Q3 2021 Aptiv PLC Earnings Call
Good day, and who has come to the App. This third quarter 2021 earnings call today's conference is being recorded.
At this time I would like to turn the conference over to Vickie oppose tobaccos director of Investor Relations. Please go ahead.
Thank you, yes, good morning, and thank you for joining after third quarter 2021 earnings conference call. The press release and related tables, along with the slide presentation can be found on our Investor relations portion of our website at <unk> Dot com.
As a review of our financials exclude restructuring and other special items and will address the continuing operations.
The reconciliation between GAAP and non-GAAP measures for both our Q3 financials as well as our full year 2020 one outlook.
Loaded in the back of the presentation and on the earnings press release.
During today's call, we'll be providing certain forward looking information, which results, which reflects <unk> current view of future financial performance and may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings.
<unk> uncertainties posed by the COVID-19 pandemic.
And the difficulty in predicting its future course and impact on the supply chain and global economy.
Joining us today are Kevin Clark absence, President 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 and full year outlook in more detail before opening the call to Q&A.
With that I would now like to turn the call over to Kevin Clark.
Sure. Thank you Vicky and thanks, everyone for joining us. This morning, beginning on slide three we experienced continued strong demand across the portfolio in the third quarter. Despite continued supply chain constraints negatively impacting vehicle production.
Revenues of $3 7 billion declined 5% versus the prior year was a record 18 points of growth over market.
New business awards of $5 8 billion, bringing the year to date total to a record 17 billion, reflecting the relevance of our product portfolio as well as the trust our customers have an active given our success executing for them in this challenging environment.
Operating income and earnings per share totaled $219 million and three <unk> respectively.
Negatively impacted by the significant headwinds from the ongoing supply chain tightness in the downstream impacts that Joe will cover in greater detail shortly.
While we expect vehicle production to improve on a sequential basis in the fourth quarter, we anticipate the headwinds related to supply chain constraints.
Well into 2022.
Starting in the near term challenges aside the team is executing well and continues to proactively position <unk> for the future optimizing our cost structure, while investing in high growth high margin technologies that further enhance the resiliency of our business model translating into greater value for both our customers and.
Shareholders.
Moving to slide four.
The relentless execution of our strategy over the past decade has positioned <unk> as a more sustainable business, creating over $40 billion of value since our IPO in 2011.
This represents an average annual return to shareholders of over 25% and.
And a total return of more than 950% today.
As we transformed out we built an industry leading portfolio of advanced solutions that make vehicles safer greener and more connected to.
To drive this transformation, we took several actions, including making smart portfolio moves to put further operating leverage in our business model, we exited low growth low margin product lines and spun off our powertrain segment.
Turning app Dev to focus on our unique capabilities around the brain and nervous system of the vehicle at.
At the same time, we completed a number of acquisitions, which enabled our software and data management capabilities.
Increased our scale and leverage and engineered components and.
And expanded our presence in adjacent markets.
Last year, we establish emotional or autonomous driving joint venture with <unk>, which will be operating fully driverless vehicles in the Lyft Ridesharing network in 2023.
These proactive actions perfectly positioned to benefit from the transition to the software defined vehicle, while further increasing the robustness of our business model all of which translates into continued outperformance and long term value creation.
Turning to slide five.
We continue to successfully navigate the current challenging environment, while proactively enhancing the strength of our competitive position.
Supply chain resiliency team is leveraging technology data and analytics to stress test our integrated supply chain network under multiple scenarios, helping us to proactively identify and address potential bottlenecks at the same time, we're working through daily constraints by leveraging our proven cross functional crisis.
Management process are.
Planning process in manufacturing.
It has enabled us to support a record number of customer program launches.
And we continue the intelligent automation of our manufacturing facilities to lower operating costs and increased product quality.
All of which improves customer service levels.
Our engineering teams are proactively redesigning products to mitigate semiconductor supply risk reduce material costs and increased functionality for our customers and lastly, our culture of continuous improvement translates into the constant pursuit of opportunities to reduce cost and improve quality.
Enabling us to continue to strengthen our operating foundation and transform our business model despite the dynamic environment.
Yes.
As shown on slide six third quarter, new business bookings reached $5 8 billion, bringing the year to date total to $17 billion.
As I already mentioned it was a record.
Our unique portfolio of safe Green and connected technologies combined with our flawless operating execution continues to position <unk> as a partner of choice for our customers our.
Our capabilities around the vehicle brain and nervous system and collaborative approach to platform solutions sets us apart in the industry.
Enabling us to conceive specify and deliver advanced architecture and software solutions that enhance system performance, while lowering the vehicles total cost <unk>.
Positioning us to increase our share of wallet with both traditional and emerging OEM customers and at the same time strengthen our overall competitive position.
Yeah.
Turning to highlights from our advanced safety and user experience segment on slide seven.
Third quarter revenues declined, 7%, which was 16 points better than the reduction in global vehicle production.
The program launches content increases and market share gains translated into continued market outgrowth. Despite the significant supply chain disruptions impacting the segment.
Consumers continue to demand more active safety and connectivity features in their vehicles, which are delivered through more advanced software software features.
Averaging the latest sensing and compute solutions.
This trend and strong consumer demand and our industry, leading capabilities presents us with additional market share opportunities and the ability to increase our customer share of wallet.
And as evidenced by our third quarter conquest business Ward with Mercedes Benz to provide our multipurpose interior sensing solutions on their Nextgen electric vehicle platform.
This business award builds on our recent in cabin monitoring successes and advances our customers roadmap of interior sensing features by further enhancing driver safety and then an improving the in cabin and user experience.
Evolution of in cabin sensing is playing out as expected and our leadership position makes apt or a strong collaboration partner for our customers.
Yeah.
Turning to slide eight revenues in our signal and power solutions segment.
Declined 4% during the COVID-19 points better than the reduction in global vehicle production.
Collecting the continued benefit from the acceleration in the production of electrified vehicles, resulting in greater demand for our high voltage solutions.
And the continued strong demand for connector and cable management products for both automotive and that automotive market applications.
We are the industry leader in electrical distribution systems, with engineering capabilities and global manufacturing scale necessary.
Rapidly build customer rapidly bring customers to market as they quickly adapt to the accelerating macro trends.
A great example is our recent business awards Atlantis and extension to our existing business to support the support design changes and content increases on the Ram truck.
It was another strong quarter for our signal and power solutions segments.
In a very challenging environment.
Slide nine provides an overview of some of the specific areas, where we're focusing our software development capabilities.
As we've mentioned previously our OEM customers are beginning to decouple software from the underlying hardware both tactically as they implement smart vehicle architecture, and then how they source new programs.
Our leading position in the design and development of high performance cost optimized automotive grade hardware as well as deep software development capabilities allows us to provide industry, leading interior and exterior perception solutions modular software and features the lower system cost and accelerate speed.
The market through higher reuse.
Middleware solutions, which support up integration and the server relation of compute.
Nicole lifecycle management through data collection, and data analytics and fall vehicle level integration testing and validation services.
These capabilities along with extensive collaboration with our customers and our supplier partners allows us to continue to be a partner of choice for our customers across literally all vehicle domains.
Enable our customers to offer greater flexibility for end user differentiation personalization and further strengthen our competitive position as a leading provider of smart vehicle architecture that accelerates the transition to the fully electrified software defined vehicle.
With that I'll hand, the call over to Joe take us through the financials in more detail.
Great Thanks, Kevin and good morning, everyone.
Starting with slide 10, the business continued to outperform the market despite the challenging environment Kevin referenced.
Revenues of $3 $7 million were down 5% with record 18% growth over market and market outgrowth in every region.
Adjusted EBITDA and operating income were $412 million and $219 million respectively.
Reflecting year over year headwinds, primarily COVID-19 and supply chain disruption costs of $55 million.
And $40 million from FX commodities and input costs.
Earnings per share in the quarter were 38 cents and operating cash flow was $4 million.
Reflecting higher inventory levels, resulting from customer schedule reductions and longer lead time requirements from certain suppliers.
As well as the lower earnings level.
Looking at the third quarter revenues in more detail on slide 11.
We continue to experience demand for higher content vehicles, driving strong growth over market across all regions, despite lower vehicle production levels.
Favorable FX and commodity movements were offset by lower production volumes in the quarter.
From a regional perspective, North America revenues were down 7%, representing 16 points of growth over market driven by the ramp in active safety launch volumes and a favorable truck and SUV platform mix.
In Europe strong double digit outgrowth of 19% due to robust customer launch activity and higher volumes in our high voltage electrification product line.
Lastly, on China revenues, reflecting 17 points of growth over market.
Going from broke leading local Oems and strong high voltage growth.
Yeah.
Moving to the segments on the next slide.
Advanced safety and user experience revenues fell 7% in the quarter translating to 16 points of growth over underlying vehicle production.
Including strong growth in active safety.
And somewhat lower market outgrowth and user experience driven by the timing of new program launches.
Segment, EBITDA was down $46 million, driven by supply chain disruption and higher input costs, primarily related to semiconductors.
Signal and power solutions revenues were down, 4%, representing 19% growth over market.
Our market outperformance was driven by continued strength in our high voltage product portfolio as well as strong outgrowth in commercial vehicle and industrial end markets.
EBITDA in the segment was down $123 million in the quarter on lower sales volumes and additional costs from supply chain disruptions and higher FX commodities and input costs.
Turning to our outlook for the remainder of the year on the next slide our revenues and operating margin remained unchanged from the outlook we provided in mid October.
We continue to expect revenue in the range of $15, one to $15 $5 billion up over 10% compared to the prior year.
We expect global vehicle production to be roughly flat for the full year translating into over 10 points of growth above market.
Demonstrating the relevance and diversity of our portfolio and product lines.
EBITDA and operating income are expected to be approximately $2 billion and $1 2 billion at the midpoint with strong year over year sales volume conversion.
Despite further COVID-19 supply chain disruption costs, which are now estimated to be $310 million for the year.
<unk> hundred $70 million over the prior year and.
And FX commodity and other rising input costs of $195 million, mainly driven by semiconductor in resin pricing.
Product line level margins continue to be in line with our expectations validating the strength of our market of our portfolio of market relevant technologies.
Lastly, we expect earnings per share of $2.55 at the midpoint and operating cash flow of $1 $2 billion.
Turning to slide 14.
As we have discussed the combined benefits of our strong product portfolio and robust business model enable us to convert more income to cash generating higher operating cash flow.
We now expect operating cash flow of $1 $2 billion in 2021, driven by increased earnings offset by higher inventory investment and continued investments in growth.
As you can see in the middle of the slide we ended the third quarter was $2 $7 billion in total cash.
Enabling us to manage through the current environment, while supporting record year to date, New business awards and launch activities.
Lastly, our investment in working capital helps ensure we are ready to keep our customers running in this challenging environment, making active our key partner of choice.
Turning to slide 15.
Despite the variability and lack of forward visibility in customer production schedules. We wanted to provide some initial thoughts on the outlook for 2022.
We continue to believe that the supply chain disruptions will impact overall vehicle production levels in the coming year, particularly in the first half of 2022.
Despite these challenges our strategy remains unchanged and we believe we are very well positioned to lead the continued transition to higher contents. It software enabled vehicles with increasing levels of active safety and powertrain electrification.
Although it is still early in our planning process for 2022, we are confident in our ability to outgrow the market driven by continued acceleration of the safe Green and connected Megatrends.
That said, we do believe in 2022 vehicle production will be impacted by supply chain constraints and that the industry will not return to pre pandemic production levels until post 2022.
As it relates to material input costs, we continue to make traction on our mitigation initiatives, including supplier recovery strategies engineer.
Engineering redesign and alternative source evaluations as well as engaging in commercial discussions with our customers.
Although we will see some benefit from these initiatives. It is unlikely that the full impact of the elevated input costs are offset in the coming year.
Additional costs related to supply chain disruptions, including elevated transportation and freight costs as well as the costs associated with the intermittent production disruptions will continue into next year.
As we have discussed these costs are not structural in nature and will ease as supply chain and material availability improve over the course of 2022.
Finally, the actions we've taken over the prior year's to drive underlying product line profitability and establish the Companys strong financial position will allow us to continue to invest in new technologies, both organically and inorganically, while supporting our new business pursuit activities.
As we've consistently demonstrated these investments will ensure that we continue to deliver disciplined revenue growth.
Beyond 2022, and the current industry operating challenges.
With that I'll turn the call back to Kevin for his closing remarks. Thanks, Joe.
I'll wrap up on slide 16, before we open it up for questions. While near term headwinds are expected to persist into 2020 twos as Jos mentioned.
We remain confident in our product portfolio aligned to the safe Green and connected Megatrends.
As we reflect on our recent operating performance its clear to us that our relentless focus on innovation and flawless execution is allowing us to better support our customers and is resulting in increased momentum related to new business bookings and strong market outgrowth.
A further widening of our competitive moat.
And a continued strong track record of delivering sustainable value creation.
As I mentioned at the start of our <unk> of our presentation. After it's been on an exciting journey of these last 10 years, but the team is even more excited about what we'll deliver over the next decade.
Beginning with providing our customers with new cost effective innovative solutions that enable the future of mobility that serve to accelerate the trend who are more safe green and connected world and translate into continued outsized returns for our shareholders.
In summary, we remain laser focused on continuing to build a more resilient business that consistently delivers for our customers and our shareholders over the next 10 years effectively advancing our vision of the company in 2025 and beyond.
So with that let's open up the line for Q&A.
Yeah.
Thank you ladies.
Ladies and gentlemen, if you would like to ask a question. Please thickness by pressing star one on your telephone keypad.
You're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
In the interest of time, please limit yourself to one question and one follow up.
Once again that his style one for your questions today.
Our first question today comes from Rod Lache from Wolfe Research. Please go ahead.
Good morning, everybody.
Iran.
I was hoping.
Maybe you could first of all clarify a.
A little bit more what drove the 61% decremental on the volume and S. M. P. S and more importantly, if we take a step back and we think about for the overall company for the year that the $310 million of supply chain and corporate costs and.
The effect the commodity costs.
195 million can you talk about what the prospects are for recovering that if they did remain elevated so any any thoughts on how to kind of frame that.
Sure why don't I start with the decremental Rod, It's Joe I think.
So as it applies to Sps and it plays out.
Overall to active right Q3, I think it's obviously, a very challenging quarter from a decremental perspective.
Really there's a couple of things driving that and I'll start by you know obviously this is this is very lumpy. When you just look at a one off quarter.
I'd say, there's two real drivers right, we saw volume fall off significantly in the back half of Q3.
You know year over year, our view of vehicle production will be flat to 2020, but the back half is going to be down.
By a little over 20%. So there's a lot of volume coming out quickly. Obviously, there's only so much you can do with the cost structure.
Given you know given such a short period of time that it has come down.
But we have continued to incur the supply chain disruption costs. So you've got not only revenue coming down quickly, but you've got a fair amount of supply chain disruption costs that are hitting us.
Hitting in the quarter and will hit in the back half of the year. So.
The quarter over quarter had a sharp decremental I think if you took a step back and looked at the full year.
You know I think we're much more in line with.
Our typical ranges of where we think incrementals and Decrementals are and what we historically talked about sort of that incremental of 18% to 22% and.
The decrementals in sort of 25% to 30% again, depending on how quickly volume comes down so for the full year I think the Incrementals are generally in line with that we're obviously picking up an impact from the overall supply chain related disruptions.
But much more in line with where we are historically expect the business, but it's you know I think on a given quarter, particularly when you see the sharp moves in volume and this isn't.
This isn't different from what we saw actually during Covid last year. We are we are gonna rod heavier on those.
Those decrementals and again it applies to it really applies to both segments.
And Rod this is Kevin I'll take the second part of your question I would break our activities to offset into four.
Four or five buckets, so as we always do where we're constantly reassessing.
Reassessing reevaluating, our cost structure and looking for opportunities both within supply chain outside of supply chain to further reduce costs.
We're in active negotiations with with with the supply base.
Situations like this I guess one of the side benefits us.
Becoming much more strategic with your customers as it relates to supply chain as well as more strategic with your supply base, which translates into.
You know quite frankly fewer supplier relationships deeper supply relationships more strategic supplier relationships, which provide you with the opportunity.
To further optimize our supply chain and reduce costs I think in the past we've talked about over 100 program our product redesign activities that we have underway.
We're we're substituting alternative.
Inputs to.
That form solutions that will further lower those all those costs.
And lastly.
Lastly, but equally important we're having.
Active discussions with all of our customers with with respect to.
The cost of doing business in today's environment.
And the support we provided to ensure that they remain connected from a supply standpoint.
So those would be the four major buckets I would I would categorize things then I would say as it relates to cost and cost structure and its important consistent with past we continue to invest in growth opportunities technologies that support growth opportunities in areas like software in areas like active say.
Ft in areas.
Like high voltage electrification and think it's important to continue to do so.
Even in light of the decremental margins that you talk about do you know due to production interruptions.
So maybe.
Maybe just to put a finer point on that do you have a view on the the extent to which this could be mitigated through those four actions. So it's a pretty big number in aggregate obviously.
Yes. It is I you know, we're working through that and as a part of our guidance for 2022, we'll talk about it.
I think it's safe to say that you don't mitigate all of it in a 12 month timeframe. So there'll be some amount of working through it.
But as focused as we are on.
On developing innovative solutions, where we have teams as well as focus on lowering overall cost.
And then just second.
The growth over market all year, it's been much stronger than you expected.
It was 16% in the first half now 18% this quarter.
Have you been able to sort of assess the extent to which this is.
Obviously, a lot of it's secular with with high voltage in and.
Active safety, but there is some component of that which is just driven by.
Production mix in what Oems have done to prioritize certain vehicles have you been able to parse that out just to get a sense of what.
The trajectory really underlying this is Ben.
Yeah, I think it's tough right I think that I think that's a great question. It's a fair question I think it's tough to do right right in reality, we've over the last few years, we've seen accelerated demand for our solutions for high voltage electrification and other items. So I think it's it's a little bit it's difficult to be pre.
<unk> sort of precisely answer that question like Joel in the past has spoken to the fact that OEM customers. It appears as though are producing a overall richer.
For the first time, we were really incurring anything at that level.
Okay.
And then just you know.
Thinking thinking out a little bit here with everything going on and lessons learned and as we sort of turned to to the casual you mentioned you know the higher inventory is that some is that something that is going to be a little bit more structural for you that you know everyone sort of in the in the value chain will sort of carry a little bit more inventory provide a little bit more.
Buffer.
Weighing I'm working capital of it and then on Capex you know I know that sort of came down are flex down I guess here uhm and I think he normally sort of.
Talk about 5% of sales so should we expect like a catch up next year for some of that that might've been deferred or delayed or or does it just returned more towards the eight five Joe.
Jones.
More precisely Israel was I I think as you look at lessons learned.
I'm not sure I would characterize it as his lessons learned as well as his folks getting smarter overall about uhm supply chain and and you know a bigger push for greater visibility from customer to supplier.
Better understanding or visibility to sub suppliers incapacity.
More committed volumes from the OEM down to the supply base, so that uhm capital is more effectively.
Deployed and then you know.
A trade off of there with that increases ability to reality is there will be areas, where there'll be more investment and inventory, but there'll be other areas, where they'll be less so.
So how how that that offsets is probably a little difficult.
Estimated at this point in time, but near term it likely translates into more inventory.
And I think the question is just how much in in a conclusion that on on certain parts of certain products without committed volumes J I T inventory management doesn't work for certain parts.
Oh.
Yeah. So.
Joey Capex there was a small push into next year I was I think well you know I think that 5% is an overall range is still good you know there's there's been years, we've been a little under there'll be years, where.
We're a little over by you know.
Not not more than half a base you know a half a percentage point. So I I still think five is a good proxy there has been a little moving around just as we.
Work through some of the disruptions in the volume call back call back, but I wouldn't say that the Ah materials material change an inventory to Kevin's point I think we're learning a lot.
There is a fair amount if you just looked at sort of normalize our inventory about half of.
The increase balance is I I would sort of describe as <unk>.
Really transactional production came down really fast in the back half of Q3, we were obviously given the lead times. We were we had inventory on hand to produce to the original schedules.
So that that have I would describe as more transaction right volume came down we have higher inventory levels. We tend to be we tend to use the same inventory. If you think about what we make residence for connectors.
Distribution business the chips will use to the extent we have them. So.
It's more of a more of a timing related to the to the production slid out for about half that balance.
Kevin's point on the remaining balance.
There is there is inventory on hand, because lead times of extended we're focused on making sure we have stock in some cases you know your.
If you've got up if you've got a a product that has 350 parts and you're waiting for one ship you tend to have the other 343 hundred 49 in stock So you're ready to go once you get that chip. So there's there's that type, but certainly the full investment that just stay on the balance sheet now I would not think is a is representative of the investment that.
Needs to be made going forward to Kevin's point, there probably will be some but it's not going to be at that level that was half of that was really the production disruptions.
Thanks for the call.
Thank you and I'm moving on to David Kenny from Jeffrey. Please go ahead.
Good morning team thanks for taking my questions.
Just three two outgrowths, another a robust quarter here and realizing we aren't guiding to <unk>.
2022, but you did reference in the slide decks and sustained growth over market opportunity can.
Can you talk about some of the drivers in the next year the content <unk>.
Mix electrification and how are you thinking about those relative to.
To the steeper hurdle, we're gonna see in the 2022.
Yeah listen I I think as we've talked about I think it's Joel mentioned, we're not we're not giving 20th of 22 guidance.
Obviously at this point in time, but but the nature of our product portfolio.
In around save screening connected obviously, there are macro trends.
That are driving significant demand for products in those three areas.
Clearly this year, we've had a number of program launches that that you should see the benefit of as we roll into two 2022.
But.
Continue to be optimistic as it relates to outgrowth.
In the out years.
In line with what we've seen.
Over a past Joe.
Yeah, the drivers, they're very consistent with what we've been saying right. It's it's high voltage inactive saved you clearly leaders.
Uhm Sps continues to benefit more broadly from the content adds into vehicles, even if it's not our active safety system or or other technology that business is content on one out of every three and a half vehicles manufactured globally. So.
Does it really positive content tailwind there and then the commercial vehicle and industrial businesses continue to cause.
Tend to be accretive to growth, where we're having a really good year from a commercial vehicle perspective.
And would expect the product lines in that space to continue to grow and be accretive to growth over market.
Okay got it. Thank you and then may be a question on the semi cause you know to specifically driver of the higher a as in UX input costs could you give a bit more color on the the semi impact in the quarter and I guess going into next year you see further semi price.
Increases on the Horizons and just curious how you were thinking about the potential price increases versus some of the offset that you referenced.
Yeah, obviously still a lot of work in process as it relates to as it relates to semiconductor pricing it tends to be the price increases. We're seeing now are are really twofold. We have seen some price increases on what I'll call the constrained chips.
That I think will continue into will continue into next year.
The other thing we're seeing at the moment and describe it as a bit of a sort of spot by market. So even if they have and sort of institutionalize. The price increase has just given the constraints.
You are paying up for you are paying up for semiconductors.
Again that total numbers about 195, it's a mixed primarily semiconductor and resident as I made my comments were obviously.
Making progress on some of the opposite initiatives to Kevin just talked about but at this point we're not.
But also not ready to talk about how much of that we see rolling into 2022, some of it will and when the offset.
Action start to take effect.
Got it thank you.
Thank you bye now moving on to a question from Mcenany Goldman Sachs. Please go ahead.
Yes, good morning, and thank you very much for taking the question.
Bookings have been running a very nicely year to date. The last couple of years. The fourth quarter. In particular has been quite strong maybe you can talk about how you see bookings tracking in the fourth quarter of Fisher.
Yeah, I bookings have been strong year to date were running at record levels, having said that.
The timing of customer awards can be very long. These so.
It's it's sometimes a bit difficult.
To predict incrementally.
Incrementally difficult predict in situations like right now, where you're seeing supply chain disruption several of the.
<unk> individuals from an Oem's standpoint that are responsible for that activity earn are engaged to some extent.
Managing overall supply chain disruption, but I think with a.
Fairly high level of confidence, we see bookings for the calendar year.
North of 2021 $22 billion, so what we see on the table today.
That's helpful. Thank you and then for my follow up question was related to the supply chain disruption, but but but more around how the industry may try to a bit better deal with these longer term and a number of the orient or talking about procuring semiconductors and and other key components more directly in and not just working with with your ones like off.
<unk> you know I I know those discussions are ongoing but we've been at this for awhile now I'm curious if you have an update you can share it around how you think after his role in supply chain and working with your OEM partners may have off thank you.
Yeah.
That's a great question I think by and large.
Every participant in the supply chain is real valuating.
Their role and potentially what they can do differently, having spoken now several times to the leaders leaders of all of the semiconductor companies.
One of the critical items that needs to be addressed is committed volumes right. When you look at at an industry that is highly capital intensive.
Predictability of production is extremely important and it gets compounded in an industry with long lead times.
That's currently constrained.
However, we transition to more of a committed volume model.
At least for the medium term.
Whether that's.
Offering the way, we historically operated with tears being the primary faced in semiconductor players.
Or it's Oems working with a semiconductor players as well as the tears.
Either can solve that problem.
I think for us for <unk> will be flexible to operating neither scenario I would say the one thing that will be different as we move forward is certainly more strategic relationships on the semiconductor side, which leg likely translates into.
Deeper relationships fewer semiconductor relationships.
That drive.
More volume in a more strategic relationship both from a technology and our supply chain standpoint.
Thank you.
Now moving on to Dawn D V from credit Suisse with our next question. Please go ahead.
Okay, Hey, good morning, everyone. Thank you.
Wanting to.
And I recognize you know you've given us some directional comments on 22 that I. Appreciate I wanted to see if maybe we could put a slightly finer points on the directional comments. So one you know you could just remind us.
Just pure volume growth alone you know flipping out the performance or other efficiencies or inefficiency what type of incremental margins you generally get what you might expect you.
You know in a year, where there could be you know double digit industry recovery and then if commodity prices just stay flat versus where they are today.
Is there an early sense on what the net commodity impact is <unk> and for 2022.
Yeah, Let me Dennis Joe Let me start I think the best way out obviously I'm not going to give any more information on 2022 or as I said in my comments were really.
Very early days to to be doing that but.
From our perspective, and we've talked about this you know the certainly the COVID-19 in the supply chain related disruption cause we do not view us as structural we think those are very much driven by the events of the day and as I said in my prepared comments as supply chain of material flow returns to normal.
What I would expect those cost too.
<unk> start to go away as well if you look at 2021, I think it's a good proxy and always historically talked about incremental margins on the line between 18 and 22%.
This year will be at 16%.
Carrying 300 plus million dollars of.
Supply chain in Covid related costs, if you backed out that $300 million would be closer to that would be closer to 24%. So.
Very much within historical range and the expected range when you adjust for the Covid and the supply chain related disruption costs now we as we said even lobster last quarter, we were not treating the inflation is transitory. The 195, so I wouldn't I'm not going to add that back, but I would really focus on.
We get back into that 18% to 22% range with.
Just adjusting for those with just adjusting for those Kobe costs. The other thing.
I've mentioned, we've got about 600 million again, we backed us out of the adjusted growth rate.
But there was about 600 million of incremental volume from commodity and FX that has a negative flow on it.
So we've often talk about copper impacting margin right, but at all it also obviously impacts the incremental right.
So again, just something to think about is your is your working through the math.
Right now, we see full year material inflation of.
Oh about $195 million.
A lot of that is.
Now come in the back half of the year I think the back half run rate is probably at least indicative of what we're managing for 2022 again not going to speak to how much we're able to where we were able to offset but certainly start with.
That 195, we're talking about that full year numbers is certainly what we're working on at the moment.
Again, if I can just chime in just just to underscore.
The point is Joe makes but maybe at a higher level you take a step back and.
And 2018, Google vehicle production was close to 100 million units and this year global vehicle production will be under 80.
And in 2018 revenues were uhm.
14.4 billion this year.
We'll do $15, three and and when you look at our guidance as it relates to.
Full year EBITDA dollars needed done margins and you factor in the.
The cost headwinds that Joe's walk through for for 2021 beautify chain.
Or COVID-19 and you look at the transition from where we were in 18 and where we are today in light of.
All these.
All these effectively macro challenges with incremental investment and advanced technologies.
It just underscores the strength of the business model, we built in the fact that hey, there may be quarters for short periods of time, we go through.
We go through macro disruption of the underlying robustness of the business model the cash conversion.
Is extremely strong if not better than what it was historic.
Thank you no that's it and that's at historical perspective, certainly is.
Well thank you.
A second question and I think it's a little a little more related but it's specific to a S. U X margin and I know, there's a number of things that are that are moving it.
Been low obviously the the the volumes are are are quite weak and you have your your 70 cost inflation.
I guess I'm I'm wondering though just broadly on on the go forward. This is a segment, where you have yourself where exposure.
Radically this is a segment where margins should sharply.
You know that software type revenue starts to come in on an eight ask you've obviously got <unk> get more but you know you're talking about continued investment it just feels like you know.
There could be more more of a period of mid single digit or high single digit Taipei S. U X margins and I guess I'm wondering what are the things that need to happen.
For the margins to really break out in this segment I know volume is the big one but.
What what else needs to happen.
Yeah listen.
I think.
Ridiculous predictability of schedules is is one.
To the execution of the launch of the existing programs that we have that we're launching today as to the continued separation of software and hardware is is three.
And I guess the ongoing demand for the for the active safety for the user experience for the dating connectivity solutions at the segment provides so.
There's there's all sorts of tailwind there now having said that we've talked about some of the year is a opportunity in the future like SBA like.
Like high performance compute areas like software areas, where.
We feel like there is tremendous opportunity and if it makes sense. There are areas that will will continue to invest in in some areas potentially increase investment it.
Got it. Thank thank you appreciate it is painful.
Okay and stuff.
Thank you from Bank of America, we have John Murphy with our next question. Please go ahead.
Good good morning, guys syndrome. Thanks, Thanks for all the info and the shot at 20 or what you're giving US a 22 and you know it's hard Kevin you kind of mentioned one of the.
What are the solutions to the issues that are going on right. Now is is that automakers sort of give more committed volumes and there's greater visibility through the supply chain. Yeah. I'm. Just curious you know how you think that mechanically could work in an industry that is.
A slave to some degree to macroeconomic cycles and you have normal 20th.
<unk>.
<unk> just it's just hard to understand how an automaker could sit there.
And give committed volume number because they are at the whim of what's happening in the macro then also now finding out that there are sort of at the whim of what could happen and a deepening in the supply chain me ne how would you envision that committed volume from an automaker working.
Yeah listen I think it's John is a great question and it's not it's not easy so you're you're.
The point you make is is a legitimate point, but but it's an issue everyone across the supply chain right has to deal with it from.
From the OEM, all the way through to the the.
The way for manufacturers so it affects every aspect.
Of the supply chain and if there isn't some level baseline commitment on some level of products for some period of time, there's an amount of estimating that everybody in the supply chain is doing and ultimately you end up in a situation.
Like we find ourselves.
Today, So I think on I think again I think we're from a supply chain standpoint will be more strategic.
With customers and then through through two tier two two or three three or four suppliers the supply chain will be more integrated with more visibility.
In exchange for that there'll be more commitments at least on certain products for some agreed period of time.
And that's the way the.
That's how we will start to dig ourselves out of this or more permanently address some of the structural issues.
Okay. So I hope, we get there and it seems like you guys are in a great in a good spot to actually help manage up and managed down into in some way. So yeah. I mean, we're working out I mean.
Undergoes leadership from our supply chain standpoint.
I'd say, we're working more closely we've always worked closely with our customers and inspires I think we're working more closely than than we ever have.
There are going to be areas, where where are we likely curie incremental inventory, but there's likely areas where will actually have to carry less and we're just we're all getting smarter.
Smarter about it and unfortunately, we had the COVID-19 induced perfect storm that we're going through an in 2021, but I think everyone's focused on how do we learn from it and how do we improve how we operate.
Okay, and just a follow up on on vertical integration I mean, we're hearing about this from these new E V manufacturers as well as being comments that are building out their own EV essentially a V platforms, but ironically, there's a lot of stuff that they talk about that's very much sounds like set your satellite architecture.
VA or other technology that you bring to the table. So when we hear when people hear vertical integration are like Oh crap.
Outsourcing is gonna reversed and there's gonna be an sourcing, but it doesn't itch seems like it's a question of semantics because it really sounds like a lot of your technology is leaning and some of these platform so should.
Should we generally think about it because it really seems like there was a ah semantics issue here about what vertical political vertical integration really is.
Yeah, No I listen I think that's a great point and we do business with with a number of the players that you'd you'd referred who is new.
Battery electric vehicle companies.
And I think in reality across all of them, there's very little in the areas of what they produce that kind of vertical integration religion.
Vertical integration tends to be an economic tradeoff to your point, we feel like we're well positioned with a software and hardware capabilities vehicle architecture capabilities.
I think we would tell you based on our discussion with all those players. The reality is there are certain areas that are growing rapidly in the car from a content standpoint like software.
And I think both in the software area in the hardware area Oems, whether the new Oems or legacy Williams in reality are going to be dealing with fewer suppliers and.
A couple of the newer the battery electric Bill companies that we have a relationship with with all actually say is.
More of the activity is actually outsource from a dollar standpoint today, but they're actually dealing with doing that with fewer suppliers and.
In our view likely the trend that takes place and that's where we're working really hard to make sure that we're in front of.
In front of that trend and we're able to benefit from them.
Great. Thank you very much.
Thank you our last question today comes from a tight machete from city. Please go ahead.
Oh, great. Thanks, I. Good morning, everybody to just two quick ones Ah near term question and a longer term question I'm Gonna need. Some question maybe Joe can you just give us a puts it takes on the implied queue for a revenue G. O M. And then maybe a longtime question for Kevin We heard you know with like recently with a G M Investor day their plans to launch.
Schumer a fee with the help of cruise in about five years I'm curious kind of what active strategy is with respect to consume a V as well as your relationship with emotional and the potential for you, but perhaps a leverage that relationship in the next five or 10 years for a consumer Avi.
Yeah. He is let me go over real quickly on the go with a a margaret listen it's a it's a bit of the same dynamic we've really been wrestling with for the last couple of quarters writers.
There's just a lack of visibility of customer schedules.
We obviously, so where it's hard to be overly precise at this point from a forecast perspective haven't obviously seen anything that would suggest that it's a.
There's going to be a a meaningful changed downward.
We have introduced sort of the 10 plus for the year.
To the extent the production holes at these levels and and we continue to see strong mix site, we're expecting another good growth over market quarter. So it's hard to call an exact number at this point.
Anytime with respect to your question about a V in and.
And we see the App this treasure I can't comment on others because it is.
Is used.
Is used differently by different Oems are different suppliers.
So as you know we are emotional which is our joint venture with a Honda Motor group, which is doing extremely well has driverless vehicles being tested on roads today and loss loss.
Las Vegas, and elsewhere, and we will have fully driverless vehicles as a party lyft network in 2023.
So.
From a business standpoint, they're doing and technology advances standpoint, the teen years doing extremely well a couple of comments broadly on a V. As you know we've always viewed autonomous driving is a for the spectrum of.
Of.
Full eight have solutions and.
We use our partnership with motion will as an opportunity to continue to task to validate.
To future proof.
Technologies that we can pull into our current <unk> solutions and that's what we continue to do we feel like active. This is emptive. There's a lot a lot of opportunity that remains in the house zero to L. Three sort of a dash.
Framework, 60% of lessons excusing of vehicles today, a and Ada solution on them.
If you believe IHS the forecast that increases to 70% by by 2025, we actually believes it will be more than that and the fastest growing area will be on L. Two and L to pass uhm. So I would tell you that's our biggest focus area, having said that.
We're using emotional.
As a resource to enhance the solutions that we use in the L. Two L two plus sort of space.
And then can currently we're working with motion all as well as have internal resources focused on L three and beyond.
Our view is that.
From a cost our commercial standpoint, that's likely be.
Beyond 2025.
But it's certainly technology that we're focused on and it's a capability we want to make sure we're position to have.
That's that's very helpful. Thank you.
Thank you that concludes today's Q&A session I'd now like to have to call back over to you Mr. Clarke for any additional clothing or at night.
Great. Thank you operator, thank you everyone for joining us this morning take care and have a great rest of the day. Thank you.
Thank you you read that concludes today's call and thank you for your participation ladies and gentlemen, you may now disconnect.