Aptiv Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2022

There are 13 speakers on the call.

Operator

Good day, and welcome to the Aptiv Q3 2022 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jessica Kyrakos, Vice President of Investor Relations and ESG. Please go ahead.

Speaker 1

Thank you, Bettina. Good morning and thank you for joining Aptiv's Q3 2022 earnings conference call. The press release and related And we'll address the continuing operations of Aptiv. The reconciliations between GAAP and non GAAP measures for our Q3 financials as well as our full year 2022 outlook are included at the back of the slide presentation and the earnings press release. The conflict between Ukraine and Russia.

Speaker 1

Joining us today will be Kevin Clark, Aptiv's Chairman and CEO and Joe Massaro, CFO and Senior Vice With that, I'd like to turn the call over to Kevin Clark.

Speaker 2

Thank you, Jessica, and thanks everyone for joining us this morning. Beginning on Slide 3, We had a strong Q3, so let me touch on a few of the highlights. New business bookings totaled over $5,000,000,000 bringing the year to date total to over 25,000,000,000 Already outpacing last year's record full year amount of $24,000,000,000 and cementing another record year in 2022. Revenue increased 33 percent to $4,600,000,000 representing 9 points of growth over underlying vehicle production, driven by the strength of our safe, green and connected product portfolio. We continue to execute well despite the constrained environment and macro headwinds.

Speaker 2

EBITDA and earnings per share totaled $673,000,000 and $1.28 respectively, reflecting flow through on volume growth and material cost recoveries, partially offset by costs related to material inflation and supply chain disruptions. We remain on track to reach this year's target of $500,000,000 of material cost recoveries and $100,000,000 of cost reductions, increasing our profitability and enhancing the resiliency of our business model. And lastly, we continue to invest in growth opportunities as reflected by our agreement to acquire Inter Cable Automotive Solutions, which further strengthens our high voltage product portfolio. Turning to slide 4, Aptiv's industry leading portfolio of electrical Inter Cable Automotive is an industry leader in the design and manufacture of high voltage bus bars and interconnect solutions. The company has an outstanding management team that's developed a portfolio of innovative high voltage power solutions, Including their 7th generation busbar product that they've leveraged into very strong relationships with several leading European automotive OEMs.

Speaker 2

The partnership between Aptiv and Inter Cable will enhance the strength and breadth of our combined product portfolios, allow Inter Cable to leverage Aptiv's global scale Manufacturing footprint, especially in North America and China, further strengthen our capabilities to design and deliver fully optimized high voltage Architecture solutions that reduce vehicle weight, mass and costs and we can leverage these synergies We look forward to closing this transaction later this year And welcoming Inter Cable Automotive to the Aptiv team. Turning to Slide 5 to review our segment highlights. Our full system solutions across both the brain and nervous system are accelerating the development of the electrified software defined vehicle of the future. In the Advanced Safety and User Experience segment, our portfolio of technologies is helping to increase the penetration of advanced active safety solutions, Including a 3rd quarter business award from a major local Chinese OEM for our next generation ADAS platform, representing our 7th major active safety platform customer. In addition, during the quarter, we secured a high volume award with a large customer in Asia to provide our next generation integrated cockpit controller.

Speaker 2

And lastly, we continue to build a growing pipeline of software revenue opportunities With an increasing number of North American, European and Asian OEMs, which we're confident will begin to turn into customer awards in 2023 beyond. In the Signal and Power Solutions segment, as the demand for vehicle electrification continues to accelerate, We're experiencing significant growth in our high voltage business, which will reach $1,200,000,000 in revenues this year and accounts for 25% of year to date new business awards in the segment. In addition, We continue to successfully leverage our vehicle architecture capabilities to drive revenue diversification and strong growth in the commercial vehicle and non automotive markets, which increased 24% during the quarter. And lastly, our industry leading position as a full system solution provider of high voltage architecture, Combined with our capabilities in vehicle electronics and software systems has uniquely positioned us to expand our portfolio into power electronic solutions And Battery Management Systems, further broadening our offerings and strengthening our position as the industry leader in vehicle architecture. Moving to Slide 6, to review how we put innovation in motion.

Speaker 2

During the quarter, Aptiv was named the 2022 PACE Award winner for our central vehicle controller, which is scheduled to begin production in 2023 with a major Chinese OEM. This high performing compute platform is a key piece of the architecture that translates software code into physical action, Efficiently and securely controlling the flow of data on and off the vehicle, managing communication for current and emerging high speed protocols, And reducing complexity by integrating critical body functions. This particular central vehicle controller is a first to market solution and a critical element of our smart vehicle architecture and is essential to enabling the software defined vehicle. We are increasingly collaborating with our OEM customers to bring these innovative solutions to market as evidenced by our full system solutions for both hardware and software to VW CEO, Oliver Blumet and his management team pictured here. With Aptiv's brain and nervous system capabilities, we're uniquely positioned to reduce complexity through architecture optimization, while enabling the full of software from hardware.

Speaker 2

Increasingly important to automotive OEMs, our system level design capabilities Enables breakthrough levels of assembly automation, increasing quality while also reducing complexity and cost. This is why Aptiv is investing in end to end cloud native software development tools, which we previewed at IGB and will unveil at CES in 2023. Feedback from IZB was overwhelmingly positive, providing an opportunity to increase our level of collaboration with OEM customers And further validating Aptiv as a trusted technology partner. Turning to Slide 7 to provide an update on new business awards. As I mentioned, 3rd quarter new business bookings totaled $5,100,000,000 Bringing our year to date total of $25,400,000,000 surpassing our previous full year record, further validation of the strength of our portfolio of advanced technologies and our ability to deliver exceptional value for our customers.

Speaker 2

Advanced Safety and User Experience bookings during the quarter totaled 1,400,000,000 bringing the year to date total to a record $11,000,000,000 Driven by the continued strong adoption of advanced active safety solutions, Including the new business award I mentioned previously from a major local Chinese OEM for our next gen ADAS solution, which will leverage our scalable ADAS platform support a wide range of advanced safety features. Bookings for our Signal and Power Solutions segment reached $3,700,000,000 during the quarter, Including another strong quarter for high voltage electrification awards, bringing the year to date total to roughly 3,500,000,000 We've seen a very balanced bookings profile across our high voltage product offerings, underscoring the strength of our industry leading portfolio of advanced technologies. Another strong quarter of new business awards, while at the same time successfully negotiating material cost recoveries with our OEM customers This further validation of the uniqueness of our portfolio, the strength of our customer relationships and our flawless operating execution. Turning to Slide 8. Despite the constrained environment and macro headwinds, We continue to take actions to increase the underlying resiliency of our business model and deliver sustainable value creation By enhancing our portfolio of full system solutions to increase our addressable content on the electrified software defined vehicles of the future, Recovering increased material input costs and optimizing our cost structure, smartly deploying capital to further strengthen our capabilities to meet the evolving needs of our And intelligently diversifying our revenue base in the less cyclical non automotive markets.

Speaker 2

We're confident that these actions will position us to continue to create value as the industry transitions to the electrified software defined vehicle And will be reflected in an acceleration in new business bookings, continued strong revenue growth over market, meaningful margin expansion And strong cash flow generation. With that, I'll turn the call over to Joe who can go through the financial highlights in more detail.

Speaker 3

Thanks, Kevin, and good morning, everyone. Starting with a recap of the Q3 financials on Slide 9. As Kevin noted in his opening comments, revenues of $4,600,000,000 were up 33 With 9 points of growth above underlying vehicle production. Adjusted EBITDA and operating income were $673,000,000 $525,000,000 respectively. EBITDA margins expanded 3.30 basis points versus Q3 last year And grew 5 60 basis points sequentially, reflecting flow through on increased volumes of approximately 32% both year over year and sequentially, Continued progress on customer recoveries of direct material inflation as well as other performance and cost savings actions, Partially offset by a return to a more normalized price down environment and the impact of FX commodities and non material cost increases.

Speaker 3

EPS in the quarter was $1.28 an increase of over 150% from prior year reflecting higher net earnings. And operating cash flow totaled $437,000,000 a significant improvement from the prior year and sequential quarters. As I will discuss in a moment, we will be updating our full year cash flow guidance to reflect a higher expected investment in certain key inventories To help better navigate supply chain constraints and prepare for 2023 launch activities. Capital expenditures for the quarter were $212,000,000 Looking ahead at the 3rd quarter revenues in more detail on Slide 10. Adjusted revenue growth of 33% reflected both our growth over market as well as the rebound in global vehicle production from the prior year, which was heavily impacted by semiconductor shortages.

Speaker 3

Growth across all regions was led by our key product lines including high voltage and active safety and reflects some improvement in supply chain conditions. However, despite this relative improvement, we continue to operate in a constrained environment With both direct and indirect impacts on our customers and operations, direct material inflation recoveries totaled $199,000,000 And price downs were $64,000,000 approximately 1.8%. The FX and commodity impact was significant, totaling $226,000,000 primarily related to the weaker euro and RMB. Regionally, North American revenues were up 31% or 7% above market as production at several of our larger North American ASU X customers were impacted by supply chain constraints. In Europe, we saw outgrowth of 9% driven by continued high voltage and active safety growth.

Speaker 3

And in China, revenues were up 42% or 11 points over market, driven in part by a significant increase in launch activity in our Signal and Power segment. Moving to the segments on the next slide, Advanced Safety and User Experience revenues rose 26% in the period or 2% over market. As previously noted, ASU X experienced lower North American growth over market as several customers experienced supply chain constraints It impacted their vehicle production in the quarter. Excluding these customers, ASU X growth over market was in line with expectations and prior periods. Segment adjusted EBITDA was $122,000,000 or 10.2 percent of revenues, reflecting strong flow through on incremental volumes, The previously discussed material cost recoveries, improved operating performance and the benefit of engineering credits.

Speaker 3

Signal and Power Solutions revenue rose 35% in the period or 11% above market. The outperformance was driven by strength in several product Segment EBITDA of $551,000,000 or 16.1 percent of revenues Includes strong flow through on incremental volumes and incremental material cost recoveries, partially offset by the impact of FX and commodities. Moving to our full year outlook on Slide 12. Our outlook for revenue, operating margins EPS remains unchanged from the guidance provided last quarter despite the negative impact of foreign exchange, which has increased significantly since we provided our full year guide. We remain confident that we are well positioned to continue to execute despite the ongoing concerns of Supply chain constraints, COVID impacts in China and disruptions in Europe.

Speaker 3

We expect revenue in the range of $17,000,000,000 to $17,300,000,000 And growth over market for the year to be within our previously communicated range of 8% to 10%. EBITDA and operating income of $2,200,000,000 $1,600,000,000 Midpoints respectively and earnings per share of $3.30 an increase of 8% over last year Despite a meaningful drag from FX and Commodities, we are updating our cash flow guidance and we now expect to finish the year at $1,350,000,000 early 2023. Before turning the call back to Kevin, I wanted to touch briefly on 2023 As we have started the early phases of planning for next year, although given the ongoing macro challenges, it is too early to provide any specific guidance. However, our strategy remains unchanged and we continue to be well positioned to lead the transition to higher contented software enabled vehicles. And although we expect to benefit from overall demand for key technologies like smart vehicle architecture, high voltage and active safety, The progress we have made on material cost recoveries and operational performance and the inclusion of the Wind River and Inter Cable acquisitions, We remain cautious of the lingering headwinds and believe continued supply chain tightness and deterioration in economic conditions, particularly in Europe making it potentially more challenging to recapture operating leverage.

Speaker 3

And we would expect the FX commodity headwinds to persist into 2023 As the more meaningful impacts of changes in the euro and RMB did not occur until the second half of this year. With that, I'd like to hand the call back to Kevin for his closing remarks.

Speaker 2

Thanks, Joe. I'll wrap up on slide 13 before opening up the call to questions. Our business is built on a strong foundation and continues to gain momentum as Close out 2022 despite the constrained environment and macro headwinds that Joe just touched on. Our strategic alignment with our OEM customers This has really never been better as reflected in our continued strong revenue growth over market and the pace of our new business bookings. We continue to make progress recovering the increases in material input costs, while also further optimizing our cost structure, and we continue to smartly deploy Capital both organically and inorganically to further strengthen our competitive position.

Speaker 2

These actions have translated into a significant improvement in our margins We'll provide a detailed update on our 2023 outlook when we release 4th quarter earnings, but you can expect us to focus on delivering continued strong revenue growth Overmarket and Margin Expansion in a Challenging Environment. With that, we can open up the line for questions. Thank

Operator

Our first question today comes from Rod Josh of Wolfe Research.

Speaker 4

Good morning, everybody. I was hoping first to just maybe Better understand the year over year earnings bridge that you had this quarter. So you did, on an adjusted basis, dollars 2 $6,000,000 of EBIT and you're getting to $525,000,000 this year. You mentioned 32% conversion on the $1,000,000,000 of Volume, which obviously there'll be more than accounting for that growth. Could you just talk to the net impact Of commodities, that $199,000,000 tailwind, what was the net effect Netting that out and were there any out of period benefits in that number?

Speaker 3

Yes, Rod, it's Joe. Let me start. So FX, we mentioned the revenue number is about 226,000,000 on the year over year. On the YOLI, that flow through is about $20,000,000 round numbers on FX and commodity. So obviously picking up Lower euro and then the really the start of the RMB weakening at the end of the 3rd quarter, although that obviously it Picked up in the Q4 as well.

Speaker 3

It will pick up in the Q4 based on everything we're seeing. I listen from an auto period perspective, A lot of puts and takes with customer recoveries, inflation, some premium that we'll get reimbursed for next quarter, but nothing overly material from a net perspective. Really just again, there's a lot going on in the quarter. So you got a few things going in different directions. But if you got the volume flow through and the FX impact, really got sort of the net there.

Speaker 4

Okay. So it sounds like mostly FX in that number and that recovery was mostly offset by higher costs, if I understand that correctly.

Speaker 3

Yes. The only other thing I'd say we and I mentioned in my prepared remarks, we're seeing a return to a more normalized price down environment. So we've got price downs of 1.7%. That had been we've been holding off on price downs until we got through all the customer recoveries. So as we Communicated last quarter, we expected to return to sort of more of a normal operating cadence with our customers.

Speaker 3

So you got that price down at 1.7% as well.

Speaker 4

Okay. And you opened the door to 2023 and I know you can't really give a lot of detail yet, Last quarter, you mentioned that on a seasonally adjusted basis, we should be thinking that margins are around 10% in the back half. And it seems like you're kind of tracking to that. You're at an $18,000,000,000 run rate of revenue, so that's about 1,800,000,000 Of EBIT, is it still correct that there's around $100,000,000 of additional kind of unrecovered cost that you're that you need to go after for next year?

Speaker 3

I'm not sure. We talked about a 10% and 10.5% jumping off point. I think that's generally holding operationally from everything we're seeing. We're sort of tracking to that. My only caution there would be, I think we're going to have to evaluate or one should So, we'll evaluate sort of the FX impact.

Speaker 3

There could be about a half a point of headwind to that range if these FX rates hold going into next year. But operationally, I'd say things are happening as we had expected.

Speaker 2

Yes, Rod, maybe if I can just Chime in on price recoveries. The team has done an excellent job as it relates To recapturing material cost increases and translating that now into POs with our OEM customers. So we feel good about heading into 2023 with respect to that particular category. Obviously, what we need to go after Next year is partly influenced by what we see from a material inflation standpoint, if there's some incremental increases going into 2023. So we're well positioned as it relates to what we've translated into POs this year heading into next year.

Speaker 2

If there's more material inflation, we'll go back to OEM customers With increased prices, the OEM customers are aware of that. And then secondly, just Joe's point on FX, I think Joe highlighted it on it in his comments a couple of times. When you look at the recent movement in the euro, in the RMB, We've seen a significant change over the last month or 2. So I think there's a question there as it relates to what's the trend And in currencies heading into 2023 and what sort of movements do we see.

Speaker 4

Great. Thank you. And just lastly, Kevin, any updated thoughts on Thoughts on investment in motional just in light of what we've heard from Ford and just elsewhere in the market? Yes.

Speaker 2

Listen, motional continues to be very successful in terms of advancing the technology roadmap. I'm You saw the announcement as it relates to Uber and the plan to integrate the motional solution or motional vehicles In the Uber network in the United States, as it relates to the Ford announcement, As it relates to Argo, listen, I think there's an element of our Specter on autonomy has probably been a bit different than most OEMs that are out there. When we originally made our investments in Automatica And newtonomy, a big piece of our strategy was with respect to How do we take those technologies that are utilized for vehicle autonomy and how do we pull those forward into active safety solutions, Which is what we're doing today, which is that technology or portion of that technology, a portion of that know how is embedded in our current generation In addition, Motion was a customer of Aptis. So when you think about perception systems and other items, They're actually a customer. So we've always viewed, Riley, we've talked about it in the past, we've always viewed autonomy as kind of the far end of the spectrum as it relates Active Safety, so from a strategic standpoint, a business standpoint, it's fairly well integrated into what we're doing operationally today.

Speaker 4

Okay. All right. Thank you.

Operator

Our next question comes from Itay Mishali of Citi. Please go ahead.

Speaker 5

Great. Thank you. Good morning, everybody. Just two quick ones. First on the Q4 guide, just hoping you can maybe share your latest LVP views for the year and maybe any Particularly bias at the low or high end of the confirmed range for 2022.

Speaker 5

And then Joe, going back to 2023, any early thoughts of how we should be thinking or how you're thinking about Global LVP for next year.

Speaker 3

Yes, Itay, let me start with 2023. It's just there. We're still working through that. There's a tremendous amount of puts and takes at the customer levels. We haven't seen schedules.

Speaker 3

So it's really too early for us to have A view on the numbers or the direction. Listen, as it relates to Q4, We're basically holding the guide. I think if we were to look at it, there's certainly some potential for upside, particularly with China production. Although more recently we've seen probably more pullbacks in some China production schedules Versus increases, but understand there is a desire in that market to build more vehicles. The way I view the guide at the moment, we're certainly confident in the mid To the extent there's bias to the top end of the range, I think it's going to be a trade off between vehicle production increases in China, Europe holding steady and then just how big an FX impact that sort of offsets on the top line.

Speaker 3

So that's really what we're looking at and really sort of the driver of holding the guide is to the extent you pick up some revenue on upside in China, which We don't quite see it yet in schedules, but understand the bias there from customers. We are mindful of just the revenue impact From the FX perspective.

Speaker 2

Itay, if I can just qualitatively, I just want to reiterate Joe's point. Although supply chains seem to be improving, the reality is we're seeing continued volatility in customer Right, week to week, and maybe more recently more volatility, to the downside on the China Production schedules, which we did not see in Q3.

Speaker 5

Got it. That's all very helpful. Thank you.

Speaker 3

Thanks, Yitachi.

Operator

Our next question comes from Joe Spak of RBC Capital Markets. Please go ahead.

Speaker 6

Thanks so much, everyone. Good morning. Joe, maybe just a little bit more on this decision To build inventory, it sounds like it's pretty customer or launch specific. I just I want to get a little bit more understanding of your thinking because we just saw a competitor, at least on the connector side, They had sort of built prior inventory and they're sort of letting some of their inventory go down now because they feel better about supply chain. So is this just you being extra cautious In terms of building your own stock and is that a new normal or should we expect that to come down over the course of a year or so?

Speaker 3

Yes. Listen, I think it is broadly speaking, Joe, in the electronics space, passive electronics, semiconductor is obviously a big part of that. I'd say it is specific around some heavy launch activity we expect in the first half of next year wanting to make sure we've got adequate Why? Sort of getting the supply when we can. There's also an element and my ASUx Comments around growth over market, so to speak to it.

Speaker 3

We are still seeing customers impacted by lack of availability. So I understand the comments you're referring to from TEL, but broadly speaking across that electronics supply chain, I don't think this is An active issue because some of the impacts we're seeing on customers weren't we were not the what for. You're still seeing some constraints on semis and passive electronics. So Making sure we're running into the decision was basically not to take inventory down as much as we originally planned in the 4th Order and hold on to what we have continuing to order to make sure we've protected next year. And I would say from an unwind, it's very hard to call at the moment.

Speaker 3

I don't think this is a new normal multiple years. Could we sort of be running at higher levels For the bulk of 2023, I think that's possible depending on how we see things improve. Yes.

Speaker 2

If I can add, Ittai, I think we should be really, Really clear, sorry, Joe. It relates to specific programs that we're launching in 2023, Relates to specific vendors who've been challenged from an overall supply chain standpoint. And to Joe's point, it's Not the new normal to the extent their capabilities or their capacity increases, we have the ability to ratchet down orders During 2023. So we're doing what we can to protect our customers and quite frankly protect ourselves from a supply chain standpoint.

Speaker 6

Okay. One, maybe just a question on sort of probing 2023 a little. I understand you mentioned that FX could weigh on that 10% to 10.5% jumping point you previously mentioned. But I guess I just If most of the cost recoveries you talked about in this Q3 were in period in response to sort of the prior question, It would seem like that alone sort of weighed by 50 bps. So is that an offset?

Speaker 6

I mean, I guess, We don't really know like maybe the recoveries continue and that's going to sort of continue to be a drag or next year. I guess I just want to understand like what sort of assumption On recoveries was in that $10,000,000 to $10,500,000 starting point?

Speaker 3

Yes, it was the $500,000,000 and sort of It was a $500,000 and basically getting that $500,000,000 of inflation covered with recoveries, round numbers and that's happening and then we'd roll that into Piece price next year. So that is on track. That's really not connected to the FX For the 10 to 10.5 discussion, like I said, operationally, I think we're hitting the things we need to do. I just again, it's a caution. The FX number Significant in Q3, it's going to be significant in Q4.

Speaker 3

And if you look at just where some of those key rates were in the first half of twenty twenty two versus If we were to ever end at sort of current spot levels, there is going to be an impact there.

Speaker 6

Okay. Maybe just one quick one. You mentioned Wind River for 23. I think it's been 10 months since you made that announcement. Any update?

Speaker 2

Yes. We're just we continue through the regulatory process at this point in time, so that's where we stand.

Speaker 6

Okay. Thank

Speaker 2

you. Thanks, Joe.

Operator

Our next question today comes from Adam Jonas of Morgan Stanley. Please go ahead.

Speaker 7

Thanks everybody. First question is on commoditization of ADAS. You have this Pretty dominant Tier 2 supplier of ADAS system on a chip that's looking to become a Tier 1. Qualcomm announced this monster auto backlog integrating ADAS The infotainment, Apple's reportedly specking out a 10 camera passive optical system and expanding CarPlay. So how Fast is ADAS becoming commoditized in your opinion?

Speaker 7

And what does this mean for the ASU X business?

Speaker 2

Yes, I don't Adam, I'll take that. Listen, we don't view it as becoming commoditized. We have as I mentioned, we won another full platform program in China In addition to the large European program that we were awarded earlier this year, it's important that as a supplier, whether you're a Tier 1 or you alluded to the Tier 2s, that you have the ability from a perception system standpoint across multiple perception systems, you have the ability to do sensor fusion, you have the ability to do integration And you have the ability to build domain controllers hardware. And with respect to the players that you're referencing, I'm not aware of any of them We don't view it as an area that will become commoditized as we've talked about in the past. It's obviously an important feature for our customers.

Speaker 2

It's obviously a feature that helps them sell cars and it's a feature that they make a lot of money on and We continue to be very well positioned in it. We continue to invest to further enhance and strengthen our position in the space.

Speaker 7

Thanks, Kevin. Just a follow-up on decelerating EV penetration or the risk of decelerating penetration. I mean, We're still going to have growth from a low base of EVs, but we're seeing battery cost inflation and geopolitics At least at the margin work against affordability, the affordability argument of EVs and many legacy OEMs still struggling to get Accessible affordable models out. I'm thinking, do you agree that there's a risk that could flatten at the margin Flatten that EV adoption curve and if the pace of EV growth is slower and we sell more ICE architectures for longer, can you remind us Is that a positive, negative or neutral to your SPS margin? Thanks.

Speaker 2

Well, yes, it's a great question. I'd say kind of Two things on it. I think what you referenced as a potential risk to EV adoption, it is a possibility That it slows EV adoption. Our view is that it doesn't flatline EV adoption. With respect to our position from a high voltage electrification standpoint, We're effectively the only player that can provide the full vehicle architecture solution.

Speaker 2

What we're finding is more and more customers coming to us Take more of the overall content to provide the cable management, the wire harness, the connector and Now with intercable automotive, the busbar content as well. So regardless if we see slowing, We think there is a huge opportunity for us to capture more content. And then as I mentioned in my comments, in addition, we're We're investing in capabilities in and around power electronics as well as battery management systems. We're in discussions with customers As it relates to both products as we speak and we'd expect customer awards to be forthcoming. So We believe it will be a continued high growth area, and we feel as though we're well positioned quite frankly to expand our share of wallet, Adam, in that space.

Speaker 2

When you look at content differential to get to the last part of your question, high voltage electrification, especially battery electric vehicles, Probably what you're alluding to that content opportunity for Aptiv is significant. Internal combustion engine typically has content, Vehicle architecture content of about $500 per vehicle, when you move to a fully battery electric vehicle, that's closer to 1500. So it's a meaningful, meaningful uptick in the content opportunity.

Speaker 7

Thanks, Kevin.

Operator

Our next question comes from Chris McNally of Evercore. Please go ahead.

Speaker 8

Hi. Thanks so much team. And Joe, I appreciate the sort of the added color on maybe some of the bias to the middle or The upper end of the range with sort of production still a little bit unclear. CapEx, obviously, a drain as the quarter went on in terms of Spot rates, but could we dive in a little bit more to your China comments and some of the volatility around schedules? I think one of the obvious questions for people is, what is the baseline for that comment?

Speaker 8

I guess, Your Q2 outlook was minus 4%. It seems the volatility now or the question is some range of China up 5% to maybe China up 9%. So it's obviously, is it better a lot better than what you had Previously maybe adding to the organic growth and then some of the questions is more around the last 2 months And what that means into 2023?

Speaker 3

Yes, Chris, I think you're right. That original full year guide was down It's obviously strengthened. I think for us that's exactly the point I was trying to make is how much higher could it be And then relative to as it relates to that guide, just how much of that gets sucked back in By FX, I'd say right now, again, I think something north of 5%, at least what we're seeing from customers would be tough to achieve. But No. Our bias to the upside within the guidance is related to China production.

Speaker 3

That's fair.

Speaker 8

Okay. Super clear. And Joe, do you think right now that the base for how customers are ordering is assuming That the VAT, the tax payments will not be renewed, sort of Typical China, we won't find out till January 3, but the history here is like 2016 2017 is that you typically get 2 years. So do you have a view on whether we'll have the stimulus renewed into next year? And could we see a pickup in the China order rates Once that happens in Q1?

Speaker 3

I would say what we're seeing, there's a lot of noise in that market. I think it's hard to pull out incentives and sort of the puts and takes, pull aheads At the moment, they're obviously, I think, coming out of that party congress. There's some discussions there around sort of market and how friendly the market gets over Coming couple of quarters. There is some heightened concern around COVID lockdown, so that we're hearing, Certainly not to the extent we saw in Q2, but renewed concern about that. So I think it's hard to pull out sort of one particular facet of that at Chris, Kevin, I don't know

Speaker 5

if you have that.

Speaker 2

No, I think you covered it.

Speaker 8

That's perfect. And if I could just sneak in one for the 2023, is it also I'm not sure if you mentioned this, should we use the 8% to 10% as sort of a base of the outgrowth, whatever production ends up being?

Speaker 3

Yes. Yes, that's fair.

Speaker 8

Thanks, team.

Speaker 3

Thank you, Chris.

Operator

We will now take a question from Emmanuel Rosner of Deutsche Bank. Please go ahead.

Speaker 9

Thank you very much. I guess in some of the words of caution that you were expressing earlier for 2023, one piece is very clearly the FX headwinds, which is understandable. The other piece seems to be supply chain tightness, which I think you said could make it more challenging to recapture operating leverage. Are you thinking that this is the sort of Volatility that would result into lower incremental margins than usual?

Speaker 3

Yes. What I was referring to Emmanuel there and we've talked about it really for different reasons for the past couple of years, right? I mean, One of the big benefits to our customers, ourselves, and I'm sure it's just not us from a supplier perspective, It's the smoothness of production. Even if you're at a lower number, the ability to sort of set up and run without these stop starts from But obviously just cautioning that to the extent we continue to see some of these disruptions, particularly in the first half of the year, again as an industry, I mean the Disruptions we saw in North America in Q3 were not related to our supply chain, but our customers were impacted. So it's Just speaking to the abruptness of shutdowns and restarts, it does hurt from an operating leverage perspective.

Speaker 9

Okay. And I'm also curious how are you thinking about cost trajectory exiting the year And into next year, I found it interesting that you're back to more normalized price downs. Obviously, You would sort of like need a more stable cost base to sort of like be able to continue like this. So how should we think about it then in terms of Additional going forward cost trajectory and any additional actions that would be needed.

Speaker 2

Is your question around price downs of annual or input costs?

Speaker 9

The question is mostly around input costs, but I was wondering if Going back to normal price down sort of like suggests that you think costs are stabilizing or not?

Speaker 2

Yes. So maybe I'll take a shot at and going back to Joe's last answer to your question. I think what you're hearing from us As a management team, although Q3 obviously improved results, Our general view that supply chain is improving. All the challenges aren't behind us. And we continue to see inflation.

Speaker 2

We continue to see volatility in schedules, which translates into volatility in production. That translates into a higher cost load as it relates to manning in our facilities, as it relates The transporting goods, so inbound and outbound freight that to a certain extent is built into our current run rate so that we have an element of flexibility To continue to support our customers. Now our customers are we've been aggressively going to our customers and pushing through that price Those cost increases to our customers, our customers have been supportive of that. We would expect that there's an element of that that Continues into 2023, certainly in the at least in the first half of the year. And just given the volatility in the overall macro headwinds, that at this point in time, We're planning that some of that doesn't go away.

Speaker 2

We're pushing through as much of it as we can, It's difficult to be precise as it relates to your predictions on what you think margin expansion

Speaker 3

Thanks, Manu.

Operator

We will now take a question from David Kelley of Jefferies. Please go ahead.

Speaker 10

Good morning and thanks for taking my questions. Maybe want to follow-up on Inter Cable. I was hoping you could talk a bit more about their Product portfolio and your opportunity to leverage their expertise within your platform. And then how should we think about their Potential contribution to that $1500 bev content opportunity you referenced earlier.

Speaker 2

Yes, intercable, strong position obviously in high voltage electrification. I mentioned in my comments, they're on their 7th generation busbar technology, so clearly the industry leader from an overall technology standpoint. When you look at They have other products as well, interconnect, high voltage interconnect solutions as well as electrical centers. So It's a nice fit with what we do. Very strong position as it relates to busbars, stronger position than what Aptiv currently has, when you look at that product portfolio, certainly additive to the overall solution that We can bring to market.

Speaker 2

I think when you look at the overall busbar market, it's a little over $1,000,000,000 today. I think by 2026, it's expected to grow at about a 30% compounded rate. So, 2026, 2027, It gets north of $4,000,000,000 so significant revenue opportunity. Content per vehicle, it's depending on the nature of the busbar solution and The nature of the vehicle, it's anywhere between low end, call it $100 to high end, close to $200 of vehicle content. So it's certainly meaningful.

Speaker 2

They have a very strong position in Europe with European OEMs, a very strong manufacturing position in Europe, Manufacturing footprint in China, we think there's an opportunity given our footprint in Asia, given our footprint in North America To expand their manufacturing footprint and introduce them to additional customers. So we view it It's really a great opportunity to generate significant synergies. And Joe, did I miss anything?

Speaker 5

No, I

Speaker 3

think that covers it.

Speaker 10

Okay, got it. Really helpful color. Thank you. And just more broadly, realizing Wind River still pending, but Can you talk about your approach to acquisitions into 2023, given what feels like a shifting macro here?

Speaker 3

Yes, David, it's Joe. I'll start that one. Listen, I think we continue to obviously Look, to grow the portfolio both organically and inorganically, I think from an M and A perspective, Obviously, you got to be mindful of valuations as the macros are challenging for us to forecast. They're obviously as challenging to sort of And on the private side, it usually takes a few quarters for valuations to catch up to public markets. We'll proceed cautiously, but we're still very much interested in the types of transactions like Inter Cable, that strengthen bolt on transactions, larger bolt on transactions that strengthen actions that strengthen the SPS portfolio around key growth areas, and then mindful of software opportunities that can help accelerate sort of the Organic plan around SBA and the software defined vehicle, we're as we've always said though, we're very careful to make sure We're building our strategy and building our plan to hit from an organic perspective.

Speaker 3

And that M and A, the added capabilities or added product lines With M and A would be in addition to that, but obviously a market where you need to be a little bit more careful around valuations, but Continue to execute on that strategy.

Speaker 10

Got it. Thank you.

Operator

We will now move to John Murphy of Bank of America. Please go ahead.

Speaker 11

Good morning, guys. Just two quick ones here. First just on the volatility in schedules. I understand that that's depressing obviously the potential for incremental margins, but this is something that's been going on for almost 2 years now. And It just seems like we keep hearing the echo of this and it seems like it's getting better, but then it's not.

Speaker 11

And that's certainly not your purview. It's outside of what you can control. What are the signs that you're looking for that we get some stability in schedules? Because I mean, it sounds It sounds like it's just kind of popping up week to week month to month and, it's very difficult to understand when it actually will start smoothing out.

Speaker 2

Yes. John, I'll start. It's Kevin. Listen, it does start week to week and day to day, to be honest with I'd say what we're seeing now are the swings are smaller. So with respect Peak to valley, you're seeing a much tighter curve.

Speaker 2

So that aspect is better, but there is still an element of When you think about manning from a manufacturing standpoint, when you think about inbound, outbound freight, those sorts of expenses, You're continuing to incur it certainly at a higher level than sort of normal run rate. I'd say we feel like We're very close connected with our strategic semiconductor suppliers. We're very closely connected With our customers, our supply chain and manufacturing teams are integrating are talking to them and integrating With them on a day to day basis, so we have our arms around it and are able to react faster when we see swings, But they're still occurring. And Q3 supply chain was better than Q2. We expect Q4 to improve over 3 over Q3, but again, we're still seeing the supply chain tightness.

Speaker 2

And if there's any sort of event That occurs during a given day, week or month, you seem to have a boomerang effect in terms of The overall comment on ultimately vehicle production and it's just something we're trying to stay close to. It's something that we're trying to manage through. We just want to make sure that you guys understand it's still going on. It's not completely behind us. And We wish it were, but it's not.

Speaker 2

And we're doing our best to manage through it.

Speaker 11

Okay. And then just a second question. As we look at Slide 7, Obviously, the bookings are pretty remarkable this year, about $13,500,000,000 or what you're hiding here in Active Safety, High Voltage and SVA. There's almost $12,000,000,000 that's outside of those three technologies. I'm just curious if you can give us some color on those.

Speaker 11

And if we think about those rolling on, maybe They roll on faster because they're sort of less leading edge technology, but they might come on faster at higher margins and higher returns. So Any color around that almost $12,000,000,000 is outside of those 3 high

Speaker 2

end? Yes. Well, yes, it ranges for Areas like user experience, like our traditional connector solutions, our traditional cable management solutions, They go on low voltage vehicles, our traditional vehicle architecture on low voltage solutions. I mentioned user experience, so infotainment systems, in cabin sensing systems, body and security So there's a whole there's a number of different products, number of different product lines that fill the balance Of those bookings. Is it fair to say, Kevin, though,

Speaker 11

that those come on at higher margins and returns in the near term potentially? Those are important to watch as

Speaker 3

well. Yes, I think it depends

Speaker 2

on what the product line is. I'd say most are basically in line with what our Margin structure is across all of our product lines. Some of those that are higher volume, it may be a little bit higher.

Speaker 7

Okay, great. Thank you very much guys.

Speaker 3

Thanks, sir.

Operator

Our final question today comes from Mark Delaney of Goldman Sachs. Please go ahead.

Speaker 12

Yes, good morning. Thank you very much for taking my questions. First on the implied 4Q revenue guidance, I think it's down sequentially relative 3Q, even if we assume the company is coming in at the high end of the full year revenue outlook, could you help us bridge what's going on with 4Q

Speaker 3

Yes. Listen, I think sequentially it is down a little bit launch activity in Q3. As I said, the answer to Chris' question Mark, Obviously, we are potentially looking at additional volumes in China and balancing the FX impact of that. Year over year and there's just some ebb and flows here as Think about the year over year as well, right? Year over year, we're still up 9%.

Speaker 3

If you recall, Q4 last year had some It was rebounding a bit from Q3 of last year, which was very depressed. So you've got a little bit of the ins and outs. But it really comes back to how much upside is from China and what the offset is with the FX. I think if you're looking at that sort of revenue top line number.

Speaker 12

Okay. And then, specifically on Europe, last quarter, the company spoke of some weakness with some of the OEMs in Europe relative To reductions to their schedule forecast, could you elaborate a little bit more on what you've seen transpire In Europe, relative to the last update you gave 90 days ago and has the magnitude or breadth of OEM schedule reductions in Europe changed at all? Thanks.

Speaker 3

Yes. No, good question. No, listen, I think we've Europe for the most part has sort of held the schedules. It's what we've seen. I realize we were lower than sort of a lot of other folks out there.

Speaker 3

I think some of those other forecasts have come in, not necessarily right to where we were, but have come in a lot Closer to us than maybe where they started. So I'd say European customer schedules, again, we're tracking. I think there Remains concern around economic disruptions in Europe. And obviously, there's Potential impact from energy shortages, although I would say the customers are a little bit more confident that they won't be impacted in Q4 than they were when we spoke in August. But no, we view as I mentioned in my comments in 2023, I think Europe remains a challenging environment for the foreseeable future just

Operator

That concludes today's question and answer session. I would now like to turn the call back to Kevin Clark for any additional or closing remarks.

Speaker 2

Great. Thank you, operator. Thanks everyone for joining us today. We really appreciate you taking the time. Take care.

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Earnings Conference Call
Aptiv Q3 2022
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