Aptiv PLC (APTV) Earnings Call Transcript & Summary

Hi, good afternoon. I'm Ryan Brinkman, the U.S. Automotive Equity Research Analyst at JPMorgan. Thank you for joining us on day 2 of the 2021 JPMorgan Automotive Conference. Very excited to get going with our next presentation, which is with Aptiv. We have with us here today, Kevin Clark, President and Chief Executive Officer; Joseph Massaro, Senior Vice President and Chief Financial Officer; Elena Rosman, Vice President of Investor Relations; and Evan Goss, Investor Relations as well. So they've got some slides they're going to walk us through, and then we'll launch into some Q&A. Just wanted to remind the investors before we get going, that there is a way for them to ask questions. You can submit it via the conference website, and I'd be happy to ask them on your behalf. So with that, I turn it over to Kevin, Joe and Elena. Thank you.

Great. Thanks, Ryan. Thanks for having us, and welcome, everyone. As Ryan said, I'm going to start with a few slides to hopefully provide a little bit of context and foster a bit of the conversation today. If we can go to Slide 2, I think we're all familiar with the forward-looking statements. So I'm not going to read it to you or spend much time on it. I'd like to move to Slide 3, titled Aptiv Today. And I think this slide is really a good overview of what Aptiv is and where we're going. So as we think about Aptiv and as we describe it to investors, we're really a global technology company that's really perfectly positioned for all the trends impacting the automotive industry. So we have an industry-leading portfolio that's really centered on what we call the brain and the nervous system of the vehicle, think about a vehicle architecture and vehicle software that really enables all the safe, green and connected solutions that are really, really enabling the underlying future of mobility. So all of those trends drive revenue growth about market, higher margins, higher cash flow conversions. On the left side of this slide is our outlook for what we described as our Aptiv today, our 2021 financial outlook. For those of you that participated in our Q2 earnings call, you know that we increased our outlook for revenue growth, our revenue growth over market -- 10 points over market as well as absolute earnings for 2021. It really reflects the increasing demand for our portfolio of safe, green and connected solutions, things like demand for Aptiv safety, high-voltage electrification and richer mix of overall products. So we don't spend a lot of time talking about it. We can just talk a lot about our innovations, our technology solutions. But I do want to spend a minute talking about Aptiv and its global footprint. And I think it's really -- as pertinent as it relates to the supply chain environment that we talk about today. So when you take a step back, we operate in 44 countries. We have 124 manufacturing facilities across the globe, 12 major technical centers, 180,000 total employees, roughly 20,000, 23,000 salaried employees. Of those 23,000 salaried employees, 20,000 are engineers. So those are the people who really are developing the innovative solutions that solve our customers' biggest challenges. Our manufacturing footprint is very broad. It's very global. We receive roughly 200 million parts on a daily basis, and we ship close to 100 million parts to our customers on a daily basis. So very large, a very global, a very complex supply chain. And we do all of that with customer service levels that run at 98%, 99% sort of customer service level. So even in a very, very tough environment, with the environment we're going through now with constrained supply chain, we operate flawlessly in a real complex situation. So we're proud of not only the products that we innovate and we develop but how we deliver those to our customers, how they integrate those into their products. If you move to the next slide, Slide 4, I talked about our product portfolio. We've spent a lot of time over the last 5, 6 years really focusing our product portfolio in and around the brain and nervous system of the vehicle, making sure that we're positioned to benefit from the acceleration of the megatrends in and around safe, green and connected. And what that's positioned us to do is really to serve markets where we see a tremendous amount of growth, both in our traditional automotive markets, we refer to those as our core markets, where we have products like electrical distribution systems, engineered components, infotainment and user experience, connectivity and security, active safety, high-voltage electrification as well as newer and adjacent markets, adjacent markets like commercial, the commercial vehicle market, newer markets like data and connectivity, like autonomous driving. So really positioning ourselves for new opportunities in high-growth markets, where the solutions we provide drive higher margin, where we have the opportunity to really leverage our position, and quite frankly, compound earnings, compound cash flow and build effectively a more resilient business model. As you move to the next slide, Slide 5, we have a lot of conversations. We've had a lot of conversations over the past few years about where our industry was headed. And our capabilities, again, in vehicle architecture, the networking of the vehicle, the power distribution, single distribution, the data distribution as well as on the brain side, so software, compute power and have been very, very focused on as the world evolves towards battery electric vehicles, as OEMs focus on a more efficient vehicle architecture that allows them to build more of a software-defined vehicle, where there's more value in software, where software can be updated on a more regular basis, where the vehicle architecture can be simplified to drive down cost and to optimize performance, that we're in a position to provide a full suite of services. And we've talked about in the past, our smart vehicle architecture solution, which is really about enabling a software-defined vehicle being positioned for the domain consolidation that is taking place and enabling and benefiting from the separation of software from hardware and changing our business model as well as improving our overall profitability. And that's an area where we've seen significant demand over the last couple of years and have a number of advanced development programs with OEMs that we've talked about in the past as well as more recently, actual commercial development program. So very proud about that. If you move to Page 6, it is obvious for a company who has as its mission, enabling the future of mobility through safe, green and connected solutions. Sustainability is really -- it's in very DNA of Aptiv. It certainly is in the product solutions that we deliver, but it's also in how we operate. And in July of this year, we released our 2021 sustainability report, title, Sustainability in Motion. And we really talked about our framework for sustainability, which is really around people, around product, around our plan as well as our governance, our platform. And in that report, if you get -- you'll find the commitments that we've made over the last several years, our path to carbon neutrality by 2040. And the progress that we're committing to make along that way. And along the bottom of the slide, you can see the number of recognitions that we've had on a regular basis over the last several years. I'll wrap up on Slide 7. Just to summarize, the supply chain environment is challenging. It's an environment that we're working through. I think we're working through very efficiently and effectively. We are hyper-focused on making sure that we keep our customers connected. And we launched 2,500 programs that we'll launch this year, and we do that flawlessly. Again, we are positively focused on reinvesting and reinventing our industry-leading portfolio of a safe, green and connected technologies that ultimately lead to the software-defined vehicle. Always pushing towards building a more resilient business model, a more robust business model so that we can benefit from all the megatrends that are going on in our industry and again, build up a business that compounds revenue, earnings and cash flow that we're able to redeploy, redeploy in a real intelligent way and continue to deliver value for our customers by solving their biggest, most complex problems, providing great work environment, career opportunities for employees and then obviously translating all of that into outside shareholder returns. So with that, we'll open it up for questions. Ryan, you're on mute.

How about now? Sorry about that. I have to start on growth over market, right? You've sustained 10% growth over market over the last number of years, generally exceeding both your targets and expectations. Can you discuss the secular trends driving growth over the next few years? And what type of outperformance that, that might imply?

Yes. Maybe I'll start at a high level, and Joe can get into more of the specifics, if that's okay. Again, as I mentioned, we've been focused on the last several years on how do we develop a product portfolio that benefits from the megatrends in and around safe, green and connected. And if anything, those trends have just strengthened. Pre-COVID, certainly, industry was driving towards safer vehicles, safety sells from a customer standpoint. Consumers want safe vehicles, the adoption of L2, L2+ sort of safety solutions. The pace of that activity is faster than L1, L0, all of that benefits a company like Aptiv. Second is a real big push for high-voltage electrification, right? We've seen tremendous pull demand for battery electric vehicles, part of that being driven by government regulations, certainly more stringent CO2 emissions in China. As you know, the European government is actually -- it appears though they're going to be issuing more stringent regulations as it relates to CO2 emissions. And more recently, the U.S. administration has been very focused on maybe not through regulation, but certainly through commitment by OEMs to drive more battery electric vehicles. And those are areas where the content differential on those vehicles versus our traditional vehicle, the traditional vehicles that we have product on, it's significantly higher. And we benefit in that situation from a revenue growth, growth over market as well as a profitability standpoint. So we really feel like we have a strong tailwind as it relates to revenue growth and growth over market. Joe can walk you through some of the numbers as it relates to our growth rate.

No. Thank you, Kevin. No, I think many of you know, we've had a 6% to 8% growth over market target really since 2019. That's a multiple year target. I mean we really do commit to that a -- to that level of out growth over an extended period of time. It doesn't always shoot straight in a particular quarter. But obviously, we think that's a good metric to judge how that -- how those product portfolios are doing. And as Kevin mentioned, we've obviously been at the higher end of that range. We've taken it up to 10% for this year, clearly benefiting from the increase in high voltage as well as, to some extent, really strong model mix coming out of the OEs at the moment. And I think the other thing to point out is that the outgrowth has proven to be fairly inelastic with the decrease in vehicle production. We were really able to continue to outgrow over the past 4 to 6 quarters as vehicle production came in with the pandemic. So it's a -- again, this number, we have a high level of confidence in.

Okay. Great. Thanks. And almost all OEMs have announced big step-ups in their spending for EV plans. What are you seeing in terms of electrification accelerating? Will you need to also invest more to keep up with those OEM ambitions? And how do some of the more recent pronouncements coming out of the EU or the Biden administration, including just this past week, how does that effect Aptiv?

Yes. I would say, Ryan, all those announcements are incrementally positive. So that's the takeaway there and should ultimately drive more demand for battery electric vehicles and more opportunity for Aptiv. Where you put it into context, if you were to go back 5 years ago. So we've had a portfolio that serve high-voltage electrification, whether it's plug-in hybrids, hybrids or battery electric vehicles for literally the last 10 years. So it's not a new space for us. It's a space where we've continued to invest. And I'd say, to a certain extent, maybe the industry has caught up. 5 years ago, we would pursue maybe 10 programs a year from a high-voltage electrification standpoint. Today, the opportunities at least are probably more than tenfold what we used to say. And I think as we've told you and we told investors, we're very, very selective in terms of where we play in high-voltage electrification. We focus on OEMs, whether they be newer battery electric vehicle companies or more traditional OEMs who are building battery electric platforms that go across multiple vehicle classes, across multiple markets so that we can drive significant volume, unique to probably any other player in the space, we can provide a whole system solution. So we have the connectors. We have the electrical centers. We have the cable management solutions. We have the wire harnesses. We're evaluating opportunities in and around power electronics, battery management systems. We have the benefit of being able to bring that together and engineering and industrializing the system that quite frankly takes out weight, takes out mass, reduces cost for OEM customers. And that's why we've been very successful with the most dominant battery electric vehicle manufacturers today, whether they be newer battery electric vehicle companies or some of the more traditional players that are operating in Europe. To give you a data point, over the next couple of years, we have content on roughly 1 out of every 2 battery electric vehicle that will be produced across the globe. So significant market share and we think we're really well positioned. And as I mentioned, it's a great tailwind from a revenue standpoint. But as Joe has walked everybody through in the past, equally accretive from a margin and earnings growth standpoint. And then I guess lastly, you asked about capital investment. We have nothing outside. I mean, we have the capital in the ground. We have the product portfolio today. And to the extent there are continues to be strong demand, I'm sure we'd be adding physical capacity, but as a percent of revenue or percent of traditional sort of CapEx, it's nothing that would be outsized.

All right. That's helpful. And it seems like smart vehicle architecture is gaining traction, right, with all the additional advanced development awards. Can you talk about some of these content opportunities as OEMs evolved their architectures and the path toward electrified, software-defined vehicles?

Sure. We've been talking about SVA for the last couple of years and about the trend towards and the need towards building vehicles that are software-defined that really allow you to separate the development of hardware and from the development of software. And a great example of that is one of our leading customers, Tesla. That the industry would trend in that direction. The push towards battery electric vehicles provides OEMs with the logical opportunity to rethink vehicle architecture. The push towards more high-voltage electrification is driving a number of OEMs to aggressively rethink that architecture. We've been working with several of those OEMs. We've been working with several of those OEMs over the last, quite frankly, several years in terms of rethinking vehicle architecture. That's translated into more advanced development programs. More recently, it's translated into commercial awards like the CDC award with Gray Wall motors. And we'd expect to see more advanced development programs. And more importantly, more commercial awards over the next couple of years. So we're excited about the opportunity. I don't think we've dollarized at the end of the day how significant it is by domain. Maybe to take a step back and think about it, our view of software, the software market for the automotive industry today behind vehicle software market is about $30 billion. That's going to close to triple over the next 10 years. So that gives you an idea of the software content. Obviously, we have capabilities in that space. We're not a manufacturer of ECU. So all that up integration into the domains that we talk about for us, that's all accretive opportunity. There's not a net loss for Aptiv. So again, it's an incremental positive opportunity as it relates to growth. But it's something we're excited about, and we're well positioned to benefit from.

Great. What are the software opportunities available to Aptiv, like where do you want to play versus what the OEMs are trying to do in-house?

Listen, there are some areas that we overlap. There are other areas we don't. And I would say it's really OEM dependent, right? So as we look at the OEM universe, there are categories of OEMs that want to do a lot of the software in-house. We have that capability to do it, are positioned to do it. They've done it for an extended period of time. There are a couple of German OEMs, as example, that I can think of that are very good at it and have been at it for quite some time. There's a broad brush of OEMs who are a mix, who do some of it, not all of it. And then there's a broad category of other OEMs, and it's really not a core competency and are focused on outsourcing it. The reality is software content, it's the fastest-growing content going into the vehicle. So I talked about the $30 billion going to $80 billion to $90 billion over the next 10 years. It's a huge high pie. We feel like we're well positioned based on our experience in infotainment and user experience and ADAS. We saw benefit from that. We're building platforms that are easily integrated as a part of smart vehicle architecture into a software-defined vehicle. But we want to make sure that we're flexible enough to enable whatever our customers want to do, whether they want to do some of it, they want to do more of it or all of it, that we're positioned to enable that to happen and have profitable revenue growth.

And any comments on the record year-to-date bookings? Any inferences that can be made as to why it is expanded like it has? Does it relate to competitive moat, changes in competitive mote, what you think?

This is Joe. I'll start. I certainly think it's reflective of our competitive strength in high-voltage and active safety. We continue to win in those environments and in those product lines, and Kevin talked a little bit about just the increased bookings activity we were seeing in high voltage. In addition, the -- we've got a very strong position in engineered components, like automotive connectors as well as electrical architecture business. And one of the natural tailwinds in that business is you don't necessarily have to have our Aptiv safety in a vehicle, right, to get more electrical architecture content. And given that, that business has content on 1 out of every 3.5 vehicles globally, they're seeing a significant amount of content growth across their portfolio as well. And I think that's just -- it's the same dynamic that sort of -- the results and the outgrowth results in strong and really strong booking activity.

Great. I wanted to get your thoughts to -- updated thoughts on the supply chain disruptions we're seeing. And we've met with a number of companies back in the May, June time frame, seemed to be more sense then that the worst will be behind us in 2Q, cycling past the Renesas fire, et cetera. But one takeaway from 2Q earnings season seemed to be that progress now is unlikely to be linear. We've got this Malaysia COVID outbreak now impacting GM production, saw announcement the other day by Nissan too, that was new to us at least. So where do you think we are in terms of the outlook for the amelioration of the shortage? And any thoughts to like when the situation might be fully resolved?

Well, I think it started there. We think it's going to be a while before it's fully resolved. It's fully resolving sort of back to sort of 2019 product flow, expect to have some level of tightness even into next year and possibly well into next year. Certainly, the first half of the year was significantly impacted by a couple of things. One, sort of the initial, what I'll call, COVID short supply cost about 1.5 million units of production, at least based on what we look at for the industry in Q1. It got a lot worse in Q2. To your point, when you added the impact of the Renesas fire, which we think was above 2 million units of production loss related to that event alone. Certainly, Q3 and Q4 from everything we see now are better than that. First, the second half will be a sequential improvement over first half in terms of number of units loss. But there is still going to be tightness. And yes, I think you point out one of the sort of the newest event that has, I think, everyone in the industry keeping an eye on Southeast Asia is the COVID-related shutdowns, first to hit Malaysia. I think folks are keeping a keen eye on places like Indonesia and the Philippines. Just given the amount of semiconductor manufacturing that's done in those areas, particularly the back-end processing. So the assembly, the test, those final stages where there tends to be a high concentration of Tier 3 suppliers in that region, but certainly see sequential improvement first half -- second half to first half.