Aptiv Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, and welcome to the Aptiv Q3 2023 Earnings Call. [Operator Instructions]

At this time, I'd like to turn the conference over to Jane Wu, Vice President of Investor Relations and Corporate Development. Please go ahead.

[Jane Wu, Vice-President, Investor Relations and Corporate Development at Aptiv]

Thank you, Margerie. Good morning, and thank you for joining Aptiv's Third Quarter 2023 Earnings Conference Call. The press release and related tables along with the slide presentation can be found on the Investor Relations portion of our website at aptiv.com. Today's review of our financials exclude amortization, restructuring and other special items and we'll address the continuing operations of Aptiv.

The reconciliations between GAAP and non-GAAP measures for our third quarter financials as well as our full year 2023 outlook are included at the back of the slide presentation and the earnings press release. During today's call we will be providing certain forward-looking information that reflects Aptiv's current view of future financial performance and may be materially different for reasons that we cite in our Form 10-K and other SEC filings.

Joining us today will be Kevin Clark, Aptiv's Chairman and CEO; and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business and Joe will cover the financial results in more detail before we open the call up to Q&A.

With that, I'd like to turn the call over to Kevin Clark.

[Kevin Clark, Chairman and CEO at Aptiv]

Thanks, Jane, and thanks everyone for joining us this morning.

Let's begin on slide 3. We delivered another strong quarter exceeding our expectations despite some headwinds. Touching on a few of the highlights. New business bookings totaled $6.6 billion bringing the year-to-date total to a record $27 billion. Revenues increased 7% to $5.1 billion, 2 points over the growth in vehicle production reflecting double-digit growth in ASUX revenues and S&PS revenue growth in-line with global vehicle production. The impact of the UAW strike in North-America as well as customer mix. EBITDA and operating income were both records totaling $727 million and $560 million respectively reflecting solid flow through on volume growth. Ongoing operating performance initiatives partially offset by unfavorable FX, timing-related to customer recoveries and the impact of the UAW strike. We expect continued sequential margin expansion is the headwinds related to supply-chain disruptions continue to dissipate, customer recoveries are closed and the benefit from further cost structure actions take hold. The team remains laser-focused on continuing this trend in the fourth-quarter and into 2024 and beyond.

Turning to slide 4. Touching on the key themes and macro trends that have had an impact on our operations this year. Our customer relationships in new business bookings are stronger than ever, driven by robust demand for smart vehicle compute and software high voltage electrification and ADAS solutions. As automotive OEMs continue on the path toward fully electrified software-defined vehicles, we are their partner of choice, delivering unique full system solutions that provide enhanced features and greater flexibility all at lower cost. We're also benefiting from the transition to the software-defined future across several other industries with opportunities in the commercial vehicle, telecom, A&D and industrial markets.

Global automotive vehicle production has been stronger than we initially forecasted as easing supply-chain constraints have led to fewer disruptions enabling increased production. Our strong year-to-date results had put us well on our way to reach the top end of the full-year guidance we laid out in early August. However, the UAW strike, which affected the production schedules of our top three North American OEM customers has had an impact on both our third and fourth quarter results. While tentative agreements have been reached with all three North American OEMs, there remains some uncertainty on vehicle build schedules as you OEMs work to finalize our plans to ramp up production during the balance of the fourth quarter. 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.

Moving to slide 5. As already mentioned new business bookings during the quarter were $6.6 billion, bringing the year-to-date total to a record $27 billion on track for our target of $32 billion for the full year. Advanced Safety and User Experience bookings totaled $2.2 billion driven by over $1 billion in Active Safety Awards. Signal and Power Solutions bookings reached $4.4 billion, including $1.1 billion in bookings for high voltage electrification solutions split across geographies, bringing the year-to-date totaled to $4.3 billion already surpassing last year's record of $4.2 billion. As OEM strategies around their vehicle architecture platforms evolved one constant will be the need for solutions that deliver improved performance at lower-cost and Aptiv is perfectly positioned to leverage our full system capabilities to enable fully electrified software-defined vehicle.

Turning to slide 6 to review our Advanced Safety and User Experience segment third-quarter highlights. Revenues increased 13%, 8 points above vehicle production, result of a 30% increase in active safety revenues reflecting strength across all regions as the launch of our level two and level two-plus ADAS solutions continue to ramp. Operating income totaled $109 million reflecting a 7.6% operating margin an increase over the prior period, but sequentially lower than the second quarter due to the seasonality of Wind River revenues and the timing of customer recoveries. New business bookings totaled $2.2 billion and included $1.2 billion of active safety customer awards, including a major award with a large German truck manufacturer underscoring the strength of our High Performance RADAR technologies and their applications outside of the automotive industry.

As demand continues to increase for more advanced active safety solutions, our unique insights improvement 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 an additional features to our AI/ML-enhanced Gen 6 ADAS platform to address complex parking scenarios. Aptiv's unique solution enables fully modularized automated parking features the scale from level 2 to level 4 from auto-parking assist and memory parking, all the way to Autopart delay. Automated parking is just one of the many features that we have under development in our Gen 6 ADAS technology roadmap which will scale to a full level 3 ADAS platform in 2026.

Turning to the Signal and Power Solutions segment on slide 7. Third quarter revenues increased 5% in-line with global vehicle production. High voltage revenues increased 13% reflecting strong growth across all product lines partially offset by customer mix in Europe and Asia and the impact of the UAW strike in North-America. The $4.4 billion in SPS bookings that I mentioned previously included a low voltage Architecture award with a Chinese OEM demonstrating the progress we're making further penetrating the local Chinese OEMs. Another strong quarter for Intercable Automotive with $400 million in new business awards, including a major award with a global customer in North-America reflecting continued strong commercial traction. And a high voltage system award with a European OEM that includes products across our electrical distribution, connection systems and Intercable Automotive portfolios demonstrating our full system approach sets us apart from the competition.

Lastly, we're proud to announce that Aptiv has once again been recognized as an automotive PACE Award finalist. Rapid Power Reserve solution is a groundbreaking technology that provides a highly reliable redundant power source for a variety of critical functions eliminating the need for a low voltage battery in the vehicle, significantly reducing weight, mass and costs. This recognition validates Aptiv's industry-leading technology as well as the value and impact our continuous innovation provides our customers.

Turning to slide 8. We're excited to showcase, many of our new innovations at the Consumer Electronics Show in Las Vegas in early January next year. We'll bring our vision of the future to reality including vehicles with Aptiv - Aptiv smart vehicle architecture running applications for next-generation ADAS and in-cabin user experience. Vehicles with our complete portfolio of optimize electrical vehicle solutions purpose built for demanding power requirements and Wind River's Edge to Cloud platforms supporting the latest safe, green and connected applications from Aptiv. We will be providing live demonstrations of how we're leveraging our deep insights into the brain and nervous system of the vehicle along with Wind River's proving software technology to develop optimized and scalable solutions that meet OEM needs for performance, flexibility and lower costs.

Moving to slide 9. 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. At Aptiv, our business strategy is directly aligned with our sustainability goals. We provide solutions of the highest quality designed, developed and manufactured responsibly that enable a safer, greener and more connective world. In doing so, we take care of our people and our communities, while minimizing our carbon footprint. Sustainability is an enterprise wide commitment and I'm proud of our entire team for helping us achieve our goals and ensuring that our company, our customers and our planet continue to thrive.

Moving to slide 10. Before I turn the call over to Joe to walk through the financials, I wanted to touch on our current view of 2024. Building on the solid foundation we've established in 2023, we're well-positioned for continued strong revenue growth and margin expansion despite the macro headwinds. Our safe, green and connected product portfolio is perfectly aligned to the demand for feature-rich electric vehicles as well as the acceleration of the software-defined future in adjacent markets. Our advanced technologies and capabilities will continue to drive strong performance across multiple industries while some macro uncertainties remain, we're confident in our ability to execute policy in a dynamic environment.

With that, I'll now turn the call over to Joe to go through the numbers in more detail.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Thanks, Kevin, and good morning, everyone.

Starting on slide 11. As Kevin highlighted Aptiv reported another quarter of strong financial results, exceeding our expectations despite the impact of the UAW strike in North-America, revenues up 7% to $5.1 billion or 2% above underlying vehicle production excluding the impact of acquisitions. As I will discuss shortly our growth over market was negatively impacted by the UAW strike in North-America as well as customer, customer mix and program timing in Europe and China. Active Safety and high voltage electrification reported strong double-digit growth of 30% and 13% respectively and the UAW strike had a negative impact on revenue in the quarter of approximately $80 million. Adjusted EBITDA and operating income was $727 million and $560 million respectively reflecting strong flow-through on increased volumes, continued progress on our ongoing performance initiatives, including reductions in supply-chain disruption costs that more than offset higher labor costs. The UAW strike had a negative impact of approximately $30 million and foreign-exchange was a headwind versus last year. Earnings per share in the quarter were $1.30, an increase of #0.02 from the prior year primarily driven by the higher operating income, partially offset by higher interest expense. Operating cash was $746 million, a significant increase over prior year primarily driven by higher earnings and improved working capital levels. Capital expenditures were flat to prior year at $212 million.

Looking at revenue in more detail on slide 12. Revenue in the third quarter was $5.1 billion reflecting sales growth of $299 million representing adjusted growth of 7%, the Wind River and Intercable acquisitions at the $153 million of revenue and net price and commodities as well as warrant exchange were slightly positive in the quarter. From a regional perspective, North-America revenues was up 10% reflecting two points of growth over market as the UAW strike negatively impacted D3 customer volumes relative to overall North American vehicle production in the quarter. In Europe, revenue grew 10% or 4 points above underlying vehicle production, driven by strong growth in Active Safety, partially offset by program timing and slowing growth for certain platforms. In China, revenue was in-line with underlying vehicle production due to our customer mix and slowing BEV growth. As noted earlier, despite the lower-growth over market our Q3 adjusted growth and revenue were in-line with our expectations. The lower-growth over market North-America is consistent with the strike impact we experienced in 2019 as we have said in the past, growth over market will be lumpy given customer mix and program timing.

Moving to the ASUX segment on the next slide. Revenue rose 13% in the quarter or 8 points over vehicle production. The outperformance was driven by strength in Active Safety where revenue was up 30%. User experience was down 5% in 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%. Segment adjusted operating income was $109 million, up 35% when compared to the same period last year. Year-over-Year ASUX margins in the quarter were negatively impacted by the timing of certain material inflation, recoveries from customers, which partially offset the flow-through on incremental volumes and improved performance. Also ASUX margins were lower on a sequential basis versus Q2 2023 due to expected seasonality and Wind River's Q3 results. We had noted the seasonality of start of the year. The Q3 impact of the UAW strike on ASUX was relatively minimal, reflecting approximately $10 million of revenue and $5 million of operating income.

Turning to Signal and Power on slide 14. Performance in the quarter was strong despite the challenging operating environment. Revenue in the quarter was $3.7 million, an increase of 5%, in-line with vehicle production despite a negative strike impact of approximately $70 million of revenue or 2 points of growth. High voltage electrification grew 13% in the quarter 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 double-digit growth in 2023. Price downs in the quarter were less than 1%. Segment adjusted operating income was $451 million in the quarter, up 2% from prior year, including a $25 million negative strike impact. Operating performance including lower supply-chain disruption costs were positive in the quarter, and offset the negative impact of higher labor costs, customer recoveries, offset material inflation and the negative commodity impact in the quarter. While foreign exchange, primarily the peso in RMB continue to present a headwind on a Year-over-Year basis. However, the FX impact is in-line with the updated guidance we provided in August. Adjusting for the impact of FX and the strike, adjusted EBIT margins for Signal and Power Solutions were 13.3% in the quarter.

Moving to cash generation and the strength of balance sheet on slide 15. As we have discussed in the past, our focus on cash-flow generation and cash conversion is as disciplined as our operational improvement efforts. 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 the recent supply-chain disruptions. Despite the operating challenges in North-America we were able to improve our operating cash-flow by over $300 million versus prior year, resulting in cash-flow conversion of 200% in the quarter and an ending cash balance of $1.8 billion. Given the strong performance in October, we opportunistically pay down our $300 million term loan Aptiv's most expensive borrowing, increasing our average tenor from 15 to 16 years. As we've 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 opportunities as we continue to maintain a well-balanced approach to capital allocation including prioritizing organic investment in the business to support our portfolio, advanced technologies and record new business awards, executing our M&A strategy by focusing on transactions that enhance our scalability, accelerate our speed-to-market with relevant technologies and access new markets, maintaining our current financial policy as it relates to our leverage profile and opportunistically returning cash to shareholders.

I will wrap-up with our full-year outlook on slide 16. Given our continued strong performance in our higher outlook for global vehicle production, we are maintaining our full year outlook for 2023 despite the impact of the North American strike. Key assumptions now underpinning our outlook include global vehicle production of 6% plus for the year versus prior estimate of 4%, driven by higher expected production levels in Europe and China. No significant strike impact beyond October 2023%. During the month of October, we experienced a negative strike impact of $100 million in revenue and $50 million on operating income. Our outlook assumes a restart of customer production and a returned to pre-strike - pre-strike production levels over the coming couple of weeks and no further meaningful disruptions. Accordingly, we expect revenue in the range of $19.95 billion to $20.25 billion including the impact of total loss rate revenue of $180 million.

I would note that while our revenue and adjusted growth rate remain unchanged, 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%. EBITDA and operating income are still expected to be approximately $2.8 billion and $2.1 billion at the mid point respectively, including total loss strike earnings of $80 million. No change to adjusted earnings per share of $4.75 at the midpoint and operating cash-flow of approximately $2 billion.

As Kevin will discuss further in his closing remarks, despite the macro challenges of the North American strike and significant foreign-exchange headwinds, our relentless focus on improving operating performance and cash-flow generation has allowed us to continue to deliver in a difficult operating environment.

With that, I'll hand the call-back to Kevin for his closing remarks.

[Kevin Clark, Chairman and CEO at Aptiv]

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 in the third quarter driven by further easing of supply-chain constraints, which partially offset lingering headwinds related to material and labor inflation, unfavorable FX rates and 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 of roughly 32 billion by year end. While our teams continue to work tirelessly to mitigate the impact of the UAW strike in North-America, including the the ramp-up of North American production, we're executing on further cost structure actions to enhance our operational resiliency. Our portfolio of advanced technologies and strong operating execution gives us confidence in our ability to further strengthen our competitive position and deliver sustainable value-creation for our shareholders. Operator let's now open the line for questions.

Questions and Answers

[Operator]

Thank you, Mr. Clark. [Operator Instructions].

We will take our first question from Joe Spak from UBS. Please go ahead.

[Joe Spak, Stock Analyst at Aptiv]

Hi. Thanks, everyone. Good morning. Kevin, Joe, just first on the growth over market for the - for the quarter and I guess - I guess the outlook, I know you said it was in-part driven by the UAW strike. I think it went from 9% to 5% that - but that's - that 100 in million is like one point I think Year-over-Year. And part of that's obviously just the industry not just your sort of growth over market. So can you just sort of detail some of the other factors that are driving, some of the - the lower growth over market for the year and in the fourth quarter?

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yeah - yeah Joe, that's a good question. So you're right, you're right there is the new sort of numerator effect of what we're doing. The bigger impact is the denominator, right, that's a calculation, so that - that comes in after the fact relative 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 we have folks like Jeff, the Japanese manufacturers, that we don't have a lot of content on in North-America going up significantly, so you get up and you get the compounding effect of new coming down and the denominator going up. For instance, just the growth win in the Japanese OEMs had a very strong Q3 that growth - that impact was about 4.5 points to 5 points against our growth over market cacl.

One of the things we look at double-check this math is sort of how did we do against the D3 standalone where we were up about 14% with the D3 relative to their production. So definitely feel like, particularly in North-America is 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 look at Europe and China, I mentioned just high voltage is growing more slowly that was probably worth about a point of growth to us on a growth over market basis. 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, particularly in Europe just infotainment is down a bit in the quarter, that's a program timing. We expect infotainment to finish the year mid-single-digit growth. So again, it was more of a - a quarterly impact but you are right the relative market component of that drives that growth over market calculation as well.

[Joe Spak, Stock Analyst at Aptiv]

Okay and then I guess just to follow-up as we think about some of your mid term targets and you pointed out some of the slowing BEV penetration in U.S. and 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 that penetration, maybe than some third parties over the mid to long term. So is this how does sort of the more recent trends I guess compare versus what you laid out back in the February Analyst Day.

[Kevin Clark, Chairman and CEO at Aptiv]

Yeah, Joe, it's Kevin. Listen I think is - is Joe highlighted and walk-through the numbers. Q3 has a lot of unique circumstances as it relates to growth over market and as we look at providing perspective on - more precise perspective on our growth over market in the out years we need to see how Q3 settles. Having said that, we still strongly believe we're very well positioned as it relates to growth over market given where we operate. Electrification and ADAS solutions are two of our higher-growth areas, which we believe will continue to be high growth, understand the question in and around high voltage electrification and in future growth rates certainly Q3 was down relative to Q2 and Q1 this year. I think we would say that is largely related or a significant portion of that impact is the strike issue and some of the other items that Joe talked about and then as you highlighted just a reminder as we developed our electrification strategy, we're very much focused on a select group of customers and had a much more conservative view on the overall market of electrification and the pace of penetration. So, long-winded way of saying it's too early to answer your question more precisely but certainly, to say, we feel very, very good about where we sit from a growth over market standpoint.

[Joe Spak, Stock Analyst at Aptiv]

Thanks, I'll pass it on.

[Operator]

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

[Rod Lache, Stock Anaylst at Aptiv]

Good morning, everybody. Just following up on Joe's question. I know you've been a lot more conservative on high voltage and BEVs than penetration by - by 2030. Can you just give us a little bit of maybe additional color on what your customer mix looks like within that backlog that was propelling the 30% annual growth just to get a sense of is it - are you more exposed to the companies that are slowing down a bit or are you sort of more - more dispersed among the - amongst the faster growers.

[Kevin Clark, Chairman and CEO at Aptiv]

Yes, so I'll start, Rod and Joe can fill in any blanks. So when you - when you look at where - where the majority of our exposure is with the European and the Chinese OEMs, that's where the bulk of our battery-electric vehicle exposure is. When we look at kind of near-term and where we have those exposures, our by and large on platforms that our BEV platforms - dedicated BEV platforms when we look out into the fourth quarter and into early next year, we're seeing very stable schedules as it relates to production there is one exception with a North American OEM who I think has been pretty public about their plan for electrification. So that will have some impact nearer-term but offsetting that are a number of OEMs, who are in the midst of launching the - the programs that we're on.

[Rod Lache, Stock Anaylst at Aptiv]

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

[Kevin Clark, Chairman and CEO at Aptiv]

Yeah, listen. Yeah, no, it's a great - yeah, we feel really good about. I think there's an element of I don't think we ever guided 30% forever. So there is a law of large numbers, right, that that we need to keep in mind, will do just under $2 billion of high voltage electrification revenues this year. I think a billion 8 or billion 9, so - so that business has grown significantly. Q3 obviously was impacted by some of the dynamics that Joe talked about. Without a doubt, we will see some impact in Q4 in early next year related to the OEM that I referenced who is reducing both schedules on the flip side, we have a number of OEMs where we look at current - current production schedules, what they have in-place for Q4 and early next year where those schedules remain strong and then in addition to that, we have a number of programs that are coming online during 2024 and the bulk of that activity is in China and is in Europe, two areas where we don't view any easing on CO2 emission regulations and customers really focused on how they continue to - to launch new best platforms.

[Rod Lache, Stock Anaylst at Aptiv]

Thanks for that and just lastly, obviously a lot of controversy around autonomous right now with crew slowing down. Hoping you can give us any updated thoughts on your investment plans there with motion all whether that's influencing your thinking on that business at all and then if Joe could just update us you originally had a like $1.7 billion performance and lower supply disruption kind of element to your 2022 to 2025 bridge how much of that are you're seeing this year?

[Kevin Clark, Chairman and CEO at Aptiv]

Yes, so I'll - I'll start so nothing new to report out, we're actively engaged with our partner, Hyundai, in terms of future funding. As it relates to - as it relates to motion as we said in the past we are on-track from a tech standpoint in commercial standpoint, but we're - we're engaged in discussions at this point in time certainly well aware of what we're reading about and we're seeing in the market. 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. We haven't determined our plan or finalizes our plan at this point in time. I'm - I will be in a position to report that out when we announce earnings In February of next year.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Hey, Rod, it's Joe, just to answer your question. I think we're - we're tracking well, if you - if you recall we had that on that walk I think you're referring to in the Investor Day from the end of '22 to '25, we had a $1.7 billion of performance that was going to work to offset $900 million of labor inflation, we talked about that being fairly - fairly ratable over the three years that wasn't sort of a 2025, think we're gonna - we're gonna make progress on that through the year. I'd say '23 is tracking very much to that sort of ratable - ratable approach on both the cost side as well as the performance, the price, recovery side. So things are tracking well. Obviously, as we sit here today and it's - it's sort of stated obviously within the comments I reiterate, 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.

[Rod Lache, Stock Anaylst at Aptiv]

Thank you.

[Operator]

Thank you. Next we'll go to John Murphy with Bank of America. Please go ahead.

[John Murphy, Stock Anaylst at Aptiv]

Hi, good morning, guys. I have another follow-up on this toggle on EVs, and the penetration rate maybe being a little bit slower than people had expected. Kevin, as you look -- 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 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 be gross over the market a little bit, but our earnings and cash flow might be a bit better. Is that potentially true here? And as you're making these capital commitments to these programs, or do you have the ability to kind of toggle down reasonably quickly so it wouldn't dent your returns and you get that benefit of maybe a slower roll.

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. It's a great question, John, and I'll start. Listen, we still are believers in electrification and just want to remind everybody in the second quarter of this year, our high voltage revenue growth on a year-over-year basis was 48%, and this quarter it was 13%. And on a go-forward basis, we think it more normalizes relative to where we were in the third quarter.

Having said that, as we stated, we've been very focused on having a -- a EV strategy that focuses on principally Europe and Asia Pacific, China, principally OEMs that have built BEV platforms, those OEMs who are taking global platforms from one region to another region and focusing our investment in those areas, which in reality allows us to scale. I mean that was one of our objectives, John, is to make sure that to the extent we're putting in capital that it scales, that we get significant revenue. On the bulk of those programs, we have scaling price relative to volume. So to the extent, an OEM does not achieve their particular targets, 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, our baseline outlook has never been that 50% of the vehicles manufactured in 2030 were going to be battery electric vehicles. We had a much lower outlook. So we think we have it ring-fenced and balanced. Listen; there may be a couple of quarters where I mentioned there's one OEM who is backing off their original schedules, where we'll see an impact on our growth rate. But as things normalize, we're still optimistic about our competitive position here and the growth opportunity and the margin opportunity it presents.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Hey John, it's Joe. The only thing I'd add to, we've talked about this for a while, right? Particularly with the electrical architecture business, we were able to leverage existing facilities, existing equipment, existing supply chain, existing engineers, 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. So I think leveraging that over the last couple of years has helped that product line get to segment accretive margins very quickly. But it's also helped from a return perspective, right, because we had a lot of that capital and plant and equipment in the ground.

[John Murphy, Stock Anaylst at Aptiv]

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 just Joe just 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 can remind us.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes. We - I mentioned it in passing in the guide, they are -- and it's in their business. I think it's somewhat of a software business phenomena, Q3 is just a very slow quarter for them. Q2, Q4 tend to be the highest. It's a highly leveraged model, like a software business would be, right? So software renewals, licenses, new licenses tend to drop at it's an 80% gross margin business, so they tend to drop at pretty high incremental rates. So we had seen this in the prior years. That's why we cautioned in February, and don't -- we're not surprised by this. So I think as you look at this and we talk about just the quarterly progression over the next couple of years, I think this will be something that we see as recurring.

[John Murphy, Stock Anaylst at Aptiv]

Okay. That's helpful. Thank you very much.

[Kevin Clark, Chairman and CEO at Aptiv]

Thanks.

[Operator]

Thank you. We'll next go to Adam Jonas with Morgan Stanley. Please go ahead.

[Adam Jonas, Managing Director at Aptiv]

Thanks, guys. So just look and follow-up to Joe's and Rod's and Murphy's question. I want to hit on this theme as well. 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. 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 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, 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. If they did, if in a world where the undisputed leader Tesla is dialing back and barely profitable themselves. And others follow and really just reset because they can't sell negative 100% margins forever. Can you tell us how much your those -- the 14.5% mid-decade operating margin target or the over 17% longer-term target? And I realize there won't be a straight pass 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?

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. I'll take it, I'll start, Adam. Listen, I - we can take a look at a scenario like that, just kind of peeling it back. This year, we'll do $1.8 billion in high voltage, or EV revenues out of our roughly $21 billion in revenues. And clearly, the growth rate that we've attached to high voltage electrification is higher than our overall average growth rate. So certainly it would have some impact there. I think as we said, a lot of these EVs are replacing 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 SP&S base margins is accretive by a couple points from a margin rate standpoint, but it's not a matter where it's 2x. So it's something that I think we would manage through. It would have an impact from a profit standpoint. I don't think it would have a huge impact just given what the margins look like. 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. So that's how I think about it.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes. Adam, I'd agree with that. Assuming unit production, total unit production stays in line, right? We'd be swapping back to content on the low voltage platforms. We've got content on one out of every 3.5 vehicles manufactured. And to Kevin's point, you're looking at a point or two of sort of accretive high voltage that we'd have to work through. But it's - there are going to be dollars that replace that assuming the world continues to build the total number.

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. And Adam aside, I kind of I understand your question, and it's a fair one, it's a good one. I do wrestle with the industrial policies and they can always change of Europe, principally maybe U.S. secondarily and that can change. 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 or 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 continue the rollout so that they can achieve the industrial policies that those particular governments have, 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 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.

[Adam Jonas, Managing Director at Aptiv]

Yes. Appreciate that, Kevin and Joe. Just one quick follow-up, if I may. Just want to confirm that out of the $1.8 billion or almost $2 billion of high voltage -- sorry, electric portion of the -- was the $2 billion -- sorry, of the $2 billion number that you quoted.

[Kevin Clark, Chairman and CEO at Aptiv]

$1.8 billion. So Adam, $1.8 billion, I use round numbers.

[Adam Jonas, Managing Director at Aptiv]

Thank you. Just want to confirm that. Tesla is the single largest 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.

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. On the customer piece, listen, we can't talk about -- speak about specific customers, so that's a question we're not going to respond to. As it relates to labor, I think I would focus on labor within the overall business. Joe?

[Joe Massaro, CFO and Senior Vice President at Aptiv]

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

[Adam Jonas, Managing Director at Aptiv]

Thanks a lot.

[Kevin Clark, Chairman and CEO at Aptiv]

Yeah.

[Operator]

Thank you. Next we'll go to Chris McNally from Evercore. Please go ahead.

[Chris McNally, Stock Analyst at Aptiv]

Thanks so much, team. Maybe we could just do a little housekeeping. Kevin and Joe, maybe I'm missing something, but the $1.8 billion in high voltage, what's the number you're using for 2022? Maybe I -- maybe it's been restated, but I think you had $1.2 billion in some of your old slides. Could you just update those 2022 and 2023?

[Kevin Clark, Chairman and CEO at Aptiv]

Yes, that's accurate -- yes, that's accurate $1.2 billion.

[Chris McNally, Stock Analyst at Aptiv]

Okay. And so that's actually -- is that an increase? I mean because I think the previous number guided to on Q2 was maybe a 30% increase. So it looks more like a 50% increase for high voltage for this year.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Chris, it depends on what you're doing with Intercable, right? We closed Intercable end of last year. So wasn't in last year call that just a little north of $200 million of revenue. So just thought if you pro forma for it, yes, it's growing, yes, and if you didn't, you got to look at that Intercable, yes.

[Chris McNally, Stock Analyst at Aptiv]

That's exactly. Okay. Thank you, Joe. Intercable was exactly what I was asking for. And the second one, just to follow-up on Adam's, you forget about talking about the customer, but the $1.8 billion 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 $1.8 billion, is that correct?

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes, 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 and the low voltage is what's going in either vehicle, right? So you don't really see a big vehicle difference.

[Chris McNally, Stock Analyst at Aptiv]

Either vehicle.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes.

[Chris McNally, Stock Analyst at Aptiv]

Absolutely. And then, the last one for Q4, because obviously there's a lot of moving currents in Q3. On ASUX, I think you talked about 8% to 9% rough margins for the year. It sounds like from the commentary, some of 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 points to a nice material pickup in the ASUX [sic] margins. And I think we've been sort of looking for that because that's a large portion of the drive towards the 2025 goal.

[Kevin Clark, Chairman and CEO at Aptiv]

Yes.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes. Yes. Full-year, the current guide would have ASUX at 8% and S&PS at 11.6%.

[Chris McNally, Stock Analyst at Aptiv]

Perfect. Three for three. Really appreciate it, team.

[Kevin Clark, Chairman and CEO at Aptiv]

Thanks.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Thanks, Chris.

[Operator]

Your next. Next we'll go to Itay Michaeli from Citi. Please go ahead.

[Itay Michaeli, Analyst at Smith Barney Citigroup]

Great. Thanks. Good morning, everyone. Just a couple of thoughts for me. First, going back to the Q4 margin outlook, I was hoping you could just kind of dimension 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 into 2024. And then second question, just hoping to talk more about the ADAS wins you had in Q3, maybe content per vehicle, and also any updated discussions with customers for Gen 6.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes. Itay, I think as you look at and we'll obviously stay away from 2024 at this point, but I think if you looked at 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. So I think it's more H2 adjusted for strike. But listen, as I - as you just go through the progression here, and as I mentioned to Rod, we're clearly have got the benefit of some volume increases offsetting strike. But our margin rates at the segments as well as total call - total company are tracking to the original guide and that's tracking to that Investor Day model. And as I mentioned to Rod, the $1.7 billion of performance, the $900 million of labor are falling in. So if you go - so I think we're on track. If you're going to start to look at back half, I would - I think H2 is a better proxy than just Q4. And then you obviously have to adjust for the strike.

[Kevin Clark, Chairman and CEO at Aptiv]

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

[Itay Michaeli, Analyst at Smith Barney Citigroup]

Perfect, that's all very helpful. Thank you.

[Operator]

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

[Emmanuel Rosner, Analyst at]

Thank you very much. I was hoping you can help us frame and quantify the exposure to electric vehicles either in terms of current revenue or more importantly, actually in terms of future growth of a market or percentage of backlog, not just within high voltage, but generally speaking, because to your earlier point, you're selling low voltage components to like very large EV manufacturer. And obviously a lot of the new programs over the next few years would probably have been on new EV platform. So anyway, 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.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes. Emmanuel, its Joe. Listen, I think Kevin frames sort of how we're thinking about long-term, right? We were conservative. I think we didn't sort of follow everybody down the path is going to be 50% in the next couple of years. So 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 billion business. You're going to see growth rates slow over time.

As I mentioned earlier, if you look just over the past call it eight plus quarters, high voltage has typically provided 2 points of growth over market round numbers, a little bit higher in certain quarters up to 2.5, 3. But on average two, this quarter, it provided a point of growth over market, so meaningful, but not - certainly not all of it. And then 80% of the business at this point, including revenue and bookings is with the European and the Chinese OEM. So we had not historically gone down the path of 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. 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.

[Emmanuel Rosner, Analyst at]

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

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes. I can't speak to the seating business, obviously like I said; we're 80% European and Chinese concentration. I'm not sure who you're talking about or what their portfolio looks like.

[Emmanuel Rosner, Analyst at]

No, no, no. my comment was EV exposure outside of high voltage, any way to frame that?

[Joe Massaro, CFO and Senior Vice President at Aptiv]

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

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. Emmanuel, from our perspective, vehicle architecture just given the fact that we're on one of every three vehicles globally, if they're not building a BEV, they're building a vehicle with an internal combustion engine. And more likely than not, we're on that vehicle. So with that low voltage vehicle architecture. So for us, I would say there's virtually no impact.

[Emmanuel Rosner, Analyst at]

That's helpful. My follow-up is on I think you were mentioning your mix impact. That's sort of like 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 I mean customer mix specifically, and which region?

[Kevin Clark, Chairman and CEO at Aptiv]

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

[Emmanuel Rosner, Analyst at]

Great, thank you for the, color.

[Kevin Clark, Chairman and CEO at Aptiv]

Yeah.

[Operator]

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

[Dan Levy, Anaylst at Aptiv]

Hi, good morning. Thanks for squeezing in.

[Kevin Clark, Chairman and CEO at Aptiv]

Hi, Dan.

[Dan Levy, Anaylst at Aptiv]

Wanted to start with your Slide 10 just the perspectives on 2024 here. And in the bottom half of the slide says continued inflationary environment, geopolitical uncertainty. Maybe you could just unpack the inflationary comment a bit. What is it that you're seeing that's incrementally worse? How does potential recovery on semiconductor costs factor in? And maybe you could just talk about the potential for better stability in production schedules to be a potential tailwind next year.

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. So it's Kevin, listen, as it relates to stability and 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 2024. So should see some benefit there. Material inflation was significant in 2023. We expect in some areas, including semiconductors that will remain significant in 2024. We're doing a number of things to address that. One, changing semiconductor partners, really across all the semi categories from core semis like SoCs, analog power PMICs to peripheral semis. So a lot of work being done by our engineering and sourcing teams, establishing commercial agreements or partnership with the Chinese semiconductor space, which is ramping up capabilities very, very aggressively. And we're deep into that and are going to take advantage of that opportunity both to serve the China market as well as to bring some of these into the nine China market. So that'll free up lower cost alternatives for ourselves and our customers.

As it relates to customer recoveries, listen, those are always challenging discussions, but given 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. 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 kind of the state. So the material inflation is relatively high. And then we're very focused on labor inflation in places like Mexico, Eastern Europe, North Africa. So those are areas that we're watching very, very closely. And then last item, I should say, it's not related to the specific inflation on material or direct labor. We're very focused on continuing to prune our cost structure to provide additional room and ultimately additional margin.

[Dan Levy, Anaylst at Aptiv]

Great. Thank you. And then, just as a follow-up on the EV side, just two 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. How should we think about the mix impact if we see outsized exposure from the Chinese? And then can you just confirm that on SVA that that is Powertrain agnostic?

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. SVA is powertrain agnostic. It makes more sense if an OEM is rethinking and moving to a BEV platform, that is the time to really it's an easier time to implement and make that architecture change. But it would be powertrain, overall powertrain agnostic. As it relates to mix of BEV customers, I think it's relatively awash margins might be a little bit higher on our China OEM partners, given we tend to do more system solutions there. So are able to kind of connect a broader portion of our overall portfolio, but it wouldn't be significantly different.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Yes. Dan, just current revenues and it's got -- it's changed over the last few years, we're about 60:40 global versus local OEs. From a revenue perspective today, that would have been north of 75% global, back in the 2018/2019 timeframe. Bookings are running 50:50. 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 EV.

[Kevin Clark, Chairman and CEO at Aptiv]

Yes. I think actually, you look at our revenue mix I think 2024; it's almost 50:50 from a local multinational.

[Dan Levy, Anaylst at Aptiv]

Great. Thank you.

[Joe Massaro, CFO and Senior Vice President at Aptiv]

Thanks, Dave.

[Operator]

And I'd like to turn the call back to Mr. Clark for any final remarks.

[Kevin Clark, Chairman and CEO at Aptiv]

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

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Jane Wu, Vice-President, Investor Relations and Corporate Development
• Kevin Clark, Chairman and CEO
• Joe Massaro, CFO and Senior Vice President

Analysts

• Joe Spak, UBS Group AG
• Rod Lache, Wolfe Research
• John Murphy, Bank of America Co.
• Adam Jonas, Morgan Stanley
• Chris McNally, Evercore ISI
• Itay Michaeli, Smith Barney Citigroup
• Emmanuel Rosner
• Dan Levy, Barclays PLC