Aptiv PLC (APTV) Earnings Call Transcript & Summary

Hi, everybody. This is Rod Lache From the Wolfe Auto team. Welcome to our next session of the Wolfe Auto and Autotech Conference, featuring Aptiv. So I'm very excited about this. One of the great things about covering Aptiv, and I think investing in Aptiv over the years has been that this -- the safe, green and connected themes are mega themes that are enduring. The company clearly has been able to show strong earnings growth over market. Based on those themes, at least 6% to 8% growth over market over time, sometimes even better. And I'd like to explore the drivers of that growth a little bit more today and maybe tease out a little bit on where there have been some changes, positive changes, arguably, positive versus what was contemplated when the original 6% to 8% growth over market forecast was laid out. And the 3 areas that I'm going to try to explore today are: number one, the changes that we're seeing in OEM strategies vis-à-vis connectivity, you heard a lot about that here in the past day or so; secondly, Aptiv safety; thirdly, electrification, clearly a huge theme; and then fourth, the scope and scale of what Aptiv is contemplating with Motional, which is their autonomous mobility business. And with that as an introduction, I'm very pleased to welcome on the phone today, Kevin Clark, company's President and CEO; and Elena Rosman, Vice President of Investor Relations. Kevin and Elena, welcome to the conference.

Rod, thanks for having us. It's a pleasure. It's an absolute pleasure.

So let me kick this off right away, and I'd like to start on connected. So Aptiv has been talking about the transition from hardware-defined to software-defined vehicle functionality for years. Tesla was the first OEM to put that into reality. But we're now detecting that this is starting to spread to other OEMs. And actually, just so that you know, yesterday on our webinar, Ford's Jim Farley talked about having 17 million connected and over-the-air upgradable vehicles in the field by 2025, 32 million by 2028, and he talked about -- really, his focus was selling features and services and upgrades through OTA. And then I also had Mary Barra yesterday afternoon, it told us that they're starting to incorporate some headroom into their compute and memory and sensors that they're putting into future vehicles so that they can add features that they can charge for. So all of us hearing that. I bet you that a significant proportion of the folks who are listening into that immediately thought about Aptiv. And I'm wondering whether you are kind of detecting a pivot from these companies as well? And just talk to us about the opportunities for Aptiv in vehicle architecture and electronics or recurring engineering services that presumably would be associated with that? And also, what's the uplift that you're seeing in terms of these architectures. I think it's coming in even before some of the longer-term things that you've talked about with zonal architecture and smart vehicle architecture.

No, Rod, thanks. And I've heard Jim and Mary talk about that previously. I think what it reflects is really what we've been talking about for a long period of time about the world becoming safer, greener, more connected. And obviously, the vehicle becoming a much bigger portion of the overall IoT and the opportunities that, that presents. So if we were to hit directly on as it relates to connectivity, clearly, OEMs as it relates to pushing vehicles, separating software from hardware, creating opportunities to use OTA to enhance a vehicle's performance, to be able to deal with OTA in terms of shortening production cycles or shortening the development cycle as well as being able to -- in addition to adding capability, dealing with issues that could become potential warranty issues, you see a major push across literally all OEMs across the globe. As you know, as well or better than anyone, the amount of software going into the vehicle, the amount of complexity related to that software, the amount of integration associated with it. It has created incremental complexity. And it's presented both opportunity, but it has also presented challenges. And to the extent there's challenges integrating software, having OTA capabilities allows OEMs on a cost-effective basis to address those issues. And I think there's a very, very significant push to do that. And so I think it comes from both ends, both from a revenue generation as well as a cost reduction standpoint. As it relates to Aptiv and connectivity, as you know, we've been in the data business for, I don't know, the last 5 years, roughly. It's not a big number. It's growing fast. Last year, given COVID, it slowed a little bit. But our history started in the preproduction space where we provided -- we collected data, analyzed data and supported OEMs as they identified either opportunities to accelerate technology advancements or identify issues related to warranty. We do -- we have that business, that legacy business with multiple OEMs across North America, Europe as well as Asia Pacific. We transitioned that business to post production. So vehicles that actually are on the road and operated on a consumer -- with consumers. And more recently, have really ramped up our focus on the commercial space, principally for fleet customers. So we have, I don't know, today, I think it's 10 or 12 POCs out there with some of the largest fleet managers, fleet providers across the globe, and we feel that's a huge incremental opportunity for us where fleet managers are looking for ways to optimize fleet performance across a number of different variables, Rod. And we think there's a lot of learnings we can take from that fleet activity and ultimately, apply it to our more traditional passenger vehicle business for OEMs. So we're very excited about it. It's real, and it's an additional revenue stream for our OEM customers as well as an opportunity to significantly reduce costs.

That -- so it sounds like, look, you're seeing some kind of a pivot here. What -- it's just finance people looking at what that means for your business. Can you give us a sense of what the difference is for an OTA -- for a connected vehicle versus the old architecture? What kind of an uplift is that even before you get zonal and smart vehicle architecture?

Yes. I don't know if I can dollarize it, and I'll ask Elena, if we have in the past. I think what it presents for us, we've been -- we've talked about smart vehicle architecture. We've talked about separation of hardware and software. OTA, in and of itself for us is not a service. It's a how you upgrade software. Our view is it puts additional emphasis on how do we accelerate SVA, so the separation of the 2. And as we continue to evolve our technology portfolio, our software portfolio, and I think Gen-2 ADAS is probably or next-gen ADAS is the best example. The ability to have scalable software solutions where we have middleware as well as features as well as other portions of the software stack that we can continue to upgrade, to enhance and to provide OEM customers. That presents a high growth, much higher-margin solution versus the older approach, which tended to be each new ADAS program was a new ADAS program with a fair amount of that software activity being kind of clean sheet start over again. So it gives you a much better recurring revenue model that's at a much higher-margin level.

And how are you kind of looking further out? And let me just -- before I ask this, let me just remind everybody, if you have questions and you think I'm missing something or you want me to chime in with a question, you have a -- those that have logged in, via the -- go to webinar, you have the ability to type in a question, and that question through that text box will appear only to me, and I'll ask it anonymously. But just as far as maybe big picture, how are you defining success separately from electrification just in terms of what you see connectivity getting to maybe out to 2025? How big a business is this? Is there any way to think about it that way?

Yes. I mean, today, it's under $100 million of revenue. I won't give specific numbers, but between what we're doing from a fleet standpoint and what we're seeing pull there is what -- as well as what we believe the opportunity is on our more traditional business, the opportunity is significant. And I think more important, Rod, for us is it's highly scalable and it's high-margin business. So again, our focus is now on how do we enable our OEMs to accelerate product development to significantly reduce warranty costs? And on the fleet side, how do we provide fleet managers with the tools to better manage and optimize fleet. We think near term, the revenue opportunity actually on the fleet side is greater. The economics or the math on the economics is actually easier for the fleet manager to do and are seeing actually greater pull in that market today than what we see on the automotive OEM side, but the automotive side is coming soon.

Okay. And that I think it may have been something that Jim Farley was alluding to when he talked about the fleet opportunity and connectivity. Can you talk a little bit about how that's sort of expanding into SVA? I mean we're hearing from -- lots of automakers are at least talking about how they're hiring thousands of software engineers, and they're taking in a lot of the compute. We get this description now of the computer on wheels. The way you guys described the industry headed is sort of what now we're hearing from executives. Is there anything that's kind of changing as far as that's concerned with OEMs starting to take on more of the IT and development of the software stack within the vehicle?

No. Listen, I think what you hear guys like Jim talking about, to enable that, right, you need what we refer to as smart vehicle architecture. So you need separation of software and hardware. So I think the one thing that's changed, Rod, I think that whole trend is accelerated. And I think that's being driven largely in our view, and we've talked about this over the last couple of years, we've reached the breaking point on battery electric vehicles. So you see a number of OEMs announcing platforms that go across multiple vehicle class that are fully battery electric. When they do that, that opens up the architecture and positions OEMs to really take a clean sheet approach to vehicle architecture and really advance the separation of software and hardware. Our view is high-voltage electrification is only going to accelerate. So what we're seeing now is just the start. And I think some of the announcements that you've seen more recently in Europe and in North America, really highlight that, the amount of money that OEMs are spending on the development of those platforms, really being driven by more stringent CO2 standards, one; two, consumers who are attracted to the performance of battery electric vehicles; and then three, just reality, the cost. OEMs cannot continue to support the costs required to develop both battery electric vehicles and solutions related to the internal combustion engine. And when you look at costs of batteries and capacity and capability out there, we've reached the tipping point. As it relates to OEMs in-sourcing versus relying on suppliers, listen, that's -- I think it's an element of -- that's all over the place. There are some OEMs who've made the decision that there are certain areas that they want to invest in and control. And you know who those OEMs are, and they've gone down that path. There are other OEMs who are balanced between in-sourcing and outsourcing. And then there's another group that have decided there are certain areas in and around software that they don't have the capabilities. They don't need to have the capabilities but they need to have a strong partner. From our perspective, our strategy has been how do we position ourselves to provide the full system solution, the full platform solution, but be flexible with our customers so that we provide them with whatever they need. And we have customers today where we're providing the full solution or most of the full solution in areas like ADAS. We have other customers where we're doing features, they're doing features, and we're doing the integration. And then there are others that we're doing -- we're providing the perception system. And that's the model or the path that we'll continue to go on. It's an exciting space to be because it's high growth, and there's a lot of room for us to play and a lot of areas where we feel like we can bring significant value.

Yes. It's clearly already manifesting itself. Maybe just transitioning to ADAS and active safety, that business it's going to be a $1.7 billion business for you this year. And you said 20 points of growth over market. You've won $4 billion or so per year since 2018. It obviously is encouraging regarding what the outlook for growth is going to be. Can you talk, first of all, about what do you see in terms of penetration of these high level ADAS technologies like a Level 2+ and autopilot? And where is that going?

Yes. So we're -- so to be specific this year. Last year, we did $1.3 billion. This year, we expect our ADAS business to grow about 35%. So it will be about $1.8 billion. And then we expect to be certainly well over $2 billion by 2022. So a very fast-growing business. When you look at penetration rates for active safety in the aggregate today, a little north of 50% in total, L0 through L2+. Today, L2+ is roughly, I don't know, 15% to 17%. We think that will be north of 25% in 2025. It's actually the fastest-growing active safety market. It's certainly our fastest-growing from a business standpoint. To your point, our bookings have been roughly -- have averaged roughly $4 billion a year over the last 4 years, and we'd expect another strong bookings year this year. Last year was a little bit slower, just given what we went through from a COVID standpoint, but very strong bookings in the back half of the year in active safety. So we expect that to be strong this year. Our win rates on the ADAS side are north of 70%. So very, very strong win rates. And our real focus, again, on the ADAS standpoint has been around that whole, how do we provide a platform or a system solution that's scalable from level 0 all the way up to with some customers level 3. I don't know, we've gone from 4 ADAS customers just a few years ago to we're north of 20 today. So it's a space where we've gained both market share from a customer standpoint as well as from a content standpoint within OEM customers. So we're very excited about it. We're working on our next-gen platform, which will be even a higher level of software reuse, more flexibility for our OEM customers, more advanced perception systems, so even much stronger performance. And the great thing for OEM customers is you really think about ADAS, ADAS sells, right? You put ADAS on a vehicle and a Level 3 system is -- or a Level 2 system is $1,000, $1,500. It sells for $3,000 to $4,000 from an end-customer standpoint. So not only does it help the OEM sell cars, it increases their overall margins.

And I was hoping you can talk about what's happening competitively. That's a pretty wild statistic that you just threw out there when -- I've heard you say this before that you're winning 70% of all these L2+ contracts that are being awarded. Is nobody catching up to you? Are you guys going to get to 50% or more of this segment?

That's a good question. Listen, we feel like we're -- we feel, and based on our win rates, we're -- from a capability standpoint, we're the lead; from a market share standpoint, and Elena can chime in on this, I think we take leading market share in either 2022 or 2023.

2023.

Yes. So we're selective where we play. We feel like our investments in and around software, our investments in and around SVA and where vehicle architecture is going, better positions us than anyone else out there. So our general view would be our competitive moat would continue to expand. I'm not sure if that -- if or when that would translate to 50% of the overall market, but we're trying -- this is a business that we're very, very focused on. We're well positioned and we're focused on growing and growing importantly, profitably.

And just to also reconfirm, I know at one point, you were thinking that look on a platform -- on any given platform, the customer is going to choose one ADAS supplier. They're not going to have multiple different ones for different levels or different trends. So if you win the Level 2+ side of things, I presume that, that helps you on the lower levels as well?

Yes. What the direction OEMs are going down, the path they're going on is how do you build something that's scalable, that you can scale between Level 0, Level 1, really through Level 2+ to Level 3. And that allows them to basically introduce that platform across all of their vehicles, across all of their vehicle lines, and validate test, integrate with one supplier versus multiple suppliers of an ADAS solution. So it's more cost effective. And our next-gen solution, we're working to make it higher-performing but even more cost-effective for the OEM. So more reuse of software, more leverageability, where select OEMs are interested in developing some of the features, giving them the flexibility, the toolkit to actually do that. So again, we continue to believe that, that scalable platform is where the market's going and what OEMs are looking for.

And you said that like Level 2+ would be $1,000, sometimes $1,500. We're starting to hear about and talk to companies, especially in the LIDAR space, companies that are saying that Level 3 is coming as well. When are you expecting that to start to get deployed? And how do you see that rolling out? Is it going to be the sort of thing, like what we're seeing right now with Level 2+ where it just kind of catches on like wildfire, and you need to have this in your vehicles?

Yes. Listen, Level 3, any of us who spend time in traffic, Level 3 is something that we certainly would like. I would say the push for Level 3 near term, I would say 2021, 2022, slowed a little bit. But as we see the number of L2, L2+ programs advance, as we see the cost of the technology come down, as we see solutions like radar continue to be enhanced as a perception system so that you minimize the need for higher cost solutions like LIDAR, the cost of Level 3 will come down and the adoption will go up. But when you look at -- any of us who's driven in a car with an advanced ADAS solution, we're not going backwards. And the reality, the technology curve is accelerating and the cost of the technology is coming down. And that's true of L2, L2+. You have suppliers like ourself, very, very focused on how do we provide a more economic solution to our customers. And we're working on that -- on the L3 side as well. So you'll see that cost curve bend and you'll see rapid adoption. It's a couple of years out from now. But again, once you see higher penetrations of L2+ and the technology curve or cost of technology come down, you will see rapid adoption of Level 3. We're convinced of that.

And that presumably would be a couple thousand dollars per vehicle of content for you, if level 2 and 2+...

That's -- yes. So yes, that would be significant content. It's not -- we don't have much of that quite frankly, in our outlook for revenues in 2023 and 2025. So that's an area where, to the extent you see adoption accelerate, you would see upside in revenue and upside in CPV for Aptiv.

At a high level, could you just talk about -- within this segment, how would you define success for the company if you thought about further beyond the 2023 time frame? If we think about the level of business that you're winning right now, is it crazy to be thinking that, that business might be able to reach something like $6 billion or so by 2025? That would be a 30% growth rate, maybe that's a little aggressive. But what sort of is the high level expectations or if you were to frame what this could become for Aptiv?