Aptiv PLC (APTV) Earnings Call Transcript & Summary

As one of the industry's fastest-growing suppliers. And their mantra from the very beginning was to pursue technologies that are safe, green and connected. And that focus on the secular growth has actually contributed to 11% growth over market over the 5 years through 2022. Of course, there are questions from time to time about the growth and a lot of challenges we've gone through semiconductor inflation. The peso appreciated over a 12-month period by 20%. Most recently, there's been some volatility about -- and some questions about the exact trajectory of electrification. But at the end of the day, Aptiv has a pretty impressive growth profile. They're one of the industry leaders in ADAS which is clearly shifting towards higher and higher levels of automation and higher content. You're a leader in electrical architecture, which gives them exposure to opportunities that are at least 2x the kind of content you'd see in Internal Combustion Vehicle. Their software platform is growing rapidly, and they've got this really small compute business that looks like it's going to have explosive growth over the next couple of year's. So over time, Aptiv, at least this year, you've been talking about 6% to 8% growth over market, maybe much more over the next couple of years. So with that as an introduction, I'm very pleased to welcome Joe Massaro.

Appreciate it. Good morning, everybody.

So I guess, just to frame this, my first question is, if I go back to the 2019, 2020 time frame, 2021, the company was $14 billion, $15 billion revenue business. And you were booking $21 billion of bookings a year in those end of year reports, that's what we would see. So today, you're a $21 billion, $22 billion company and you're reporting $33 billion, $34 billion of bookings. So that's 60% higher than where you are today. Do you believe that Aptiv, as we look out maybe to the 2027, 2028 time frame, is Aptiv a $30 billion or more kind of company? Do you have that 8.5% growth trajectory kind of -- is that what we should be seeing?

Yes. No, we certainly -- and listen, I appreciate your comments, and I certainly understand the last couple of years overall have been noisy with things like COVID and supply chain. And certainly, there's some questions around the growth over market calculation we can talk about today. But no, absolutely. I mean if you go back, and I think it's on a very consistent trajectory too. If you -- we've always talked about our bookings converting into revenue 2 to 3 years following the bookings event. Production then ramps programs tend to last 5 to 7 years and sort of years 3, 4, 5 tend to be where we realize the most revenue. So we clearly are on that path. We've demonstrated it with the higher bookings numbers. We took a big step up in bookings to your point, over the last couple of years, driven by a couple of things. Certainly, high voltage. But just as importantly, really driven by what I'll call sort of global -- not only global awards, but global system awards. So in a lot of our businesses, we're tending to see more of a system sale than an individual component sale. We still sell a lot of components, radars, those types of things. But we're seeing, particularly in the active safety Level 2+, high voltage, particularly in China, where customers are really looking for the full systems. And those awards obviously go a lot the dollar value of those awards go up when you talk full systems. The other thing we've seen, which has helped these bookings grow in sort of overall size is where you used to have even complex systems being split between 1 or 2 -- between a couple of suppliers. For instance, we had an active -- Legacy Active Safety Award where we were on the North American side, we had a competitor that was on the European side, 2 different systems going to market. As our customer rolled out the next-generation system, they said we're going to do a global system with only one supplier, and we won that last year, right? So you're seeing a bit of consolidation of the opportunity volumes that are helping drive bookings, and we believe those roll out over the same -- generally speaking, over the same period of time that to your point, when were $14 billion, $15 billion of revenue, saw the $20-plus billion of bookings now at $21 billion, $22 billion of revenue and $24 million from 2018, 2019, we believe it's sort of that same overall trajectory.

There's obviously, a lot can change from the point when you book a contract and when that actually comes to fruition and you start to -- if it starts to materialize, and I think that the market is, to some extent, debating whether or not that algorithm is changing a little bit between what you say is the value and what it actually winds up being? And maybe you can spend a couple of minutes talking about the assumptions that you put into these estimates. So when you're telling us about $32 billion in 2022, $34 billion in 2023, how do you derive those numbers? And is there actually conservatism that's kind of employed internally to try to be accurate about that?

So the conservatism tends to come in the out-year revenue forecast. So at Investor Day last year, we talked about $40 billion in 2030. And we have layered in some level of conservatism. We certainly don't use our customers' volumes. I think everyone knows in this industry, the industry is well overcapacitized. You tend to have fairly robust estimates from OEMs on volumes. So yes, there are certainly haircuts that go into the play -- go into the overall revenue forecast calculations. Bookings, we tend to use IHS at the time of the bookings to have sort of a consistent mechanism as opposed to for both internal and external purposes versus folks being able to subjectively calculate that number. And then as we look to revenue forecast, we apply -- we'll apply some level of conservatism. Listen, if you think about a bookings award, right? You're always going to have adjustments on vehicle production, right? Vehicle production is going to move around apart from COVID or supply chain. If you go back to 2018, 2019, we think it moves within a relatively small band. We've sort of always assumed long-term sort of flattish vehicle production. Maybe it's down a point, maybe it's up a point in a given year, but -- and I think we're back there now in those sort of 92 million, 93 million, 94 million units of global vehicle production, including commercial vehicle per year. So what would impact bookings significantly would be large program cancellations, right? We win a $1.5 billion active safety award. That's going to start production in 2026. It's a 7-year program. On an individual year, that gets relatively small, right? So you're not necessarily -- if there's changes in vehicle production or changes in take rates on a particular customer, you're not having something that's going to impact a $20-plus billion revenue stream significantly. What would? Would be program cancellations, which we have not seen for a long time. The last time we had a, I'd say, is a large-scale program cancellation, it was back in that 2016 time frame when FCA at the time really pulled out of passenger cars in North America. That was sort of a well-publicized very large event. So those booking numbers, they'll change -- can change on the margins with FX, you see right, we book in China, we book in Europe, a stronger euro or a weaker euro, depending on what we used at the time of the booking, but it tends to be on the margins. We really don't see big wholesale cancellations or products, product awards being pulled back from the customers.

When we talk about the growth, again, 7%, let's use the midpoint of that growth over market range, that's about $3 billion worth of growth coming from that. Can you talk about the pillars of that growth? So if we divided it into high-voltage ADAS, SVA software, how big is each of those right now? And can you give us some updated color on what the growth rates are?

Sure. And I think it's important and just given sort of what's happened over the last couple of months, I think it's important, let's talk adjusted growth, and we'll come back to growth over market, but let's talk adjusted growth. Now this year, it's a little -- our adjusted growth estimate is 6% to 8% in a flat market. So it happens to be the same as the growth over market mathematically. But I think talking about adjusted growth is important. So we're expected to grow 7% at the midpoint of our range. That's really driven by a couple of things, right. We have still product lines that are growing outside. So our active safety product line, which is now a $2.5 billion business at the end of 2023. That business will grow well north of 20%. So call it somewhere between 20% and 25%, probably towards the higher end of that range this year. We're going to continue to launch new systems. We continue to see take rates being very strong in active safety. Active safety is one of those product lines that our customers actually make money on. And that consumer -- end consumers have a strong demand for strong rebuy rates, strong interest in the technology in the vehicle. So that strength is going to continue. We've brought our high-voltage growth rate down from approximately 30% to approximately 20%. And completely understand the concerns around EV headwind, but still a very strong product line from a growth perspective. And that growth is really based on customer schedules. So we have customers that have adjusted their schedules down over the course of last year. This 20% is based on the schedules that we now have and are producing to now and that they have forecasted for the year. In addition to that, those are sort of some of the faster-growing product lines, right? You also have a -- within Aptiv, an engineered components business, so think connectors, cable management fasteners. So think something like a TE Connectivity, a Molex, an Amphenol, that has really strong sort of, call it, mid-single-digit growth rates, as you would expect a business like that to have. Our electrical architecture business, the wire harness business, will tend to grow a little bit small -- a little bit slower because it's very large. It's got content on about 1 out of every 3 cars manufactured globally. So you have an element of the market coming in on that -- on a business of that size. But even that's a very strong 2%, 3%, 4% grower. We don't have product lines that grow below vehicle production. I think we've done a nice job over the last few years sort of taking a look at the portfolio and making sure we really are in those safe, green and connected areas. But there's a lot of drivers. And to Rod's point, I think the other thing, it's small dollars at the moment, but we're going to start to see a lot more software growth in the business. Our software product line, including Wind River is a little over $500 million in revenue. We expect that business to start to grow significantly as you get out to '26 and '27. Last year, we had about well over $200 million of pure software bookings, exclusive of Wind River. Wind River also has about a $500 million -- a little less than $500 million in annual revenues, growing mid-teens. So I think that will start to come on. Again, not necessarily in '24 and '25, but certainly, as you get out to 2026 as we see those bookings come in.

So it's been easy for us to follow the bookings in active safety. It was a $2.5 billion business, $3.8 billion of bookings, high voltage, $1.7 billion business and $4.6 billion of bookings, these SVA probably is only 100 -- it's a very small business today, a $3.5 billion a year, if you average the next couple of year bookings. But this is the first I've heard about the software bookings of $200 million. So you've had...

Kevin's talked about them in the past. I think you just have to sort of add them up as you go through the quarters as he's talked about them. But yes.

Well, look, it's an interesting data point. Wind River, when you acquired this, you were talking about how this is going to be a pivotal acquisition for this company. Because there's so many problems that it solves for the auto industry in terms of product development, abstracting software from hardware, all the things that the industry needs -- knows that they need to do, over their upgradability, all these things that Wind River has. So you've had a year now of Wind River under your belt. I'm sure you've been going to OEMs and auto wasn't really a big business for them. When you...

It was not. it was not an area of focus for them.

So what's -- can you talk a little bit more about what has the response been? And what are the data points that we should be looking for? how big will this be? How widespread will this be?

Sure. Yes, let's back up a little bit. So we acquired Wind River over a year ago now. Wind River is a intelligent edge, real-time intelligent edge software company. So it provides a cloud-enabled system or devices that need high levels of compute out on the edge. So think aerospace and defense, telecom, industrial automation, where the amount of compute needed on the device is too significant to completely depend upon the cloud. It's tied to the cloud as it relates to software life cycle management, upgrades, patches, that type of thing, but the compute really needs to be done on the device because of the real-time nature of what that particular device is doing. We started a development project with Wind River prior to the acquisition to really look at is that software stack, what auto needs, right? Auto is missing a sort of complete software stack for these large domain controllers that can do what the industry wants that can be cloud-enabled that can manage the full life cycle of the software over the life of the vehicle that can give the OEM a relationship with the second or third owner of the vehicle, which for our customers is very important. You hear our customers talking a lot about their ambitions to earn revenue over the life of a vehicle. That's going to come through the software, the ability to update features, the ability to have sort of subscription type or almost streaming type revenues with the owners of the vehicle. We felt Wind River was very well placed to do that. To your point, since acquisition, they've made -- there's been some wins. There's been certainly progress in automotive. They're partnered now with Hyundai Mobis to build out that automotive software stack. And one of the ways I think about this, if you followed us for years around smart vehicle architecture, we've often talked about the hardware, the large compute platforms that go into the vehicle. Wind River will be the software stack that will help run those large computes. There's been wins with European truck manufacturer on an individual domain controller using Wind River technology. And there's been a couple of wins on active safety systems with a couple of Chinese OEMs. And I would say our experience as it relates to both Wind River, smart vehicle architecture and certainly electrification. Chinese OEMs are moving very quickly. And I talked about a typically a bookings cadence where we booked something in 2 to 3 years out, we'd start revenue on, start generating revenue that the systems have been in production. China is at the very end of that -- at the very end of that range, even on more complex systems. So we're seeing active safety systems, which in North America, Europe would be at 3 years plus, maybe a couple of months before it hits the road, the Chinese are able to put that on particularly the newer EV players, able to put those systems on the road within about 2 years. But software, it's progressing. We had a thesis around really what the industry needed? Wind River has solved those problems in 3 industries in a significant way. The aerospace industry went through domain consolidation over the past 10 or 12 years on some of the newer platforms, telecoms going through domain centralization now as it goes through the 5G rollout. And certainly, industrial automation, we've seen over the last couple of years as the factory automation, industrial tools become more intelligent, become more robust in factories, needing a lot more compute and Wind River has provided the software for that.

So how big -- is this is a $500 million business all in, it's growing at what rate? What should we be looking for in the next...

Yes. We bought it was right around $400 million of revenue. Last year it finished a bit below $500 million. Really no automotive revenues per se yet. So those are those other end markets that are...

The $200 million was automotive only?

The $200 million was non Wind River. That's software bookings within Aptiv's, and that's bookings. So again, that will turn into revenue in a couple of years. I'm talking about Wind River revenue now, just to be clear. So we expect it to be over $0.5 billion of revenue this year. And automotive revenues, we see really kicking in, as we talked about before in sort of 2026 and early as possible. You see some in the second half of 2025, but meaningful revenue starting in 2026.

Double-digit growth still in that business. And one of the things that -- I was a little surprised by the way that this was sort of portrayed on your earnings call. So obviously, there were a lot of questions about -- you were a 2% growth over market company last year, but a lot of unusual things that happen. And then you bridged us back to 6% to 8% growth this year. And one of the ways that you did this is in China, there was some market share shifts and launch issues that subtracted 200 basis points. You add that back in North America, same story, the Japanese gaining. You added that 200 basis point back, 100 basis points for UAW. Some of those things feel like they're structural, right? The U.S. automakers didn't really lose inventory during the strike. And I was hoping you can maybe go back to that, and just explain, is there a different way to look at that reacceleration. It's a little bit more granular than well, let's just add back the stuff that was bad.

I think it's a good question. Listen, I think -- and certainly appreciate, really since I remember all of the questions understand the concerns around growth over market. We -- and that is a metric we provide. Well, anybody can calculate it, right? That is not a metric that's unique to us or that we can only come up with. That is effectively our growth, either by region or total company over global vehicle production. And we get global vehicle production from the same place as you folks would, right? Usually an IHS or check it against an LMC on a forecast basis, but actuals are actual. So -- that is a sort of a number. I know a lot of suppliers use it. It's used to evaluate suppliers -- completely get it. We, for years, have said that number will be lumpy. And that number, in part, is lumpy because of the denominator. And we had a version of this in 2021. It was a little different. Our growth over market was 15% in 2021. And we got asked a lot of questions is this, are you guys going to grow this fast above market forever now? And we were very careful to caution. No, there are some unique things happening in the denominator of that calculation. Our customers or our take at the time, there were some semiconductor constraints, our technology is coming back faster than the broader market, right? So we are growing faster, but we're not changing our long-term outlook on growth over market. Clearly, at the end of 2023, that math went the other way. We had a couple of things. And I know that numbers are the same in North America and China, but there's sort of 2 different things driving it. In North America, you had the strike impact. We saw a significant impact in 2019 from the UAW strike as well. We're weighted towards the Detroit 3 in North America. It's about 65% of our business. So when their production slows down as a result of the strike, they're relative mix to the North American market in a given quarter changes, right? So they're lower. So -- and we talked about at this time, we were up 13% with the D3 in Q3. If you looked at the D3 production and our revenue growth, we were 13%. We talked about this at the time in the quarter. Now that's not how you calculate growth over market -- growth over markets on total vehicle production. But when we looked at it, we're certainly holding our share with the customers, but their production was lower because of the strike impact. The other -- we think was somewhat unique in North America to 2023, the Japanese producers -- the Japanese production in North America came back very strong in 2023, after being relatively low in the back half of 2022, is the Japanese OEMs globally had to triage their semiconductor supply, they bias towards Japanese production. So by the time you got into 2023, inventory levels at Japanese dealers were very low. So you saw them get their chip supplies normalized and start to ramp production. So by the time you got to Q3, you had our customers the D3 relatively lower. You had the Japanese relatively higher. And I think overall J3 production ended last year somewhere north of 20%. As we -- and that was about, call it, 2 points of growth over market impact to us, right, just the denominator effect of higher J3 relative to our customers. As you look out to 2024, they're not forecasted to -- they're forecasted to be effectively flat from a production perspective. They've rebuilt inventories and they've started to -- the J3 have started to normalize out. That is the forecast for their production. They don't have their schedules, they're not on their content. We're using the same information that folks like yourself would use, but that's our current estimate in that North American growth over market. Now we've -- there are questions, and I think, Rod, you've raised these as well, what if that's indicative of a long-term market share trend where the Japanese are going to go 20 points higher than the D3? I think that's an interesting question and certainly one that can be asked. We don't see that in the production schedules at least for 2024. Our business in North America is about 75% weighted to the truck and SUV market. I think the Japanese have tried for years to take -- share the meaningful share in the truck and SUV space from the North America and it hasn't been successful yet. But that's something, I think, for the future, fair that it bears watching, but not something we're seeing play out in the numbers today, which is why we have that reversing. China is different. China is going through an OEM mix shift amongst multinational JVs that are in China and their local OEMs. Some of their local OEMs are very strong. There's a lot of them. There's about 100, 100-plus OEMs in China. We tend to concentrate on the top 10 or 15 of them. That mix shift really came into play last year, particularly towards the last half of the year, where you saw the local significantly outproducing the multinational joint ventures. Our revenue mix today is 60-40; 60% multinational, 40% local. We've made tremendous progress on the local if we we're having this discussion back in 2017, 2018, we'd be closer to a 75-25 mix, multinational-local. So we've grown significantly with the locals. But we're still at a bit of an inflection point where the larger part of our business is flat to falling. The smaller part is growing. But we quite haven't hit that point yet. But we do think as that continues to move forward, our bookings over the last couple of years have been 50-50. So again, going back to our bookings discussion, we expect that revenue to continue to roll out. And again, I -- and I'm not suggesting we changed the growth over market calculation. I understand it's used by a lot of folks. But one of the things we look at internally to understand our share, this is sort of, again, growth over markets and after the fact calculation that anyone can do. When we look at internally to see how our business is growing, is how are we doing with those customers? So last year, with the top 10 or 12 Chinese OEMs, we grew well above 25% with those customers, right? So when we think about our product line, our ability to grow the viability of our technology with those Chinese OEMs, we feel very good about that. Now again, relative to the total market, it's not yet showing up. But what we look at helps give us confidence in that growth. And to some extent, the growth over market starting to trend back towards that 6% to 8%. If you think about -- and I'll stop, sorry, I just want to make sure that -- because for us, I think it's very important. I think Kevin and I were -- we always thought we were clear that this is growth and this is growth over market. I think we have gotten a lot of questions where -- it's clear folks have conflated the 2, and we do think there's a difference. Both are important, but we do think there's a difference. So as we're looking out over the next year, next 2 years, feel very good about our mid-single-digit growth rate. Based on what we're seeing from a forecasting service perspective, believe vehicle production to be flat. But again, you could have a risk where and we'll obviously need to be talking about this. If you were to have those 100 OEMs in China that we deliberately don't do business with, either because they don't have very sophisticated vehicles, they don't buy our technology or they're from a margin profile, not the kind of customers we want to do business with, if they were to have a significant -- significantly outpaced the top 10 or 12 OEMs, at a given quarter from a manufacturing perspective, our growth over market in China will be impacted, that after the fact calculation will be impacted. We still may be growing 20% with our customer base. So I think that's part of the distinction, I think just being a little bit more clear on and sort of forcing the discussion between, okay, we're going to talk adjusted growth, and we're going to talk growth over market. There are sort of 2 different things. And I think for a lot of time, they moved in the same direction. We've been using that calculation since we went public, right? For 11 and 12 years ago. I think for a long period of time, those 2 were generally aligned and there have been impacts in 2023 that sort of disconnected those 2. Does that make sense?

Yes, I think it does. Look, there's risks, but there's this inherent growth within the company. And I guess maybe to kind of sum it up, if I were to just say, let's assume -- let's ignore the growth over market concept because it complicates things. But let's say you grow 6% or 7% per year, and we include the $750 million of buybacks let's assume that happens again next year. It's really not that difficult with your margin targets to get to the low 7s in earnings next year, even with about $1.20 emotional losses. So mid-8s earnings per share, something like that. Do you think that Aptiv stock trading at less than 10x the X emotional number, do you think of the stock is cheap? And if so, why only $0.05 of accretion from buybacks, why so modest in terms of the...

Yes. Listen, obviously, we're -- I think -- and I think a lot of folks have known Kevin and I for a period of time. We're not happy with where the stock is, obviously. And we take that upon ourselves. We know we've got work to do to get back there. I think 2 different questions. One, we've put the share buybacks back on this year. We had stopped during COVID and supply chain disruption. If you look at our history between going public in 2011 and early 2020, we bought back over -- we returned over $6 billion of cash to shareholders while investing in these underlying technologies, while growing the business while doing accretive M&A, right? So we have a really good track record, I think, of doing both. And certainly, from a philosophical perspective, we are believers, if we don't have good use for the capital, return it to shareholders. And I think we've demonstrated that. Took a break from that out during COVID and supply chain disruption, just given the need to see where the world was going and the requirement to have my view as CFO to have a little bit more cash on the balance sheet. We've now returned. We bought $300 million of shares -- $400 million buyback in 2023, including $300 million in the fourth quarter. We've committed to buy back at least $750 million worth of stock in 2024.

At least.

at least 2024.

That's a deliberate insert...

And that's my point. There is a -- well, we talked about it. Kevin said it on the call, could it be higher than $750 million? Yes. If we get towards the end of the year, and we don't have a use for the cash on the balance sheet, fully appreciate at this multiple, M&A is obviously a little bit more complicated to do. And he said it on the earnings call. If we get to later in the year and don't have a use for the cash, would we expect to do more share buybacks? Certainly. From a guidance perspective, we've done 2 things. One, we put $750 million into the cash guide and we put $0.05 into the EPS guide. The reason we put the $0.05 in was a little bit to anchor the guide, right? Because to some extent, buyback timing impacts how much EPS would flow, when we do it, there are rules now as to how much a company can buy back on a any -- over a given period of time, there is math at the SEC. So we wanted to be mindful of all of that, the timing of the buybacks. So put a $0.05 placeholder in. But certainly, if that $750 million was to happen sooner in the year or if we were to do more, there's upside there. But I think the more important takeaway isn't necessarily whether it's going to be $0.05 or $0.06 or $0.07. It will be what it is based on the buybacks. But I think the philosophy, we believe the stock is not where it should be. I think by the time we get to the beginning in Q4, even if it's just the $750 million, we'll have bought back on an LTM basis, $1 billion worth of stock from the Q3 earnings call. We're going to generate a lot of cash. Our operating cash flow in 2023 was about $1.9 billion. We expect it to be about $2.3 billion in 2024. And that's going to give us a lot of optionality.

What's the cash that you want to -- you've got $1.6 billion on the balance sheet. We're looking at $1.2 billion of free cash flow, something like that. So what's the appropriate level of cash on the...

Running the business, we call it between $500 million and $800 million. Which is up, we used to pre-COVID talk about around $500 million. We have bumped that up a little bit, just given some of the newer complexities in the world.

Great. Well, I think we've run out of time, Joe. This was really great. Appreciate you taking your time to talk to us.

I appreciate everybody's time. It's good to see everybody.

It's terrific. Good seeing you again.