Aptiv PLC (APTV) Earnings Call Transcript & Summary

Yes. Ultimately -- our view is, ultimately, it is with the OE. They have responsibility for sort of the complete system. But with that said, it would depend on the nature of the issue. Obviously, there would be warranty considerations with those products, like there are for all products. So I think it's very fact and circumstances-based analysis of what happened or what went wrong. But clearly, it would rest with, at least, initially with the OE and who's responsible for sort of the complete vehicle architecture and the operation of the complete system.

Understood. That's helpful. Before we get to Level 3, 4 or 5 types of vehicles, though, there's a lot of growth ahead of us in ADAS systems around Level 2, Level 2+, and Aptiv has a lot of content on that. There's also been a lot of announcements of auto OEMs deploying more of those sorts of systems and even some Level 3 systems we're hearing could come in the second half 2022 type of time frame. Maybe you can speak more specifically to what Aptiv is seen at levels such as Level 2 and 3, what kind of adoption rates are you expecting over, say, the next 3 to 4 years of something like Level 2, Level 3 capability?

Sure. Let me start off and Elena can give the specifics on some of the take rates that we're seeing and where the opportunity goes. But you're absolutely right. Our active safety business has been growing strong double digits for years now. We finished last year at about $1.3 billion, expected to continue to grow well above 20%. It's a profitable business. We've invested a lot in the business. But at this point, it's profitable, and we're seeing the expected margin expansion. The core of our business at this point is really around what I'll call Level 2 and Level 2+ systems, where we've really been able to differentiate ourselves. And really from a competitive position, really only see Bosch as a main competitor, where we've gained a lot of know-how, a lot of capabilities around taking these sort of complex, scalable systems, putting them into vehicles and at an increase degree putting them into smaller vehicles. You hear Kevin, our CEO, talk a lot about the democratization of active safety as we see those systems get pushed down into lower models, really driven by consumer demand, certainly in the U.S. and China. There's obviously some regulatory considerations in Europe. But consumer pull for active safety systems remains -- ultimate consumer pull remains very strong. And the systems are proving to be very sticky, at least, the technology is proving to be very sticky, meaning -- someone who had a 2017 or 2018 model year vehicle that had some active safety features, and it certainly expects the same, if not more, features in the next vehicle they purchase. And as a result, are willing to pay for it. So the OEs like to put the content in. But it's a product line, our view that we continue to see, again, growing strong double digits for a number of years. We expect to, by 2022, 2023, to be the largest provider of active safety solutions. We'll have technology on cars with over 20 global OEs. Level 3 is still a little ways out. There's going to be some fuzziness around what's called the high-performing Level 2+ system or an entry level L3. our L3-type systems tend to be a little later from what we're seeing from customers a little further out than late 2022, they tend to be in that 2024, 2025 time frame. But there's a lot of opportunity to continue to grow into Level 2 while we wait for those systems. Elena, do you want to frame sort of the market share and the take rates?

Yes. So in active safety today, penetration, if you look across the spectrum, right, from Level 0 to Level 2, Level 2+, about 50%. And it's expected to reach 60% next year and 70% by 2025. So -- and those numbers have continued to go up for a number of the reasons that Joe mentioned. Where the -- today, most of that 50% is really centered on Level 0, Level 1 and a lot of the growth that we're seeing over the next couple of years plays to our sweet spot in that level 2, Level 2+. I think when we talk about Level 2+ capabilities, that includes features such as lane keeping, auto park assist, automatic emergency braking, both for bicycles and for oncoming traffic. And all those are all additive, great features to what a level 0, level 1 application have. Level 2, you start to look at things like Traffic Jam Pilot, Highway Chauffeur and Park Valet. And I think, as Joe mentioned, that's where that -- some of that fuzziness comes in from a definitional perspective. And you kind of jokingly hear -- folks, you hear referring to Level 2++. But there's very strong interest in this. And for Aptiv, we see incremental content opportunity that we've talked about, that hasn't changed. So a Level 1 content per vehicle can be in that range of, call it, $300; a Level 2 center is around $500; a level 2+, right, is $750 to $1,000 per vehicle. And when you get to Level 3, a true Level 3 system, you're really talking in upwards of $3,000 per vehicle. So additional penetration, additional content that's going to continue to drive continued growth in our safety product line. And it's reflected in the strong bookings that we've had that have averaged about $4 billion per year for the last 4 years.

That's all really helpful. Thank you for the details on that. When you are starting to see some of these designs for Level 3, recognizing there's still a little bit further out in time, are they predominantly using a LiDAR-based sensor as part of that package? Or do you think there's enough improvements in vision and radar that you can get to Level 3 capability without a LiDAR sensor?

It's close. It's going to be tight. And I think, Mark, some of it may be definitional, like we sort of one person's entry Level 3 is somebody else's Level 2++. We're certainly of a view that you do not need LiDAR for Level 2++ systems. We ourselves have made a lot of -- as others in the industry, a lot of advancements with the radar and vision combination. With Motional, we're big users of LiDAR for Level 4. So we're positive on the technology in terms of -- in the Level 4, 5 space, what it's capable of, the redundancy it provides you. And it also provides the robotaxi, some very unique capabilities, localization down to sort of inches from the curb type thing, which is important when the car is in sort of full autonomous mode. But I think there is going to be a bit of a squeeze coming in that Level 3 space. We don't have a definitive view of where it's going to shake out yet. But certainly, LiDAR needs to advance from a price perspective, from a sort of size perspective and obviously needs to be solid state, much like the journey radar has taken over the past 20 years. So LiDAR needs to do. It probably needs to do it a little more quickly than radar had the luxury of sort of growing into the -- growing into the technology. Where for LiDAR, it's sort of here and now, and people are expecting it. But I think you will see some eating in of what had traditionally been thought of as LiDAR space, in that low end Level 3, again, you may have some call it 2++, all our customers have slightly different definitions. But I do think you'll see some of it. Some of it get taken as people aren't going to wait for LiDAR and can make progress on radar and vision. But certainly, our view at the moment is once you get up to Level 4, you're going to continue to need it.

Understood. That's a really helpful perspective. If we could, I'd like to dig more into the EBIT margin potential in the AS & UX segment because on the one hand, we're talking about selling software, which is extremely high margin. But on the other hand, we're talking about potentially having to have more of a bundled package where you're perhaps passing through hardware products, be it a LiDAR sensor, cameras, something of that nature that. Perhaps there's a higher piece of hardware where there's more pass-through. So could you speak to how you see the EBIT margins of the AS & UX segment evolving over time?

Sure. Sure. Again, I'll start off and then Elena, if you want to go through the -- if you just want to go through the specifics. But listen, we've talked about margin expansion in that business for the last couple of years. And we've seen it, particularly in the active safety. In the active safety portfolio, we hit low double-digit OI in that business in 2019. We did make the decision to take some of that profit and reinvest it in the business, about $95 million we put back in, in engineering and active safety last year. And despite the COVID disruptions and other forms of cost actions, we really stayed on track with that spend because we felt it was important to -- in a couple of areas, not only to advance the technology, but there was also some pursuit activity, some commercial award activity with our customers that we thought would be -- we'd have a much better opportunity with some more resources. So it was effectively a pull ahead of planned investment in the business in 2021 that we pulled into 2020. But active safety, the product line itself will get back to double-digit margins this year. We've talked about that between sort of now and 2023 being in the sort of low teens. But to your point, Mark, do expect that as you get to 2025 and beyond with the additional scale and to some extent, the leveraging of the prior investments and the prior systems, do expect that business to get into sort of the mid-teens range. And we'll obviously -- and Elena can go through the segment detail, but that will obviously bring up the segment as well.

Yes, Mark. So in -- and if our outlook for 2021, we have 13% EBITDA margin for AS & UX. And I would just note that, that includes a portion of the $80 million of supply chain inefficiencies are largely going to be represented in the AS & UX segment in 2021 as opposed to a lot of that was in S&PS in the fourth quarter. As well as, obviously, their portion of the COVID-related operating costs. So in addition to volume growth, which typically we see in that 25% to 30% incremental range, there's a lot of drivers from a productivity perspective over the coming years.

Understood. That's very helpful. If we could shift gears into the opportunities for the company in electrification, there's been a lot of news recently, and you had GM recently, say, they want to be as an aspiration, all EV by 2035. Ford just announced the plan to double their investment into electric vehicles. I'm hoping to better understand is Aptiv already seeing that inflection in -- that we're all hearing about in terms of announcements. Are you actually seeing that show up with your customer dialogues and perhaps even in your order book at this point?

Yes. We've certainly -- it's a little bit different by region. If you go back even 6 months ago, certainly, a year ago, our view was sort of 80% of the EV opportunity over the coming, call it, 3 to 5 years, was going to be between Europe and China, with 20% in North America and that, that North American opportunity would come further down the road than Europe and China. So I think what you've really seen evolve over the last 6 months is a bit of an acceleration in North American expectations, I think, driven by some of the consumer demand, some of the consumer appeal to vehicles. There's obviously a -- I think, a regulatory -- or pending regulatory/political view that's changed over the past 6 months. So you've seen, I think, some higher levels of activity coming from the North American OE. So that is relatively new to us. We're excited about it. We think there's the same sort of commensurate opportunity we've had with European and Chinese OEs we'll have with the North American folks. So that's a little bit new and as a result, really isn't -- and there's some, obviously, in the order book, but that hasn't been a big part of the bookings over the past 2 years, where we've booked about $2 billion of high-voltage business each year over the last couple of years. It's a very strong product line for us. It's -- we expect that it's now over $500 million of revenue is very profitable. It's at -- sort of at slightly above segment margins. We expect it to be accretive to this SPS segment margins over the coming year. But we expect that over $500 million of revenue to grow at 50% plus here for the next few years. We expect to be over $1 billion in revenue by the end of 2022, going into 2023. And again, we think it's just got a lot of running room based on what we're seeing from customers, what customers are seeing from consumers and then some of the commitments that are being made. So the North American stuff, again, we hadn't expected it to come this soon. So that's sort of an incremental opportunity for us there.

That's good news. And the company has spoken I think in the past that the content opportunity per vehicle in the Signal and Power Solutions, or S&PS segment, could potentially double compared to a nice vehicle. So I think it was $900 to $1,000, potentially on a BEV compared to about $500 of opportunity on an internal combustion engine vehicle. Is that still the way to think about the content opportunity for Aptiv? And as this portion of the industry grows and BEV increasingly becomes a larger part of the mix, does that change the kind of step up you think you're going to achieve if there's more volume purchasing going on? Or perhaps even as architectures are starting to evolve, and Aptiv, of course, is playing a role in that. But if you have more centralized compute, does that change that content so if you could speak to the longer-term content step up within BEV, that would be very helpful.

Yes. No. Listen, the numbers you gave were right. Those were our first sort of looks at it a couple of years ago. We haven't updated those numbers yet, but actually do believe we're seeing opportunities to increase the content, our content and BEVs over time. Some of that, to your point, comes as the BEV architectures are refined. And we think you'll -- it is for this industry, even though there's been certainly, electric vehicles are out for a bit, sort of doing it at this level of volume across so many sort of platform sizes and different types of models is obviously new to the industry. So there is a lot of innovation going on. And we think we'll see content growth from incremental products that we can provide that either haven't been a focus of ours in the ICE world or products that aren't required in the ICE world, in the internal combustion world. But we think we'll enjoy that over the next couple of years, and we're working hard on both from an inorganic and an organic perspective to look at those product areas and those opportunities to grow within BEV. The other thing that we think is going to happen over time, which -- and you alluded to it a bit, is these BEVs are very technology-rich vehicles, right? There's more tech that has to go in to manage the batteries, manage the power. There's some more consumer interface, just around a consumer staying connected with their vehicle about where the charging stands, what kind of trips can they make? When should they charge? How can they charge effectively? All of that requires just much more technology around the vehicle. So as BEVs continue to develop, and I think you'll get to their sort of second and third-generation over the next sort of, call it, 3 to 5 years on some of these platforms, you'll see greater levels of connectivity within the architecture itself. You'll see different materials being used. There'll be different types of conduit throughout the vehicle. We're expecting copper to come out. Part of that is taking some math out of the vehicles and making sure you keep the weight in check. Some of that's going to be -- you need greater reliability of signal and power distributions throughout the vehicle. There needs to be some redundancies. So different types of materials like flex circuits or ribbon cables will come in. And we think we'll get to sort of an auto-grade level that will also simplify the manufacturing in the vehicles to the extent you can get some copper out. And that's a very good content story for us, because copper in our business is effectively a pass-through. We don't make margin on copper. So when you replace it with more sophisticated materials to do other things in the vehicle, it actually ends up costing a bit more, but there's benefits, whether it's from a manufacturing capability or the benefits of the more reliable signal and power processing. You tend to -- you always tend to enjoy other benefits, and we tend to enjoy sort of an increasing content opportunity there.

That's great. We had a question come in over the webcast, and it was about market share for Aptiv. You already spoke to the good bookings numbers of about $2 billion related to high-voltage in each of the last few years. What kind of market share or win rate is Aptiv seeing in that area?

Yes. Kevin talked about it on the calls. In the high-voltage space, the early win rates have been very high, about 70%, which, for us, I don't necessarily think we're going to maintain that forever, obviously, but it's been off to a very good start. I think it speaks to the capabilities of the business. SPS is a business. We have content on 1 out of every 3.5 vehicles manufactured globally. It's a business that really has a unique scale in this part of the industry. And what we're finding as customers have come and relatively quickly, really, over the past year, I'd say, maybe 15 months and have really increased their expectations around the volume of electric vehicles and the number of platforms that are going to be electrified whether it's hybrid or full BEV. We offer sort of a ready-to-go business, right? We've got a lot of engineering capability. We've got a lot of supply chain capability, given our low voltage business is so big. And we've been able to ramp up here for high voltage very quickly, very economically. We've been using the same plants, using the same machines, using the same engineering talent. So we've really provided sort of that value to the customers of being someone they can go to when they want to ramp quickly, and we have the capacity in place. And that's -- we've seen that. That's really a bit of the story about how our Tesla relationship developed. I mean, we're very good at offering within that SPS business customers a very strong value proposition when there's high complexity and high volume. And over the years, as Tesla has grown and now has gone global, we've been able to sort of provide them access to first in North America to a great manufacturing base for SPS in the U.S. and Mexico and sort of ready access to that as the business started to ramp. And that's really what I think is driving those early win rates. Long term, I'd expect us to be a very strong player in the market. Again, we have content on 1 out of every 3.5 vehicles from electrical architecture perspective now. That to us is the minimum we're shooting for from a high-voltage perspective. We've got an absolute right to play in this space based on our -- based on the strength of our existing electrical architecture business, whether it's the cabling, the wire harnesses themselves. Our connector business is a very strong competitor to TE, depending on how it's ranked #1 or #2 in sort of automotive connectors. And then HellermannTyton, which is a business we acquired back in 2015, which is another Engineered Components business. It's like a connector business, they're not connectors. But there's a lot around sort of cable management, fastening, channeling, that's important to an electrical architecture system in a harsh environment. You can't have vibration. You can't have the system hitting other things or rubbing against other things. And that business actually has a lot of opportunities within high voltage because the cable management, the fastening becomes more important because the cabling is actually heavier and it's carrying a high voltage. So there's a lot more security that goes around those types of things. And that's -- again, that's an opportunity, and that's sort of a complete system for us. We can provide the entire system from connectors to cable management fastening. So we think we got a very strong right to play in the space. Mark, if I can go back, and I left one thing out on content, and I think it's important for folks to focus on when they think about Aptiv and high voltage, because of the portfolio moves and really the strategy we've had over the last couple of years, we effectively have almost no decremental content as it relates to internal combustion engines. When you think of the Aptiv story around EV, there's no big part of the business that goes away. Our only sort of content around the internal combustion engine, it's a little less than $200 that basically is the electrical connections to the engine itself. That obviously goes away, but it's more than compensated for with the increase of electrical architecture in BEV or hybrid. So I think it's something we focused on over the years. As we knew this ship was coming, we weren't quite sure when it was going to come or how fast it was going to come. But we thought it was important to make sure that we didn't sit there with a, hey, a great opportunity in one hand around electrical architecture, but a business that was going to go away in the other because it was so tied to ICE. And so those content numbers that Kevin or Elena talk about, those are net numbers. But there's very little decremental there. That's really going to be sort of all growth for the -- all growth for the business over the coming years.

That's great. We, unfortunately, have run out of time. So Joe, Elena, I'd like to thank you for speaking with us this afternoon, answering all of our questions, and we're looking forward to learning more as we go forward.

All right. Mark, I appreciate you hosting. Thank you.

Thanks, Mark.

Thank you.