Aptiv PLC (APTV) Earnings Call Transcript & Summary

I'll pause every now and then for questions. Hopefully, you'll raise them. You can do the ARS on -- by scanning this card here. Please do that. We're not being interrupted like we usually do, just given the constraints for it. Also, if you send in questions, they might pop up here. But like I said, feel free to raise your hand. Kevin and I and Joe were talking in the hallway when we were here 2 years ago. There was something called COVID that proved to be -- we were worried at the 2-week or 3-week shutdown in China. Obviously, things developed differently. Barclays' timing is ideal. Of course, now we've got war in Eastern Europe.

So I want to ask you then 2 questions to kick off in the macro. One is very tactical on what particular exposure do you have to either Ukraine, do you have any manufacturing facilities there, or Russia, in terms of either manufacturing or shipment side of your base? And then secondly, I want to -- the bigger question, where are we on global production schedules versus what you thought just a few weeks ago when you guided?

Sure. Hello, everybody. So Russia, 2 plants, 100% in Russia for Russian OE production, less than $100 million of revenue, cash flow positive. So it's, in theory, can sort of sit there and continue to operate. Ukraine, 4 plants on the electrical distribution side of the business, kind of be in the western part of the country, which may or may not matter, depending on what happens, obviously, but supporting production in Western Europe. Over the course of the last couple of months, we actually moved a couple of, what I'll call, high-runner programs out of the Ukraine, swapped them, put in some lower runners into the Ukraine just so we were better positioned to manage disruption. So we'll see what happens, but I'd say, it's not overly material at this point. Obviously concerned about employees, safety and such, but from a business perspective, not overly material.

And just so we -- just to add a little broader follow-on there. You may or may not know the answer, but we've always thought of Poland, Romania, Slovakia as parts of Eastern Europe, they're very active in auto and auto parts. Is there much of a auto parts supply base in Ukraine coming into sort of Central Eastern Europe to serve the European OEMs with facilities there? Or is that you're kind of there because you were chasing -- yes, you're going after the lowest-cost country footprint then happened to be there?

Yes. Out of Ukraine, we serve, principally, Western European OEM manufacturers. To Joe's point, the Russian footprint is for Russia market. It's fairly balanced. They tend to be the large European OEMs that obviously...

[ And so mainly ] what supply risk is there to...

There's other suppliers there.

Those [ customers' ] reduction from other suppliers, to be frank.

There's other suppliers there. There's a couple of -- on the electrical distribution side, a couple of competitors there. There's actually been, I would say, for that type of heavy labor, content in -- there's actually been a transition over the past couple of years from Romania to -- from Romania and Poland to the Ukraine. Romania, Poland tend to be now -- where we have our ASUX plants, our connection system plants, to higher automated facilities. The labor has shifted really to a survey in the Ukraine after the last year.

Okay. Okay. So something to watch for. And in terms of the broader production, maybe start with North America. Let's start with China, which we -- out of sight, out of mind, but IHS is continuing to drive this up. They're probably more optimistic than you now for Europe and for China. What are you seeing?

Yes. So let me start with just total. So we expect vehicle production to be up 6% this year, adjusted for our markets. It's a little bit behind IHS, really, if you look at the difference there. We're flat in the first half of the year, up 15% in the second half of the year. That's really based -- we're on customer schedules at this point for the year. We've got this rolling 12-week forecast that we've historically had. That's a little disrupted last year with all the supply chain issues, but we're back on that sort of cadence with our customers. It's, relative basis, a global standard. So we've got pretty good visibility in the next 12 weeks out. We got forecast for the full year. So we tend to be aligned with, at least, what our customers are telling us they want to buy, what they want us to make. We have China flat year-over-year. That's more reflective of China coming back faster last year and some heavy launch volumes at about 26 million units. Europe and North America, we have up single digits. Europe, a little bit higher, mid- to high single digits, really, because Europe was most impacted, particularly in the back half of last year by the supply chain constraints and lost the most units of production. Through -- it's obviously early days here in the year, but have seen some improvement in supply chain disruptions, continues to be very tight. So if there are transportation issues, weather issues, production delays, COVID shutdowns, it can ripple through pretty quickly. But it's certainly better than where we were in the third quarter of last year.

Okay. Great. Well, let's get to then in the heart of it. I want to really talk about your role in the software-defined vehicle as well as other issues, really, around the electronics -- margins electronics, which are really the 2 kind of things that I think we would have talked a lot about at CES. I don't know, but before we do that, Kevin, if you want to say anything, general about the business before we dive into it, the role of the -- Aptiv in monetizing the software-defined vehicle?

Sure. From an overall kind of business standpoint, competitive moat, how we're positioned with our customers' growth outlook, very well positioned, very strong. Obviously, everyone is aware we updated our growth over market outlook. I think that reflects our competitive position. The underlying businesses is performing better than it's, quite frankly, ever performed, at least since I've been associated with Aptiv. Obviously, we're dealing with challenges related to supply chain and COVID still. We're watching those very closely. We're working through -- COVID will solve itself, hopefully, over some period of time. From a supply chain standpoint, inflation standpoint, we're making sure we keep our customers connected to the extent there are areas that we're experiencing material inflation. We're either seeing now with our customers and pushing it through to our customers, renegotiating with supply base, or engineering out alternative solutions. Some of those are easier to do than others, sort of take-off, something we can do faster than others. We'd expect to work through most of those challenging areas with respect to engineering out solutions during the balance of this year. And then, from a material inflation standpoint, we're in a different environment today, whether it's what we buy or the people that work for us, it's an ongoing effort of how do we drive productivity, how do we drive efficiencies and drive out costs. And that's something that, quite frankly, when you look at the base business, we're doing extremely well. Its supply chain disruption, COVID cost is a real challenge, and we're working through this.

Okay. So let's go -- since you didn't do a presentation at CES for investors, but you do hopefully with customers. You've been talking to CES for a number of years about SVA. And more broadly, about the software-defined vehicle, which, at least, for you and I, it's become clear since the Tesla model S that this was the way of the future.

Right.

A few questions. The first is you have development programs, 10 advanced development programs, including 5 for central domain collectors. So in answering -- the questions are kind of [ truthful ]. One, where is the industry on the move from old architectures to intermediary, like, domain controllers, but layered on top to the full clean sheet thing? Second, within that evolution, how do you actually monetize it? As you know, I used to be a consultant, and there's nothing more frustrating than going in with great PowerPoint and then having the client run with your ideas. Or even worse, run with them with a competitor. So how do you actually monetize it? Is it in the connectors? Is it in the domain controllers? And then thirdly, we'll get to how kind of Wind River and where that repositions you in the software stack? I know it's a broad topic.

No, it's a broad topic. I think -- listen, as we've always talked about, SVA is an evolutionary thing. I'd say we're at a point now where we're quite, frankly, it's here, right? We're -- when you think about domain consolidation, I think we have 15 programs that we're executing today. When you think about CDC awards, I think we have 2 that are actually commercial. When you look at zonal controllers, we're launching, actually, on a program this year. So we've arrived, certainly, from a hardware and partially software -- partial software standpoint. What's in front of us, the number of opportunities that we're looking at this year and working with customers on are close to -- it's 20 or more different programs. We're close to $10 billion of total lifetime revenues. So it's here. Those OEMs that are building full battery electric vehicle platforms are further along as it relates to transitioning to a new architecture. So you'll see more progress there. Big revenues for us will show up kind of 2025 and beyond. So we're seeing that evolution actually accelerate. When you think about the software side, it's always been a big part of our view of Smart Vehicle Architecture. SVA is really what enables the software-defined vehicle. So domain consolidations, zonal controllers, CDCs, PDCs, all of those sorts -- those sorts of consolidations that up integration is what's enabling the software-defined vehicle. Wind River, when you think about it, that effectively provides the open scalable middleware that's safety certified, that operates at the intelligent edge. Wind River Studio, really, is what -- with the open architecture, is really what enables our OEM customers to drive upgrades and life cycle management, which is really important for them. It's really important for us. One, it allows -- provides them with flexibility, so they can provide what software they want to provide or integrate with software they want to integrate. We're better positioned to pursue software opportunities up the stack. And it has a by-product of effectively -- when you think about life cycle management, actually, increasing the size of the underlying market, whether it's a user experience -- the user experience market, the infotainment market, the ADAS market, which we benefit from, from a recurring revenue standpoint or will benefit from, as well as our OEM customers. So we would say that middleware, which allows the OEM to operate much more flexibly than open -- of an open platform is really foundational to enable the software-defined vehicle.

I should have asked you to clarify for -- hopefully, we have some generalists on the call. SVA stands for...

Smart Vehicle Architecture.

Right. Just so people are clear. Okay. So can you kind of refresh us on the content uptake? In your 2019 Investor Day, you talked about 6,500 for one of these advanced development content versus 3,500 today. Where is that trending? And then, I think, there's hard time for investors to kind of get a little bit more granular, like, how much of that is from products that are already in the shelf, like the high-voltage connectors? How many is from actually creating a domain controller box or other value-added hardware? And how much is from software or other consultative engineering kind of services?

Yes. I think it's obviously still early days. I think those ranges still hold from everything we're seeing. We certainly -- back then, they were projections. Certainly, there's parts of that content that's starting to come together, particularly around things like high voltage, where we're seeing 1,200 sort of slots content, with some room to continue to grow that on for a full high-voltage system. I would say, the domain controllers and that Smart Vehicle Architecture, you start to get above where we are right now from a, what I'll call, Level 2 active safety system. So that system is right around 1,000 or 1,200. So think of it going up closer to 2,000 when you talk about that compute platform. That includes, obviously, some software that's in there today. Our expectation, as we move into this full software stack, the Wind River Studio product, that will not be a content per vehicle type sale. Wind River Studio is the development platform. That's a revenue subscription service. That's how it operates today across a number of industries: aerospace, telecom, industrial automation. And we think that's actually important. We think the ability to put a development environment around a vehicle platform, obviously, charge for those licenses a subscription basis, where the development effort takes place, the deployment, to your point, Brian, on the OTA. All of that will take place within River Studio under that revenue subscription model.

So now, if we think about the software stack, and I want you to add kind of picture behind it. You've got the -- obviously, the application layers. You are very active in ASU.

Yes.

And active safety is somewhat active in infotainment, potentially, middleware, although that's kind of a squishy concept. I would want you to talk about TTTech and Wind River, how they fit in that. If you go down a layer, you have the RTOS, cybersecurity and then just the core underpinning. So what's your vision of the software stack, where you want to get involved where you get paid? Were you happy to say if an OEM wants to do it their way with their people, they can? Or plugging in another, for example, you deemphasized infotainment, there's clearly, I mean, the other infotainment applications there. So where do you see playing in that software stack?

Yes, really, across the board. So again, there's a lot of software that is going into the car to enable all the technologies that we've talked about. So we estimate software market in a car goes from $30 billion to $90 billion over the next years. Our view is it starts with an open scalable middleware platform that goes across domains. So that's an opportunity, certainly, for us. Wind River is design-engineered. And Wind River Studio allows OEMs to basically -- when you think about software design architecture with containerization, if there's certain assets like TTTech or other solutions in ours within the middleware, it's much easier for them to make those changes to the underlying software. As you go up the stack, given that it's an open system, it positions us to sell all of our features, whether that's -- features and building blocks, whether that's an ADAS solution, a user experience solution, battery management system solution or other. But it's an open platform. So if the OEM is interested in integrating their features into that solution, they're positioned to do so. If they want to utilize another supplier or another partner and integrate it to the system, they have enough flexibility to do that. So again, our real focus is open system, give our customers flexibility. Obviously, from a -- there's a lot of opportunity in that middleware solution from a financial standpoint for Aptiv. We think it better positions us to go up the stack, quite frankly, that the ability to integrate that, which we develop, we should be in a better position. But we want to give our customers choice. And we do that today with several of the software solutions that we sell. ADAS solutions, for instance, there are times we use our full ADAS platform. There are times we integrate some of the features that OEMs want to develop that they consider to be strategic into our platform.

So following up on that, when investors are concerned because [ the alliance ] has software data -- are in 4,500 engineers; Volkswagen, 7,500 plus; GM, with acquisitions in BlackBerry, ex folks in Canada. So they also -- they want to do software. But then they don't really say which software they want to do. Within GM active, for example, an ADAS. But when you go in with this vision, do they sort of say, "Okay, I get it. There's a lot of stuff that's not going to differentiate me in the market OTA that's absolutely by the large GM management, middleware. I'd love you to do that so I can focus on resource"? Or are they still, "I said we're going to do software so we're going to do software"?

Yes, I don't think there's anyone dealing with us that says, "We're going to do software. We don't need your software." So I think in terms of how they operate, how they're interacting with players like ourselves. I think, given the nature of how the vehicle is becoming much more software-defined, given the fact that software drives much more of the performance and response of a particular vehicle, given the growth that's taking place in that space, the reality is it's natural for an OEM to say they're going to do more, especially in areas where it defines a specific brand, kind of, experience for performance, which they do today, with a human-machine interface. Certain OEMs want a certain look, feel and response. So that continues. I think those areas where you can bring forward a value proposition with cost, quality from a speed to market, enablement of a recurring revenue stream for the OEM faster, sooner, they're all ears. I don't think there's any OEM that says, "Listen, we need to do everything because it's religion." And we believe we [ dev ] the full software stack.

Okay. Why don't I pause there to see if there's any questions from the audience about Wind River, the software stack. One back there.

Curious what the competitive landscape is for these development environments? Like I'm not an expert, but I follow BlackBerry a little bit. And they talked about QNX. Like what are the competing ecosystems? And where the competitive dynamics to get the incremental new OEM to commit to your platform?

Go ahead.

Sure. There's certainly -- I need to get a sort of differentiate between sort of what I call sort of development ecosystem and sort of existing products, right? There are a number of automotive-grade, automotive-standard, real-time operating systems in use today. We partner with all of them. So QNX would be one vector. There's Mentor Graphics is involved in the space. There's a number of AutoStore developers. Those tend to be, at the moment, a sort of copy per car, right? You burn them into the controller, they're in the car, and they effectively stay that way for the life of the vehicle. And going all the way back to 2019 in our CES presentation, part of the vision for SVA was hardware, but the other part was software. And over the last 1.5 years, we really started to focus on, okay, what needs to happen within that vehicle software stack to reach the desired goals of our customers in 2030 around enabling software revenues off the vehicle, selling enhancements, having relationships, commercial relationships with the second or third owner of the vehicle? That software stack needs to be able to be managed by vehicle, by platform from a central location. You have to be able to develop on a platform. You have to be able to deploy that software, enhance it, upgrade it. And we're sort of running out of time here. So over the course of the last 1.5 years, as an industry, we're running out of time, okay, if we really want to do some of these things in 2030. And as a part of that strategy, one of the things we start to look at was, hey, listen, automotive is having a hard time answering this question around life cycle management, deployment enhancement, as it's been solved in other industries, which is, in a way, how we found ourselves to Wind River, who have, at Wind River Studio, set up. There's tens of thousands of installations now on the edge, the intelligent edge in telecom and aerospace of the software system managing the life cycle of the software. And I think they're fairly unique there. Right now, within automotive, it's still very much sort of the core RTOS was burned in, and it stays that way. And most of us know, there's some OTA capabilities around things like navigation and some of those features. But if there's a real issue with the software in the vehicle, you're -- as the owner of the vehicle, you're going to get a letter in the mail. You're going to be told to go to the dealership. You're going to give your car to the dealer. You're going to wait in the waiting room. And they're going to plug the car in, and they're going to go through their software, patch process or reflash process. And obviously, if you want to realize the ambitions of the industry by 2030 of deriving revenues, having relationships with end consumers, that model is not going to work, right? You're not going to hope that the second owner brings the car into the dealership, and you somehow establish relationship that way. You have to have life cycle management. That's on the revenue side. Quite honestly, the other opportunity here is on the warranty side, right? About half of the industry's warranty expense is on software at the moment, It's very costly to update that software, very -- it takes a long time relative to what we can do on a phone or other industries can do from a cloud perspective, with the software, being able to be managing life cycle software for the cloud. And you got to be able to start to address those warranty costs, particularly as the software becomes more complex. So we think there's a number of things out there, companies out there that do parts of what we're talking about. But we really think the Wind River solution, our solution with Wind River will be the first to holistically be able to have a -- you deploy the software in 0.5 million vehicles. It's a platform. It's like the 2023, 2024, 2025 model year. That software is then maintained by somebody at the OE off of, what they call, a single pane of glass.

Safety-certified, requirements that the traditional -- the industry is very focused from an overall [ for example ].

Exactly. Just a follow-up on -- one of the things we really like about Wind River, it's just 2 things that I think are relevant. First, we got to know them as a development partner. Our first -- we signed a collaboration agreement earlier in 2021 to codevelop that software stack. So we got to know them, their technology, their capabilities outside of the M&A environment, which was helpful, right? You just had more time, and it was more collaboration. But one of the things we confirmed as part of that was the learnings from other industries that can be ported to automotive are huge. So that Wind -- just for example, that Wind River Studio product today is managing tens of thousands of software installations for a large telecom provider here in the U.S. It's managing their 5G, about 1/3 of their 5G sites. Now it's going to be rolled out completely. And you may sit there and say, "What's a 5G site and a car have in common?" From a software perspective, there are some similarities, right? They're edge devices. They sit out on the edge. They're not continually plugged into a -- to the enterprise. A lot of the computing needs to happen on the edge because the latency, you need some connectivity to the cloud to maintain the software. But given the latency and given some of the critical decisions you have to make on the device itself, in the car or in the tower around signal processing, you have to have a software package that can manage on the edge. And again, we just think it's a demonstrated capability out on the edge that we think works very well to automotive.

And not something I would imagine the OEMs -- they know their need, but yes, investing in a OTA update capability, plumbing would seem to be something where they were smart. They turned to...

Yes. There's no need for 20 of them. Listen, I think our view would be, if you fast forward to 2030, are there 2 of the -- 3 of these solutions in the industry? Most likely. Are there 25 because each OEs done it themselves? Unlikely.

Right. Let's -- more questions on software at the back? We may not even get the chance.

A quick follow-up. How are -- is it just certification process that you talked about the Wind River already being certified? [indiscernible]

Yes. Well, they have a process where, on the real-time operating system, VxWorks, it's fundamental to the underlying architecture. So it's not third-party certification. It's validation based on the way it operates and the way it's upgraded.

So it's effectively certified now. What you need to know in Wind River, that middleware and RTOS has been around for years. It's been deploying over 2 billion devices worldwide: aircraft, industrial automation, telecom. Studio is the development environment that's brought it up, connected it to the cloud and allowed this to take place. So the underlying software has been certified for years.

So on-vehicle, off-vehicle, on Studio, when you think about the industries, they sort of like aerospace and defense mission-critical, right, that safety certification, performance certification is critical?

Yes. Just following up, since we're just on the software theme. You recently hired some from Microsoft, Sophia. Can you describe that role and kind of just then, maybe, organization between Wind River, ASUX and SPS? How are you organized to go after this opportunity? I can't pronounce the right name.

Yes. Sophia Velastegui, she comes from Microsoft, worked at Google, worked at Apple. Strong software and interesting semiconductor and hardware background. So full understanding of those linkages, strong background in AI machine learning, all her experience really on productization. So if you look at, I think, where our industry struggles is how do we evolve from programs to products, right? And she comes with the experience to help us effectively frame all of our technology, although we have a product rotation, we elevated and put more resources, focused on driving consistency, driving reuse, driving productization. So a real focus on how do we continually build and strengthen our IP base, right? How do we drive more reuse? How do we make sure that as we're involved in these customer programs and solutions, we're doing it along the road map that enhances the underlying ADAS platform, user experience platform, battery electric vehicle platform. So she is bringing that sort of discipline. Within our organization, we operate it as a separate business unit, as a separate business unit that is a part of our ASUX segment. We operate it as a P&L so that we have constructive tension between the product org and the delivery org. And it's, really, how do we force that sort of mindset, how do we force collaboration across our segments in our business units and how do we make sure that we have a very disciplined product development process.

Great. Any further questions? We have time for maybe one more. Okay. And do you want to say anything about when we could meet in person again and see all these things in terms of an Investor Day sometime this year?

Yes, sometime in the back half of next year -- of this year.

Just making sure we clear all the -- much time as we can between COVID surges this and that. So we'll plan on something for, I would say, probably late Q3, early Q4.

Okay. Thank you very much. Thanks, Kevin. Thank you, Joe. Always a pleasure.

Thanks very much, Brian.