Aptiv PLC (APTV) Earnings Call Transcript & Summary

[ Audio Gap ] through the discussion, we hope to cover some of the drivers of topline growth, the competitive landscape, questions that we've been getting about SVA and Wind River. We'll talk a little bit about how we're thinking about margins and also how Aptiv shareholders should be thinking about Motional. And with that, I'd like to welcome Kevin Clark, Aptiv's President and CEO. Kevin, thanks for joining us.

Thanks for having me, Rod. Great to be here.

So it's good to see you. So you just raised your multiyear growth over market forecast to 8% to 10%, which looks really big. And the 2 big drivers of that growth today are high-voltage electrification and ADAS. And it sounds like there's going to be a new tranche of growth even after that coming from Smart Vehicle Architecture. So maybe we can start talking about 20% a year, that will add at least $300 million.

So Rod, it's Kevin. I don't know if you can hear me, but there's an element of breaking up that's taking place at this point. So I don't know if it's on your end or my end. Can you hear me?

Or 200 basis points organic -- I hear you perfectly. Do you hear me?

Yes. You keep breaking up. So there's a big portion of your question I missed. So...

Okay. So maybe my question is just talking about the ADAS business. It was a $1.6 billion business. The external data points were a little bit confusing when we looked at those in terms of bookings, they're still big, 2x what your revenue is, but maybe you can shed a little bit of light on what's happening behind the scenes?

Yes. So from an ADAS standpoint, that's a business that we've been in, as you know, since the late '90s. And I'd say our overall business model evolved from being a -- maybe I would call it a providing certain aspects of the ADAS solution to providing broader platforms and integrating solutions from others as well. So we've had tremendous success, very, very strong growth last year, over 20% growth last year, expecting north of 30% growth, as we head into 2022. So it continues to be an area where we're seeing tremendous pull from our customers. Safety cells, we're seeing significant pull on the L2, L2+ side from a mix standpoint. So I think that underscores, one, the demand from a consumer standpoint and how safety cells helps our OEMs sell vehicles. Two, it tends to be a more profitable feature from an OEM standpoint. So it benefits them from an overall revenue and return standpoint. And that's something that we expect to continue. When you look at bookings, as we said in the past, bookings have been -- have -- by the nature, have been lumpy, and it's the nature of whether it's ADAS or non-ADAS. When you go back over the last 5 years, we've had periods where we've had significant programs that stretch across multiple vehicles with OEMs. We're launching those programs now and Satellite Architecture is the great example where we have scalable L0, all the way up through L3 sort of solutions for our customers where they can pick the level of ADAS solution that they're looking for. There were a few years that we had roughly $4 billion in bookings. Last year, I think, we were just under $3 billion of bookings. But when you look at that relative to the funnel, the underlying programs that are outstanding, the reality is relative to those underlying opportunities, the percentage of booked revenue has actually gone up. So I think we're headed now, Rod, into that next period where we're seeing the next generation of advanced ADAS solutions. So we'll go through a period in 2022, 2023 and beyond, where we'll have another period of significant booking opportunities, a significant customer award, significant wins. So I think you'll see that booking trajectory begin to increase again here in 2022.

So that's a big deal because the higher content, the L2+ is still relatively low penetration today, and that could be $1,000, $1,100 per vehicle versus $250, $350, something like that for a lower contented vehicle. That sounds like it's a powerful positive. On the flip side, to some extent, the automakers are talking about in-sourcing some of that capability, particularly in driving policy. Can you talk about how Aptiv fits in when your customers are moving in that direction, does that meaningfully change the content opportunity for you?

Yes. I would say that phenomenon has been present for actually quite some time. And our approach has been, how do we develop the platform solutions where we can provide customers with the entire solution. And there are OEMs that we're launching with -- now. We're -- we provide the full soup to nuts platform, including the integration of things like vision, including the integration of things like park assist, all of the features, all the driving features, all the policy, all the sensor fusion. There are other situations where we're providing OEMs with the opportunity to do some of their own features. We're integrating it into the overall system, including sensor fusion and driving policy. So if they're looking for a particular performance level or feel on a particular ADAS solution, they have the ability to do that. And that's something that we'll continue to do. And we're seeing some OEMs who are continuing down that path, and we'd like to continue to develop those features. We have others and we're in discussions now about those next generation of ADAS solutions who are looking to continue on the path that we're on now and how do they leverage the features that we've already developed into that next-generation solution. So I would say, I think it's a real mix in terms of what OEMs want to do. I don't see any OEMs, at least in our customer base, that are significantly changing their approach and what it is that they want to own and be responsible for. I will say, again, we're seeing much stronger adoption of L2+ solutions than what we forecasted a couple of years ago. And again, I think, that underscores the fact that safety cells.

So big picture, it doesn't change the content opportunity for you if an OEM says, "look, we'd like for you to do the hardware, sensor fusion and certain aspects of this and integration, but we're going to take on driving policy." It's not a material difference from a financial perspective for...

No, it's -- yes, it's not a -- I would take a step back. It's not a material difference on a program -- from a program-to-program standpoint. But there's also the tailwind, as it relates to -- again, we have customers who are continuing on the path of they're not experts in this particular area. They don't view that, let's say, a part of the driving feature to be a strategic capability that they need to have in and around a particular feature. And they're launching more L2+ programs than what they forecasted or estimated 2, 3 years ago, which again, means, it means more radar, a more robust ADAS solution and more content for Aptiv.

Okay. The other major trend that I think might relate to this is SVA. So Smart Vehicle Architecture, centralizing the compute. Does automation, Level2+ ADAS kind of go hand-in-hand with the consolidation of compute? Or are they...

No, it's -- listen, it's really where it started, right? It started with that domain centralization in and around ADAS. And as we've talked about SVA in the past, that really was the first phase as you think about a path towards ultimately an SVA solution. So we would say it started with ADAS. And to the extent we see these more advanced solutions that require higher compute, more push towards domain centralization, that's perfect for us. I mean, that's the area where it started with zFAS for us a number of years ago in terms of being awarded that program with Audi and then ultimately launching. That's a domain, a program that still is a big part of what's going on at Audi today. And to the extent we continue to see domain consolidation in and around ADAS, it benefits players like ourselves who offer a full platform solution that's integrated, where we take a lot of that intelligence out of the sensor, put it into the actual domain controller so that we get more efficiency or productivity. And again, the ability to scale, the ability to scale from L0 all the way up to L2, L2+.

That's really helpful. And on this SVA, you talked about 10 development programs and then there's another 20 that you have line of sight on. I wanted to better understand what that means for Aptiv financially? Is there a way to maybe frame the content opportunity that you have on non-SVA vehicles? And maybe some of this goes away, but what is the incremental opportunity when you're adding domain controllers and power data centers and bus bars and so forth?

Yes. So in the aggregate, when we look at what's in front of us for 2022 and our discussions with OEMs about the opportunities in and around a Smart Vehicle Architecture, that -- RFQs are coming to market today, as you mentioned. There's roughly 20 programs that are out there for 2022. It translates into literally billions of dollars. And it includes areas like zonal controllers, areas like CVCs, central vehicle controllers, where we certainly have had a lot of experience from an advanced development standpoint, as you mentioned. So we've worked with a number of the leading OEMs in terms of developing those technologies and those solutions. We've been awarded programs. And actually, later this year, we'll be launching our first. So meaningful opportunity in the aggregate, literally billions of dollars. When you look at it from a content that goes in and content that comes out, it's about driving efficiency in vehicle architecture. The content that comes out is principally copper and copper mass. That's the way to think about it. How do you take weight and mass out of the solution, and we estimate that's about $100 per vehicle. But then that's replaced with roughly $300 of content that goes into the vehicle, which is more advanced connector solutions, more advanced vehicle architecture solution. And then overlaid on top of that, not included in that number is the software element, right? The middleware element, a hypervisor, the operating system, all of those sorts of opportunities that we are well positioned to start with, but we think with the Wind River acquisition that we announced even provides us with an even stronger position.

Let's talk about that Wind River acquisition and how that fits in. Maybe you could just describe what really is the strategic value? What are you trying to integrate into your SVA strategy with Wind River?

Sure. So as you think about domain centralization, as you think about the trend from current vehicles to a vehicle that's architected in a much more intelligent way and the ability to separate software from hardware, as we've worked with OEMs, whether it's on aspects of this SVA solution, whether it's on some of our more advanced ADAS programs or it's -- as it relates to some of our relationships with those players who are developing autonomous driving solutions, a more efficient vehicle architecture is critically important. And again, we've made a lot of progress on the hardware. We're making progress on the software side as it relates to middleware. One of the huge constraints that we've recognized within the industry is, in order to get to where we as an industry want to get, both separating software from hardware, one. Two, enabling our OEM customers to really create a vehicle that is adaptable and you can really provide life cycle management solutions to the OEM customer, you really need to start with middleware. And that middleware needs to go across each and every domain that needs to be open. So there are aspects of it that provide a tremendous amount of flexibility to our OEM customers, depending on who they want to partner with above the middleware stack, that we're providing the OEM with a tool set that, different from today, an operating system is put on a vehicle, it's launch, it leaves the factory, and that operating system is static for the life of the vehicle. With the Wind River studio solution, there's the safety of the security of an operating system that can go across multiple domains, but it's also a system that can be constantly upgraded and constantly connected. So it makes OTA. It makes enhancement of the underlying middleware software. Middleware -- software in the middleware, much more dynamic, much more productive. And it provides more flexibility for the OEM, lower cost to develop software. And the most important thing is the ability to really stay connected to that vehicle and manage that vehicle over the full life cycle. And today, folks who follow our industry, obviously, a lot more software is going into the car. We estimate, today, there's roughly 30 software market -- the software market for the automotive industry is roughly $30 billion. Our view is that's going to grow to $90 billion by 2030. And it's accelerating, and it's accelerating at a rapid pace. And a big portion of the industry participants are really struggling in terms of how do we transition? How do we develop software? How do we do it in an efficient and effective way? And Wind River is about, how do we enable that, one, how do we make it easier to develop software? But two, how do we give our OEM customers with connectivity to the vehicle over the life of the vehicle, which allows them to stay connected to the consumer, it allows them to create different business models, it allows them to generate different revenue streams and it eliminates some of the constraints that currently exist in middleware the way it's done today.

So this -- with Wind River, with this middleware, your -- from Aptiv's perspective, it sounds like this will allow you to get into every domain in the vehicle. So maybe there's another company that's doing battery management system. Maybe there's another company that's even doing the ADAS in the vehicle or infotainment in the vehicle. You are the interface basically that goes into all of those domains, irrespective of who the supplier is?

Yes.

Is that a reasonable way to describe that? And is there a strategic value to Aptiv, longer term, from that?

Yes. Yes. So -- sure. So we're the interface. So that's a great example. We feel as though, one, there's a great opportunity being that interface. Two, we think it's really important that we provide our customers with flexibility. Three, we think to the extent we have a great position in that interface. It positions us well above that particular stack from a feature standpoint, other areas of software that we developed, so that we're better positioned. But again, it provides our customers with the varying levels of control that they're looking for. And that -- again, that's the real reason for the Wind River acquisition, and we think it's going to be -- it's going to make software development for the automotive industry, life cycle management much easier than what the industry or the way the industry is doing it today.

That makes sense. Let's switch gears to talk about margins. The topline growth of Aptiv has been awesome. And it sounds like it's going to continue to be over the next couple of years. But when I went back to your original 2022 margin targets that were in your Capital Markets Day in 2019, and so much has happened since then. But basically, at that point, you were targeting something like 12.5% margins by 2022. And if we excluded Motional, it'd be closer to 13.5%. So you're currently targeting 10.5%, not 13.5%. So my question is, look, I think we could see what drove that, what the differences were, the inflationary items, whether it was COVID costs or copper, things like that. This year, if it wasn't for this $265 million of inflation, your margins would have been up 300 basis points. You have enough leverage on your organic growth and productivity to get something like that. As we look out to 2023, why wouldn't production be up just as much as what you're expecting this year, the 6% or better? Why wouldn't growth over market be just as much? And why wouldn't you get just as much productivity? So could we actually start to see a recovery to that 13.5% target in the next year or 2?

Yes. Well, I'll -- listen, we'll have another Investor Day today. So I'll stay away from specifics. I think the scenario you talk about, so where are we confident? The 8 to 10 points of growth over market, very confident. In vehicle production, in the environment we're operating in today is a little more difficult to predict. Where we sit today, as you know, our OEM customers want to produce as much as they can. Unfortunately, there are supply chain constraints that are impacting that. So I think what vehicle production looks like this year and next year, Rod, is highly dependent upon those supply constraints. Depending on where COVID sits, we spend -- it's roughly, I believe, $80 million a year on protection of our employees, as it relates to COVID-19, so that we can make sure we can operate while there is a pandemic. We'll see how that plays out and when we're comfortable to scale some activities back. As it relates to inflation, those are things that we're working through with our suppliers and our customers. We've made a lot of progress since last year. As we talked about in our earnings call, Rod, there's more progress we need to make, and we're focused on making that progress. And then the piece that we have less control over is the supply chain disruption, right? So their schedules continue to be volatile. We expect supply chain disruptions to continue through the 2022 calendar year. Capacity is coming online. So hopefully, overall, things improve. But we don't get full visibility to, customers are impacted by other suppliers. So those are some -- those are things that we're reacting to. So long way of saying, is there a path to exactly what you talked about? Absolutely, there is. But the dynamic depends on the 2 variables we don't control is, what will vehicle build look like, as we sit here and look at 2023? And then what do the supply chain disruptions look like that are related to that view?

Yes. I mean it's clearly -- I mean there's uncertainty every day in this business. I mean just -- I mean Ukraine is a big producer of neon gas, which goes into semiconductors or a palladium that goes into catalytic converters. There's so many things that are questions. But it's nice to see that 30% incremental margin that you're getting on the business that you've won and the productivity that you're getting. And it's good to hear that you see a path to getting back to that. Last topic I wanted to ask you about was on Motional. Maybe just first of all, what should we expect from that business? It's been a big investment, it's costing earnings about $1 a share. But maybe you could just talk about, from here, what are the things that we should be looking for milestones that show the progress that the business is making?

Okay. So I would characterize it in a couple of ways. So business is doing extremely well, technology, technology roadmap doing extremely well on track, launching a fully driverless vehicle in 2023 in the Lyft network in Las Vegas. You probably saw the announcement with Uber. So we'll be launching that program as well. You'll be seeing some additional -- or I would expect to see additional announcements related to partnerships during the 2022 calendar year. Our real focus though is how do we advance the technology in the ODD. With our partners at Hyundai, we're very aligned on -- it's about technology development, it's about sale of that technology to multiple parties, whether they're other OEMs or they're large owners of fleets. And then most importantly, from a shareholder standpoint, it's about how do we maximize value. And there are multiple ways, as you know, to do that. And we're aligned with Hyundai in terms of that's the end game, how do we maximize value through the technology stack that Motional is developing. So that's the ultimate end game. Everything is on track. It's going extremely well, extremely well.

So the -- we get a lot of questions about this, just in terms of the status of the technology, there are places out there where the vehicles are actually driving around unsupervised with no human behind the wheel in...

Yes. Yes. So we're testing. They're not a part of a network at this point in time. Actually, I was out in Las Vegas, I don't know, 6 months ago and actually had a ride in one of our vehicles that are -- that we're operating on public streets that are fully driverless. And as I said, from a technology development standpoint, everything is on track. And in 2023, they'll be available on the Lyft network. So...

Yes. That's a huge milestone, something that the people described as a moonshot. It's great to hear. The confidence that you have in the technology that you'd let the vehicles do that, it's a big statement. Can you talk about the business model? So what is the model? And I know that Aptiv gets paid for some equipment sales or hardware, there's a recurring revenue stream. Any kind of insights you can provide on how we should be thinking about that?

Yes. So I'd look at it from 2 aspects. One, yes, there's an aspect, there's a commercial relationship between Aptiv and Motional, as it relates to providing Motional with some of the technologies that are developed within Aptiv, not too different from what we do with other automated driving players, mobility players. There is an aspect of commercial relationship between Motional and Aptiv in terms of how do we bring some of those advanced technologies into advanced ADAS solutions. So that takes place as well. The Motional focus is not on building out a Motional network and being a mobility on-demand provider, it's really selling or providing the full software stack to other OEMs or I mentioned other parties that run large fleets. They're in discussions about multiple models at this point in time, whether it be rev sharing or some sort of SaaS model. And that's something, that at this point in time, haven't finalized yet, but are in discussions with several players about.

Okay. But you can't provide any color on this, if we wanted to frame what this looks like, what a vehicle hardware sale would be and what a recurring revenue stream would look like at this point?

Yes, I wouldn't break it out. We could, but I wouldn't be comfortable providing it at this point in time, from competitive standpoint.

So let's talk about that. The other point that you made is that you're standing up a business that's going to be very valuable. And maybe you can describe how that value is going to accrue to an owner of Aptiv. So how does an Aptiv owner realize that value? And when do you expect that to start to become visible?

Yes. Listen, I think there's multiple ways to do that. There's the commercial transaction between Motional and Aptiv. There's a commercial transaction with Motional and outside parties where you see revenue and profitability. And then there's the third aspect with respect to how do you think about monetizing all of Motional? And that's something that we regularly evaluate in terms of if and when it would be the best time to do that. Listen, Hyundai is very aligned with us in terms of, it's about value creation. I can't say that enough. So whichever mechanism or mechanisms make the most sense that's ultimately where we will arrive, and we'll do it when we think it's the right time to maximize that value.

So presumably, they'll be proving out of the technology first. But ultimately, your view is that you're building this in order to realize value for Aptiv shareholders. This is not something that in the long run, there's other aspirations for Aptiv to build its business...

Yes. No. It's -- yes, it's really -- listen, if there are opportunities to enhance and expand, that's something that we certainly would look at. But when we first went down -- developed this path of autonomous driving, it was a couple fold. One, we viewed it to be an attractive market. We viewed it to be an opportunity to diversify the nature of our revenues. We viewed it as an opportunity ultimately from an optionality standpoint, whether that entity is a public entity or not to create incremental value. We viewed it as an opportunity to use those advanced technologies develop within Motional for our ADAS and other solutions. So things like SVA. We benefit from the work we're doing with Motional, but it's all about maximizing value. And I think with more technology development, more commercial progress, a more clear line of sight and communication of exactly what that business model looks like. That's the opportune time to really talk about what are some of those ultimate end gains for monetizing the overall business. That make sense?

Yes, that makes a lot of sense. I've got 1 more minute left with you, and I wanted to tuck in 1 last question. We skipped over electrification, which is huge, right? It's clearly positive. That business was the high-voltage part of the business. It was $300 million for you in 2019. It was $1 billion last year, growing at 40% per year. This is a business that looks like it could be, just based on that simple math, an over $3 billion business, right, by 2025. That alone is like 300 basis points of growth. An interesting thing what we noticed reading your 10-K is, last year, you actually had 4% of your sales with Tesla. And we did the math, just divided by their production and came up with something like $670 a vehicle. And we just did that and said Tesla succeeds and gets to 3.8 million vehicles by 2025. It sounds huge, right? But I mean, that alone is a $2.5 billion business, potentially for Aptiv. So is it possible -- my question is, is it possible that we're underestimating some of these things, like even high-voltage electrification and what that ultimately means for you?

Yes. it's possible, Rod. It's possible. So demand for high-voltage electrification has been extremely high. The growth rate has really been incredible. The number of opportunities from a business standpoint have been significant. We've been very focused on how do we make sure that we're partnering with the right -- the OEMs who are building battery electric vehicle platforms that they're taking across vehicle lines, across markets. And the company you mentioned is a great example of that. So we've grown with them from North America to China to Europe and expect to continue to grow with them. So there's tremendous opportunity there. We're adding to our capabilities today. Most of that is in and around Vehicle Architecture. So it's the connectors, the cable management solutions, the cabling, it's bus bars, it's that full product portfolio. We're adding power electronics and battery management systems, just given our strong position on those platforms, and we're seeing demand or interest from OEM customers. So it's a significant opportunity in the future.

Super. Well, we're over time. I want to thank you again, Kevin, for taking the time to talk to us. It's always a pleasure to speak to you, and hope to see you again soon.

Great. Thanks, Rod. Take care. See you.

All right. Thanks, Kevin. Bye.