Aptiv PLC (APTV) Earnings Call Transcript & Summary

Okay. I think we're ready to kick off the next session. Very delighted to have Aptiv back with us at the Citi Industrials Conference virtually this year, hopefully, back in Miami next year. I'm Itay Michaeli, Citi's U.S. auto and mobility analyst. And I'm delighted to host a session and thank you all for joining us. So we're going to have a fireside chat, a session for the next 40 minutes to go through a bunch of very interesting topics, surrounding Aptiv and the industry. Of course, we want to make sure your questions are answered during the course of this session. So if you do have any questions for the management team, please just feel free to e-mail me at itay.michaeli@citi.com. You'll be seeing me staring at my other screen throughout the session, and we will gladly get to all of your questions. We also have our legal disclosures available if you need them. So from Aptiv, we are delighted to have Kevin Clark, President and CEO; Joe Massaro, Site Senior Vice President and CFO; and Elena Rosman, VP of Investor Relations. Kevin, Joe and Elena, thank you so much for joining us. Looking forward to our discussion this afternoon.

Thanks for having us.

Thanks for having us.

Great. Well, let's get right to it. So I thought I'd start with a bunch of kind of random strategic questions, some of which we've been receiving from investors as well. And the first just relates to the wave of EV entrants that we're seeing new companies, Apple's potential entry into the space. And curious to which -- or how that might be affecting the speed by which your traditional customers are adopting technology, whether it's SVA, L2+, and other high levels of autonomy? And just curious if you're seeing any signs with this acceleration of these new entrants of potential threats to your traditional customers if you're seeing the industry move faster to adopting these technologies earlier than maybe they would have or at higher volume than they normally would have ramped, just given what's going on?

Itay, I'll -- maybe I'll start, and Joe and Elena can certainly chime in. Technology adoption in the automotive space is definitely accelerating. I don't know how much of that, to be honest with you is related to what we've gone through over the last 12 months and a certain amount of the technology adoption and the connectivity that consumers have gotten much more comfortable with that seems to have moved kind of tenfold versus more traditional technology adoption. So I think that's a part of it. I think, obviously, there are other players who had been, have been and are maybe accelerating their interest within the overall automotive space. I think it's a testament to the level of technology and the opportunity in the automotive and mobility ecosystem, which is something that, obviously, we've been very focused on and attracted to and positioning the company over the last several years. As you think about more specifically your comment about companies in and around the battery electric vehicle space, clearly, there are new entrants with new platforms that have started with a clean sheet to develop better battery-electric platforms with potentially top hats that can be placed on those vehicles that provide -- maybe make it easier to separate software from hardware, maybe a more simplified approach to overall vehicle, the vehicle-vehicle architecture, and ultimately, vehicle manufacturing and development. So a lot of progress has been made there. We've partnered with several of those, including one of those that's been around for a bit longer than the others. It's expanded from North America to Europe, to Asia, so on and so forth. But there's also a number of legacy automotive OEMs who've done terrific jobs and started actually a few years ago, really building battery-electric platforms that they could leverage across multiple models, and have been very, very successful in building really fantastic vehicles, and we're seeing more of that. Now part of that is driven by CO2 standards that are becoming more stringent, principally in Europe and China. Maybe we'll get some tailwind here in North America with the new administration. We'll see. So that's a part of it. Part of it has been the success of companies like Tesla from a consumer standpoint and more consumer pull for battery electric vehicles as they get maybe more comfortable with range and the practical realities of how much range they really need; two, more attractive to the vehicle performance and what the vehicle is able to do, so more consumer pull; but then three, we're at a point now when you think about battery cost, battery electric vehicle costs, the cost curve has come down significantly or cost of batteries has come down the cost curve significantly. And the reality is developing new solutions or new programs for internal combustion engines is very costly. And as we introduce more technology into cars, whether it's battery-electric vehicles or it's advanced ADAS solutions, costs are going up, and the OEMs need to focus on opportunities to reduce cost of these overall technologies. And maybe a conclusion that the future is battery electric and continue to invest in both the development of battery-electric solutions as well as solutions in and around the internal combustion engine, it makes more economic sense to focus on electrification. So that's probably a big tilting factor as well.

Perfect. And then one of the things we've heard a lot about is this idea that if you combine EV-AV, connected technology, the automakers start to have major opportunities to realize more than just that onetime transactional revenue and move more into lifetime revenue. We've seen GM talk about more vocally about selling super cruise as a subscription model. So a couple of questions around that. First, to what extent are you seeing automakers potentially move to much higher attach rates over time for things like L2+ on the view that they can now have more shots on goal to realize revenue over the life of the vehicle as opposed to a typical attach rate? And maybe more broadly and related to that, maybe what portions of Aptiv's business lines tend to benefit from obtaining a share of lifetime revenue, whether it's subscriptions, data licensing, [indiscernible], et cetera?

Yes, listen, the industry and with more adoption of battery electric vehicles, to your point, it makes it easier. But quite frankly, it's a logical breaking point to be able to do that. I think that recurring revenue stream is attractive to all the automotive OEMs. I think when you think about the spaces like advanced ADAS solutions, certainly, there are opportunities to do that. And I think from a business model standpoint, certainly, Tesla has proven that out. I think the reality, though, items like ADAS, vehicle safety cells, right? So whether that is a business model for an OEM where they can collect revenues over a period of time or not, the profitability on an ADAS solution, the ability to drive 1 unit sale, but also the ability to drive mix improvement, margin improvement, Level 2, Level 2+ ADAS solutions are perfectly positioned, right? Safety cells, consumers want safe vehicles and as they get more accustomed to some of the more advanced ADAS solutions, that will certainly continue. When you look at the ability to separate software from hardware, which is what our whole -- over the last 3-plus years, our discussion about smart vehicle architecture enables. That certainly positions you with OTA to continue to enhance the performance of a vehicle one. So it presents a revenue opportunity. Two, it also, though, presents an opportunity to accelerate the development of vehicles and to minimize warranty costs. Vehicles are getting more and more complex as more software is getting introduced to the car. And to the extent that you have the ability to deal with that or deal with challenges, the over-the-air update versus physically bringing a car into a dealership and having to repair. And do it early once an issue is identified, it can save OEMs or save the industry, literally billions of dollars, billions of dollars. How are we positioned to take advantage of it? Listen, we've been on this journey for the last 3 years. And as we've talked about our company being both the brain and nervous system of the vehicle, the hardware and the software of the vehicle in separating both so that we can be uniquely positioned to sell both hardware that enables the optimization of software and software that is able to be optimized and create a recurring revenue stream based on our hardware knowledge. That's the path we've been on, and we think the trend is really positive for the industry and it's positive for Aptiv.

Terrific. One strategic question, as we've all seen prevailing EV and AV, LiDAR valuations, the marketplace, Aptiv shares have performed well. And we received -- increasingly begun to receive questions on looking at Aptiv on a sum of the parts, whether it's ADAS, high voltage, of course, Motional, which we'll come back to later. How are you thinking about, in light of these prevailing valuations, your portfolio and maybe potential opportunities in light of kind of what we're seeing in the market right now?

Yes. I mean, we -- I'll start, and Joe should add to this. I think, as you know, we've been very active over the last 5 years, optimizing and positioning our portfolio and the value creation that's transpired is not that we pick stock price valuation but it's the ultimate outcome of the actions that we took 2, 3, 4, 5 years ago, right? And there's a strategic aspect in terms of areas that we want to focus, and we were very focused on, again, how do we leverage capabilities and hardware to enable our capabilities in software? How do we invest in both? How do we make sure that we're positioned to not only survive but actually benefit from the changes in the industry that are taking place today? How do we position ourselves for recurring revenue streams that are higher-margin and more attractive, whether that's software or data? I mean, that's something that we've been thinking about for the last 5 years. I don't think the way we manage our business really changes. At the end of the day, the focus is -- has been and always will be on value creation. Again, how do we solve problems for our customers? And then how does that translate into driving value for our shareholders? And that's played out. Joe, you should add on to my response.

No, I, obviously, agree with all that. I think Itay, one of the fundamentals that you've seen us do -- one of the fundamental things you've seen us do over the last couple of years is really position the business very much how we go to market, very much aligned with the strategy, very much aligned with both the organic and inorganic growth opportunities, right, around this brain and nervous system. And we've got strengths in both. I think with things like SVA, you start to see a middle ground between brain and nervous system develop where both parts of that -- both parts of the business start to help each other. And I think certainly, from an inorganic strategy and additional M&A, which we're very well prepared for and we start to see the M&A pipeline come back, you'll see us do, quite honestly, explore opportunities on both the brain and nervous system as well as are there areas in the middle where we can get up the curve faster in things like SVA. So I think one of the things we've really done is to some extent, simplify the strategy, simplify the business so that everything we do is aligned. Brain and nervous system just isn't on our IR slides. It's actually how we think about the business. It's how we develop products. It's how we run the business.

Yes. To Joe's point, if I can add to that, and it's a really important point, when you think about our experience in hardware and software, when you think about our experience, for example, on autonomous driving, and we've spoken to you about it, previously. I mean, that journey was initially about how do we enhance our capabilities as it relates to vehicle safety, most broadly speaking, right? And how do we continue to advance technologies that we can bring into Level 0 through Level 3? How can we also participate in future revenue streams as mobility changes? And in addition to strengthening our ADAS business, our perception system capabilities, driving policy. The reality, Joe's point on SVA, one of the things that we clearly were able to figure out was vehicle architecture. When you take a battery electric vehicle and a highly autonomous vehicle, going down the incremental path that the industry historically had gone down, it's overly complex and it's inefficient, which helped us frame up our strategy and thinking in and around SVA. And earlier this year, we announced our next-gen ADAS platform as well as some other items; all of that development, all of that technology, you can think about as fitting in and connecting to the ultimate end state, which is smart vehicle architecture. And to Joe's point, that's shared across our organization. So everyone knows from a technology development standpoint, from a manufacturing standpoint, from a commercial standpoint, where they fit in executing that play.

Absolutely. No, that's super helpful. And maybe on the brain and nervous system, one of the common questions we often receive, it just goes around the outsourced, in-source trends as the industry is moving to electric, autonomous and connected. And on one hand, it does seem that in some respects the automakers are trying to bring key technologies and capabilities in-house. And of course, we also have the Tier 2s. On the other hand, we know this has always been an evolving dynamic, not even going back a long time ago, how would you compare what we're seeing today versus the past? How much it evolved over time? Maybe sort of talk about the content opportunity that's sort of available to go around?

Yes, the content -- I'd say, the content opportunity is accelerating. I think the overall trend, to your point, isn't a lot different from what we've seen in the past. There are some OEMs who want to do more in-house. There are other OEMs who make conscious decisions not to do certain things in-house. And there are some OEMs who've brought -- actually brought activities in-house and then moved them back outside. So we expect that to continue. There might be slightly more emphasis today from some OEMs on being more vertically integrated as they look at players like Tesla, from a value creation strategy. But I think in reality, if you can present a better value proposition, a better solution, some element of flexibility, which is what our real focus is on and you can deliver the savings and economics as a supplier, which as someone who provides solutions to multiple players in the industry, you ought to be able to do. We have a higher volume level to spread things over. And I think our satellite architecture solution with 5 OEMs that go across multiple platforms that scales from Level 0, all the way up to Level 3 with the -- some of those 5 OEMs, it will be across 10 million vehicles over the next few years. That's a lot of scale. And if we're doing our job right and we're driving standardization, we're driving scale, economically, we should be a more attractive solution.

Absolutely. No, that's super helpful. And I guess, culminating in all that discussion, and then maybe I'll move to some Motional questions, is sort of the high-level view on bookings this year. Obviously, I think there could be a lot of quarterly volatility, we know. But is it possible that we could end up seeing a very, very strong year for bookings, both because of the catch-up from last year as well as this acceleration that we may be seeing and just adoption of all the technology? Or should we be thinking maybe more just a gradual recovery at this point?

Joe, do you want to take a first shot at it?

Yes. Sure. Listen, I think we're going to have a strong bookings year. We've had strong bookings years the last couple of years. There's obviously a -- depending on comparing points, you got to adjust for vehicle production. Have seen no program cancellations from 2020 or COVID related. There was definitely a slowdown in award activity, which I think was just purely people focused, particularly at our customers, but within the tiers as well, there are people focused on other challenges, right? So award activity did slow a bit. As we've talked about before, I don't think you catch that up all in one quarter. Often, it's the same commercial folks, the same engineers that are working across multiple awards. But I do think by the end of 2021, if you look back on 2 years, we'll say we are, in all material respects, whole for the prior 2 years, right? It won't necessarily come in one quarter. But you'll continue to see strong bookings activity across the new product lines like active safety and high voltage. We're seeing a tremendous amount of newer opportunities in high voltage where, on average, we used to be chasing, call it, 10 or 15 high-voltage opportunities. Over a set period of time, that number is now north of 40 in discrete opportunities. So you'll continue to see strong trends. And then the underlying business, the underlying nervous system business, in particular, just has an inherently strong tailwind is -- just given its scale and size, content on one out of every 3.5 vehicles manufactured globally, it doesn't necessarily have to be our Aptiv safety system going on to a car to drive more connector content, more electrical architecture content for the SVS business. So yes, I think it's a -- no reason we would expect bookings at this point to slow down. Certainly no indications from our customers that they're thinking about things differently.

Perfect. Perfect. Appreciate all that detail. Why don't shift gears into Motional? Obviously, it was -- I thought the announcement to deploy in 2023 was a major announcement, not too long ago. Kevin, last year at our conference, when we were still in Miami, you provided an assessment of Motional's position at that time relative to players like Cruise and Waymo. Hoping you could give us an update now that we've seen some updated California data, obviously, Motional's progress, kind of where you see Motional's relative position today?

Yes. I think -- let me start a little bit broader. I think from a joint venture standpoint, I think even relative to a year ago, I think Joe and I would tell you the strength of the partnership with HMG and the value that Hyundai brings to the joint venture. We're even more positive about it today than we were a year ago. And when we closed on the transaction marks, they've been a great partner on multiple facets, in terms of the value they bring from a technical standpoint, in terms of the vehicle platform, which will be the Gen 2 AD vehicle for mobility on demand, which will be developed and introduced late 2022, available in 2023. It's a great platform. The resources they're dedicating -- you've seen, I think, firsthand, the investments they're making in and around technology that they're sharing with the joint venture. They've been a terrific partner. And then I think important, from an investor standpoint, their objective is similar to what ours was historically. It's about value creation. And they have very much a value creation mindset, which is really, really important. From a technology standpoint, where we sit, different from the 2 that you mentioned, our focus is not providing mobility service. Our focus is providing the technical stack that can go into vehicles, for sales to whether it's OEMs or fleet providers who buy cars from others or build cars. So that really is our focus. We've made some announcements in and around Lyft and Veo, which is really about validating our technology, testing our technology and understanding ultimately some of the challenges, the issues, the opportunities that end customers will have to deal with a slightly different business model. From a technology standpoint, use case standpoint, we feel like we're right in line. Players like Waymo who spent factors more than ourselves are probably a bit ahead from an overall technology/use case. But relative to the rest of the players, we have vehicles. We received the license from the State of Nevada to go fully driverless. The folks at Motional will be making some announcements shortly with respect to what they've been doing with that license. We feel like we're equal from an overall capability standpoint. And there's going to be a number of announcements coming out during 2021 that reflect commercial and other activities in 2022 and 2023 that we're really excited about.

Terrific. It's perfect. So an update, Kevin. And maybe a financial question, and I know it's early days, and it's probably very fluid in terms of the financial agreement with Lyft for the 2023 plan deployment. But maybe at a high level, as we start to sort of think about these deployments and you have a better sense now of what the terms might look like, how do we think about the financial model for kind of Motional deploying with a rideshare company? Maybe is the framework sort of mostly set at this point? I know in the past that rideshare companies have talked about sort of an AV provider kind of getting maybe a share all of what typically goes to a driver. Just curious how the framework is shaping up in development?

Yes. Joe, do you want to -- I think there's a near term, and then there's a longer-term framework to think about. I'll let Joe walk through that.

Yes. I think, Itay, to your point, it's still evolving, but I think there are a couple of foundational elements that are obviously starting to come into focus. One is, obviously, there is a sale. There is a technology sale -- for Motional it could come in a couple of different versions. It could be sale of the full unit, the software stack in the Hyundai vehicle with the perception systems, that could be sold to a ride-hail network operator that is -- wants to own their own fleet. It could also -- we're talking to a lot of, what I'll call, sort of fleet owners or asset owners that are interested in sort of the robo taxi as a means of earning income, sweating the asset and putting it to work. Someone buys 15,000 units and puts it to work on the Uber network in Southern California, that type of thing. So you obviously have that upfront sale. We do think there will be recurring revenue streams. We'd fully expect that, that could come in the form of some type of share of the ride. I think that's still an open discussion. But certainly, we'd expect there to be a software-like revenue stream that comes from software upgrades, software maintenance, enhancements to the software. There's going to be an element of data that comes off of these vehicles. Some of that will be owned by the network operator or the asset operator. Some of it's going to come into our system and presumably be available to Motional to monetize. Motional's actually also learned a lot, over 100,000 rides with the Lyft folks in Vegas. They have capabilities around fleet management, fleet deployment, how to maximize fleet utilization. We -- the company has built a great command center in Las Vegas actually that could actually cover a nationwide fleet or multiple fleets across the nation. And we think there's some revenue opportunities coming from the ability to monetize that know-how and that capability.