Aptiv PLC (APTV) Earnings Call Transcript & Summary

Okay. Thank you, everyone, for joining the Barclays Industrial Select Conference. I'm glad at Barclays. And I think really great to pick it off with Aptiv on the heels of really an excellent Investor Day. I thought what was interesting is you've sort of laid out the pieces of the puzzle over the past few years with SVA [indiscernible] concept software is a lot of new concepts. ADAS, you've heard -- we've heard about that for a long time, but I thought that the significance of that was that you really put the pieces of puzzle together really well for us for a through decade strategy. So thank you. We're going to start -- many of you in the room actually have clickers in front of you. And so to make this a little more interactive, we're going to start with some of the audience response questions. So vote early and vote often. You guys.

No, we don't. We can't give a vote.

Okay. So we're going to start in the back, if you could just load up question number 1, we're just going to get a few of these, and then we'll save you a few for the end. So question number 1, please. You currently own the stock. I think you probably want the answer to be more to skew so you can skew it higher. You don't want it to be overweighted. [Voting]

Okay. So you have some opportunity there. Question number 2, what is your general bias towards the stock right now? And I think that was a really good Investor Day. So hopefully, it's one, and again, you want opportunity to further improve bias. [Voting]

Okay. So mostly positive. And then question number 3, in your opinion, should through cycle EPS for Aptiv should be above peers, in line with peers, below peers? I think the answer there should be one, hopefully. [Voting]

Okay. That makes sense. So I'll leave up here.

So I want to start with a question from the Investor Day. And the way that I've always framed the Aptiv story is the Aptiv story is one of the compasses where you always have the foresight to know, which products are going to lead the way. And you've also done some very smart portfolio pruning adjustments along talking all the way back to 2012. So a, is software the next, so to speak, the compass, right? The last couple of years, we've seen high voltage get the bit none at ADAS getting the con. Is SBA software is the next to the Compass? And then my other question is, we've heard about safe, green, connected for a long time now. So that's not new. But software, there are some pieces that are new for you. Wind River is very different from all the other acquisitions you've ever done. So is this the same Aptiv? Or is this part of this a new Aptiv?

Yes. I think your passing of baton is a pretty good analogy. I would say though as we think about kind of the path and the journey our industry has gone, it's more of a transition versus a transformation. So when you talk about the safe, green and connected megatrends in our industry, it drives certain outcomes for our customers. And we've made sure from a portfolio, from a capability, from a global footprint standpoint, we stand to benefit from that. So we spend a lot of time focusing on, what does that mean for ourselves, for our industry, for our customers. And then how do we make sure that we position so we have a -- the back versus the wind in our face because our focus is about value creation, right? It's about value creation for our shareholders. That's -- we start there and to deliver that value, we have to create value for our customers. When you think about ADAS, battery electric vehicles, user experience, smart vehicle architecture, they really, in reality, have all kind of one thing in common to enable what consumers want, what needs to go on the car, whether that's advanced safety, whether it's autonomy, whether it's battery electric vehicles. To do that efficiently, cost effectively, you need to rearchitect both hardware on the vehicle as well as the software on the vehicle. And as we've also saw in SVA, or I think we tended to sound more like a hardware play, given in our roots. Our view is always about -- it's about enabling the software-defined vehicle. And software needs to be architected in a way that is somewhat consistent with how you think about hardware to enable the life cycle management, to enable the performance of advanced ADAS solution for user experience solutions. And then how do you do that as you were talking to Joe when I came on -- how do you do that in a way that's cost efficient for the customer, and highly profitable for us. So a lot of what we talked about at the last Investor Day is about how does hardware come together to enable software to perform, where do we sit in that broader ecosystem, where do we gain, which is across a number of aspects of our business, where there are areas, where there would be net losses from a content standpoint, which is very, very minimal for us. So we've always viewed it as it's an evolution. I think where we are today is what we envisioned quite frankly, 10 years ago, and it's a matter of putting yourself in a position to take advantage of it in the industry, recognizing the need and with the acceleration of battery electric vehicles, relooking at platforms, the acceleration of software going into the vehicle, I'd say the industry has caught up.

Organizationally, we see our customers have struggled with software. These are very large organizations, and it's been a challenge. What have you done organizationally on your side? Because you've also been historically a hardware organization, and that's changing. So how have you changed because, clearly, customers are changing as well from a software standpoint?

Yes. I think about 5 years ago, our traditional industry approach is tends to be program oriented, whether it's software or hardware. And about 5 years ago, we installed from an organization structure standpoint, a product organization. So software as a product, compute as a product. So we forced our organization to separate software from hardware. Given the experiences we had with our customers in terms of delivering programs and recognizing the challenges associated with doing that, some of it by virtue of how we operated a lot of it by virtue of how our customer operated, transformed our skill sets, transformed our go-to-market, productized ADAS solutions. So we got significant reuse, same with user experience, so that we could actually make it easier for our customers and at the same time, more profitable for us. Now the last couple of years, it's tough to see in our numbers to be transparent, given COVID in 2020, and then supply chain challenges in 2021 and 2022. But as we continue to work through the supply chain issues, which seem to be improving, you'll see that flow through our numbers.

Great. One of the messages that came out last week was really positioning you as a full system provider that you've got the entire stack in AS & UX got the entire stack in S&PS. We've heard other suppliers talk about having the full stack. Sometimes that works in winning programs and sometimes we don't see that. So maybe you can give us a sense of how that full stack solution is actually playing out in winning programs where -- examples where a customer sees you and says, okay, because you've got the full stack, we want to work with you over piece mailing this out?

Yes, I think, ultimately, having the full stack solution means you're able to more cost-effectively design and design solutions to solve customers' challenges. So where is it most evident for us today is in reality on the hardware side, and it's high-voltage electrification. So when you think about vehicle architecture and our capability across a broad portfolio of hardware, now winning awards in power electronics and management systems with additional products to bring in, we bring a significant amount of value to bear, where there are situations where we've had programs where we've reduced weight mass and then as a result, cost by 30% on existing vehicle architecture for battery electric vehicles. That's huge. From a software standpoint, I'd see -- I'd say, it's earlier days. We've been building these platform solutions. We think they're more cost effective. Some customers will purchase the platform. We have an ADAS solution that where we've launched with a large global OEM, headquartered out of Europe that is completely [indiscernible] solution. But we want to make sure that we provide the flexibility that if our customers choose to buy part of that platform, we enable them to do that, right?

Great. One more before we pivot to SVA so we have a good segue to it, you've talked about a very large CPV opportunity. That's always been part of the growth, is expanding your content per vehicle. You said it's $1,500 today, potential to reach $2,300 SVA, Smart Vehicle Architecture is a big part of that. We know megatrends unlocking a lot of content. We also know automakers have many different calls on content and actually what they're trying to do is trying to reduce off the BOM where they can fits it in. So how does that fit into the theme of automakers trying to cut away costs where they can? Are they willing to increase the chance for the [indiscernible]?

Yes. So in our Investor Day, we have a slide we talked about that in a few ways. When you look at from a hardware standpoint, SVA, apples-to-apples to direct cost to direct cost, our solution, grew a cost by 10% on direct costs. When you factor in indirect cost manufacturing footprint, SKU reduction, some other items that, that the math is less direct, the calculus is maybe a little bit more complicated. it's 2 to 3x that. We've had a couple of European OEMs where we've done very extensive advanced development programs, where it was closer to a 30% reduction in terms of their assessment of the cost reduction opportunity versus the 20%. So that's on the hardware side. On the software side, Wind River, and again, we've given the example in our Investor Day presentation. When you look at the flexibility associated with VxWorks is hypervisor that Wind River's developed for aerospace defense, for telecommunications, we look at that opportunity as roughly a 20% reduction as it relates to on-vehicle software costs. When you look at development costs or DevOps tools, what it brings from a software engineering standpoint and productivity standpoint, it's somewhere between 20% and 30%. And then when you look at the life cycle management that, that open architecture that DevOps platform enables [indiscernible] OEMs to basically launch, it gives them future revenue opportunities, life cycle management opportunities create new business models. So our focus is we recognize the technology is interesting. It needs to solve a real problem to enable, but it needs to lower our OEMs. And the way it does that on the hardware side, it's all the up integration, domain consolidation is all the up integration being consolidated, domains combining the user experience of infotainment domain with the ADAS domain. So reducing controllers, reducing semiconductor content, we're taking that cost out, but enhancing performance.

I think I'd just add on that. I think we've also gone past where this is sort of an Aptiv concept that we're introducing to customers. Kevin mentioned on the cost reduction studies, those are actually done with customers. And within the last couple of months, we were global [indiscernible] out a -- from top global OEM, their concept or software architectures so they are Smart Vehicle Architecture. This came from them where one of the mandates of sort of a successful bid was reduction of 75% of the domain controllers in the vehicle, basically getting rid of all of the small controllers, up integrating the software that belongs to those controllers to the large potential compute. So I think it's been past the concept of how to take costs out. I think customers understand. Consolidation of all these discrete domains for over 100 of them in the vehicle, losing that hardware, architecting more efficiently is particularly for BEV systems on a global BEV platform is the way to start cost out, make those vehicles more profitable.

How far away are we from -- because that's like a pretty radical notion. 75% reduction in ECUs that came from 1 customer. How far away are we from that being more broadly is done? Yes, is it a 2030-plus trend or...?

Yes, our estimate -- so the concept of that's where we need to get this year. The -- I'm not sure it's a challenge, but there's a timing issue with respect to launch of new programs, launching new platforms where it's most efficient to rearchitect the car. Our estimate is by 2030, roughly 1 in 4 cars, we'll have an SVA like architecture. But the demand from a cost standpoint is significant. And we talked about the -- roughly $5 billion of SVA programs we've been awarded over the last years. We've launched roughly 3 years from [indiscernible] so that can give you an idea as to how those show up in terms of revenue. The momentum is there.

Great. Maybe we can put a final point on SVA. We've heard about the -- in the smart vehicle compute product set, we've heard about where our [indiscernible] that seems clear. We've heard about zone controllers centralize compute as a product view. Help us marry the 2 together and why it is so critical that you are providing an integrated solution [indiscernible]?

Well, one is about power and power distribution [indiscernible] effectively think about the over the vehicle [indiscernible] given our experience both on the software side as well as the hardware side, the brain and nervous system. And we've talked about in the past, our view is from an understanding standpoint and a capability standpoint it's now out there that has both. So as we develop the design solutions for customers, we are working on the entire SVA structure from a hardware standpoint, more recently over the last year for software, tech stack standpoint or architecture standpoint. There are customers who are interested in buying more of it from us. There are other customers, again, we're -- it's important to us that we provide flexibility that it's not a closed system. That although we feel as though our capabilities and the solution we provide [indiscernible] would be lowest cost, if there's a customer that wants flexibility in the industry that we operate in today has a natural tendency whether we believe it makes sense or not to disaggregate that we provide them with the flexibility to do that. And by doing that, we'll participate in the entire pie and by continuing to develop real cutting-edge solutions that we can commercialize, generate money or save money for the customers and be able to show that to them that we'll win a significant amount of business.

Are you -- do you think you'll see bids for the 2 combined as a system? Is that...

Yes, we have.

Okay. The in-sourcing question because this comes up a lot. We know automakers are trying to own some of the strategic domains within the vehicle, whether it's the powertrain or the software. We hear a lot about that. Help us understand what parts of the SVA, software, compute stack, automakers want to -- let's put Tesla side because they're probably an extreme on all this. But what parts of this would the majority of automakers want to own? And what parts just need to go to partners because they can't deal with the complexity?

Yes. Listen, I think we have a different view. I think if you talk to Tesla in reality, Tesla will say, they need to own 2 things. They need to own battery technology and they need to own driving policy. That's what they have to own. So then that is what is strategic. The rest is an economic decision. Now Tesla grew up as a start-up OEM with a supply base who was always focused on volumes, right? So in order to build cars, they had to develop a lot on their own. As we look at the legacy OEM business today, I think there's an element of we need to be like Tesla, but I think there's also an element of what they're really saying is that old model where you're dealing with dozens of suppliers to do a ADAS controller and ADAS software stack, a perception system. Then weaving that into a vehicle system doesn't work, it's overly complicated. It's costly, connecting the software, optimizing the vehicle, optimizing vehicle performance is highly complex. So the natural reaction is, okay, can we do more of that to simplify drive to simplification? Our view is what's going to have is a -- you're going to have OEMs doing more because more software is going into the car. So some will do more on the feature set, for example. So how does the BMW vehicle perform? How does it drive? Is the ADAS system more or less aggressive? But then the bulk of the activity will be consolidated amongst the smaller group of suppliers, whether that's up integration of hardware or it's up integration with software. So if you're in a single domain or if you're in a single vertical that ADAS is going to get up integrated into an OSP, there'll be an aspect of the software that suppliers can provide. There may be an aspect of the software that the OEMs will want to do, but it will need to be an open system. So our general view is from a consolidation standpoint, up integration standpoint, hardware/software wins at our back, and it's a huge opportunity.

And we're starting -- again, we're starting to see that manifest itself, right? We had a global Level 2+ system -- Level 2 Aptiv Safety System win this year that was almost $3 billion, which was almost sort of 3x the size of a more typical historical Aptiv Safety win. And that is, to Kevin's point, that's the OE deciding there's going to be fewer suppliers on the system, the whole system is going to come together. And making it a global award, historically, they had split the globe between a couple of suppliers. So for their prior Aptiv Safety System, Level 2 systems. So we are not only talking about it, we are starting to see it manifest themselves in the awards and then how customers are giving us business.

I think that's actually a really good pivot, which is you've laid out the product strategy and then you put out a very impressive set of numbers. So I think what's interesting is you're talking about -- you've already had a very strong track record of growth over market. On your numbers, you're going to be at $23 billion to $24 billion by 2025. That's actually one of the largest suppliers out there. And then you have a growth over market accelerating from their 10-plus points, which would put you at $40 billion by 2030, which on today's numbers is, I think, like the top 3 supplier globally. So what is your visibility to that growth over market accelerating? Is it just that these types of awards you're talking about $3 billion, you're going to get more of these large awards manifesting?

Yes. Can I make one comment? Look, our objective is not to be the largest supplier. I got to start there. Our objective is how are we positioned to be the most profitable cash generative business that we can be. When you look at trends in the market and where we're positioned today, I would say, and Joe should go deeper into this, we have clear line of sight in terms of what the opportunities are and what's going on from an overall industry standpoint. And the outlook we provided, we feel is very reasonable in terms of, obviously, near-term, we have a closer line of sight to delivering those revenues in those programs. But you go out beyond that, what we've done in the past in a more normalized supply chain are obviously numbers we can achieve. Sorry, Joe.

No, I was going to actually start at the same place. It's not always -- it's the right kind of growth. It's the right kind of volume, just not the total. Listen, through 2025, obviously, as I think a lot of folks know, 2023, we're on customer schedules, very good line of sight in terms of what we should be building over the course of this year. Launches, continue to build on that revenue and launch activity through '24, '25 gives us confidence. A lot of confidence in that 8% to 10% growth over market planning range. As we start to get out past '26, a couple of things start to happen. One, the SVA revenue starts to tick up. So life to date, we booked $5 billion of SVA revenues on the big central computes or zonal computes. That revenue starts in 2024, but really starts to ramp in '25 and then into '26, '27. So that's a new product line that's growing. We also obviously have Wind River growth accelerating as you get into '24, '25, '26 as well as high voltage. That high-voltage product line, we expect to grow north of 30% for the next 3 or 4 years based on the visibility we have today, and there's no reason to believe that, that slows down. I think we've had a relatively -- I think we have a good perspective on vehicle production. We're assuming 2% vehicle production growth between '23 and '25. So we wanted to make sure that the -- from a growth over market perspective, from a margin enhancement perspective, improved profitability that it's -- the business is set up to do it well in a fairly modest vehicle production environment. Certainly, that puts us in 2025 at about 89 million units. I know there's a view out there it could be higher. We'd certainly be ready if it was higher, but we think we've established ourselves at a pretty reasonable base.

Question on the bookings, and I think this came up on one of the prior questions. So it's clear your bookings are going to grow. But I think the view is that if what I had 10 straight years of $30 billion of bookings, your revenue would be $30 billion. So if you're saying you're going to be $40 billion, at what point do we need to start to see $40 billion of bookings to achieve?

Yes, bookings start to -- it's a fair question. You're right. If we do 32 for 10 years, it'd be close to 32. So you've got to continue to grow. Listen, I think the one caveat there is when you -- we are seeing right higher take rates. Some of the technology or some of the programs we booked a couple of years ago, there's more cars with Aptiv Safety. The mix has been more favorable. I think high voltage is broadly speaking, pulling through a very favorable mix. So there's a tailwind there. But yes, I think as you start to get past the '25, '26 time period, we would expect bookings to continue to grow. I think it's -- bookings will always be lumpy. We obviously had a big step up in '22 -- '21 to '22 from $24 billion to $32 billion. We're expecting around $32 billion this year. So you'll have -- it won't be a perfectly straight line. There will be some lumpiness. But yes, we expect bookings to continue to grow.

Great. Let's pivot on the margins. And I know this margin question has been asked a number of times. But I'll maybe ask it a little differently. So this $1.7 billion of performance in your '23 to '25 bridge that you're talking about. So you've said you're going to do $400 million this year, which implies an acceleration in performance. I think you've said some of the opportunities are manufacturing, redesign, et cetera. Maybe you could just unpack what is it that leads to that performance number accelerating? Is it that you've put in place some of these initiatives that you're talking about, and it just takes some time to get this to pay out?

It's a combination of things. I think the $1.7 billion from Investor Day is '22 through '25. And a big piece of that over the next couple of years, we've assumed the supply chain disruption costs which have been significant for us. There were $315 million in 2022. We assume those go away in '23 and '24. So that's obviously a big step down. The remaining $1.4 billion, you're absolutely right, Dan, it's the more traditional material manufacturing performance, a little bit of benefit from coming from SG&A, although we've historically run a pretty tight ship on the SG&A line. Manufacturing coming from a couple of places, right? We have our -- and we've been doing this for the last couple of years to Kevin's earlier comment, it's sometimes hard to see in the numbers, just given the level of COVID and supply chain disruption costs, continuing to lean out the facilities. We have -- if you think about our product lines, very leverageable product lines, the high-voltage business, heavy interconnect content, heavy connectors, those are easier to scale. You drive a lot of benefit in the plants as you scale those types of product lines. The electronics business is the same way, right, highly automated manufacturing process. On the material side, just like we're expecting a return to annual price downs with our customers within our material performance. We're expecting performance from our supply base in the terms of annual economics. I think we're very well positioned to that. We are -- all of the things we talk about that make us attractive from a top line performance perspective, the strong bookings, the growth over market. The heavy bias towards incremental content opportunities makes us a very attractive customer to our supply base. They obviously want to grow as well. And particularly with the new bookings, there's opportunities where we identify suppliers that are going to participate with us on a given award at the time of award. And obviously, that comes with some commitments on material performance and how to improve our position as they get that added volume.

Great. Let's wrap up with the last few areas, and then I'll ask a final question. So if we could just plop question number 4, quite a lot, [indiscernible] the last few questions here. So cash usage, bolt-on M&A, large M&A, buybacks, dividends. While people are going through, I mean, is there -- you've had a balanced view what's your focus over the next few years?

Yes. Listen, we think there are plenty of opportunities to enhance the business, improve profitability, accelerate growth through internal investment and acquisitions.

Okay. There we -- people want you to pay down some debt also. Question number 5. And I'll just -- great. I'll just note, I know this is 2023, this is actually standard across all companies. But I think given everyone should be saying number 6. So I'm going to say through cycle, do not -- assume this is through cycle, and you're saying $8 of earnings by '25. So let's just say, through cycle. So assess it that way? You want to be number 6 regardless.

Yes.

Okay. So we're going to work on that one. Number 6, share price headwind, growth, margin performance, capital deployment. I would venture to guess, you've laid out -- I mean, there are some points here that you've been working on already, but there's definitely some -- there's a lot to execute here. Would you say sort of the biggest thing you need to work on is just sort of executing this growth successfully?

Yes. I think there's executing that translates into, ultimately, right, growth and margin performance. The reality is of the last couple of years, right? It's been tough to see the underlying strengthening of our business and the enhancement of our -- of the flow on volume, which we completely understand between our goal in supply chain. So that's something that will play out as supply chain improves. And as Joe talked about is something that we're continuously working on in terms of lowering our overall cost structure.

Great. And then let's pull up number 7. I think this is -- I don't know if Jessica in the room.

No, she's knock down this room.

Okay. So yes, ESG. which I think is also -- that was the key message that you were hitting from last week?

Well, safe, green, connected, it helps. That's a big piece of the overall ESG strategy. So...

Okay. I'll just wrap up by asking, you've laid out a really interesting and compelling plan going forward. So what are the things we should be watching for to see this is -- just, obviously, there's growth and there's bookings and there's margins and we understand all that. But one of the other things that we should be looking out to see that the strategy is playing out as you've articulated?

Yes. Listen, I think what are the commercial awards, obviously, from a business award standpoint. So I think that bookings piece is important, the continued growth over market, system wins versus subset of systems and then obviously, margin enhancement, cash flow generation, right? That's ultimately why we do all this and need to deliver on those.

Great. Okay. Kevin, Joe, thank you so much.

Great. Thank you, everyone. Thanks, Dan. Good to see. Welcome back.

Thank you.