Aptiv PLC (APTV) Earnings Call Transcript & Summary

Thank you. Welcome, everyone, to our first afternoon session. Very pleased to have with us Aptiv. We're joined by audio -- by Kevin Clark, CEO; Joseph Massaro, SVP of Business Operations and CFO; and Elena Rosman from Investor Relations. You all see, hopefully, my e-mail address. You were not shy during the BorgWarner presentation about sending me e-mails, so I expect some here. As well as if you're on Bloomberg, I'm BJohnson487, and I'll accept your Bloomberg chat for questions as well. So with that, want to go in.

And Joe, since we've had a number of other suppliers give us production updates and the COVID risk in Europe, I don't really want to go with the typical update on some production trends but want to kind of dive right into the key issues around growth over market. You had a preliminary 2021 guide of 6 to 8 points of growth over market that you conveyed on your 3Q EPS hall. Any sense for which region segments are growing fastest or slowest?

Yes. Brian, it's Joe. Thanks for hosting. Yes, we provided guardrails for 2021, 6% to 8%, which is very much in line with our historical framework, supported by the key pillars we've talked about for a while of growth, active safety, high voltage, the interconnect business as well as the adjacent markets. Didn't provide guardrails by segment or region, but I will say we remain very well balanced across regions and across the segments. AS & UX, as you know, will run a little bit higher, just given the growth in active -- the significant growth in active safety. But both businesses continue to grow, and it's fairly balanced around region. When you take sort of a full look snapshot, we will continue to see lumpiness in a given region or in a given business, maybe in a particular quarter. A lot of that driven by launch cadence, whether we're launching in the current period or lapping a strong launch period in the prior year. And that's really -- we've had that type of lumpiness for years now. That's nothing COVID related or anything, that just tends to be the trend in the business, but again, continue to see it really well balanced. When you take a step back over a longer period of time, would expect sort of the regions and the segments to fall in line with that guidance.

Okay. And you had earlier talked about mid-single digits growth over market in SPS, 10 points growth over market in AS & UX. Is that still what you're expecting?

Yes. That's a general range. Certainly, we've seen a little bit of an uptick in SPS here as high voltage has kicked in. AS & UX, I think long term is that active safety business gets bigger. Obviously, the percentage comes down a little bit. It's just growing off a bigger number. We're now almost $1.5 billion in active safety revenue. But yes, that's -- I think that's a reasonable range.

And for that 6 to 8 points, you -- that's over and above the estimate of global production being up 10%, so that implies 16% to 18% of organic growth. But to what extent is that growth over market a function of global production volumes? So if production is softer or higher, will that accept it? And kind of related to that, how are the launches in 2H that will carry over to '21 proceeding? And then what kind of visibility do you have on launches in '21 and any risk of delays?

Yes. Let me start with sort of the outgrowth resiliency. We've been watching for what I'll sort of call elasticity of that outgrowth with vehicle production. Really for the past couple of years now, starting sort of on a regional basis in 2019 as things in China started to slow and, obviously, through the COVID period in 2020, we've yet to see any real elasticity between the 2, meaning we haven't seen any compression of that outgrowth as vehicle production has come down. I think that's in part driven by the nature of the products, right? Active safety helps sell vehicles. We continue to see customers putting more active safety in vehicles across more platforms. High voltage, as folks know, has seen some significant tick ups here over the past few quarters, and we'd expect that resiliency to continue. So you're right. Our 10% production growth guardrail for 2021 and then on top of that, the 6% to 8% outgrowth. Launch cadence continues as expected. As you mentioned at the top of your comments, I know you didn't ask, but there's clearly disruption in the system, right? There's -- it's a much noisier operating environment around delays in production schedules, constraints in supply chain. Not necessarily ours. We continue to do reasonably well. But certainly, others that are either COVID related or labor shortage or supply related, just given how quickly the markets tip back up. So it's -- I'd say the planned launches, the strategic side of launching remains on track. We don't have customers canceling launches that -- we don't have customers changing their longer-term plans. But in the near term, the environment continues to remain pretty choppy. And I think as an industry, we watch those schedules closely and watch the overall environment closely to understand where disruptions may pop up.

Okay. Let's move on to electrification because, of course, the theme of our conference this year, once again, is legacy versus new entrants or dinosaurs versus disruptors, electrification being one of the big discontinuities. You've guided to mid-single-digit growth over market as we discussed in SPS. But frankly, when I talk to investors, they wonder, with the shift to xEV happening now in the EU, in China, and we'll get to the U.S. and what could happen in the new administration, but why the growth isn't even faster? So maybe start, let's kind of go into that kind of -- can you remind us of the content per vehicle difference between internal combustion, 48-volt plug-in hybrids and full BEVs?

Yes. Let me take a step back. So the -- we'll have about $500 million in high-voltage revenue this year. That's growing at a 40% CAGR this year, and we expect that to continue through 2022. So we've got some fairly significant growth assumptions in there around high voltage. Certainly seeing positive opportunities, and again, the potential for this to continue. But again, within our forecast, we have a 40% growth rate that's contributing to the 6% to 8%. So we think that's a pretty reasonable sort of forecast to put out there from a growth perspective. Content can average anywhere from 2 to 3x over an internal combustion engine. And one of the things for Aptiv that's important to know is we have very little decremental content as you move from internal combustion engine to a -- to either a hybrid or a full BEV, meaning we lose very little content. There's usually somewhere around $150 of -- on average, content around electrification or basically the electrical distribution system that connects to the internal combustion engine. That goes away, obviously, as you get to full BEV, but it's more than made up for -- with the additional content. And for us -- and I know we've talked about this a number of times. That business, the high-voltage business at this point is printing at SPS segment margins, which is certainly ahead from our typical product lines. We've historically said product lines breakeven between $350 million and $500 million of revenue and achieve sort of segment level margins between $750 million and $1 billion. So at $500 million of revenue, the high-voltage product line is clearly running ahead. And that's in part because we're able to really leverage the low voltage business, where we have tremendous scale, tremendous manufacturing capabilities, engineering capabilities, a very strong supply chain. And we're really just layering this high product -- high-voltage product line on top of that. High-voltage product line as a system is also a more margin-rich system, just given that it tends to have a significantly more connector content than a typical low voltage system. A low voltage system would be sort of 70% cabling, 30% connector. A high-voltage system is 50-50. So we wind up with a stronger margin mix there.

So we had this conversation around the 3Q results, but just doing the math on what you said about xEV for '21 seemed to be about basis points of, call it, 600-ish basis points in SPS. So a couple of things. Kind of first, as you kind of do the math of a business compounding at 40% to 50%, at which point could it reach the point in terms of absolute dollars when it can drive faster than mid-single-digit growth for the SPS segment?

Well, we've -- and I laid out -- if you have that math off the top of your head, I don't, Brian. I will tell you, we expect that business to be above $1 billion in revenue by 2022 at its current growth rates. So again, it starts to have a meaningful impact and becomes a larger business, certainly as we move into 2022 and beyond.

Yes. And Joe, I don't have it off the top of my head in terms of the overall beyond 2022 impact. Certainly, it has continued -- that contribution that Brian referenced has continued to grow as the base level of revenues have obviously gotten bigger. So it will have, obviously, more of a contributing factor, certainly as we get to 2022 and beyond.

Okay. And as we kind of think of those outyears and see the growth there, I think we -- when this was called [ EEA ], there were occasional surprises of business rolling off, winding down that you -- because of margins, just choose not to pursue. Should we -- is there any headwind from that we ought to be thinking about over the next 3 to 4 years?

No, nothing large or significant, I'd call out, Brian. I mean we tend to have that -- again, we launched -- you have costs around launching. And launches, as we've talked about before, they're not sort of a single magical day. You tend to build up to a launch over a couple of quarters. You tend to run it sort of with additional launch costs for equal quarters post launch. But that's something we've seen in the business on a normal basis, something that's been included in our guardrails of 10% to 11%. So I wouldn't say there's anything sort of unusual that needs to be called out there.

Okay. Or particularly lumpy that we ought to be aware of in advance?

Well, listen, we went through T1XX. That's obviously a big -- we're working through the stages of the SUV launch here for T1XX. But again, that's in there. But that -- large launches like that will -- when they happen, we'll talk about it. But nothing, I think, needs to be called out as a negative at this point.

Okay. Good. Taking you to electrification, and we'll get back to safety later, but you had a very high win rate of 70% -- or roughly 70% in high-voltage electrification that you told us about in the 3Q earnings. What's the driver of that win rate? Is it sustainable? And what does that imply about that competitive structure for the type of business you're pursuing in high voltage?

Sure. Kevin, do you want to take that? Or I'll take it? Sorry.

Yes, sure. Yes, Brian, our win rate has been north of 70%. And I would characterize it the result of kind of 2 things. One, a focus on pursuing opportunities where we can bring a more holistic approach to the RFQ. So we can include a proposal that includes the wire harness, more connector content as well as cable management solutions. So it's a solution that effectively has more content for Aptiv. It provides the OEM with maybe more efficiencies, more mass reductions, so cost savings. So there have been a few OEMs that we've put forward proposals that have saved them. And I'm sure Elena has talked to you about this in the past or investors about it. At 30% to 40% sort of mass reduction, which obviously, when you think about high voltage translates into cost savings. I'd say that's one. The second is we've been very focused in terms of the pursuits that we're evaluating, really focusing our efforts on those OEM customers who are fully bought in and have a very strong competitive position as it relates to battery electric vehicles. So players like Tesla, like Volvo, like VW, and players where we can take our solution and grow both across vehicle platforms as well as grow regionally as they bring better electric vehicles into other geographies.

And sort of related since you mentioned OEMs, if you kind of just think of them in 3 or 4 buckets kind of traditional OEMS. Some, as you mentioned, who are very aggressive in EVs, others who are followers. Tesla is kind of the $0.5 trillion gorilla in the marketplace. But as well as kind of the new entrants, a number of U.S. EV companies that have gone out by way of the SPAC route. You have [indiscernible] and others growing in China. How are your relationships in each of those buckets? And in particular, you quoting with some of the newer, smaller entrants?

Yes. We quote with some of the newer smaller entrants, players like Rivian. We pick our spots. Those areas where we feel as though the technology or the OEM has a strong position from which they can leverage and grow if they're a newer entrant into the battery electric vehicle market. So we have exposure to some of the newer players that are out there. I think today, it's on a relative basis small, growing in selective areas. Much bigger presence, again, with players -- with the 3 players that I mentioned on a global basis. So we have the benefit of their scale and their current vehicle production volumes and the fact that they're expanding electrification across multiple models, and those models are already in their launch plans.

And to the extent that some of those customers pursue kind of a common modular skateboard as a platform versus different designs for different models or just converting over a legacy ICE car. Does that make a difference if they've committed to a big global platform, modular platform?

Yes, definitely. I mean, in reality, those -- our view, those who are fully committed to battery electric vehicles are -- and obviously, there's a spectrum from a standardized spectrum that you put a top head on and change the vehicle. But those who are fully committed tend to have some element of that skateboard concept in their battery electric vehicles. They've made the investment. They've made the commitment. It ultimately is a more cost-effective solution for them longer term. So I think the players that I mentioned are players who have some version of that and continue to evolve to a more standardized sort of underlying vehicle architecture when you think about battery electric vehicles.

So let's talk a bit about North America. Clearly, there's very likely to be a new administration, hence, new café, new leadership and EPA and it's a -- we've written, we can expect the objections to the California ZEV program to be dropped. The House Democrats published a proposal that would kind of now through model year '25, '26, not that different, but an aggressive ramp after that. So how are you thinking about xEV in North America now? How are your OEM customers thinking about it? And is there North American xEV in the backlog now? Or could this be additive as the OEMs face the reality of the new administration?