Aptiv PLC (APTV) Earnings Call Transcript & Summary

Okay. Thank you, everybody, for joining us. My name is Mark Delaney, and I cover the auto and industrial tech sector for Goldman Sachs. I'm very pleased to be hosting Aptiv's CFO, Joe Massaro; and VP of Investor Relations, Elena Rosman. As many of you know, Aptiv is a leading supplier of electronic components and advanced safety systems. We will be taking questions via the webcast page later in the session, so please submit those, and we'll get to as many as we can. I thought we could start out with something that's been very topical this earnings season, which is some of the operating challenges that the auto industry is going through. The semiconductor shortages, in particular, have impacted auto production pretty materially in the first half of this year.

Joe, I was hoping you could start and talk a little bit more about what Aptiv is seeing at this point in time related to component supply? And when do you think it's going to start to improve and what gives you that view?

Sure. So thanks, Mark. So no, I think that's a good place to start. It's obviously something the industry is spending a lot of time on. I think it's important when you sort of start to look at the impact of the chip shortage, I think a lot of times when it's discussed or reported on, it's sort of it's singular, it's the chip shortage when there's really sort of 3 -- at least from what we've seen, 3 distinct drivers of it. And the nature of those drivers in part sort of help us form a view of when we think we're going to start to come out of this. So the first driver was really the original sort of chip constraint that came from COVID-related disruption supplies of chips, right? There were some capacity moves to chip makers that I think auto found out about, to some extent, after the fact, late 2020, where the -- maybe you had some chip makers who were making some different assumptions about how quickly auto would come back. We've obviously come back as an industry very quickly, sort of more of a -- much more of a V-shape than some may have been expecting. And we started to feel that pinch on supply of chips at the very end of Q4 and into Q1. And that's the original constraint that we talked about on our year-end earnings call, really felt like for that particular item, Q1 was going to get tight, you'd start to see it get better in Q2. There's going to be some noise for the balance of the year, but I think it'll be down to specific -- either specific suppliers or specific types of chips that are more noisy than others, but back half of the year should return to -- should start to get better. I won't say return to normal, but should start to get better. And we've seen that generally play out as expected. That first chip constraint shortage cost us -- cost the industry about 1.5 million units vehicles produced from everything we looked at in Q1 and should cause an impact of about 500,000 to 600,000 missed units in Q2. So overall, a big number, 2 million-plus units but getting better sequentially. What happened though in late Q1, late February and then later in March, there were 2 discrete events: one was weather-related disruptions at large semiconductor fabs in Texas due to the winter weather there and a fire at a very large auto chip fabrication and assembly plant in Renesas, Germany, often referred to as the -- I'm sorry, Renesas, Japan, often referred to as the Naka fire. Those 2 items are -- those 2 events are very disruptive. They're -- but they're much more sort of timing related, right? In the case of the weather, the plant shut down for a period of time. They actually lost their natural gas feed, so they were no longer even able to run their generators. When a fab shuts down like that, WIP stops getting produced. Unfortunately, you just can't turn the switch back on. You've got to take the work in process out. It's got to be tested. It's got to be evaluated to see if it's been permanently damaged or if it can be put back in construction. The fire much the same. It destroyed a clean room, destroyed equipment. But they get the fire put out, they order new equipment, they start to rebuild the facility. And both those events create what I'll call sort of calculable air pockets in supply, right? They were dealing with work in process. So it wasn't an immediate shortage because there were finished goods, the plants could keep shipping finished goods, but there was a WIP, work in process. And if you think of these chips anywhere from a -- can have up to a 6-month lead time. So when you get a WIP disruption, a work in process disruption like that, there's going to be some point in the future where you hit that air pocket. And for both the weather and the fire, that air pocket goes from sort of mid-May to into June and Q2 and, obviously, something we didn't know was going to happen in January as an industry. But you can define that air pocket. You can watch the progress of those plants coming back online, which they are. And that's really why I think you hear most in the industry talk about it getting worse in Q2. It's not the original constraint that's necessarily getting worse, it's a chip constraint, it's a chip shortage, but it's really from 2 distinct -- different, distinct causes. And those are big. And I think that's -- those are going to be somewhere between 1.5 million and 2 million units of auto production in Q2. So for the first half of the year, those 2 events will be as big as the original chip events. But all concentrated really in the back half of Q2. But given that those are discrete events, they're air pockets in WIP, we can forecast when the supply starts to come back online in July and August, that's how you sort of gain confidence that you'll start to normalize. Like I said, I think chips will be noisy for a period of time, in the back half of '21 into 2020. There's a lot of global industry demand for chips outside of auto. Auto is not the only industry that's experiencing these challenges. It takes a while to add capacity in the chip space. So I think you'll hear about a tightness for a period of time. But our view is these big sort of shocks to the system in Q1 and Q2 should be behind us as we get into the back half of the year.

That's helpful. And if I could just clarify, the 1.5 million to 2 million in 2Q, is that specific to the incremental?

They are.

Okay. So if you take the total, it's like 2 million to 2.6 million, if you aggregate it along with the original?

Yes, if you aggregate it. Yes. Yes. And again, those are our estimates. We look at IHS. We obviously talk to the suppliers as such. But order of magnitude, I think it's a good indicator of how significant those 2 discrete items really were.

Yes. And maybe just remind us how much of that do you think Aptiv is able to make up over the course of the year, perhaps some of it is recoverable in 2 ways but maybe some of it is just sort of lost until next year.

I wasn't aware -- we as -- on our earnings call last week, we talked about we're still holding with our original guidance. We had a guidance that was built on 84 million units of production for the year. We think that somewhere between 3 million to 4 million unit loss in the first half, that a sufficient amount of that is recoverable in the back half to hit that 84 million units. And I think when you hear people talking about how much can be made up and such in the back half, it's really -- in part, that's driven by what the starting point was for vehicle assumption, right? So we were at 84 million units for the year, which is a 10% growth up from 2020. And we feel like that's still very achievable. And we've basically held our original guidance range that we provided in January for the full year, obviously, not able to give Q2 guidance, just given the volatility in production. It's very easy for a couple of weeks of production to slip from June or July. And that's obviously more impactful on a quarter than it is on a full year.

Yes. One of the discussions we've been having with investors -- it's not Aptiv-specific, it's really for the whole industry -- but there's this concern about, well, perhaps some of this Q1 strength has been companies shipping in the effectively inventory, either just these uncertainties and people are trying to buy components and products to kind of build buffer or there is these partially built cars that some of the customers have been working on because they can't get all the chips. And so maybe that's been misleading and perhaps leading to some risk of more of a correction than perhaps companies like Aptiv have been guiding for. Maybe talk about how you thought about that risk when you were building your guidance for the year.

Yes. Listen, I think it starts with a reasonable assumption around 84 million units, right? To us, that was recovering the COVID shutdown from the prior year and sort of 2 to 3 points of growth on top of that. So I think it starts with having a reasonable expectation to begin with. What we're seeing from our customers at this point, and I think what they're seeing, is very strong end consumer demand. And that, I think, is certainly expected to continue through 2021 into 2022. Our view, just at least what we're starting to see from customers, is an expectation that the back half of the year is a very busy period of time from a build perspective. We're starting to see customers. I don't know who -- I haven't tracked which ones have publicly announced this, but one of the things we're starting to see are customers actually using the chip-related shutdowns, particularly in the June time frame as their summer shutdown weeks. And if you think what that does from a schedule perspective, that adds capacity into Q3 because a lot of those plants are scheduled to have 2- to 3-week shutdowns in the August time frame, generally. So if they're going to use the June period when they're shut down anyway as their summer shutdown, that creates some capacity opportunities for folks in the back half of the year. And from what we're seeing, they're -- we've got a number of OEs that are looking at that and setting expectations with the supply base that they'll be open for those weeks. I don't think broadly speaking at this point, at least from an auto perspective, you're seeing inventory built in the channel, there's -- in any significant sense. There are some replenishment of supply chains, right? They were drawn down just not in chips but we had -- there were some tightness in the back half of last year around things like connectors and cable management. So we've seen folks building back up to what I'll call more normalized inventory levels but nothing that exceeds sort of pre-COVID type levels of inventory in the channel. So I think people are trying to get their supply chain back up and stabilized, broadly speaking, but we haven't seen any indications of -- for the business, our businesses, that sell to other peers or sell into other parts of the industry or Aptiv itself. We're not seeing any big inventory build at this point.

Okay. That's really helpful. Thanks for all those comments. I know it's early, but maybe we could talk a little bit on 2022 and at least some of the things you'd be thinking about. I think IHS is looking for production growth next year of between 7% and 8%. I'm curious to what extent that's similar or different to what some of the customers are now indicating to Aptiv about what to be ready to prepare for. And if that's not something you can talk about at this point in time, maybe just talk about some of the higher-level inputs to be considered because we've got this really -- at least in certain countries, right, demand has been very strong. Inventory of finished vehicles is low and production has been constrained with the chip issues. So kind of curious if perhaps next year is going to be a particularly good year for auto production when we start considering some of those different factors.

Yes. It's certainly too early for us to have a view on the exact percentage. The qualitative indicators, to your point, are very positive. They're good. We're seeing customers that are continuing with launch cadences. There's been no -- we didn't see any during COVID and certainly haven't seen any in the recent quarter on customers changing plans for big launches. EV is incredibly strong at this point. We've talked for a couple of quarters now that we really felt that our customers had rounded the corner around their commitment to EVs. That's certainly what they're saying publicly, and we're starting to see it in number of launches and new bookings opportunities, and quite honestly, take rates. Our high-voltage business was up about 125% in Q1, which we forecast 50% to 60% annual growth. So we had a healthy forecasted growth rate but obviously had a very strong Q1 as we saw some take rates increase. We saw some launches. And then one of the real interesting things, I think, from this chip constraint in Q1, when you get on a phone -- there's a lot of, obviously, phone calls with customers and suppliers around the tightness and where to send chips and how to utilize the chips we have. You'll get on a phone call with a North American OE and the phone call is very much about protect the truck, protect the SUV, meaning if there's chips to be allocated by the OE, they prefer that they go to their high runners, their models where they make the most margin, sell the most. And those, certainly in North America, are the truck and SUVs. The interesting in Q1, a lot of the discussion with the European OEs was protect the EVs, right? So when given a choice in Q1 around manufacturing electrified powertrain vehicles or internal combustion vehicles, we saw a lot of emphasis on making sure that the EVs got their chips. And there were some -- a couple of prominent launches in the first quarter from a couple of German OEs, and there was a real focus there. So -- and then the active safety, Mark, as you know, that active safety tailwind continues to remain strong, strong, high double-digit growth in that. And that business continues, and we expect it to continue. So we're very confident in our outgrowth over the coming years, very confident in the trends. And we were -- for us, the way I tend to think about it, pre-COVID, we had prepared the business very well to operate effectively, to outgrow with essentially a flat vehicle production, right? If you remember, our expectation pre-COVID was that we were basically sort of flattening out globally. You may get a bump here or there in either direction, 1 point or 2, just depending on what was going on in a particular region, but we had really prepared the business for flat vehicle production. So in an environment where you do see some growth next year, that's obviously -- that's more positive for us. But even to the extent of a lower growth period from an auto perspective, we're very confident in that 6% to 8% outgrowth range, and we're very confident that the key product lines we have will continue to do very well.

That's helpful. Maybe we could dig more specifically into ADAS and autonomous vehicles. I know Aptiv has a range of capabilities it offers to help customers with automation and active safety. But it's a competitive industry, right? You have other Tier 1. You also have OEMs with sort of in-house capabilities, trying to do some of this on their own. So maybe talk about what you think differentiates Aptiv's solutions for ADAS and EVs and will allow the company to be successful.

Yes. No, we're certainly -- obviously, a lot of time, a lot of history and a lot of experience putting increasingly more complicated, active safety systems into vehicles. Started with what is now a 20-plus year experience with radars, has grown into the domain controller business. And I think our core strength, and you see it in, what we call, the satellite architecture systems where we've won 5 of these with 5 OEs, we've won systems that are really scalable. They're very robust Level 2, Level 2+ systems that are scalable across an OE's entire portfolio, right? So there's an ability to leverage that initial investment in a system by going across the portfolio. So you don't need a different system for your Level 1 or your A and B platforms versus your Level C and D. And that system, the integration capabilities around that system is obviously something that differentiates us. I think the other thing that we're good at and have experience with is the integration of multiple software into our system. So even going back to the Audi zFAS system that we launched, which was a very high end -- very early high-end Level 2 system in 2016 with Audi, we incorporated software from Audi into that system. There were certain software applications that Audi felt it was important that they own, that they developed, and those were incorporated into the system. And being able to be the integrator -- the provider of a robust system but also the integrator of multiple software components, I think, puts us in a very, very strong position. At this point, we really only see competition from Bosch in these sort of high-end Level 2, Level 2+ systems. And fully aware, and I think you mentioned it, you do have customers, OEs talking a lot about investing in software resources. I think that's really 2 -- what we see is them doing that for 2 reasons. One, getting better overall about understanding software in their vehicles, which is important because if you think of the way a car comes together, there are multiple software elements throughout the vehicle and the OE is ultimately the one that's responsible for the total vehicle architecture, right, they're the only ones that see that, all of those software components come together in the car. No one supplier does all of that software. So it's important that they have a good understanding of it. And there are going to be applications that they want to develop. Like I said, even back in 2016, Audi was developing their own. A lot of the applications that the OEs are partial to tend to be around what I'll call the human machine interface of a vehicle, the cockpit experience, some of the driving behavior for on-highway driving. And listen, I think that's a trend that's going to continue. There'll be OEs that do more on software than others that will be integrating their software into our systems. There'll probably be some OEs that try and are not as successful as others and will need help. And there are going to be some OEs who decide that, that type of investment is too much and will continue to rely on the strong technology-focused Tier 1s like ourselves or Bosch or certainly Denso in Japan. So it's something we've seen. It's something we've been able to incorporate into sort of how we deliver products, and it's -- that business -- we'll finish this year with what, Elena, about $1.8 billion in active safety revenue. And that business has grown significantly over the past 4 or 5 years.

That's right.

That's helpful. Elena, one of the things you and I have talked about was the different content that Aptiv has at certain levels of automation. I think it's about $300 at Level 1, $500 at Level 2, $1,000 at Level 2+, and I think $3,000 or more at Level 3. So it's a pretty big step-up at the Level 3. Maybe -- I mean, first, is that still the right set of numbers to be thinking of? But -- the second question there would be, what is driving that big step-up, especially at Levels 3 and higher? Is that more that software content? Is it more sensor units? Maybe talk a little bit about what was driving those increases for Aptiv.

Yes, happy to. It really comes down to increasing levels of functionality that results in significantly higher content per vehicle. So you're right, for us, to put it into perspective, an L2 system sits at about $500, while an L2+ system could be in upwards of $750 per vehicle and an L3 system, obviously, can go up $3,000, $4,000. The increase for a Level 3 system is really -- it's more automation, thinking about, under a certain set of conditions, the driver is able to fully disengage, which is very different than an L2+ or L2++ type system. So for that, it's certainly sensing. We believe a real Level 3 system would probably include some form of LiDAR. So we get the full benefits of all sensor modalities. The compute is much bigger in terms of content, so that compute software stack to accommodate that conditional automation. So for us, those are the big drivers of that increase.

That's helpful. And then I guess just related to that would be how do margins vary by level? Because on one hand, I would generally think higher degrees of the technology would lend themselves well to better margins for a company like Aptiv, but I don't know if there's more pass-through content of sensor types that maybe changes that normal type of dynamic.

No. Listen, I think the -- I think your instinct is right. The higher, more complicated a system, the more expensive, the greater software content. Obviously, the margin profile gets better. I think the way we really envision this business folding -- playing out over the next couple of years is the growth in margin in that product line comes from being able to leverage the satellite architecture platforms across multiple -- sorry, satellite architecture systems across multiple platforms, right, because the initial design, the initial launch of a system is going to be more complicated and more expensive than the fine-tuning of that system for the third or fourth platform, right? And so that's in part -- as we've communicated, the margin improvement in active safety over the next number of years, that's in part what's driving that, it's the leverageability of these systems. I think the other thing that differentiates us a little bit here is when you sell a satellite architecture system, you are providing the customer, in theory, with a Level 1 solution, right, or a Level 1+ solution. They can take a slimmer version of that system and put it into a less expensive option package for a particular vehicle. But we're in that space without necessarily sort of doing combat in the Level 1 bid process, which could be a much more competitive environment, if that makes sense. So the system that can go across multiple functionality, across multiple platforms to us is a way to provide the customer with a much more cost-effective solution because they're developing one system once across multiple platforms for their Level 1 and Level 2 but also puts us in a better position to invest once in the system and really start to leverage that across multiple applications.

That's helpful. Elena, you already mentioned -- you generally expect LiDAR on more advanced levels of automation. But one of the leading auto OEMs has talked about not just avoiding LiDAR but now is also talking about moving away from radar as well and just using camera inputs, so a vision-based solution. Are you seeing other customers consider that kind of approach? Or are the majority of customers you're talking about -- you're talking to expecting to use at least radar and cameras and kind of how you're thinking about LiDAR as well and kind of the configuration you're seeing most often?

Yes, I think...

Go ahead, Joe, sorry.

You go ahead, Elena -- sorry, I'll start. I'll start. From what we're seeing, the vast majority of customers for anything, from sort of Level 2 to Level 2+, there may be a toggling between what vision does or what radar does, but both are involved, right? So there's sort of different applications for both, but both tend to be involved. And that's something we believe in, and certainly, the vast majority of our customers believe in, is having dual sensors. And there's areas where one of those sensors works better than the other, and then there's a level of redundancy there. As you get into Level 3, and certainly, into Level 4, our view is you're going to have to add LiDAR at this point. There's an exception to that, a possible exception to that, that I'll come back to. But certainly on the Level 4 robotaxi vehicles that Motional is working on and driving around, LiDAR is incredibly important from a localization perspective. And for those cars, it's not localization, meaning what Elena meant; it's localization, meaning am I 10 centimeters off the curb when I pull up to drop a passenger off kind of things. So certainly, we think LiDAR has a role in the higher end. The one exception is going to be early Level 3 where our view is, if over the next couple of years, if you don't see breakthroughs in LiDAR around lower cost, solid-state applications, it is possible radar, particularly those 4D imaging radars that ourselves and a couple of others are working on, could potentially catch up and be very helpful in sort of those early Level 3 applications and potentially displace LiDAR sort of from that section, if that makes sense. Radar is much more cost effective. The 4D imaging and some of the things we're able to do with the software technology now is getting real close to what sort of the theoretical application of LiDAR would be. And to the extent LiDAR remains expensive and/or sort of more electromechanical and less solid-state, we do think there's a potential for radar to do a little more.

Got it. That's helpful. Just curious on the ability to apply some of Aptiv's technologies beyond light vehicles and hoping you could talk a little bit about to what extent Aptiv is doing some of the same type of work around sensors and automation with things like last-mile delivery vehicles, robotics, anything like that, that you can speak to where perhaps Aptiv is working.

Yes. Between ourselves and Motional, there are certainly other areas of interest. Aptiv, ourselves, we're spending time on commercial vehicle side of things, whether that's the larger vehicles or some of the more, what I'll call, sort of urban delivery type vehicles. So there's certainly applications in CV. From our perspective, in a lot of cases in the commercial vehicle market, it's actually not a software issue, it tends to be a hardware issue around greater levels of automation. And by that, I mean, the software that we use today to control the vehicles, be it in active safety or in more of an automated driving mode, can certainly control the larger vehicles. The challenge is the perception systems effectively looking far enough out that you can stop the vehicle or that you can control the vehicle because you obviously need more operating distance to control the vehicle. And that's a solution from a long-range radar perspective, from a vision perspective, where we think we have some expertise and could be additive to that industry. Now you tend to have somewhat slower development in that industry only because it's versus passenger cars, it's lower volume, so you really need to get to a good commercial case. But our view is that will get there over time. Motional is, first and foremost, focused on the robotaxi business but does do a lot with others, from at least sort of a proof-of-concept perspective, on how to use that technology in other industrialized settings. There's a lot of robotics expertise in that business that has been brought in over time to help with the automated vehicle delivery. And obviously, the partnership with Hyundai allows us -- allows that business access into other Hyundai companies, including some of the off-road type businesses and such. So there's certainly development efforts going on across a number of those fronts.

No, that's really interesting. I think my associate was saying that they're getting pizza delivered now by automated vehicles in his city. So a lot of exciting things for us to track there. Maybe just in the interest of time, we can move on to SPS. And you already mentioned about seeing this uptick in EV plans from some of your customers. But maybe you could talk about plug-in hybrids. I know maybe in Europe, that's been something, with some of the CO2 targets, that has seen some uplift. But I'd be curious, especially on a broader basis around the world, what are you seeing, especially as you get these big investments towards BEVs, I mean is that impacting the rate of engagements on PHEVs or both, powertrain type stuff still seeing good adoption?

I would say -- and Elena, feel free to jump in. I would say we are starting to see greater pushes towards sort of full commitment on BEV. I would agree with you, 3 years ago, 4 years ago, there was this view that there would be sort of this interim period of hybrid go all the way back to the 48-volt discussion. I think OEs viewed that as a good stopgap to give them time to work through their BEV plans and to develop those platforms and those would be sort of post-2025 launches. And the hybrids, particularly on a 48-volt type hybrid, you could sort of do that with almost the same sort of cost and time impact as almost a robust mid-model upgrade, right, 48-volt systems you could generally fit within the existing framework. As time has accelerated here, I think the Model 3 introduction probably helps spur them along the continued consumer and government interest in, and regulatory interest in, EVs. I would say it's -- the EV, electrified powertrain is accelerating, and it's accelerating through greater focus on BEVs. And Elena, I don't know if you have a view, but it's for -- and for us, it's -- all of them are good content outcomes, right? We get a lot more content in a hybrid. We get more in a BEV. But it's all along a very positive content curve. So we were, to some extent, I won't say indifferent, but we benefited along the entire adoption curve. So for us, it was a little bit of what the customer wants to do. But I think, Elena, if you look at the numbers, we've seen a much quicker move towards full BEV and not necessarily that pause at hybrids that we're originally thinking.

That's correct.

And maybe I can build off that, Elena. When we've spoken before, the company's talked about $500 of content opportunity for ICE and I think $900 to $1,000 on BEV. But as you start thinking about designs using the smart vehicle architecture, yes, I know there's influences on other parts of the business and ASUX, but what does that mean for the content opportunity in SPS as you start thinking about SVA? And I guess as well, I mean, the other thing we hear from investors sometimes is, well, as BEVs become much more mainstream, perhaps there's volume discounting and things like that, that you need to be thinking about. And so this sort of doubling of content, is that still the right framework to think about as you start considering SVA or just sort of the volume purchasing?

Yes. I could start, Joe, if that's all right. And then feel free to chime in.

Yes, go ahead.

Yes. So for -- it's interesting, the smart vehicle architecture is really helping our customers enable a more efficient path to electrification. So as OEMs are making decisions to really more fully invest in high-voltage electrification, we're helping support them do that through our complete portfolio offering in SPS, so a combination of electrical distribution systems, connectors, cable management solutions. And in several cases, we've had some really high-profile conquest wins as a result of bringing that total solution in an optimized fashion to these OEMs. For us, specifically on content, even though we're always about architecture optimization, we're helping OEMs get there lighter, smaller, more durable electrified solutions, for us, it's actually still very much in line with what we've talked about historically in terms of greater than 2x multiple on total content opportunities. So again, as a reminder, if you are just looking at a midsized passenger vehicle, an average internal combustion engine for us, we have a TAM of roughly $500. When you build up to a plug-in hybrid or more specifically a full battery electric vehicle, that content grows with high-voltage wiring, high-voltage connectors, we do battery pack busbars, the battery disconnect units and we do charging. So when you net that against some minor deduct for engine harnesses, you're really in excess of $1,000, even in a full SVA architecture approach. And I think it's really SVA that, as I said earlier, is really helping the OEMs enable a faster, more efficient transition to electrification.

Yes. That's really helpful. Well, I could probably keep you guys for another half hour, but unfortunately, we're out of time. So Joe, Elena, I really appreciate you guys joining us again this year for the conference. And I'm looking forward to seeing how this all progresses going forward.

Great, Mark. Thanks for the time. Appreciate it.

Thanks, Mark.

Thank you. Great. I don't know if Joe, Elena, if you guys are still on, but again, we really wanted to thank you guys for doing the conference.