Aptiv PLC (APTV) Earnings Call Transcript & Summary

Okay. Once again, I'm Ryan Brinkman, the U.S. automotive equity research analyst at JPMorgan. Very happy to get going with our next presentation, always very informative to have Aptiv with us including next to me, Joseph Massaro, Senior Vice President and Chief Financial Officer; and next to him, Kevin Clark, Chairman and Chief Executive Officer. So with that, Kevin and Joe, thanks so much for coming to the conference.

Thanks for having us. It's good to be here. It's good to see everyone face-to-face.

Great. I thought to start off with some questions, and then we'll open it up to the audience. And I'm going to start with a general industry question, not really necessarily specific to Aptiv and not on Europe. On North America, on normalized demand in North America, talked about SAR in the U.S. Prior to the pandemic, we average 17 million sales for many years. We're at 13.7 million now, with the most often suggested reason being the clear constraints on supply, which obviously is a huge factor. But I was wondering if it might not be more complicated than that. Whether demand in terms of unit volumes is really likely to truly come back to pre-pandemic levels or over what period of time, just given how much more expensive the vehicles are 46,000 versus 35,000 in 2019 and maybe the price moderates too. But should it be the case that we're in some sort of prolonged period characterized by lower volume and higher price? How do you think suppliers or Aptiv, in particular, is positioned for that?

Yes. Listen, I'm not sure we have a perfect line of sight to ultimately where vehicle production can go. It seems like yesterday, we're at roughly 98 million units of global vehicle production, right? We're certainly not operating at that level today. Our outlook is roughly 81 million, 82 million units. So as it relates -- so that's the industry backdrop. Clearly, today, the industry is constrained from a production standpoint just given supply, whether it's semiconductor chip or some other inputs. So that has impacted production across every region. When we think about Aptiv, and when we think about the Aptiv business model, our focus has really been on how do we make sure that we have a product portfolio that sits in areas that, regardless of vehicle production, we're growing well in excess of underlying vehicle production, one; and two, we're enabling the macro trends within the automotive industry. So making people safer, making them greener, making them more connected. And I think when you look at our revenue growth, when you look at our bookings, when you look at our framework for growth over market at 8 to 10 points of growth over market, even with a relatively low increases in vehicle production over the next several years, our revenue growth is extremely strong. Now for the underlying market to get stronger, we need to see the supply chain get stronger. We need to see more availability of select parts. It looks like that's getting better, not quite as fast as we'd like it to, but we certainly are seeing some improvements.

Okay. And I wanted to get your thoughts, too, on the pace and progress of customer discussions to recover a lot of the premium costs that you've been incurring over the past year, including diesel, freight, logistics, natural gas, ocean shipping, electricity, all that stuff and the likely impact to Aptiv's margin. And maybe you can answer it in a couple of ways. First of all, with regard to the current contracts, which didn't anticipate these premium costs, which I think you're looking for collecting on a lot of that in the back half of the year, $4 million out of $500 million, maybe already in the bag. I heard you say at another conference, Joe, that you could take a harder line maybe with some customers who aren't playing ball. What's the latest maybe with regards to that development? And then, secondly, with regard to new contracts that have been signed over the past year, with the lessons learned from these other costs have been tracked higher, are you maybe better protected in some of the recent or upcoming contracts should noncommodity supply chain cost surprise higher again in the future.

Do you want to go through the numbers?

Sure. For sure. No. So we've direct material inflation, that's a lot of it semiconductors. We buy a little less than $2 billion of semiconductors a year. A lot of the cost increases we've seen in semiconductors and electronics, about $500 million for the year. We're working with customers to pass through those price increases. Now this year is a little broken up as those discussions are happening, why we're shipping the higher-priced parts. So we've got some sort of retroactive recoveries in addition to increasing the piece part price on those parts. But we'd expect to finish this -- by the time we finish this year, to have passed on that $500 million into piece parts and start next year sort of at a reset level with those direct material costs in. Currently, of the $500 million, we have $400 million committed to by customers and $300 million of it in POs, meaning we've got it and updated the contracts and our pricing that as part of the piece price. So still some work to do, but making good progress. I think my earlier comments that you referenced, listen no customer is happy to accept the price increases, right? We're obviously not excited to get them from our supply base and some of those conversations can be difficult, but there are leverage points. I think we've seen other suppliers comment around at some point, not necessarily willing to ship parts that you're not getting properly paid for. And what we do are complex systems and would expect to get paid and get paid a reasonable margin for those. And I think the conversations are progressing well, but there are some that are a little more difficult than others.

As it relates to newer programs, so those all reflect the updated macro. So when you think about inflation, whether it's on material or labor, they all reflect those updated macros. In addition, for those that are more complicated, where there's a lot of systems integration, where there's a lot of semiconductor or other content where it can be subject to certain areas where you see incremental inflation or less, you see spikes in inflation, the ability to work with the OEM to substitute particular supplier, whether it's directed by them or it's a supplier that we select with a different supplier. So that gives us more flexibility to both managed supply base as well as drive down costs.

Okay. Great. And we discussed how you're working with customers to obtain higher pricing to account for higher non-commodity supply chain costs. And you're incurring while fulfilling the current orders that were negotiated in the past before cost increased. And we talked about how maybe you're thinking differently about negotiating new contracts that you're signing possibly to provide more protection of future costs should track differently. But do we also need to think about how the large amount of business that you won in recent years before the cost increase, but have yet to launch, right? So because Aptiv is a growth company within the auto industry, presumably maybe you have more exposure here than some other suppliers. Are you working to potentially renegotiate already signed contracts that have yet to enter into production? Or do you need to sort of wait to see what the future costs are before taking action? Or just how to think about that kind of issue?

Yes, it's a great question. So our approach on that is twofold. It's; one, for those programs where we haven't launched the program. So we're not at SOP. We start with the supplier. So the supplier that's engineered in discussions with the supplier about cost, about price increases. Depending upon the response to that discussion, we introduce or evaluate introducing additional alternatives or replacement parts. So most of you have probably heard us talk about, since last year, we've implemented 160 product redesign initiatives with varying levels of complexity, mostly in and around the semiconductor space. Some require a significant amount of validation. So it goes into a system like an ADAS solution, some actually very little validation. So in those situations, we can make that change quick. So I would say more of the focus is on that, and then augmenting that is discussions with the customers about where we are now from an overall economic standpoint, and what we need from a price standpoint to make -- for it to make sense for us financially. And if we can't work those 2 out, well, it's just business that we're not interested in, we'll figure out a way to transition that business to someone else.

Great. And on your recent 2Q earnings call, you sounded a quite cautious note regarding industry-wide production in Europe in the back half of the year. IHS is, I think, looking for a 3% increase in production there this year for the full year, whereas you recently anticipated a 5% decline sighting softening production schedules recently received directly from your customers given ongoing semiconductor shortages, which may be a little bit more acute in that region and various different macroeconomic factors. Now I'm going to be introducing IHS Mike Wall, this evening. I used to work for a competitor as my first job out college I'll be the first to tell you. They don't know. They don't know what's going on over the next weeks or months as we've all found out over the past couple of years. Now I think where their value add is, is they know that an automaker is launching this plant or this factory over the next year and aims to increase their share in Brazil or whatever, right? So they don't have anybody counting cars coming out of the like Orion facility or whatever, right? So I am much more interested in what you guys have to say. I hope it's not true. I'm a little worried that it is because you were basically the first to talk about component shortage is in the electrical parts and semiconductors back in like November and December of 2020, when we didn't hear about it from the rest of the industry until CES in January of '21. So maybe just tell us what your sort of on-the-ground knowledge is, and possibly if there could maybe be some conservatism in there?

I think we're going to disappoint you again. So maybe it's important to note, and maybe we were different from some players. The forecast we give, how we operate, what we communicate externally is based off of vehicle production schedule. So it's schedules we received from our -- directly from our customers. Now the closer they are to production, the more accurate they are. And the last -- to be honest, the last year, 1.5 years, just given the volatility in supply, I would say they were a bit less predictive. However, when there were adjustments over the last year plus, they've been to the downside. Maybe different than other suppliers. We have a large business, our EDS business, a wire harness business that is the #1 player in the world that across the globe is on 1 of every 3 cars produced. So as we look at that business, as we look at customer schedules, our view is that business represents the market, right? It represents a unit of production and does that extremely well, and it's very distributed across regions. It's very distributed across customers. So we have a high level of confidence in their underlying production schedules and what translates into an operating plan, which translates into our financial forecast. Now a part of what we're seeing, and, again, we're in dialogue with these customers, and it's tough to parse is some of it is supply related. So some of it is the constraints associated with semiconductor and other parts. Some of it is demand related. And it's tough to get a clear view of the breakdown of those 2. If supply does improve, it's possible that we see some improvement in those schedules. Some, but there's still a demand element there. And as I said, we feel more confident in the schedules that are kind of 8 to 12 weeks out, maybe a little less confident in those that are 12 to 24, so kind of Q4 schedules. So there may be some changes there. But based on where we sit today, what we see, the discussions we're having with our customers, most importantly, what their orders are, and when you think in a tight supply chain environment today, when you think about lead time on products, it's longer than it's ever been. We need the parts in our system. We need the labor in our plants, right? We need to lock in the transportation capacity to ship products, we feel highly confident in what our current outlook is.

Maybe shifting to a brighter spot. Bookings in the second quarter were pretty much off the charts, right, $14.2 billion versus the prior record for any quarter ever, I think, was like basically half that at $7.5 billion. And in the first 6 months of the year, you secured over $20 billion in new awards, almost as much in all of last year. So some questions around that, including -- is the strength more or less across the board? Or are there certain product segments or technologies that are driving the order intake? Is it driven more by industry adoption of products and technologies that you and others are levered to? Or is maybe Aptiv gaining share on sort of future revenue within these growing categories or both? And then going forward, what do you think the outlook for bookings is? And also, we heard during the pandemic, and I think during the most acute phase of the chip shortage, particularly in like 2Q, 3Q last year, the automakers, which just like all hands on deck, coping with emergencies, putting out fires that temporarily, maybe there were fewer programs being put out for bid. So is this kind of like maybe a bounce back from that, and then we could expect some normalization going forward? Or just how to think about this incredible trend?

Sure. Let me start there because I think it helps set it up. So we certainly saw in 2020 delayed bookings as a result of COVID. I would say that generally balanced out last year. So I don't think, particularly on some of these larger key programs that are scheduled for launch in '26 or '27, I think OEs are very focused on getting those out because they're so tied into their vehicle electrification strategy, some of their platform consolidation. So I don't think this is sort of a big catch-up. With that said, bookings are lumpy. And I'll go through -- this quarter, we had almost a $3 billion award for a global active safety system for a large European OE that will go across multiple platforms. So that is just a large booking. It was a very strategic booking. We'd obviously been working on that for a long period of time, but it's not one that's going to repeat every quarter, right? That's not the kind of thing that gets regularly awarded. So bookings are going to be lumpy. Really seeing them across the board from both a regional perspective, customer perspective as well as a technology perspective. So I mentioned the Active Safety Award, which is a very, very significant award. Our high-voltage business continues to be very strong from a bookings perspective, our high-voltage electrical architecture. We booked over $2 billion year-to-date. I bet we doubled that or come close to doubling that as for the full year just based on what we're seeing. And that is a business that, over the last couple of years, has grown to about $1 billion in revenue, very profitable at that segment average. And we expect that business, even at the size it is today to have a 30% growth rate for the next few years as those bookings come in. The other thing that's very exciting and Kevin can certainly speak to it, for a long time, really if you go back to 2018, 2019, we've been talking about our smart vehicle architecture. Our vision for how the architecture of the vehicle changes, how you get controller consolidation, you get larger, more powerful computes that control more aspects of the vehicle. And at the same time, you take out a number of the smaller ECUs on average, a number anywhere from 100 to 140 smaller ECUs in a car today. Those get consolidated down. And we've started to see actual bookings. Saw 1 late last year and saw 2 significant ones this year where actually we're having SBA awards, commercial opportunities. So we're seeing our advanced development efforts that have been in place with about 9 OEs over the last couple of years actually come to fruition and develop into commercial bookings. We had one for a central compute platform, which will be sort of the large controller within the vehicle, within the new architecture as well as a large award for zonal controllers, which the way to think about that, it's a -- to some extent, it's a precursor to getting to full SVA where you've distributed the compute within certain sections of the vehicle instead of consolidating to a single or a single sort of redundant systems. So bookings remain, again, strong across the company, strong across regions and really focused on those key technologies that we've really been growing over the last couple of years.

Great. And what does the record pace of these bookings? We just talk about -- what does it imply for growth over market in coming years as those bookings translate into revenue? There are a number of factors impacting growth over market at the moment, maybe causing it to run super-hot, right, like segment mix and so forth. But presumably, the trend in bookings that we've seen recently, it would reflect the more structural factors in large part. Does it provide upward pressure, do you think, on the potential for out-year growth over market?