Aptiv PLC (APTV) Earnings Call Transcript & Summary

Good morning, and welcome to the second day of the Industrial Select Conference. Brian Johnson from Barclays. Very pleased to have with us once again this year, although we miss not being there in person with them, the Aptiv management team. We have on the video with us Kevin Clark, CEO; Joseph Massaro, CFO, as -- and SVP of Business Operations; as well as Elena Rosman from Investor Relations.

I want to start, Kevin and Joe and Elena, can you just give us an update on the chip shortage situation? Your guidance talked about 10% light vehicle production growth in '21. Obviously, that's lapping some easy comps in difficult times. And first quarter, China; and second quarter, [ Europe ] and America. But what's the chip shortage impact within that? And then since IHS updated in January, they've taken their numbers down based on Ford and GM. And is that kind of the more recent factory closures embedded in your guidance?

So maybe I'll start and then Joe can walk through any number -- any of the numbers. So Brian, as we saw vehicle production pick up the back half of last year, you had an interesting confluence of events, right? You had the COVID impact and the negative impact on vehicle production. Conversely, you had more people working from home, and you saw a significant increase in consumer demand for chips. So 2 markets going in opposite directions. As vehicle production began to pick up in the back half of last year, I would say supply chain, broadly speaking, was relatively tight. I would say the first signs of tightness within the semiconductor supply chain, you started to see in the back half of Q4. From an industry standpoint, the industry did a pretty good job balancing supply and demand. I think as we've seen Q1 schedules increase, Q1, Q2, you saw further tightening from a semiconductor standpoint. So again, imbalance between supply/demand, continued demand, strong demand for consumer applications of semiconductor chips, stronger automotive schedules, which the net result being, quite frankly, I'd say, global shortage on the automotive side, with the most significant impacts really being in the European markets and in the North America markets. It's something that we had visibility to, like I said, starting in late Q4. It's something that we factored into our full year guidance for 2021. It's the reason that we didn't provide specific guidance as it relates to Q1 2021. Our view is it's going to take a couple of quarters to work itself out. Biggest challenges being in Q1 and portions of Q2. But as we exit Q2 and get into Q3 and then Q4, you'll improvements and a more balancing -- again, balancing of supply and demand. And our current guidance basically encompasses what we think is going to be the full year impact of the supply constraints. Joe, you should add anything to my answer?

Yes. No. Just a couple of things. Brian, I know there was a little bit of timing in our earnings call relative to some of the announcements from OEs that happened following. But we obviously had some line of sight, visibility to those. So those were not new news to our guide. They were sort of what we are anticipating. And I think your comment on IHS is right. I think they were, at least at the time of our earnings call, I think probably at 16% vehicle production growth versus 10%. We would expect them to come down. In our view, it's just that sort of 84 million units, given the disruption that we're seeing and what will be apportioned till late Q2 and into the back half of the year is still something the industry, and certainly Aptiv, can make up before the end of the year. And that's how we really frame that full year view.

Now Volkswagen is making noise, blaming suppliers for not ordering enough parts and creating kind of a buffer stock or putting in the right orders [ at the end of ] the year. So I guess, are there chip issues within what you're sourcing and shipping to customers? Or is it more for the want of a nail, the -- for want of a part, your customer can't build the car and therefore you're held up?

Yes. It's -- well, listen, to put it in perspective, the automotive industry accounts for roughly 10% of total semiconductor demand. So on a relative basis, the industry is fairly small. Again, it is a phenomenon that is affecting, I would say, the entire customer base as well as supply base. Some suppliers, some OEMs, are depending upon their sources of semiconductor products, are more impacted than others. I think when you look at where schedules are now for 2021 relative to where they were a year ago, they're certainly up. I think when you look at capacity within the industry, the semiconductor industry, broadly speaking, in consumer demand, the reality is, I think it would have been tough for anyone to build buffer stock during 2020. So it's -- again, it's an unfortunate confluence of events where you see fixed capacity in semiconductor market. You see significant demand on the consumer side. And the reality, you've seen a rapid ramp-up in automotive. And I think the industry will do a decent job figuring this thing out and working through it, just like we've had in the past. And with that will go some element of finger-pointing, I'm sure.

But are you having trouble getting chips to build what you need to build? Whether it's UX or...

Yes. We've been able to make it work. We haven't had any issues where we've impacted customers. But it's -- for all of us, it's a day-to-day, week-to-week sort of management approach that needs to take place given where the industry is.

Okay. Great. Let's move on to high-voltage electrification. The -- you have 70% win rates in high voltage, we saw another competitor in the wiring harness business talking about win rates that would imply, between the 2 of you, you have all of it. That's probably not the case. So can you help us first understand where you choose to quote and where are you don't choose to quote? Thinking in particular of your full range of capabilities, including cable management, wiring and connectors.

Yes. Sure. Well, first, I should probably make a comment. I'm pretty confident in ourselves, with whomever the other suppliers, we don't have 100% of the market. So I don't have all the details. Our focus on high-voltage electrification has really been around where we can bring the most value. So where we can provide as much of a system solution as possible. So where we can provide wire harness with connectors, with cable management solutions, and have a role in designing that high-voltage architecture. We think it puts us in a position to bring more value to the OEM customer, one. And then two, quite frankly, make more money for Aptiv. It makes us more strategic from a relationship standpoint with the OEM customer. And then two, we've really focused our efforts on a select group of OEM customers, historically, principally in Europe and China, who have focused on building battery electric vehicle platforms, where we were confident that you would -- that they would have significant volume. They have significant commitment to building battery electric vehicles or a battery electric brand. And we benefit from that volume. Secondly, we've had an approach where the -- let's call them the newer battery electric vehicle companies that have been around for maybe a decade, and some that are newer, that are really focused on rearchitecting the vehicle from the ground up, clean sheet. How do we participate in their overall vehicle architecture strategy and how does that translate into high voltage? And as they've grown, grown with them across platforms and then across regions. So I think one of the reasons our win rate is as high as it is, Brian, just to cut to the chase, is we've been very focused on who and where we pursue business. And what we found is when we pursue business in a very focused effort, we have a high-voltage organization that's focused vehicle architecture all the way through power electronics and we bring everything that we have to bear, more often than not, we're in the pole position to win.

So a couple of follow-on questions. That was helpful. So first, and this actually came up over in the seating world, but I think it has analogies over in your world. And -- the tension has always been between directed buy, down to the little screw that goes in a certain place; versus systems buying. And you and I have been around for a while, know that kind of pendulum swings back and forth. What I heard you talking about was really more of a systems buy within the high voltage. A, is that accurate? B, do the OEMs get it, that not piecing out every nail and piece of wire can actually save them money? And C, what does that imply about the competitive environment out there?

Yes. Listen, it varies. And you're right, we've been around long enough to talk about the benefits of systems buy and have customers who work really hard to disaggregate everything. And I think one of our best examples on the high voltage, there's a very large European OEM, who we have a significant amount of high-voltage business with, where based on working with them and taking all of our capabilities from a vehicle architecture standpoint, relative to what they thought was their optimized high-voltage solution, we were able to reduce kind of 30% of the weight, 30% of the mass, which translates into a significant amount of cost savings, which has allowed us to be awarded a number of programs across their single high-voltage platform. So to the extent you can show the economic savings, you can be successful, and we have been successful. And that will continue to be our approach. And we get the benefit of bringing forward a more straightforward, maybe lower margin on a relative basis, kind of wire harness solution; but wrapping around that, high-margin, high-growth connectors, cable management solutions. That net-net, and you've heard Joe and Elena talk about this in the past, translates into a situation where we have margin-accretive high-voltage business for our SPS segment.

And I would normally ask this later, but since we're on the topic. In terms of capital allocation, are there additional either tuck-ins or more major things that could flesh out that systems approach in high voltage?

Yes. So we -- and Joe should add to this. I mean, as you know, we've been very active on the vehicle architecture standpoint from a connector, cable management standpoint as it relates to low voltage as well as high voltage. And we're evaluating other areas, both organically and via acquisition, to expand our high-voltage capabilities. Joe, why don't you add to it?

Yes. No, Brian, we're certainly -- listen, one of the disciplines we have in the company is to make sure we have an organic path to hit our targets, to hit our achievements, right? We don't assume M&A would be available to us. So there's a good organic plan in place, increases the product offering, expands products, even including outside of the electrical architecture space, where we think there's some opportunities for HV. But also very interested in -- to the extent there are M&A opportunities out there, which we believe they are. Things need to be for sale to buy, and they got to be the right value and such. But we do think there's some opportunities to perhaps accelerate that. So we're really working on both fronts.

And with the SPAC activity out there driving up valuations across the board, is that creating an issue? Or are the kind of things you're looking at still small and niche enough that you're not competing against the SPAC sponsor?

Go ahead, Joe.

Yes. No, we -- for those types of -- at least to date, I think the SPACs have been more focused in the EV space, on some vehicle producers or maybe on some of the battery themselves. But in the spaces we're looking at, we're not bumping up against SPAC. Valuation, particularly obviously, that EV is an area where people are aware of higher valuation, so we've got to do our work. But the SPACs per se are not a [ challenger ].

Okay. Moving on to -- I guess 1 final question on the EV. You talked about platforms. But does that imply that, if you take a OEM who is electrifying a existing product here and there, creating plug-in hybrids versus [ bad ] versions of some of their popular models. Is that a less attractive customer to you than someone who has created a dedicated BEV platform, skateboard approach, if you will, that will cover multiple top heads? Or does it really just matter, the volume?

Yes. No, the latter is more attractive for a couple of reasons. One, we feel like we're in a better position to take more of the content, one. Two, ultimately, it's a better economic solution for the OEM, right, with a clean-sheet approach. So our general view is it will translate into more volumes. However, there are a few programs where we have strong relationships with the OEM customers from a vehicle architecture standpoint. They want us in on the high voltage. We can do it profitably, and we support those programs. But I would say the bulk of our volume and our activity is in and around those dedicated BEV platforms.

Okay. Good. And then just to close that out. Plug-in hybrids, is that something you spend any time on? Is there high-voltage opportunities there? Or you just prefer to focus on dedicated BEVs.

Yes, there's some. We have some business with OEMs on plug-in hybrid platforms. Our view is, over the medium-term, you're going to see an acceleration of a movement to full battery electric vehicles. So I would say we're focusing more of our research and development activities on those opportunities.

Okay. Great. Moving on to some of the things you talked about at CES. And I guess it really follows on that dedicated BEV platform question. So are the EVs we're seeing rolling out, are there any that you're involved with that have significant steps, part, of course, from the kind of now 15-year-old OEM that you work with? But are there any of the legacy or maybe some of the other start-ups you're working with, who have SVA-type of things on the market now? And if not, what is the timing on that based on some of the customer discussions you're having?