Aptiv PLC (APTV) Earnings Call Transcript & Summary

Thanks, everybody. Delighted to have representing Aptiv Chairman and CEO, Kevin Clark; and Chief Financial Officer, Joe Massaro, who is also Senior Vice President of the business. Thank you. Thanks for joining us.

Thanks for having us.

Nothing going on in your industry, just another day at the office, right?

A lot going in. A lot of good things going on.

What are you most excited about, you want to convey to the audience at the top?

I would say, most excited about the momentum in and around re-architecture of the vehicle, both from a hardware and a software standpoint to drive towards software defined. So what we're most excited about is what we're well positioned for.

And how we track into the end of the year in terms of like relative to your 3% to 4% full year outlook, anything you want to update us on or...

No, listen, obviously, we're going to see what happens on the 14th here with the UAW, and that could obviously impact things. But apart from that, remain confident in the outlook, and we took our guidance up in August for increase in vehicle production and some of the changes in macros and some better performance in the business, and so continue to track well. Again, waiting to see what happens with the strike, but continue to track well.

Okay. So since you brought it up, how do you prepare for this kind of uncertainty around strikes. I mean not your first rodeo there. You've seen it before, but any messages in terms of your exposure and kind of actions that you can take to mitigate disruption?

So North America is roughly 30% of our revenues, and the big three account for roughly a little bit north of 50% of that overall business. We've been through it before, to your point, the important thing is that you're connected and communicating with customers, which we have been as well as your supply base. We feel like we're well positioned to flex either down to the extent there is a slowdown in production or up to the extent we need to ramp up production in a period of time. And we do that from a labor standpoint as well as from a supply chain standpoint.

So it is going to bring to point though, the -- just the issue of labor inflation, right? And we see these true-ups, we've seen them in other industries as well. We made a point to our clients that the D3 don't live in isolation, if they're represented, the members do see 20, 30, 30-plus percent inflation. If not that Tesla is going to stand still or the Japanese and Korean aren't going to have some inflation, too, right? They share that world together. So as those OEMs see higher costs, they're going to lean on other areas, including the suppliers to try to get it. So on the -- while material costs abating in your business, clearly, would love your thoughts on the longer tail of labor cost inflation and kind of how significant is labor across your business. And anything you see changing in the next few years in terms of cost recoveries in '23 as well and '24.

So listen, inflation for all of us. We went through a protracted period where in reality, we had no inflation or disinflation, right? And I'd say for the last 3 years, whether it be in material, whether it be labor or others, we've all seen it. We've all experienced it firsthand. I think there's an element of from an industrial standpoint, that muscle getting reworked, re-recognized. And that's obviously taken place. So we've doubled down on our focus in terms of what do we need to do from a productivity standpoint, what do we control within our four walls, how do we partner from a supply chain standpoint, where we source to the extent where we can't basically offset that inflation, the conversations with our customers about pricing and price increases, which has been pretty significant over the last 2 years. And then importantly, for our customer base is recognizing the fact that they're facing technology change, adoption of new technologies, some of which are high cost. And then the inflation, how do we make sure we bring forward to them solutions that are lower cost that drive their cost of develop, their cost of introduction down while at the same time being margin accretive for ourselves. So when you think about whether it's our high-voltage electrification solutions that we approach those holistically, whether it's our ADAS platforms, how do we approach and deliver on solutions that they can adopt that perform at industry standards but deliver those at a lower, more attractive cost for our customers.

Kevin, how is Wind River integration going?

It's going great. It's a light integration. Obviously, it's a software business. So we've basically given Wind River the support in terms of how do we make Wind River grow both in the markets where they operate. So they're traditional markets like aerospace and defense, like telecommunications, the industrial markets. Those markets where you've seen mission-critical needs and at the same time, the desire of customers to virtualize hardware, separate software from hardware. That's taking place in those markets. So we've been very focused on how do we continue to grow in those markets and then how at the same point in time, do we introduce them to our automotive customers, which we've been doing and how do we get customer pull within the automotive industry where we're trying to enable the exact same thing. How do we separate hardware and software. How do you do it in a way where, just given the nature of our product, the safety certification requirements that are put forward, how do you do that where a customer is confident that the software is going to operate when it needs to, just like a telecommunications customer or an A&D customer. And how is the software architected in a way where it gives our OEM customers the most flexibility to update, upgrade and do things like OTA. So it's going extremely well.

From memory, at the time you acquired River Automotive, was sub-10%, maybe correct me -- just -- I don't think it's 5%, but it was sub-10% of the business. Has that changed? Or is that on the path to changing? Remind us where you see that kind of going to mid-decade -- or do you want to?

Yes. No, we've talked about it. So it upon acquisition, it was roughly a $400 million business in total, less than 10% automotive. So a lot of opportunity. We've talked about Wind River in total being sort of approaching the $1 billion in revenue in the '27, '28 time frame. And by then, we expect about 30% of the business to be automotive. So we're going to continue to see really strong growth in the A&D, telecom, industrial markets that they currently serve. But we really see an opportunity for accelerated growth in automotive.

Thanks, Joe. And for both of you, give us the AI pitch. I mean you could giggle, you could chuckle, but like it's -- you run a complicated business, tons of data, the needs and demands of your customers and the technologies you're focused on, the cutting edge, bleeding-edge of edge compute and I don't know if you -- just in your own words, how does -- from an investor value that and when what are some of the proof points in your business?

Yes. Listen, we use AI on some of the obvious places are in and around the product areas, right, obviously, when you think about ADAS solutions, you think about autonomous driving, when you think about enhancing and developing perception systems in their performance, obviously, that's the most obvious application. And the benefit there is more rapid advancement of the underlying performance of the technology and doing it at lower cost. So that's the area where there's a tremendous amount of focus. Joe and his role as SVP of Business Operations, there's also a real focus on how do we use that within how we operate; what we do from a process standpoint; what we do from a back office standpoint; how do we make ourselves more efficient, more effective; how do we reduce the dependence we have on people and [doing things] manually.

Anything you want to add here, Joe?

No, listen, we've looked at it or are looking at it really across the organization. There's certainly some back office functions where we're continually looking at how to manage the cost structure more effectively, and we think there's some opportunities there. And then as Kevin said, how to streamline development. And I think one of the areas where we've been most successful over the last couple of years is really using it AI, ML in the -- in radar development with our next-generation radar and our 4D radar solutions.

Kevin, we know each other for a long time. And one of the things I admire about you, one of the many things I admire about you and your -- in addition to your ability to execute, frankly, and run and work on a great team to execute is -- your kind of conservative approach. I find that at times when the world is going through exogenous shocks or whether it's a credit event or a strike or whatever or see change, you're kind of like -- I'm paraphrasing you kind of be saying Adam, our business is doing well, but we are concerned about this. We are looking at this and you try to stay ahead of it. You put a lot of stress on yourself.

[indiscernible] here.

Okay. Takes one [indiscernible]. Anything kind of concerning you right now on the edge in terms of if you're seeing the rise of the Chinese or some of the valuations of some of your customers in Europe and just how -- just like the market's telling them something the market's telling Volkswagen that you -- you're not just over-earning, but you might be like going like becoming Kodak. Like is this kind of stuff concern you or anything else from the macro environment is keeping you up at night, I know you sleep well, is a little bit .

Yes. Listen, I mean, I think we're always appropriately paranoid. As a management team, we make sure we are and others that work with us are appropriately paranoid. And we feel like we've positioned the business. We've taken actions and we positioned the benefits -- the business to benefit from the tailwinds that are out there. We do. However, at the same time, we really focus on those things that we control from an execution standpoint, how do we make sure that we have the right management team in place, how do we make sure that management team is executing across our 130 manufacturing facilities across the world, on a day in and day out basis. So how do we do that? How do we position ourselves from a geopolitics? So one thing out of our control or the geopolitical situation. And obviously, that is an area which I think the world is much more concerned. But how do we offset potential risk, whether it's regional sourcing, supplying China for China, North America for North America, Europe for Europe, how do we position us to do that, which we've been on that path for the last 4 or 5 years. And then just given the complexity of our industry, the transition, our customers are going through the inflation that Adam talked about, how do we really focus on, in addition to providing technologies that make vehicles safer, make them greater, more connected. The reality is they need to be done at lower cost. Our customers are under tremendous pressure from a cost standpoint to decide the labor issues in the U.S. right now. And how do we make sure that we're enabling them to deliver these technologies at lower cost at higher margins to ourselves. I mean that's obviously the focus that we have. And how do we give them the flexibility to if they want to do some activities internally, some aspects of the software stack or software development, they have the ability to do that, but it's often off of an Aptiv platform.

I think some of your customers, OEM customers -- maybe overpromised is a wrong description. But let's say, in their press releases and statements over the last 2 or 3 years on their decommissioning of ICE and the acceleration of EV, maybe need to like reexamine that and recalibrate some of that adoption. Is that something that you consider again with your conservative approach of planning and execution? And how would that affect your business in EV adoption in some of the Western markets was 1,000 basis points lower by 2030?

Yes. Well, we've had this conversation in the past. We've changed presents challenges. Recognizing all those challenges sometimes is hard. I would say as it relates to [BEV adoption] and some of these other big swings, we've been relatively conservative. We're conservative on our overall penetration rates. We've been very selective in terms of the customers that we've partnered with in terms of BEV adoptions and the platforms that we're on. We've contracted in a way where we protect ourselves if volume doesn't show up. And in exchange for that, we've tended to give them sort of platform solutions. So when you think about the wire harness, you think about the bus bars, you think about the engineered component solutions that, again, are accretive to our overall margin but a lower cost to the OEM. And that's been the trade-off. I don't know if our customers should be more conservative. We do know how we should manage the business and the [path] we should take. And we feel like we've done that pretty well.

I think it helps level the playing field between Tesla and its competition? Or does it kind of pad Tesla's lead given their scale and vertical integration and the amount of content that they have in place onshore relative to their competition. I don't know where you come out on that?

[indiscernible] Yes. That's a great question. Listen, they're a great company, and they've been focused on how do they build a BEV platform for a number of years, right? Actually, well beyond most of the players out there a BEV dedicated platform and that's presented success. I think IRA in terms of access to capital and government funding for those other than Tesla, obviously, it makes it easier for them to invest. But obviously, they need to develop solutions that are competitive with the overall market.

I don't -- it kind of does actually. It kind of does. It's easier to invest. Questions from the audience?

I didn't say it.

I'm pretty words in around. Forgive me. Any questions from the audience for Joe or Kevin?

[indiscernible]

Yes. The pipeline is very active. I think we've got a great track record of acquiring and integrating -- if you look at where we'll focus, I think you look at where we've been focused, right? I think the add-on type acquisitions that are additive to product line, product line capabilities in both SPS and ASUX, our two operating segments. We see a lot of opportunities there. So things like Intercable, the acquisition that we did last year that provided high-voltage bus bars, 8-generation high-voltage bus bars that have actually seen tremendous customer traction since we closed that deal, continuing to invest in the interconnect space, both in automotive and nonautomotive. As we talked about at Investor Day, the Engineered Components, our interconnect business within SPS is over $6 billion in revenue. It's a significant business now. We've grown that considerably over the past 10 years, both organically and inorganically and would continue to expect to do that. Wind River was obviously very strategic. Was -- that's something that we think significantly added to the portfolio. And as we look out over the next couple of years, see opportunities to add to those software capabilities, not necessarily at the deal size of Wind River, but certainly adding capabilities, the augment Wind River's continued success in both automotive as well as the other markets that it serves.

Kevin, I mean, you have content on. So it's so diversified geographically and by customer character and the quality. What are your thoughts on the Chinese OEMs -- the Chinese EV OEMs specifically? And what do they do that's -- what's the key to their success?

Well, China, from a policy standpoint, has been focused on new energy vehicles for, I don't know, the last 5, 6 years. So I'd say that was one focus. Two, they move fast, right? They move very, very fast. And as they've advanced technologies, they get them on vehicles, they get vehicles on the road much faster than, quite frankly, what's done in the European or North American market. At the same time, they've been able to improve quality to a level where some are now focused on exporting outside of China, which will be -- it'll be interesting how that plays out. The most that we have business with are focused on Europe versus North America for obvious reasons. And we'll see how that plays out.

Do you think there's an on-ramp for Chinese involvement in the North America market over the long term in terms of ability to penetrate the market either through transplant, the way the Japanese and the Koreans did or through other ways?

Possibly. The geopolitics are complex. I don't think that's a simple question or a simple answer. If our real push is for how do we make them more -- the world more green, reduce CO2 emissions, you wrestle with the path of how do you get more battery electric vehicles on the road. How do you do that quickly? Obviously, the Chinese have made a lot of progress over the last decade. They'll continue to make progress. On the flip side, there are social, political and other issues that are in front of them.

Agreed. More questions? More, please just speak up.

[indiscernible] Talk a little bit more about Europe, both short term just speak a little bit more about Europe short term and also the sort of mix shift as Chinese penetration increases in Europe, how that helps your business?

Yes. Very short term, we've certainly seen improvements in European outlooks in the back half of this year versus where we started this year. I think when we first got our customer schedules and outlooks for customers, sort of this time last year for 2023, there was a lot of concern around energy availability, energy prices impact on maybe some supply chain impacts from those energy issues. And I think they work through those, albeit in part because I had somewhat of a mild winter. So I think just in general, they're feeling better about that. And we did see schedules increase in the back half of the year. I think for the European OEs, the China discussions a little bit more complicated, right, because you do have some of those larger European OEs that still have -- that have very big businesses in China that drive a lot of profitability out of China. So I think they're going to have to over time find a little bit of a balance there. You are seeing some penetration of Chinese EVs into that European market. And we see our European OEs sort of really sharpening the pencil on how to be more competitive in China. But I do think they're going to need a bit of a balance there, just given how important that Chinese market is to several of those larger European OEs.

More please.

[indiscernible] what's the risk to your business? Or how do you see [indiscernible]

Maybe they're not at scale yet, but they're losing a ton of money on EVs. If they can't get there and have an economic product, I mean, the implications for them are really bad, but how do you see the development of your business if they can't get to either scale or profitability?

Well, for us, today, from an electrification standpoint, they're a small percentage of our total high-voltage revenues. Their push to get towards electrification and kind of the government mandates as it relates to CO2 emissions and penalties if they don't, obviously, over the longer term, have implications. So it's something that we're obviously supportive. We're obviously hopeful that they're able to develop those solutions. I know they have on the drawing board some pretty attractive solutions that are out there, some nice car lines. So...

I think to Kevin's earlier comment, just to frame it a little bit. We -- if you look at sort of our Investor Day model, through sort of the end of the decade as you get close to 2030, we've assumed about 80% of our EV business comes from Europe and China. So we've never overemphasized North America, just given we always assume, particularly given some of the products, larger trucks, larger SUVs, they were going to take time to find an electric alternative. And to the comment made earlier, our overall penetration rate are in the low 30s for EVs by 2030. So we're -- I think we've got a sort of ring-fenced in a fairly sort of conservative way, at least relative to some of the other assumptions that have it, pushing 50% penetration by 2030.

And one of the impediments just onshoring, I mean -- it seems like a high EV penetration and rapid onshoring might have some conflicting elements to that, right, to try to replicate those supply chains and diversify. I don't know if you want to elaborate on that because you see all that you're seeing that onshoring thesis play out, but you're also seeing the difficulty there, any friction points you'd point out to this audience, it would be appreciated.

So I think you'll see some of that in the battery space, probably most pronounced. We are not directly involved with battery manufacturing. That was a strategic decision, a view that either our customers who would want to be heavy involved with that or there is an existing battery supply chain that really didn't -- wasn't something where we could add value. We're certainly seeing sort of near-shoring happening. Now I think from our perspective, we had -- in part the way our customers are set up in part the way our products are. We, from a manufacturing standpoint, if you look at our three big regions, Europe, Asia Pac and North America, we've always been about 95% of what we manufacture in region is regions. So from a manufacturing perspective, we had -- we're sort of ahead of the near shoring. Doing some work to pull the supply chain and the supply chain is closer to sort of that 80%-ish for Europe and North America when you look at within region. A lot of that has to do with electronics, and we're working through how to get some of that a little bit closer to the manufacturing operations.

More questions?

[indiscernible] We just had the biggest lithium discovery maybe ever in Nevada and $45 a kilowatt hour of cash is a lot of cash that's about to come to the battery space. So what would sort of make you more optimistic about U.S. onshoring and sort of the EV supply chain?

Yes. I don't know if it was inherent [indiscernible], we just expected the EV market in the U.S., in particular, to develop more slowly than Europe and China. To Kevin's earlier comments, China, and they're very good at they set a policy and people fall online, and they set that NAV policy about 6 years ago. Europe's got a tougher regulatory environment. So by no means bearish. We do think it's going to take longer to develop. And some of that is to the question early as to my view, you've got to have the right products.

Yes. Nature vehicles, application of those vehicles the consumer and the vehicles they buy, the size of those vehicles range, all those other challenges that from a day-to-day standpoint, unless you're living in an urban setting may be a little bit different, right? And -- so I'd say those are the big differences. Listen, we're believers in electrification. Our view is it's coming and technology will be enabled as long as governments are still focused on how do they reduce CO2 emissions? How do they drive CO2 emissions down? But for the average consumer, costs need to come down significantly. Things like ranging anxiety need to be resolved, right? Infrastructure needs to be put in place. It's not quite as easy here as it is in China to do that, right? That is the reality. And that all needs to play out. And at the same time, our customers are going through a process of at least as of now, replacing highly profitable cars, trucks, internal combustion engines with battery electric vehicles, which at present are more costly, right, and come with certain constraints.

How's Karl doing -- motional?

Karl's doing great. We're actually going to see Karl later today. Karl is doing fantastic. Motional is doing well. Technology is advancing rapidly. They'll be launching a couple of networks in Las Vegas, fully driverless a little later this year. So we're excited about that. The partnership with Hyundai is going extremely well.

Just some feedback. I would love to hear more or if your team could get a broader audience for Karl, to talk, that would be great.

We'll do that.

Great. You're becoming more topical -- I would love to ask some questions. I want to ask you now on like getting AI chips and GPU clusters from Nvidia and where are you seeing some bottlenecks and some opportunities. Thoughts on just a couple of final thoughts here. Any changes in business you're seeing real time in terms of let's say, regionally within the U.S., maybe EV inventory we've seen kind of going up a little bit. Are you seeing that kind of flow through into schedules, maybe and hybrids kind of taking up some of the slack. I don't know if you've seen some of those mix shifts at all in the business?

Nothing from a significance standpoint.

Okay. No, I agree. Anything on a forward -- really forward curve on hydrogen, either fuel cell or hydrogen combustion that you'd highlight?

Yes. A lot of focus in Asia in and around fuel cell and hydrogen combustion. Certainly, it's an area of focus for Hyundai. I know that from a priority standpoint, challenges. You need a country that's very supportive of putting the infrastructure in place to be able to -- for you to enable that technology.

Any -- we have one more minute if there's another question from the audience, Kevin or Joe. Has any final thoughts, anything, anything I didn't ask or anything you wanted to like to kind of leave the audience with?

No. I'd see what we're -- and what we're most excited about setting aside the day-to-day challenge as it relates to chasing semiconductor chips and those sort of items which are getting better, labor inflation. As we think about how the company is positioned in enabling a software-defined vehicle, enabling what our OEM customers want to do, need to do both from a hardware standpoint and a software standpoint, we feel really good about how we're positioned. And -- that's reflected in our customer engagements. It's reflected in our -- more recently, our bookings, and it's reflected in our ongoing strong revenue growth over market. And as supply chain continues to improve, you'll see margin trajectory improve along with that.

I think over the arc of your careers at leading Aptiv, you've seen us have been able to stay concurrent and then, in many cases, way ahead of some of the trends, not just on a relative basis, but on an absolute basis, you've seen the results and the valuation as well. So keep kicking a**. Thanks for coming back.

Thanks for having us.

Here at Laguna, and this concludes the Aptiv session.

Thanks, Adam.

You got it. Thanks. Thank you.

Thanks a lot.

Thanks.