutdowns, again, assuming there's no extended shutdowns, will grow 6% to 8%, which is consistent with our outgrowth range. And our running assumption is we'll be dealing with COVID in the environment for the balance of 2021. It requires pretty aggressive management of things like supply chains and production schedules to make sure you can work through. But we've had folks back in our plants now since early May and have really demonstrated that our safety protocols and the precautions we're taking to keep our employees safe work and that we're able to produce and deliver to our customers. And our view that, I think, the industry has done a pretty good job of proving the same. So high level, that's really how we're seeing it at this point. Again, no disruption to date from Europe, in particular, from a Q4 increased level of lockdowns.

Okay. That's, yes, great to hear. Yes. Moving the discussion forward, I wanted to start with advanced safety and user experience. And the first question that I've got is, if we could talk about how Aptiv's approach to active safety is unique versus the other Tier 1s. This is maybe the most common question that we get, is what differentiates the company from these peers? If you could address that directly to start.

Yes. Maybe -- it's Kevin. So I'll start. We've been in the active safety business for a long period of time, starting as a -- really a radar manufacturer -- radar designer, engineer and manufacturer. And we've evolved that position from a focus on radar as a component to a focus on how do we use radar as a leverage point to integrate full advanced ADAS systems. So providing the radar solution, partnering with great partners like Mobileye on the vision side, doing the sensor fusion, the compute platform and then providing effectively the brain of the ADAS system that directs the car how to respond to various inputs from the perception systems. So starting a few years ago, we leveraged those cross capabilities in what we call a satellite architecture solution, which was starting with 3 radars, a vision solution, integrating those and launching what today we refer to as our scalable architecture solution with 5 OEMs across the globe. We're now launching into a second generation, a Gen 2 ADAS solution that provides more capability in and around radar. So less of a dependence on either vision or LiDAR for Level 3-like solutions. More feature development, algorithm development, whether that's highway pilot, traffic jam assist, lane-keeping assist, those sorts of things, so developing the software there as well as developing the middleware that allows us to partner with the OEM where some OEMs prefer to develop some of their own features. It allows us to integrate those solutions into the Gen 2 advanced ADAS solution. So really, a -- what we consider a cost-effective scalable solution that goes from level 0 all the way up to Level 3. And we would say that's what differentiates us from most of the other players in and around active safety who tend to focus on a single sort of perception system as a component that integrates into a -- ultimately into a broader solution.

Yes. And then for Aptiv, specifically, with third quarter reporting, you guys outlined a 25% annual growth target for active safety business through 2022. And could you just talk about your level of visibility in terms of what's already booked and launches that are coming here? And then maybe more importantly, if you could also discuss current booking activity in active safety. I think you've said 2020 is essentially on trend to be pretty flat year-over-year despite COVID [ disruptions ].

Yes, visibility to revenue is extremely solid, right? We know the timing of programs. We have forecast from the OEMs with respect to unit volume from a vehicle standpoint. We have pretty clear line of sight as it relates to penetration rate or adoption of active safety solutions. So the near-term outlook, I would say, is very strong. To the extent you have flare-ups of COVID or things like that, obviously, if assembly plants are shut down for some period of time, it can affect that plus or minus. But I'd say we have a high level of confidence in our revenue outlook. As it relates to bookings, I think we said on our Q3 earnings call that we'd expect to book roughly $4 billion of bookings this year. That's in line with what we booked last year. One of the issues that we, like our other players in our space are dealing with just given work from home, given how our OEM customers are dealing with keeping their employees safe, from an overall booking standpoint, the administrative aspect associated with awards is a bit more challenging. So it's likely to be a lower bookings year than what we've had previously. But that doesn't reflect any sort of underlying demand for active safety or for new business. It's just the logistics associated with operating with COVID.

Okay. Great. Well, yes. And my next question is, from a customer standpoint, maybe we could unpack some of the trends that we've seen this year in light of COVID-related disruptions financially, let's say, for your customers, as well as the increase in focus that we're seeing in terms of electrification. It does seem like there is really right now more of a focus on, say, L2+ and L2++ systems versus L3. If you could talk about that dynamic, that would be great.

Sure. Yes. Luke, I think if you take a step back, and we've talked about this a couple of times, we clearly had a lot of disruption in 2020, and we'll be managing some in 2021 as we discussed. But really haven't seen anything that indicates, from a longer-term perspective, that our strategy has been disrupted from COVID. And that includes the active safety penetration. As Kevin said, we -- it helps OEs sell vehicles. That's large -- there's a significant end-user demand for active safety. And we continue to see that growing and sort of well over $2 billion in revenue by 2022, 2023. There have been, I would say, a -- certainly a focus on Level 2 and Level 2+ systems. We have seen some customers push back some smaller Level 3 programs. But quite honestly, those weren't really going to be revenue until that sort of 2025 time frame. And they've been pushed out a bit, effort to save some money on advanced engineering today. But I think from our perspective, we'll have those Level 2+ scalable systems on those platforms. It's out a bit from a revenue perspective, so really -- we really don't see that as -- and they were smaller, so we really don't see that as a significant impact. High voltage has clearly been a very bright spot for 2020 despite everything happening with COVID. We've seen customers, really, particularly in Europe and China, increase their focus on high-voltage electrification. Now focused on bringing hybridized or electrified powertrains across more models and really, particularly with a couple of the European OEs, really start the planning process for, call it, over the next 5-, 8-type years, where electrified powertrains are their powertrain of choice. And they're deemphasizing the internal combustion platforms and really getting to the point where their cost structure, their level of complexity around the powertrain is greatly simplified by going with electric. And we'll end this year with about $500 million of high-voltage revenue. That business is at SPS segment margins today. We expect to be over $1 billion of high-voltage revenue by 2022. Bookings remain strong. And as some may have heard us say, our focus on high voltage over the last couple of years, we really expect that 80% of the opportunity to be in Europe and China. So to the extent, and there's certainly, I would say, early rumblings of increased electrification opportunities from the North American OEs. I think to the extent that happens, that would be additional opportunities for us. We really haven't factored in a strong electrification market in North America at this point. We'd be ready for it if it was to materialize, but that would be, I think, an upside opportunity.

Okay. Great. Well, just -- yes, sticking with active safety for a second. I did have a follow-up question in, and that was -- if maybe we could touch on the content opportunity for Aptiv at each incremental level of autonomous driving. And I guess what I'm driving towards is, is there an argument to be made that broader adoption of L2 and L2+ systems actually expands your addressable market relative to, as you alluded to, what was in the near term, at least expected to be more limited adoption of L3-type systems, I would say?

Yes. It's Kevin, Luke. So, yes, near term through 2025 or shortly thereafter, the view on L3 adoption was actually, from a penetration rate, relatively low. But to put it in perspective, when you look at a Level 1 sort of solution, content for a company like Aptiv is roughly $300. When you look at a Level 2+ sort of solution, which is where we're actually seeing the highest rate of growth, you're at the low end, call it, roughly $600. At the high end, roughly $1,000 depending on the overall capabilities of the Level 2 or a Level 2+ solution. So an opportunity for more than a doubling of overall content. So it's significant. As we said, as Joe said and I said, we're very focused on providing scalable solutions that give the OEM the option to democratize active safety across a broader set of vehicle platforms. So there may be an entry vehicle that has a Level 1 solution and then a more advanced vehicle that has a Level 2 or Level 2+ solution on that's more appealing to the consumer that they're trying to attract. But the opportunity is meaningful. And importantly, it aligns well with the OEM. OEMs -- ADAS help sell cars and OEMs make incremental margin on ADAS solutions.

Okay. Well, yes, wrapping up in terms of ADAS. And Joe, maybe a question for you on the margin trajectory going forward. So you had pulled forward some investment into this year. And if we just talk about how that business is positioned going into 2021, with respect to the pace of investment spending and also soaking up some of the capacity that you've already put in place from a manufacturing standpoint.

Yes. So we -- similar to sort of the revenue trajectory we talked about earlier, I think the -- from our perspective, the margin trajectory that really we talked about at our Investor Day in 2019 of sort of those mid-teens by that 2022-2023 time frame, we remain on track for that. Again, we're dealing with some disruption here in 2020 and 2021, but believe that business, as you get past sort of COVID and gets to the scale that we're talking about in 2022, prints at that margin level. As it relates to the engineering investment, you're right, Luke. We did pull ahead about $95 million of investment into 2020. We talked about this in February, well before COVID. Those programs continued. We really didn't see any delays or disruptions in those engineering activities with our customers. And that spends in the business at this point. We actually start to lap it in Q4, so it's less of a comp from a year-over-year perspective as we get to the back half of the year. And that investment is included in the 10% to 11% margin guardrail we provided for 2021. So investment is in. Certainly don't expect that level of step-up into 2021 in the business. So it's -- it was a pull ahead, and at this point, it's in the business and reflected in the guardrails that we provided.