Aptiv PLC (APTV) Earnings Call Transcript & Summary

Welcome, everyone, to our first fireside chat within the auto teams electric vehicle track here at the inaugural TMT conference. Now it's only fitting that we have our friends from Aptiv. It is no secret we see Aptiv is sitting at the forefront of all things megatrends and, in particular, electric, through their wide offering of high-voltage electrical architecture, Tier 1 components and systems. With us today is Joe Massaro, their CFO for over 8 years now from out of bankruptcy through the Delphi spin and now CFO of the renamed Aptiv. And of course, Elena Rosman, Head of IR. Joe and Elena are joining us today by phone. And so welcome to them both.

Thanks, Chris.

Thanks, Chris.

Now, Joe, maybe we could start with an overview of what Aptiv does in electric car, as some of our listeners may just be unfamiliar with the role of electrical architecture as a Tier 1 auto supplier or maybe just don't realize that most of the power trade components that were a part of the company several years ago have now been spun out. So maybe you could just give us a quick overview.

Sure. So I think that's a great place to start. So if you think of Aptiv today or Aptiv post spin of the Delphi Technologies, the Powertrain business, really have 2 segments that we refer to as the brain and the nervous system, the brain being the advanced safety and user experience business that sells the software and the large compute platforms, the second segment being the Signal and Power Solutions segment. And that business is one that is -- if you really want to think about it sort of a ruggedized, harsh environment electronics business that has a very strong presence in auto. We've been diversifying that revenue stream through adjacent markets, but still really a very strong presence in auto and, until recently, really responsible for what we now refer to as low-voltage architecture or the legacy architecture systems that all vehicles have to power the peripheral devices, the sensors, the infotainment and such. Huge scale in the industry. Signal and Power Solutions has content on 1 out of every 3.5 vehicles manufactured globally. So truly an industry leader in that space and over the past several years have been very aggressively pursuing what we view as our share of the electric vehicle market. And what happens when you convert a vehicle from an internal combustion platform to a -- and let's just go right to full battery electric by way of example, you obviously take the engine out, you put in the batteries, you put in motors, you put in other forms of what we refer to as power electronics to help manage the power distribution throughout the car. And you create basically a high-voltage system that sits side-by-side with a low-voltage system, which is important. So the low voltage system, which is typically a 12-volt battery system, exists even within a fully electric car. The high-voltage architecture is really a distribution system that transfers the power from the battery to effectively the endpoints, the motors. There's obviously a couple of stops along the way depending on the various type of vehicle, the architecture. And what we've done over the last couple of years is very successfully leveraged our leadership position in low voltage to -- into the high-voltage market. Over the last couple of years, we've had bookings of over $2 billion a year. Actually, in the first quarter of 2021, we had over $900 million of bookings, which I don't necessarily think is a run rate number. Our bookings can be a little lumpy but certainly speaks to the growth that we're seeing on the award side, and that's business that we've been awarded to customers that will convert into revenue over the next couple of years. And then on the revenue side, we've been experiencing north of 50% growth in that product line. That business will finish this year right around $900 million in revenue or so. We expect it to continue to grow at 50% to 60% for the next several years. So we're not only seeing a significant increase in bookings but a very significant product line revenue growth. And again, when you think about what's important there, no loss content, the low voltage opportunity is still there for us. So this is really incremental content. And over the last couple of years, Chris mentioned the spin-off of the Powertrain business, we've been very disciplined from a portfolio perspective around investments in internal combustion-type technology, have done literally none since the spin of Powertrain and, as a result, have very little decremental content or headwind as internal combustions go away. There's a small amount of electrical connectivity to a typical internal combustion engine, but that's less than a couple of hundred dollars per vehicle. So there's really a significant sort of net content growth opportunity here as this business grows well past $1 billion next year and, again, we believe, continues to grow north of 50% for the next couple of years.

That's great, Joe. And you talked about the division primarily being in Signal and Power, but can we think about a halo effect or the electrification of the industry going to also have positive impacts for your other divisions within that like, for example, within ASUV for ADAS, infotainment, connectivity? Can you talk about the electrification driving other aspects of Aptiv's product?

Sure. Well, I think there's a couple of direct and some indirect benefits there. So again, Signal and Power Solutions is the business where we have our electrical architecture, our connector business. So we do close to $4 billion of connector revenue. So think TE or TEL or Amphenol, we've got a business that's very similar to those companies within SPS, and we've got a cable management business, HellermannTyton, which was at one point a U.K. public company that we acquired back in 2015. And Chris is right, that's where we're seeing a lot of the immediate content opportunities and they're ramping quickly. Longer term, there's a couple of things. One, the electric vehicle creates new domains within a vehicle, and a domain is effectively a set of functionality in a vehicle that needs to be controlled by a compute platform and, in particular, things like battery management systems, more robust power and signal domain controllers or effectively routers within a vehicle. All of those are going to grow significantly as EVs become a greater part of the vehicle population, and we're well positioned there on the brain side. The one other indirect benefit that we're already seeing is a -- and this is a little bit of consumer-driven if you think Tesla, which is a very technology-enabled vehicle. The expectation from the consumers is when they make the transition from an internal combustion platform to an electric that they're getting a lot of technology. They're getting connectivity with the outside world. Connectivity is, if you have an EV, you know, it becomes very -- your phone app with an electric vehicle becomes a lot more relevant, right? You can monitor the charging, you can look for charging stations, the vehicle needs. The experience is a little bit more interactive. So there's a higher level of technology expectation with those vehicles, which accommodates us -- really accommodates opportunities for the ASUX business. And a good example is the Porsche Taycan. When Porsche went to introduce that, they were obviously looking at go-to-market quickly. They looked around at existing systems within the broader Volkswagen group that could be used in the Taycan to help it launch more quickly as opposed to developing bespoke systems for that vehicle. And they actually pulled the active safety system out of the Audi A8, which we call the zFAS, which is a system we've manufactured since 2016, and put that very high level active safety system into the Taycan, which, again, was more incremental opportunity for us but speaks to -- I think it really speaks to 2 things, one, that EVs are expected to have a high level of technology just -- well beyond just the electrical and the battery side of things but also that as our customers have really rounded the corner on commitment to EVs, which we've seen over the last couple of years a significant acceleration and desire to manufacture EVs at volume, which is, again, important. If you're a supplier, you want somebody to do things at volume from a customer perspective, really commit to do them at volume and to get them to launch quickly. So borrowing technology, some of our other technology for other platforms has been a benefit as well.

Very helpful. Joe, maybe we talk a little bit -- again, sort of a little bit one-on-one, who you're mostly competing with, not only just SPS, but really specifically in electrification? If you could talk to things like win rate, potential market share because it's various competitors across the broad spectrum. But who are you seeing most often in final bids?

Sure. Let me go through that and Elena can then speak to sort of win rates and such. So if you think about our SPS segment first, there are a couple of -- there's no sort of one competitor that does it all. So you have to look by -- really by product line. So if you look at the electrical architecture, we tend to compete mostly with Yazaki, who's another very large electrical architecture company, although they don't have our capabilities around connectors or cable management, engineering, design, those types of things, but they are a very formidable electrical architecture competitor and really the only other Tier 1 that we compete within that space. Other competitors for, like, things on the connector side would be somebody like a TEL or an Amphenol. Now they are in the Tier 2 position in the industry. So we -- they sell to folks like us. We actually end up buying certain connectors from TEL or Amphenol given the applications in addition to using our own connectors. But those are really the most formidable competitors. It's interesting. It's really the same set of competitors that we have on the low voltage side that have started to move into the high voltage market. So we're very comfortable that we compete well against them. We sort of know our competition, if you will. I think the other thing that's important for us in this space is, they're fairly well disciplined companies, right? It's a structured part of the market. And there are some barriers to entry, although you may think of it like, well, it's electrical architecture, it's wire harness, it's connectors, can there really be barriers there. One of the advantages of this part of the business and why we like it so much, our products in SPS tend to be very low cost relative to the BOM of the vehicle. In the case of aerospace or industrial that -- where we sell into as well, they tend to be very low cost relative to the BOM of what they're being put into but incredibly high cost of failure. So you tend to wind up in a situation when you designed a product that works, when you designed a product that's successfully been in the field for a period of time, there tends to be very, very little incentive for the OE to replace, particularly around price. If you've got a $15 high-voltage connector that effectively connects into an inverter from the battery, it's worked successfully for years, it's passed all the tests, you're hesitant to go to a low-cost guy to save a couple of bucks and risk that. And one of the reasons it's high cost of failure even on the low voltage side is repairs tend to be very difficult, right? You don't -- unless you look under the hood, it's really the only place you can see elements of the electrical architecture system. They tend to be covered up by all of the other items in the car. They tend -- the electrical architecture system tends to be the first thing that's placed into the top of the vehicle and then covered up with the flooring, the carpeting, the seat. So high cost of failure, meaning, high cost to repair. And certainly, when you get to the high voltage side and you're above 60 volts, carrying a lethal charge effectively to humans, there's obviously more of a safety concern around failure, whether that's personal safety, individual safety or obviously things like fire. So it tends to be fairly sticky. It's a well-disciplined part of the market, and we've competed there well over a number of years now. Elena, do you want to go into win rates?

Yes, happy to. So as Joe mentioned, as the demand for electrification rises and customers pull forward plans, they're really looking for partners that can help them pack in as much content and functionality, sort of getting back to your point about some of the halo effect on the AS & UX side, into smaller, lighter components that reduce the space consumption, reduce the weight but also enhance the performance and reliability of these vehicles. So for us, that's obviously been a big competitive advantage, and that's allowed us to gain share as both traditional and emerging mobility providers accelerate their pace of new electric vehicle launches. I think these capabilities are really on display in 2020 even with the pandemic, as we moved at unprecedented speed to support customers globally with a comprehensive portfolio and some high degree of vertical integration. So you saw a significant increase in bookings activity, which Joe referenced, even here in the first quarter of 2021, at just under $1 billion in high voltage wins. So I think that you're seeing that in -- for us, where we're targeting the market in midsized platforms that are higher volume and higher complexity, which really highlights Aptiv's strengths and capabilities in terms of that ability to optimize the architecture. As a result, Joe referenced having -- Aptiv having content on 1 out of every, call it, 3.5 vehicles globally on the low voltage side. When we look at the battery electric vehicles that are launching between 2020 and 2022, we have probably 1 out of every 2 we have content on. And I think you're seeing that obviously in the bookings numbers. We don't tend to quote market share sort of beyond that, but that's consistent with where we're playing in the market, where we're focused with our customers from a strategic perspective, winning in that range, roughly 70% of wins that we're pursuing.

Elena, really appreciate that on 1 out of every 2 BEVs. That's a pretty striking number.

That are currently -- yes, that are currently launching.

Yes. That's very impressive. For those on the line, I'm going to continue with my questions, but feel free to write in your questions. In the last 5 or 7 minutes, I'll try to incorporate audience questions. So you use the dashboard at the bottom, and I'll lead off as many questions as we can. Joe, Elena made a good point. We talk about this CPV, content per car and everyone's thinking 20 years into the future, right? We know there's a fast adoption of EVs, but we want to think about, all right, it's 2040, every car is an EV. What is Aptiv's content per car opportunity? Pricing may change, et cetera. But what is the multiplication versus a typical ICE electrical architecture to a BEV? And I know it may be a range, but any sort of rules of thumb that you can give to the audience so we can think about the long-term outlook for Aptiv?

No. Yes, listen, we've got some very specific ranges we can provide, and Elena will run through those in a second. I think from -- again, just starting at a little bit higher level, a couple of important things to focus on. One, as I mentioned earlier, which is something we've worked very hard at, is very little to basically no decremental content, right? A lot of times when you're talking to folks, particularly suppliers with something like the EV conversion, it's both the discussion about the upside. It becomes sort of a gross upside discussion around where is the content going as well as what's going away. And I think what's very important for Aptiv is basically minimal decremental content as we move to -- through hybrids and into full BEV. I also think the other big takeaway is just -- these are products that we know very well. And they're products that are in a lot of ways versions of the low-voltage product we make. A high voltage connector tends to be physically larger, tends to be more robust but comes off of the same equipment, comes out of the same supply chain, comes out of the same plant, the same engineers. So not only is there incremental -- a strong net incremental content, but it's highly leverageable to our existing business model. Elena, do you want to run through the actual content numbers?

Yes, happy to, Joe. So when you look at our average internal combustion engine or low voltage, I should say, content on a midsized passenger vehicle, it really starts at roughly $500. So that comprises the electrical distribution systems, the connection systems, the cable management. When you layer on top, so for plug-in hybrids, full battery electric vehicles, you're adding high-voltage wiring, you're adding high-voltage connectors, battery packs, [ self-starts ], areas where we've actually been able to increase our content per vehicle opportunity, including things like battery disconnect units, power distribution boxes. We do some chargers. And again, net of what Joe referenced comes off from the wiring harness and engine connection systems. That translates into north of $1,000 of content per vehicle. Certainly, we'll provide a little bit more details on this on our upcoming electrification teach-in at the end of June. But that's consistent with how we've been talking about it, Chris, and we continue to sort of expand our range of content per vehicle opportunity as we look for areas for Aptiv to play.

Elena, that's super helpful. I mean, essentially, look, it's a doubling over X number of years. You can run that CAGR, but it's obviously super impressive. One just quick follow-up. The $1,000 -- do I get an incremental if there's this halo effect that Joe mentioned that we get connectivity? We're getting 4G connectivity in the car. We're getting high functioning ADAS Level 2+, Level 3. Does the $1,000 grow, obviously, not because of electrification but because of the halo from the other systems?

Absolutely.

Willing to put any numbers on that?

Well, we talk about content per vehicle opportunities in ADAS and certainly, when you look at the implementation of smart vehicle architecture, the shift to what will be in the next -- between now and 2025, the implementation of zone control, zonal architectures, that's incremental content for us. And then beyond that 2025, call it, the 2028 time frame, really, full smart vehicle architecture, further up-integration and consolidation of compute, those things combined, obviously, add additional content for us. We're not a big player in individual body ECUs. So as those individual zones get packaged up and up-integrated, we would see market share probably more commensurate to what you see in our active safety business, having that core capability set. So it's incremental content. There are obviously 2 different decisions. But in a lot of ways, we're seeing the -- what we're able to save OEMs on their path to electrification is helping them fund some of that incremental content and functionality on the AS & UX side.

That's great. So we'd see a benefit, obviously, from increased electrical architecture and SPS but also from zonal in ASUV. Maybe, Joe, we could go back to some of the financial metrics. And if I could just push you on one of your comments, you've made this target of 2022 revenue, you're running north of $1 billion. I think you mentioned well north of $1 billion. I think some of the investors will also take your comments. You're at $900 million this year, up at 65%, still growing 50% per year. That's obviously a number closer to $1.3 billion to $1.4 billion. So can you talk a little bit about the visibility you're seeing in electrification? Because, obviously, these are now becoming material numbers to the overall content per vehicle story.

Yes. No, listen, I think from a visibility perspective, and I don't disagree with your math, Chris, we've publicly talked about this product line growing at 50% to 60% for the next couple of years that includes 2022. And right now, I'd say, we're somewhere between, call it, $875 million and $925 million of revenue for the full year, which is why I mentioned the $900 million. So listen, the visibility remains good. Obviously, it's in line with sort of how we -- our normal revenue forecast. I think, if anything, there's been higher levels of take rate over the past couple of quarters. I mean our Q1 growth, what, Elena, it was about 125% year-over-year. Now some of that was driven by the fact that China -- the COVID shutdowns in China occurred for us in Q1 of last year. The rest of the world, it was Q2. So you've got a little bit of a COVID comp there. But no, I mentioned it earlier, our customers have rounded the corner. If you talk to us probably -- well, at 2019 Investor Day, I think we would have said this, the level of activities we're seeing now is more of a sort of a 2024-type activity in our original expectation. So it's definitely coming faster. We would have said, hey, 80% of the opportunity is going to be for between, call it, 2024 and 2028 or so, it's going to be in China and Europe. We expect North American adoption to be more -- to be slower. And that was just given views at the time of OE sentiment in North America, consumer sentiment in North America and really the types of vehicles that folks in the U.S. like to drive, right? I don't think any of us envisioned a fully electric F-150 in 2021, right? So there's been some significant changes in how North American OEs are thinking about this, how North American consumers are thinking about it. So there's a significant opportunity there. And I do think our commitment to grow what is quickly becoming a $1 billion product line by 50% to 60% over the next couple of years. I obviously don't take that lightly. And acknowledge, to some extent, we're defying -- for at least for the next couple of years defying the law of larger numbers, if you will. I think we'll have a pretty meaningful growth rate on what is, to your point, a large number.

Joe, I just wanted to add. I also think there is some consensus building around what battery electric vehicle penetration will be in 2025. You're seeing most folks coalesce around 10% to 15% in 2025 and something closer to 25% to 30% in 2030. So I think that there's every year for the last 7 years consistently. IHS has revised up their forecast in addition to, obviously, a number of others who are putting industry forecasts out there.

Yes, Elena. That's a great point.

No, that's helpful, Elena. Those numbers are similar to what we have in our industry forecast. Joe, if you could talk a little bit also about the margin structure, right, because with this rapid growth in some of the other businesses, it's obviously -- there's been a cost to that growth when you think about ADAS over the last couple of years. But I think you've made comments that, generally, at this point, call it, this year, $900 million, high voltage could be at roughly company average margins. I know you have that rule of thumb that above $750 million, a business line gets roughly to company average margins. Two more questions. How do we think about margins for high voltage? And also, if I think forward 5 years to that $2 billion-plus run rate of your orders, where could margins end up sort of steady state?

Yes. So let me back up a bit. You're right. Our framework has historically been, and it's typically held true that a product line breaks even around $350 million to $500 million of revenue and gets to segment margin between $750 million and $1 billion. So the product lines are somewhat different by segment but generally consistent within segment. High voltage has defied that a bit. It's effectively been profitable since launch. Last year was effectively at segment margin already, SPS segment margin. And we expect that as it moves into 2022 and well past the $1 billion, we'll start to be accretive to the segment. Haven't given specific numbers yet on that, but we do expect it to be accretive to the segment. And it really goes back to something that I mentioned earlier, the leverageability of this product line and this know-how over our existing business, right? We have a large, call it, $11 billion-plus revenue business that has been a leader in low-voltage vehicle architecture for years, whether it's electrical architecture itself, the connectors, the cable management. Moving into a high voltage product line, we were able to leverage really everything within that existing business, the engineering talent, including advanced engineering; the supply chain; the factory footprint; the tooling. In a lot of cases, when you're making connectors for high voltage, you can use the same equipment basically that use the low voltage, and there's just a different tool set, a different mold that you're using. So there's a lot of leverageability that's contributed to the strength in the margin. Again, we expect it to be accretive to the segment as we get in the next couple of years. One of the other benefits of a high-voltage system from a margin perspective is the system itself is about 50-50, connectors and cable. And connectors have almost a 2x margin higher than the cabling system. So when you've got a 50-50 mix, you get a higher level of connector content. By way of comparison, a low-voltage system is 70% cable, 30% connector. So it's not only a highly leverageable product line, but there's more -- when you get to the system level, it's inherently a better mix within the system. And I think the other advantage we've had, and this is one of the reasons that you haven't seen what I'll call discrete investment to go build the high-voltage product line, we certainly made that, but it's sort of within the normal investment cycle of a very large business, right? It's not had -- it has not had to be additional -- and this is one of the reasons why I think we get the win rates we do, just given our footprint and our scale, one of our value propositions to customers is we're able to get up to speed very quickly, get up to volume very quickly. And with all of the complexities our customers face around EV launches and doing EV launches quickly and really with a fairly steep ramp curve, they've got the ability with us to sort of take one large concern off the table, right, as your electrical architecture provider going to be able to ramp and ramp at the same rate. And again, just given our footprint, given the fact that we're in a lot of cases providing the low-voltage systems any way for these platforms, the ability to augment the high voltage and get to the sort of run rate production levels quickly, I think it's been another advantage for us.

That's great. Joe, I'm going to jump to -- I'm going to combine a couple of questions I got from the audience just for time purposes. And a couple of them are around this halo effect and take rate. So you've talked a little bit about it, but given we have you on the line, I know it's an electrification day, people are asking, are we seeing some of the benefit, that halo effect that you talked about, there's one question, are we seeing higher ADAS take rate, another one about infotainment or connectivity take rate. So if you could talk about maybe some of the current trends in ADAS or infotainment. Are we also getting that sort of positive uplift, talking about the 65% growth in EV this year?

Yes. Listen, that's a great question. And I think there's certainly -- we certainly are. I mean the EVs, even if you -- when you get into the smaller EV platforms that are coming out, things like the ID.4, where we have content, those already exceeded even the TV commercials, right? They're very technology-enabled vehicles. There's an expectation from consumers that those cars are software rich. So there is definitely an EV tide that is going to lift things like the digital cockpit, things like active safety. And I think a midsized platform where maybe you had sort of some auction packages from an OE that would be maybe exclude active safety and an internal combustion scenario, much more likely to include at least entry-level active safety because it's the expectation. And remember, what they're chasing -- what these OEs are effectively chasing from a technology perspective is the standard that Tesla has set at this point across its various models. So that's really where they're going. So you do see that. We don't necessarily talk about that as a high-voltage content opportunity. We really see it as in the active -- continued active safety growth rates. And I mentioned zFAS going into the Taycan, but it's definitely a tide that is rising and lifting things like infotainment and active safety. And I think you see that in the AS -- the continued strength in the ASUX growth rate. There's also some discrete examples of, as I mentioned, new domains being created. I mean one of the really interesting ones -- and again, this is just how you think about EV, when you take a step back, all the additional technology requirements. An EV is somewhat unique versus an internal combustion engine. When you put a gas pump into an internal combustion engine, it fills gas. That's all it does, right? There's no interaction. There's no technology connection. There's no information sharing between the gas pump and the car. It's a hose, you plug it in, you fill the tank, you pull it out. When you plug an EV into a public charger, right, there's information sharing. There's information being communicated to -- between the charger and the car. So we've had several customers that have identified that as effectively a security risk and want to make sure that there are controls around what information the car is sharing, what information the charger receives and retains and wants to make sure there's nothing else coming in from the charger into the vehicle from a software perspective, from a viral or security perspective. So we're working with one customer on what is effectively a new security domain. It is a gateway controller around the inlet charger. It's a small compute platform that's going to be connected to the inlet charger that manages the information flow between the vehicle and that -- and those public charge stations. So that's the domain. We're obviously good with compute platforms. We're good with cybersecurity. But that is a domain that just didn't exist a couple of years ago. And there are opportunities like that throughout the vehicle. And I think they'll continue to develop as EVs become much more common. And we continue -- one of the things the industry is working hard on is the next 2, I think success -- and jump in here, Elena. I know you speak to this a lot. The next 2 successive generations of EVs, they're going to have smarter architecture, right? There is a bit with the rush to get to market of, some compromises around the architecture and how to do it most efficiently. I think over the next couple of years, with the increased levels of technology in the vehicle, you're actually going to see first to move to a big push to zonal architecture. And then I think EV is really going to necessitate post 2025 the move to smart vehicle architecture.

Yes, Joe, I would just say, we've been doing a few studies with both North American and European customers on the implementation of these smart vehicle architecture optimized EV solutions, and they do generate significant weight and cost savings, and we're demonstrating that in these studies, which is contributing, obviously, to our ability to win additional business with these customers.

Thanks, Elena. And actually, the 2 of you actually answered my final question. It was going to be what's next in Electrical Architecture. I think you just answered it. New domains like security and new levels of smarter architecture. So guys, I wanted to thank you both for joining. This has been super insightful as always. Look forward to seeing you live in Boston, hopefully, soon. And for anyone on the line, feel free to e-mail us or Aptiv to learn more about the company as a whole or their rolling in electrification. So Elena and Joe, thanks so much for joining.

Great, Chris. Thanks for having us. Great questions and enjoyed the discussion. Thank you.

Thank you. To everyone on the line, we'll see you back for General Motors at 11 a.m. Eastern. See you everyone soon.