Aptiv Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 13 speakers on the call.

Operator

Day and welcome to the Aptiv Q3 2023 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jane Wu, Vice President, Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Thank you, Marjorie. Good morning, to Aptiv's Q3 2023 earnings conference call. The press release and related tables, along with the slide presentation, to you. Can be found on the Investor Relations

Speaker 2

portion of our website at aptiv.com.

Speaker 1

Today's review of our financials exclude amortization, to the Q3 and other special items and will address the continuing operations of Aptiv. The reconciliations between GAAP and non GAAP measures for our Q3 financials to our full year 2023 outlook are included at the back of the slide presentation and the earnings press release. To the operator. During today's call, we will be providing certain forward looking information that reflects Active's current view of future financial performance to the operator and may be materially different for reasons that we cite in our Form 10 ks and other SEC filings. Joining us today will be Kevin Clark, to Aptus' Chairman and CEO and Joe Massaro, CFO and Senior Vice President of Business Operations.

Speaker 1

Kevin will provide a strategic update on the business to Kevin Clark, and Joe will cover the financial results in more detail before we open the call up to Q and A. With that, I'd like to turn the call over to Kevin Clark.

Speaker 2

To Tim.

Speaker 3

Thanks, Jane. Thanks, everyone, for joining us this morning. Let's begin on Slide 3. We delivered another strong quarter, exceeding our expectations despite some headwinds. To Touching on a few of the highlights, new business bookings totaled $6,600,000,000 bringing the year to date total to a record 27,000,000,000 to you.

Speaker 3

Revenues increased 7 percent to $5,100,000,000 2 points over the growth in vehicle production, to Reflecting double digit growth in ASU X revenues and S and PS revenue growth in line with global vehicle production. To the impact of the UAW strike in North America as well as customer mix. EBITDA and operating income were both records to totaling $727,000,000 $560,000,000 respectively, reflecting solid flow through on volume growth to the Q1 of 2019. We expect continued sequential margin expansion as the headwinds related to supply chain disruptions continue to dissipate, to customer recoveries are closed and the benefits from further cost structure actions take hold. The team remains laser focused on continuing this trend in the 4th to the Q4 and into 2024 and beyond.

Speaker 3

Turning to Slide 4, to Touching on the key themes and macro trends that have had an impact on our operations this year, our customer relationships to to Jim. As automotive OEMs continue on the path toward fully electrified software defined vehicles, we are their partner of choice, delivering unique to full system solutions that provide enhanced features and greater flexibility, all at a lower cost. We're also benefiting from the transition to to the software defined future across several other industries with opportunities in the commercial vehicle, telecom, A and D and industrial markets. To our operator. Global automotive vehicle production has been stronger than we initially forecasted, as easing supply chain constraints to the operator.

Speaker 3

Our strong year to date results had put us well on our way to reach the top end to the full year guidance we laid out in early August. However, the UAW strike, which affected the production schedules of our top 3 North American OEM customers, to the operator for questions. Has had an impact on both our 3rd and 4th quarter results. While tentative agreements have been reached with all 3 North American OEMs, to There remains some uncertainty on vehicle build schedules as the OEMs work to finalize their plans to ramp up production to the operator during the balance of the Q4. Our operating teams in North America are working closely with our customers and supply chain partners to help accelerate the ramp up of production and minimize any potential disruptions.

Speaker 3

Moving to Slide 5, to As already mentioned, new business bookings during the quarter were $6,600,000,000 bringing our year to date total to a record $27,000,000,000 to our target of $32,000,000,000 for the full year. Advanced Safety and User Experience bookings totaled 2,200,000,000 to Driven by over $1,000,000,000 in active safety awards. Signal and Power Solutions bookings reached $4,400,000,000 to including $1,100,000,000 in bookings for our high voltage electrification solutions split across geographies, bringing the year to date total to $4,300,000,000 to Already surpassing last year's record of $4,200,000,000 As OEM's strategies around their vehicle architecture platforms evolve, to One constant will be the need for solutions that deliver improved performance at lower cost. Aptiv is perfectly positioned to leverage our full system capabilities to enable a fully electrified software defined vehicle. Turning to slide 6 to review our Advanced Safety and User Experience segment's to Q3 highlights.

Speaker 3

Revenues increased 13%, 8 points above vehicle production, the result of a 30% increase in active safety revenues, to Reflecting strength across all regions as the launch of our Level 2 and Level 2 plus ADAS solutions continue to ramp. To the operator. Operating income totaled $109,000,000 reflecting a 7.6% operating margin, an increase over the prior period, to the Q2 due to the seasonality of Wind River revenues and the timing of customer recoveries. To our operator. New business bookings totaled $2,200,000,000 and included $1,200,000,000 of active safety customer awards, including a major award with a large German truck manufacturer, to underscoring the strength of our high performance radar technologies and their applications outside of the automotive industry.

Speaker 3

To Aptiv. As demand continues to increase for more advanced active safety solutions, our unique insights, improving domain expertise position Aptiv to deliver differentiated value to our customers. To that end, we're excited to have recently launched our automated parking solution, to an additional feature to our AIML enhanced Gen 6 ADAS platform to address complex parking scenarios. To Apti's unique solution enables fully modularized automated parking features that scale from level 2 to level 4 to from Auto Parking Assist and Memory Parking all the way to AutoPark LA. Automated parking is just one of the many features to you.

Speaker 3

That we have under development in our Gen 6 ADAS technology roadmap, which will scale to a full Level 3 ADAS platform in 2026. To the operator. Turning to the Signal and Power Solutions segment on Slide 7. 3rd quarter revenues increased 5% in line with global vehicle production. To Tim.

Speaker 3

High voltage revenues increased 13%, reflecting strong growth across all product lines, to the operator, partially offset by customer mix in Europe and Asia and the impact of the UAW strike in North America. To the operator. The $4,400,000,000 in SPS bookings that I mentioned previously included a low voltage architecture award with a Chinese OEM, to demonstrating the progress we're making further penetrating the local Chinese OEMs. Another strong quarter for Inter Cable Automotive with $400,000,000 in new business awards, to including a major award with a global customer in North America, reflecting continued strong commercial traction and a high voltage system award to the operator. With a European OEM that includes products across our electrical distribution, connection systems and intercable automotive portfolios, to demonstrating how our full system approach sets us apart from the competition.

Speaker 3

Lastly, we're proud to announce that Aptiv has once again to the operator and the operator to introduce our operator to the operator. Our rapid power reserve solution is a groundbreaking technology to provide a highly reliable redundant power source for a variety of critical functions, eliminating the need for a low voltage battery in the vehicle, to Significantly reducing weight, mass and costs. This recognition validates Aptiv's industry leading technology to as well as the value and impact our continuous innovation provides our customers. Turning to slide 8. To our operator.

Speaker 3

We're excited to showcase many of our new innovations at the Consumer Electronics Show in Las Vegas in early January next year. To We'll bring our vision of the future to reality, including vehicles with Aptiv smart vehicle architecture, running applications for next generation ADAS to an in cabin user experience. Vehicles with our complete portfolio of optimized electrical vehicle solutions, to purpose built for demanding power requirements and Wind River's edge to cloud platforms, supporting the latest safe, green and connected applications from Aptiv. To the operator. We'll be providing live demonstrations of how we're leveraging our deep insights into the brain and nervous system of the vehicle, to along with Wind River's proven software technology to develop optimized and scalable solutions that meet OEM needs for performance, to flexibility and lower costs.

Speaker 3

Moving to slide 9. To Aptiv. In recognition of our strong commitment to innovation, operational excellence and sustainability, Aptiv was recently named by Newsweek as one of America's Greenest Companies. To At Aptiv, our business strategy is directly aligned with our sustainability goals. We provide solutions of the highest quality, to the operator to discuss our financial results.

Speaker 3

We are now ready to begin the call to discuss our financial results. We are now ready to begin the call to to our next question. Sustainability is an enterprise wide commitment and I'm proud of our entire team for helping us to achieve our goals to in ensuring that our company, our customers and our planet continue to thrive. To Joe. Moving to Slide 10.

Speaker 3

Before I turn the call over to Joe to walk through the financials, I wanted to touch on our current view of 2024. To Tony. Building on the solid foundation we've established in 2023, we're well positioned for continued strong revenue growth and margin expansion to despite the macro headwinds. Our Safe, Green and Connected product portfolio is perfectly aligned to the demand for feature rich to electric vehicles as well as the acceleration of the software defined future in adjacent markets. Our advanced technologies and capabilities will continue to drive to strong performance across multiple industries.

Speaker 3

While some macro uncertainties remain, we're confident in our ability to execute flawlessly to Joe to go through the numbers in more detail.

Speaker 2

To you.

Speaker 4

Thanks, Kevin, and good morning, everyone. Starting on Slide 11, as Kevin highlighted, Aptiv reported another quarter of strong financial results, to Exceeding our expectations, despite the impact of the UAW strike in North America. Revenue was up 7% to to $5,100,000,000 or 2% above underlying vehicle production, excluding the impact of acquisitions. To our operator. As I will discuss shortly, our growth over market was negatively impacted by the UAW strike in North America as well as to customer mix and program timing in Europe and China.

Speaker 4

Active Safety and High Voltage Electrification reported strong double digit growth of 30% 13%, to you, to the operator. Adjusted EBITDA and operating income were $727,000,000 $560,000,000 respectively, to Reflecting strong flow through on increased volumes, continued progress on our ongoing performance initiatives, including reductions in supply chain disruption costs to That more than offset higher labor costs.

Speaker 5

The UAW strike had a

Speaker 4

negative impact of approximately $30,000,000 and foreign exchange was a headwind to the operator. Earnings per share in the quarter were $1.30 an increase of $0.02 from the prior year, to the operator. Primarily driven by the higher operating income, partially offset by higher interest expense. Operating cash was $746,000,000 to a significant increase over prior year, primarily driven by higher earnings and improved working capital levels.

Speaker 2

To the operator.

Speaker 4

Capital expenditures were flat to prior year at $212,000,000 to Looking at revenue in more detail on Slide 12. Revenue in the Q3 was $5,100,000,000 to Reflecting sales growth of $299,000,000 representing adjusted growth of 7% the Wind River and Inter Cable acquisitions at the 150 to $3,000,000 of revenue and net price and commodities as well as foreign exchange were slightly positive in the quarter. To From a regional perspective, North America revenues was up 10%, reflecting 2 points of growth over market to UAW strike negatively impacted D3 customer volumes relative to overall North American vehicle production in the quarter.

Speaker 2

To the operator. In Europe, revenue grew 10% or

Speaker 4

4 points above underlying vehicle production, driven by strong growth in active safety, to Partially offset by program timing and slowing growth for certain bev platforms. In China, revenue was in line with underlying vehicle production to our customer mix and slowing bev growth. As noted earlier, despite the lower growth over market, our Q3 adjusted growth to and revenue were in line with our expectations. The lower growth over market in North America is consistent with the strike impact we experienced in 2019. To the operator.

Speaker 4

As we have said in the past, growth over market will be lumpy given customer mix and program timing. To the ASU X segment on the next slide. Revenue rose 13% in the quarter or 8 points over vehicle production. To the operator. The outperformance was driven by strength in active safety, where revenue was up 30%.

Speaker 4

User experience was down 5 to the quarter reflecting the timing of certain customer programs and a more difficult year over year comparison. Price downs in the quarter were less than 1%. To Segment adjusted operating income was $109,000,000 up 35% when compared to the same period last year. To our operator. Year over year, ASU X margins in the quarter were negatively impacted by the timing of certain material inflation recoveries from customers, to which partially offset the flow through on incremental volumes and improved performance.

Speaker 4

Also, to ASU X margins will lower on a sequential basis versus Q2 2023 due to expected seasonality in Wind River's Q3 results.

Speaker 2

To the operator. We had noted the seasonality at the start of

Speaker 4

the year. The QE3 impact of the UAW strike on ASU X was relatively minimal, to reflecting approximately $10,000,000 of revenue $5,000,000 of operating income. To Turning to Signal and Power on Slide 14. Performance in the quarter was strong despite a challenging operating environment. To the operator.

Speaker 4

Revenue in the quarter was $3,700,000,000 an increase of 5%, in line with vehicle production, to the operator. Despite a negative strike impact of approximately $70,000,000 of revenue or two points of growth, high voltage electrification grew 13% in the quarter, to Reflecting a slowdown in growth rate from prior quarters. Despite the slowing of EV production, we continue to expect our high voltage business to have a strong to double digit growth in 2023. Price downs in the quarter were less than 1%. To Segment adjusted operating income was $451,000,000 in the quarter, up 2% from prior year, including a $25,000,000 negative strike impact.

Speaker 4

To Operating performance, including lower supply chain disruption costs were positive in the quarter and offset the negative impact of higher labor costs. To Mr. Earnings. Customer recoveries offset material inflation and the negative commodity impact in the quarter, while foreign exchange,

Speaker 2

to the operator. Primarily the peso in RMB continue to

Speaker 4

present a headwind on a year over year basis. However, the FX impact is in line with the updated guidance we provided in August. To Adjusting for the impact of FX and the strike, adjusted EBIT margins for Signal and Power Solutions were 13.3% in the quarter. To Moving to cash generation and the strength of ACTA's balance sheet on slide 15. To Todd.

Speaker 4

As we have discussed in the past, our focus on cash flow generation and cash conversion is as disciplined as our operational improvement efforts. To Mr. President. The past quarter was a clear example of that as we saw the results of our efforts to reduce the higher working capital levels we maintained during to the recent supply chain disruptions. Despite the operating challenges in North America, we were able to improve operating cash flow by over to $300,000,000 versus prior year, resulting in cash flow conversion of 200% in the quarter and an ending cash balance of $1,800,000,000 to Given the strong performance, in October, we opportunistically paid down our $300,000,000 term loan, to Apta's most expensive borrowing, increasing our average tenure from 15 to 16 years.

Speaker 4

To Mr. President. As we have discussed in the past, our sustainable business model is enabling us to convert more income to cash and we believe there is no shortage of attractive deployment to our shareholders as we continue to maintain a well balanced approach to capital allocation, including prioritizing organic investment of the business

Speaker 6

to support our portfolio of

Speaker 4

advanced technologies and record new business awards, executing our M and A strategy by focusing on transactions that enhance our scalability, to accelerate our speed to market with relevant technologies and access new markets, maintaining our current financial policy as it relates to our leverage profile to and opportunistically returning cash to shareholders.

Speaker 6

I will wrap up

Speaker 4

with our full year outlook on Slide 16. To Given our continued strong performance and a higher outlook for global vehicle production, we are maintaining our full year outlook for 2023 to the operator. Despite the impact of the North American strike, key assumptions now underpinning our outlook include global vehicle production up 6% plus to the year versus the prior estimate of 4%, driven by higher expected production levels in Europe and China, to No significant strike impact beyond October 2023. During the month of October, we experienced a negative strike impact of $100,000,000 in revenue to $50,000,000 in operating income. Our outlook assumes a restart of customer production and a return to to the company's press release and no further meaningful disruptions.

Speaker 4

To Mr. Earnings. Accordingly, we expect revenue in the range of $19,950,000,000 to $20,250,000,000 to the operator. Including the impact of total lost strike revenue of $180,000,000 I would note that while our revenue and adjusted growth rate remain unchanged, to Given the Q4 strike impact, we are forecasting our growth over market for 2023 to be below our long term forecast range of 8% to 10%. To EBITDA and operating income are still expected to be approximately $2,800,000,000 $2,100,000,000 at the midpoints respectively, to Including total loss strike earnings of $80,000,000 No change to adjusted earnings per share of $4.75 at the midpoint to Mr.

Speaker 4

President and CEO of approximately $2,000,000,000 As Kevin will discuss further in his closing remarks, to Despite the macro challenges of the North American strike and the significant foreign exchange headwinds, our relentless focus on improving operating to Kevin for his closing remarks.

Speaker 3

To Thanks, Joe. I'll wrap up on Slide 17 before we open the line for questions. As Joe and I have discussed, we experienced strong underlying business performance to the Q3, driven by further easing of supply chain constraints, which partially offset lingering headwinds related to material and labor inflation, unfavorable FX to the UAW strike in North America. We continue to see tremendous momentum in new business awards and are well on our way to reaching our bookings target to roughly $32,000,000,000 by year end. While our teams continue to work tirelessly to mitigate the impact of the UAW strike in North America, to Including the ramp up of North American production, we're executing on further cost structure actions to enhance our operational resiliency.

Speaker 3

To our shareholders. Our portfolio of advanced technologies and strong operating execution gives us confidence in our ability to further strengthen our competitive position to and deliver sustainable value creation for our shareholders. Operator, let's now open the line for questions.

Operator

To to you. To Andy. We'll take our first question from Joe Spak from UBS. Please go ahead.

Speaker 7

To Thanks, everyone. Good morning. Kevin, Joe, just first on the growth over market to For the quarter and I guess the outlook. I know you said it was in part driven by the UAW to W. Strike, I think it went from 9% to 5%.

Speaker 7

But that's that $180,000,000 is like 1 point, I think, year over year. To And part of that's obviously just the industry, not just your sort of growth over market. So can you sort of detail some of the other factors that are driving to some of the lower growth of our market for the year and in the Q4.

Speaker 4

Yes. Joe, that's a good question. So you're right. There is the to Sort of numerator effect of what we're doing. The bigger impact is the denominator, right?

Speaker 4

That's a calculation sort of that comes in after the fact relative to to everything else that happened in the markets. So not only do we have the slowing of the D3, Where we do have about 65% of our North American business, but you have folks like the Japanese manufacturers that we don't have a lot of content on in North America to Going up significantly. So you get the compounding effect of numerator coming down to the denominator going up. To For instance, just the growth and the Japanese OEMs had a very strong Q3. That growth that impact was about 4.5 points, 5 points against our growth over market to Joe.

Speaker 4

One of the things we look at to double check this math is sort of how did we do against the D3 standalone, where we were up about to 14% with the D3 relative to their production. So definitely feel like particularly in North America, it's more of a market mix at the moment. I did caution on full year because we got to see how quickly that sort of unwinds. The other places to look at, if you looked at Europe and China, I mentioned just to So high voltage is growing more slowly. That was probably worth about a point of growth to us on a growth over market basis.

Speaker 4

To We're still it's still contributing to growth over market, but less than the prior quarters by about a point. And then some program mix, to Particularly in Europe, just infotainment is down a bit in the quarter. That's some program timing. We expect infotainment to finish to It's the year mid single digit growth. So again, it was more of a quarterly impact.

Speaker 4

But you are right, the relative market to component of that, drives that growth over market calculation as well.

Speaker 7

Okay. And then I guess just to follow-up as we think about to some of your midterm targets and you pointed out some of the slowing bev penetration in U. S. To Europe and I think this has been pretty well documented right now. Does that at all I know you've taken a more conservative view of to the next question.

Speaker 7

Maybe then some third parties over the mid- to long term. So is this how does sort of the more recent trends to compare versus what you laid out back in the February Analyst Day.

Speaker 3

Yes. Hey, Joe, it's Kevin. Listen, I think to Jim. As Joe highlighted, walk through the numbers. Q3 has a lot of unique to circumstances in it as it relates to growth over market.

Speaker 3

And as we look at to You're providing a perspective on more precise perspective on our growth over market in the out years. We need to see how Q3 settles. To Having said that, we still strongly believe we're very well positioned as it relates to growth over market to Given where we operate, electrification and ADAS solutions are 2 of our higher growth areas, which we to believe we'll continue to be high growth, understand the questions in and around high voltage electrification to And future growth rates, certainly Q3 was down relative to Q2 and Q1 this year. To I think we would say that is largely related or a significant portion of that impact to Is the strike issue and some of the other items that Joe talked about. And then as you highlighted, just a reminder, to As we developed our electrification strategy, we very much focused on a select group of customers to And had a much more conservative view on the overall market of electrification and the patient penetration.

Speaker 3

So long winded way of saying, it's to Too early to answer your question more precisely, but certainly to say we feel very good about where we sit from a growth over market standpoint.

Speaker 2

To Mr. President.

Speaker 7

Thanks. I'll pass it on.

Operator

Thank you very much. Next, we'll go to Rod Lache with Wolfe Research. Please go ahead.

Speaker 8

To Good morning, everybody.

Speaker 3

Good morning, Rod.

Speaker 8

Just following up on Joe's question, I know you've been a lot more conservative to On high voltage and bevs than just about everybody in the market. You had a 35 to the 2,030.

Speaker 2

But can you just give us

Speaker 8

a little bit of maybe additional color on to what your customer mix looks like within that backlog that was propelling the 30% annual growth, just to get a sense of to Is it are you more exposed to the companies that are slowing down a bit? Or are you sort of to more dispersed among the faster growers.

Speaker 3

Yes. So I'll start, Rod, and Joe can fill in any blanks. To So when you look at where the majority of our exposure is, it's with the European and to The Chinese OEMs. That's where the bulk of our battery electric vehicle exposure is. To When we look at kind of nearer term and where we have those exposures, to our by and large on platforms that are bev platforms, so they're dedicated bev platforms.

Speaker 3

To When we look out into the Q4 and into early next year, we're seeing very stable schedules as it relates to production. There's one exception with a North American OEM, who I think has been pretty to the public about their plan for electrification. So that will have some impact nearer term. To But offsetting that are a number of OEMs who are in the midst of launching that programs that we're on.

Speaker 8

To So high level, Kevin, when you look at this in its totality, do you feel like there's to A material change to that original 30% that you were looking at? Or is it I guess our question to it's not that specific, but how are you kind of viewing the expectation for

Speaker 2

the drug trial?

Speaker 3

Yes. Listen, yes. No, it's great. Yes, we feel really good about it. I think there's to It's an element of I don't think we ever guided 30% forever.

Speaker 3

So there's a lot of large numbers, right, that we need to keep in mind. We'll do to just under $2,000,000,000 of high voltage electrification revenues this year, I think $1,800,000,000 or $1,900,000,000 to So that business has grown significantly. Q3 obviously was impacted by some of the dynamics that Joe talked about. To Without a doubt, we will see some impact in Q4 and early next year related to the OEM that I referenced to is reducing bev schedules. On the flip side, we have a number of OEMs where we look at to current production schedules, what they have in place for Q4 and early next year, where those schedules remain strong.

Speaker 3

And then in addition to that, we have a number to of programs that are coming online during 2024. And the bulk of that activity is in China to Ann is in Europe, 2 areas where we don't view any easing on CO2 emission regulations and to customers really focused on how do they continue to launch new best platforms.

Speaker 8

Okay. Thanks to that. And just lastly, obviously, a lot of controversy around Autonomous right now with crews slowing down. I was hoping you can give us any to your questions. Updated thoughts on your investment plans there with Motional, whether that's influencing your thinking on that business at all?

Speaker 8

And then if Joe could

Speaker 2

to just update us.

Speaker 8

You originally had like a $1,700,000,000 performance and lower supply disruption to kind of element to your 2022 to 2025 bridge. How much of that are you seeing this year?

Speaker 3

To Yes. So I'll start. So nothing new to report out. We're actively engaged to with our partner Hyundai in terms of future funding as it relates to Motional. As we said in the past, they're on track from a tech to standpoint and commercial standpoint.

Speaker 3

But we're engaged in discussions at this point in time, certainly well aware of what we're reading about, we're seeing in the market. To Those are certainly things that we'll consider as we make our ultimate decision. Again, if we were to fund, we would fund half of their cash needs. To We haven't determined our plan or finalized our plan at this point in time. We'll be in a position to report that out to when we announce earnings in February of next year.

Speaker 4

Hey, Rod, it's Joe. Just to answer your question, I think to We're tracking well. If you recall, we had that on that walk I think you're referring to in the Investor Day from the end of 'twenty two to 'twenty five. To We had a $1,700,000,000 of performance that was going to work to offset $900,000,000 of labor inflation. To We talked about that being fairly ratable over the 3 years.

Speaker 4

That wasn't sort of a 2025 thing. We were going to make progress on that through the year. To I'd say 23 is tracking very much to that sort of ratable approach on both the cost side to As well as the performance, the price recovery side. So things are tracking well. Obviously, as we sit here today and to It's sort of stated obviously within the comments I made right.

Speaker 4

We do have some higher volumes helping offset the strike impact. But for the most part, those performance initiatives are coming through as planned, and we're seeing that particularly on the offset of the labor expense.

Operator

To John Murphy with Bank of America. Please go ahead.

Speaker 9

To Good morning, guys. I have another follow-up on this toggle on EVs and the penetration rate maybe being a little slower than people had expected. To Kevin, as you look at this Kevin and Joe, I mean, as you look at this, an optimist could say, hey, listen, EVs are taking a little bit longer and we're going to run our programs to as they exist right now, get better margins and returns in the interim, generate more cash and be able to fund the future more robustly, might make to gross over market a little bit, but our earnings and cash flow might be a bit better. Is that potentially to Drew here and as you're making these capital commitments to these programs, you have the ability to kind of toggle down to Reasonably quickly, so it wouldn't dent your returns and you get that benefit of maybe a slower roll.

Speaker 3

Yes. To Paul. It's a great question, John, and I'll start. Listen, we still are to the believers in electrification. And just want to remind everybody in the Q2 of this year, our high voltage revenue growth to On a year over year basis, it was 48%.

Speaker 3

And this quarter, it was 13%. And on a go forward basis, we think it more normalizes just relative to where we were in the Q3. Having said that, as we stated, we've been very focused on to Having a EV strategy that focuses on principally Europe to in Asia Pacific, China, principally OEMs that have built BEV to platforms. Those OEMs who are taking global platforms from one region to another region and focusing our investment in those areas, which to In reality, allows us to scale. I mean, that's what that was one of our objectives, John, is to make sure that to the extent we're putting in capital to That it scales, that we get significant revenue.

Speaker 3

On the bulk of those programs, we have scaling price to Relative to volume, so to the extent an OEM does not achieve their particular targets, to We have the ability to adjust prices and that's contractual. So we've protected ourselves that way. And then to the point you made, to Our baseline outlook has never been that 50% of vehicles manufactured in 2,030 were going to be battery electric vehicles. To We had a much lower outlook. So we think we have it ring fenced and balanced.

Speaker 3

To Listen, there may be a couple of quarters where I mentioned there's one OEM who is backing off their original to schedules where we'll see an impact on our growth rate. But as things normalize, to We're still optimistic about our competitive position here and the growth opportunity and the margin opportunity it presents.

Speaker 4

To Yes, John, it's Joe. The only thing I'd add to and we've talked about this for a while, right, particularly with the Electrical Architecture business, to We were able to leverage existing facilities, existing equipment, existing supply chain, existing engineers, to Low voltage, high voltage, the products are different, but they're very complementary. So for us and we've got obviously a very large architecture business. To I think leveraging that over the last couple of years has helped that product line get to segment accretive margins very quickly. To But it's also held from a return perspective, right, because we had a lot of that capital and plant equipment in the ground.

Speaker 9

To Super helpful. Just one follow-up on the Wind River seasonality, because it did seem to we may have missed this in the quarter in our model and our estimates. Could you to Joe. Just want to run through this, how would you think about seasonality for Wind River? I know you talked about it earlier in the year, but just if you could remind us.

Speaker 4

To me. I mentioned it in passing in the guide. They are and it's been there. It's in their business. I think it's somewhat of a software business to phenomena.

Speaker 4

Q3 is just a very slow quarter for them. Q2, Q4 tend to be the highest. To It's a highly leveraged model like a software business would be, right? So software renewals, licenses, new licenses to It's a 80% gross margin business, so they tend to drop at pretty high incremental rates. So We had seen this.

Speaker 4

We had seen this in the prior years. That's why we cautioned in February and to We're not surprised by this. So I think as you look at this and we talk about just to the quarterly progression over the next couple of years. I think this will be something that we see as recurring.

Operator

To Adam Jonas with Morgan Stanley. Please go ahead.

Speaker 10

To Thanks guys. So just look, it's a follow-up to Joe's and Rod's and Merv's question. I'm going to hit on this theme as well. To This EV journey for legacy OEMs has just been an unmitigated disaster so far. I don't think you need to be pragmatic Bostonians to see that to see through that.

Speaker 10

To With respect to like the inability to generate anything close to a reasonable return on capital and I don't see a path to it. So just speaking for myself here guys, but to It wouldn't surprise me and I suppose a lot of people on this call, if GM, Ford and the Germans pulled back their EV spending a lot. To I mean a lot. And I know you're not going to you're not in a position to answer the exact impact yet. So I'll phrase the question this way.

Speaker 10

If they did, to If in a world where the undisputed leader Tesla is dialing back and barely profitable themselves to and others follow and really just reset because they can't sell negative 100% margins forever. To Can you tell us how much your those 14.5% mid decade operating margin target or the over 17% longer term target? To I realize it won't be a straight path there, but how much of those targets really depend on the pace of EV adoption to continue the way you outlined, even conservatively outlined in February 14.

Speaker 3

To you. Yes. I'll take a I'll start, Adam. Listen, to We can take a look at a scenario like that, just kind of peeling it back. This year we'll do $1,800,000,000 In high voltage or EV revenues out of our roughly $21,000,000,000 in revenues.

Speaker 3

To And clearly, the growth rate that we've attached to high voltage electrification is higher than our overall average growth rate. So to Certainly, it would have some impact there. I think as we've said, a lot of these EVs are replacing to vehicles with internal combustion engines, most of which most of those OEMs where we actually have the vehicle architecture content. So the trade off isn't dollar for dollar. The high voltage content or margins related to the to SP and F base margins is accretive by a couple of points from a margin rate standpoint, but it's not a matter where it's 2x.

Speaker 3

To So it's something that I think we would manage through. It would have an impact to From a profit standpoint, I don't think it would have a huge impact, just given what the margins look like. To you. And we would be going again, if these OEMs aren't achieving their targets, their prices are going up to the extent they're significantly reducing. There are one time payments from the OEM as it relates to us reducing our capacity to produce the product.

Speaker 3

So that's how I think about it.

Speaker 4

Yes. Adam, I'd agree with that. Assuming unit production Total unit production stays in line, right? It would be we'd be swapping back to content on the low voltage platforms. We've got to Content on 1 out of every 3.5 vehicles manufactured.

Speaker 4

And to Kevin's point, you're looking at a point or 2 of sort of accretive high voltage that we'd have to work through. But to There are going to be dollars that replace that assuming the world continues to build the total number.

Speaker 3

Yes. And Adam, to Asad, I kind of I understand your question and it's a fair one. It's a good one. I do wrestle with to The industrial policies and they can always change of Europe principally, maybe U. S.

Speaker 3

Secondarily and that can change. To China from an environmental standpoint, but from a national security standpoint, technology standpoint, The push for EVs and the impact on OEM profitability, there's a question I would ask to A scenario that I would throw out where, that the OEMs are going to be going to the governments wherever they are for support to To continue the rollout so that they can achieve the industrial policies that those particular governments have, to Right, because all of this is tied to CO2 emission targets or national security. And if OEMs are uncomfortable or if the investment required is to Beyond which they can absorb and be profitable, ultimately, I think they're going to look for some support, Not too different from the semiconductor industry in the U. S. And Europe.

Speaker 10

Appreciate that, Kevin and Joe. Just one quick follow-up, if I may. Just want to confirm that out of the $1,800,000,000 or almost $2,000,000,000 of high voltage sorry, electric to portion of the was it $2,000,000,000 sorry.

Speaker 8

Of the $2,000,000,000 number that you quoted 1.8.

Speaker 3

To So Adam, 1.8, I used round numbers.

Speaker 5

Thank you. Just want

Speaker 10

to confirm that. Tesla is the single largest to component of that. I want to confirm that. And then labor, remind us how much of your sales is labor and what rate of inflation you're seeing in real time? Thanks guys.

Speaker 3

To Yes. On the customer piece, listen, we can't talk about speak about specific customers. So that's a question we're not to Going to respond to as it relates to labor, I think I would focus on labor within the overall business. To Joe Lane.

Speaker 4

Yes. We've talked about it, Adam. We had in the Investor Day $900,000,000 of dollar increase, it was between to Evenly split over the 3 years. That was about 10% or 11% increase and that's what we're seeing.

Speaker 10

Thanks a lot.

Operator

To Chris McNally from Evercore. Please go ahead.

Speaker 5

To Thanks so much team. If maybe we could just do a little housekeeping. Kevin and Joe, maybe I'm missing something, to But the $1,800,000,000 in high voltage, what's the number you're using for 2022? Maybe I Maybe it's been restated, but I think you had $1,200,000,000

Speaker 3

in some of your old slides. Could you just

Speaker 5

update those in 2022 and 2023?

Speaker 4

Yes. That's actually

Speaker 5

to Is that an increase? I mean, because I think the previous number guided to on Q2 was maybe a 30% to Chris. So it looks more like a 50% increase for high voltage for this year?

Speaker 4

Chris, it depends on what you're doing with inter cable, right? We closed inter to Cable end of last year. So wasn't in last year, call that, it's a little north of $200,000,000 of revenue. So to Just thought if you pro forward for it, yes, it's growing.

Speaker 2

Yes. And if you didn't, you got to know

Speaker 4

that Intercable is growing. Yes.

Speaker 5

To That's exactly okay. Thank you, Joe. Inter cable was exactly what I was asking for. And the second one, just to follow-up on Adam's, you forget about to talking about the customer, but the 1.8 is only high voltage, right? So if there was a large EV player that you mostly did low voltage for, That low voltage revenue, even though it goes to an EV, would not be in the $1,800,000,000 Is that correct?

Speaker 4

Yes, to That's right. We talked about that. We really wanted to focus on just the high voltage product line and that's when we started providing that guidance a few years back. So That's just high voltage. So the low and the low voltage is what's going in either vehicle, right?

Speaker 4

So you don't really see a big difference. To you. Yes.

Speaker 5

Absolutely. And then the last one for Q4, because obviously there's a lot of moving currents in Q3. To On ASUS, I think you talked about 8% to 9% rough margins for the year. It sounds like from the commentary, to The recoveries were pushed from Q3 to Q4. The first, is that 8% to 9% still pretty good even if it's the low end because it to Points to a nice material pickup in the ASUE margins and I think we've been sort of looking for that because that's a large portion of the drive towards to Your 2025 call.

Speaker 4

Yes. Yes. Full year, the current guide to We'd have ASU X at 8 and SBS at 11.6.

Speaker 5

Perfect. 3 to 3. Really appreciate it team.

Speaker 3

To Mr. President.

Speaker 4

Thanks, Chris.

Operator

Thank you. Next, we'll go to Itay Micheli from Citi. Please go ahead.

Speaker 11

To you. Great. Thanks. Good morning, everyone. Just a couple of follow ups for me.

Speaker 11

First, going back to the Q4 margin outlook, I was hoping you could just kind of dimension to the seasonality factors in there. It looks like you'll be exiting closer to 13% ex strikes. Just kind of curious how to think about the baseline as we look to Bridge to 2024. And then second question, just hoping to talk more about the ADAS wins you had in Q3, maybe content per vehicle to And also any updated discussions with customers for Gen 6?

Speaker 4

To Yes. Ittai, I think as you look at and we'll obviously stay away from 2024 at this point. But I think if you looked at to I sort of give our standard cautions, right? I'd focus more on H2 versus Q4 because Q4 can be heavy with things like engineering recovery. To So I think it's more H2 adjusted for strike.

Speaker 4

But listen, as you just go through the progression to Tienaron. As I mentioned to Rod, we clearly have got the benefit of some volume increases offsetting strike. But our margin rates at the segments to As well as Total Coal or Total Company are tracking to the original guide and that's tracking to that Investor Day model. And as I mentioned to Rod, the 1,700,000,000 to The $900,000,000 of labor are falling in. So if you go so I think we're on track.

Speaker 4

If you're going to start to look at back half, to I think H2 is a better proxy than just Q4 and then you obviously have to adjust for the strike.

Speaker 3

To On conversations with customers about Gen 6 ADAS platform, to I would say we're in active dialogue with roughly a dozen Asian, to European and North American. So interaction there and to strategic dialogue is very, very strong, going very well. As it relates to the Q3 bookings, the bulk of those bookings to We're in and around radar solutions that were being they're being plugged into existing ADAS platforms with OEMs to In Europe and in China. Terrific. That's all very helpful.

Speaker 3

Thank you. To Mr. President.

Operator

Thank you. Next, we'll go to Emmanuel Rosner. Please go ahead.

Speaker 6

Thank you very much.

Speaker 2

I to I

Speaker 6

was hoping you can help us frame and quantify the exposure to electric vehicles to either in terms of current revenue or more importantly actually in terms of future growth of the market or percentage of backlog, to Not just within high voltage, but generally speaking, because to your earlier point, you're selling low voltage components to to a very large EV manufacturer and obviously a lot of the new programs over the next few years, which probably have been on new EV platform. So Any way to maybe quantify when you sort of like look at this outgrowth expected over the next few years, how much of that would have landed on EV platform?

Speaker 4

To Yes. Emmanuel, it's Joe. Listen, I think Kevin framed sort of how we're thinking about long term, right? We were conservative. To I think we didn't sort of follow everybody down the path that it's going to be 50% in the next couple of years.

Speaker 4

So to From what we see now, remain confident in that outlook. We do expect growth to slow. We just get to the law of larger numbers, you get almost a $2,000,000,000 business. To You're going to see growth rates slow over time. As I mentioned earlier, to If you look just over the past, call it 8 plus quarters, high voltage has typically provided 2 points of growth over market, round numbers, to a little bit higher in certain quarters up to 2.5%, 3%.

Speaker 4

But on average too, this quarter, it provided a point of growth over market. To So meaningful, but not certainly not all of it. And then 80% of the business at this to including revenue and bookings is with the European and the Chinese OEMs. So we've we had not historically gone down the path of to The North American products, at least the initial products, I think were very niche, right? They were the high end SUVs, sort of more of the unique type vehicles.

Speaker 4

To We have some content on them, but they were by no means the bulk of the business. So I think from I think that should help frame it at this point.

Speaker 6

To I appreciate it. Joe, the reason I'm asking for EV exposure outside of high voltage is to There's a large seating supplier that would be the ideally the most powertrain agnostic product you could possibly sell, to slashing their backlog by 20% because all these new seats were going to go on new EV platforms They were charged. They're being pushed out or at sort of like lower volume.

Speaker 4

Yes, I can't speak to the Seating business. Obviously, like I said, we're 80 to European and Chinese concentration. I'm not sure who you're talking about

Speaker 6

or what their portfolio looks like. No, no, no. My comment was to EV exposure outside of high voltage and any way to frame that?

Speaker 4

To No, I think we've provided what we're going to provide, Emmanuel.

Speaker 3

Yes. Emmanuel, from our perspective, vehicle architecture, just given the fact that we're on one of every 3 vehicles to Globally, if they're not building a BEV, they're building a vehicle with an internal combustion engine and more likely than that, we're on that vehicle. To So with that low voltage vehicle architecture. So for us, I would say there's

Speaker 6

to virtually no impact. That's helpful. My follow-up is on, I think you were mentioning your mix impact as sort of like to A little bit of a headwind in the quarter outside of just the strike, obviously, in North America. Can you just elaborate a little bit more on the other region? Was it sort of like to I mean, customer mix specifically and which region?

Speaker 3

Yes, it was customer mix to Across really all regions and some examples were kind of outsized growth to the Japanese OEMs across North America, across Europe, as well as to some significant growth in parts of Eastern Europe that are either products manufactured in Eastern Europe or in places like China that are to So areas where we have less customer exposure. So a lot of that we think is related to to. Semiconductor rebound and availability of chips for select OEMs and the other pieces the impact of or the opportunity as it relates to UAW strike in North America for select OEMs to potentially gain share.

Speaker 6

To Great. Thank you for the color. Great.

Operator

Thank you. And we'll go to our last question from Dan Levy from Barclays. Please go ahead.

Speaker 3

To you.

Speaker 12

Hi, good morning. Thanks for squeezing me in. I wanted to start with your Slide 10, just to the perspectives on 2024 here. And in the bottom half of the slide, it says continued inflationary environment, geopolitical uncertainty. To Maybe you could just unpack the inflationary comment a bit.

Speaker 12

What is it that you're seeing that's incrementally worse? To How does potential recovery on semiconductor costs factor in? And maybe you could just talk about the potential for to better stability in production schedules to be a potential tailwind next year.

Speaker 3

To Yes. So, yes, it's Kevin. Listen, as it relates to stability in production schedules, we're seeing that now. I mean, there's some element Of disruption in COVID that remains, but we've seen a significant improvement throughout the year. We'd expect availability to continue obviously into 2020 to you.

Speaker 3

So you should see some benefit there. Material inflation was significant in 2023. We expect in some areas, to Including semiconductors that will remain significant in 2024. We're doing a number of things to you. To address that, one, changing semiconductor partners really across to all the semi categories from core semis like SoCs, analog power PMICs To peripheral semis.

Speaker 3

So a lot of work being done by our engineering and sourcing teams, establishing to commercial agreements or partnership with the Chinese semiconductor space, which is ramping up capabilities to very, very aggressively and we're deep into that and are going to take advantage of that opportunity both to To serve the China market as well as to bring some of these into the Dine China market. So that will free up to lower cost alternatives for ourselves and our customers. As it relates to customer recoveries, to Listen, those are always challenging discussions, but given to where we have contracts given where we are from a financial standpoint, we are passing 100% of those costs on to the customer. Again, it's not a simple discussion. It's not an easy discussion, but that's what the commercial team or how the operating team is operating.

Speaker 3

To And that's something that will continue to the extent they're interested in some of these lower cost alternatives. There's an opportunity For us to jointly benefit and we'll put those in front of them. But as of now, that's to Kind of the state. So the material inflation is relatively high. And then we're very focused on labor inflation to In places like Mexico, Eastern Europe, North Africa, so those are areas that we're watching very, very closely.

Speaker 3

And then last item, I should say, it's not related to the to specific inflation on material or direct labor. We're very focused on continuing to prune our cost structure to To provide additional room and ultimately additional margin.

Speaker 12

Great. Thank you. And then just to As a follow-up on EV side, just the 2 quick ones there. Can you just confirm, I know you said you're overweight to the European and Chinese. China, we've obviously seen a lot of uptake, especially from BYD.

Speaker 12

How should we think about the mix impact to if we see outsized exposure from the Chinese. And then can you just confirm that on SVA that that is powertrain agnostic? To

Speaker 3

Yes, SCA is powertrain agnostic. To It makes more sense, if an OEM is rethinking and moving to a BEV platform, to That is the time to really it's an easier time to implement and make that architecture change. But to It would be Powertrain overall Powertrain agnostic. As it relates to mix of to Bev customers. I think it's relatively awash.

Speaker 3

Margins might be a little bit higher to On our China OEM partners, given we tend to do more system solutions there, so are able to to Kind of connect a broader portion of our overall portfolio, but it wouldn't be significantly different.

Speaker 4

Yes. Dan, just current revenues and to It's gotten it's changed over the last few years. We're about sixty-forty global versus local OEs from a revenue perspective today. That would have been north of 75 to Sensient Global back in the 2018, 2019 timeframe. Bookings are running fifty-fifty.

Speaker 4

So we'd expect that to increase in favor of the locals and obviously just given what's being made over there a lot of that's EV.

Speaker 3

Yes, I think actually you look at our revenue mix, I think 2024, to It's almost fifty-fifty from a local

Operator

multi national.

Speaker 12

Great. Thank you.

Operator

To Jason, and I'd like to turn the call back to Mr. Clark for any final remarks.

Speaker 11

Okay. Thank you, operator.

Speaker 2

To Thank

Speaker 3

you, everyone. We appreciate you taking your time this morning. Please let us know if you have any further questions. Thank you.

Speaker 2

To the operator.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. Have a wonderful day.

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Earnings Conference Call
Aptiv Q3 2023
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