Q1 2022 Aptiv PLC Earnings Call
So these are placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session. Thank you Christina.
The director of Investor Relations you May begin your conference.
Thank you Mary.
Good morning, and thank you for joining <unk> first quarter 2022 earnings conference call.
Press release and related tables, along with the slide presentation can be found at the Investor Relations portion of our website at <unk> Dot com.
Today's review of our financials exclude amortization restructuring and other special items and will address the continuing operations of <unk>.
Reconciliations between GAAP and non-GAAP measures for our Q1 financials as well as our full year 2022 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, which reflects <unk> 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, including uncertainties posed by the COVID-19 pandemic, the ongoing supply chain disruptions and the conflict between Ukraine.
In Russia.
Joining us today will be Kevin Clark Apt, as 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 to Q&A.
And with that I'd like to turn the call over to Kevin Clark.
Thank you, Chris and thanks, everyone for joining us this morning, beginning on slide three after they had a solid start to the year showcasing our ability to continue to outperform in a volatile market Rev.
<unk> revenues totaled $4 2 billion up 4% from the prior year driven by strong demand across our portfolio of safe Green and connected technologies.
Operating income and earnings per share totaled $324 million.63, respectively.
<unk> continued revenue growth despite a decline in vehicle production in the quarter more than offset by material inflation and increased operating cost associated with the ongoing supply chain disruptions.
Highlights for the quarter include 11 points growth over underlying vehicle production with all regions reporting strong growth over market driven by continued growth in our key product lines, which I'll touch on in more detail on the next slide.
New business bookings reached $6 1 billion. The result of growing demand for our portfolio of industry, leading advanced technologies.
As the World continues to grapple with the ongoing COVID-19 pandemic and the related supply chain challenges at this business has not been immune to the effects of the various disruptions.
We continue to monitor the situation in Ukraine, and Lockdowns in China, which will impact the balance of the year, but at this point in time, we remain confident in our full year outlook.
Team is doing an exceptional job executing in a very fluid environment working to mitigate the challenges, we're facing and our sustainable double digit growth over market and pace of new business bookings during the quarter are a testament to our ability to continue to deliver for our customers.
Turning to slide four.
Revenue growth across our key product lines continued to outpace the market.
Our <unk> segment active safety revenue growth remained strong up 9% during the quarter driven by the continued penetration of advanced Adas systems and user experience revenues increased 10%.
Gulf of the launch of infotainment programs in Europe , and North America.
And our signal and power solutions segment high voltage revenues increased 10% during the quarter driven by the accelerated launch of electric vehicle programs, particularly in Asia, and Europe , and our non automotive revenues, which now represent roughly 16% of after sales increased 5%. The result of strong growth in the general industrial.
Semiconductor datacom markets.
Our portfolio of advanced technologies aligned to the safe Green and connected Megatrends is uniquely positioned to solve our customers' biggest challenges, which we've capitalized on to increase our market share with new customers and expand our share of wallet with existing customers.
Moving to slide five.
Tumor demand remains very strong requiring us to proactively manage through the ongoing supply chain disruptions, while also offsetting the increase material inflation.
As I mentioned already our team is doing an excellent job confronting these issues head on and have taken several actions to offset the headwinds related to macro factors, including further reducing overhead costs, while selectively investing in initiatives related to high voltage electrification smart vehicle architecture and software development are.
We announced agreement to acquire wind River, which we expect to close mid year has translated into several direct OEM engagements, including the commercial agreement with Hyundai that was announced earlier this week.
We're also working closely with our supplier partners and our customers and several product redesign initiatives to both mitigate part shortages and offset material price increases over 50 of which have already been implemented and roughly another 50 will be implemented during the balance of the year.
Lastly, we're making progress on other cost recovery initiatives, including price reductions from our suppliers and commercial recoveries from our customers, which are which have a more meaningful impact during the back half of the year.
We continue to confront the supply chain and inflation challenges and are focused on strengthening the underlying resiliency of our business model and reaping the full benefits once these headwinds subside.
As shown on slide six.
First quarter bookings totaled $6 1 billion, the highest first quarter level over the last several years advair.
Advanced safety and user experience bookings totaled 800 million for the quarter in line with our expectations, representing the timing of customer customer program awards during the year.
Notable customer awards during the quarter include a central vehicle controller for a European OEM.
Our funnel for new business bookings for the <unk> segment for the balance of the year remains very strong with several aid as user experience and smart vehicle architecture program.
Not to be awarded.
In the second quarter is off to a strong start.
With over 3 billion of Ada Es Awards, and a central vehicle control award with lifetime revenues totaling $1 5 billion.
Bookings for our signal and power solutions segment reached $5 3 billion during the quarter, including $1 2 billion in high voltage electrification awards.
The strength of our competitive position and the size of our funnel for high voltage electrification programs gives us confidence in reaching over 4 billion of customer awards during 2022.
Our strong track record of new business bookings is proof that our portfolio of advanced technologies is perfectly aligned to the areas of significant growth in vehicle content.
And our unique position as the only provider both the brain and nervous system of the vehicle is presenting active with opportunities to capitalize on the acceleration towards the electrified software defined vehicle.
Turning to the highlights from our advanced safety and user experience segment on slide seven.
Revenues for the first quarter increased 7% 14 points over underlying vehicle production driven by strong product line growth in both active safety and user experience.
As I referenced on the last slide during the first quarter, we received a new business award from a leading German OEM for a central vehicle control or on the next wave of its leading EV platforms.
This award is another strategic win for our portfolio of Smart vehicle architecture solutions and is a key building block for this Oems new electric vehicle platform, which is fully aligned with apt is designed for smart vehicle architecture.
Moving to slide eight.
First quarter revenues in our signal and power solutions segment rose, 2% nine points better than the decline in global vehicle production, reflecting increased demand for high voltage architecture solutions and continued strong revenue growth in non automotive markets.
Our industry, leading portfolio of power and data distribution connectors electrical centers and cable management solutions combined with our global scale uniquely positions apt as to both design and manufacture optimized vehicle architectures systems for customers located virtually anywhere in the world and as a proof point, our leading global electric vehicle.
OEM ordered apt as an additional vehicle architecture program to support their further expansion into Europe .
In addition, we continue to support the growth of a German Oems electric vehicle platform and the award of this charging device underscores our strong market position and electric vehicle charging.
The first quarter's new business bookings validates the value, we bring with our system level approach to optimizing vehicle architecture, which reduces vehicle weight and mass, thereby reducing cost for our OEM customers.
We remain confident that our competitive position combined with the accelerating demand for electrified vehicles physicians active for profitable growth in the signal and power solutions segment for the next several years.
Turning to slide nine despite the current challenges we remain focused on increasing the underlying resiliency of our business model to deliver sustainable value creation.
Although the macro environment remains very challenging and difficult to navigate we continue to focus on increasing the flexibility of our operating model by leveraging our advanced technologies for both the brain and nervous system of the vehicle providing more content for the software defined vehicles of the future deploying capital to further strengthen our portfolio.
Safe Green and connected technologies, including expanding our portfolio of software solutions to meet the increasing needs of our customers and intelligently diversifying diversifying our revenue base and the less cyclical non automotive markets.
Which will better position after for value creation from the acceleration of the trend towards a fully electrified software defined vehicle increased market share gains and continued operational efficiency and cost structure optimization.
This translates into revenue growth margin expansion and cash flow generation, which can be reinvested in the business to create an even more resilient business model.
With that I'll turn the call over to Joe to go through the financial highlights in more detail, thanks, Kevin and good morning, everyone.
Starting with a recap of the quarter on slide 10, the business generated strong top line performance, while successfully navigating through several industry wide operating challenges.
Revenues of $4 $2 billion were up 4%.
7% ahead of vehicle production, which was down 7% in the quarter adjusted.
EBITDA and operating income were $478 million and $324 million, respectively, reflecting strong flow through on higher volumes and the benefit of savings and cost reduction actions.
Price downs that were effectively flat year over year, and the negative impact of supply chain disruption costs, FX and commodities and material inflation.
Earnings per share in the quarter was 63 cents.
Lastly, we had operating cash flows outflows of $202 million driven primarily by our decision to maintain a higher working capital investment to help impart mitigate the impact of supply chain disruptions.
Capital expenditures were $247 million driven by investments to support program launches across our key product lines.
Looking at the first quarter revenues in more detail on slide 11, we.
We saw growth over market in all regions. Despite production disruptions in Europe from the Russia Ukrainian war as well as Covid related shutdowns in China, which impacted the final weeks of the quarter.
The FX commodity impact on the topline was minimal as the pass through of the higher copper prices to our customers offset the impact of the lower Europe .
As I previously noted the negative impact of price downs was minimal almost flat on a year over year basis.
From a regional perspective, North America revenue was up 7% on an adjusted basis or 8% above vehicle production driven by our active safety high voltage and non automotive product lines.
European growth was.
European growth above market was 13% despite a contraction in vehicle production of 18% in the quarter.
Led by strength in our active safety and high voltage product lines as well as the launch of several user experience programs.
And lastly in China revenues were up 14% over a flat market as both segments posted strong double digit growth. Despite the impact of Covid disruptions in late March.
Moving to the segment recap on slide 12.
Advanced safety and user experience revenues increased 7% in the quarter.
Reflecting 14% growth over underlying vehicle production, including growth in both active safety and user experience.
As we have discussed the increase in material input costs, primarily semiconductors has negatively impacted segment profitability.
Segment, adjusted operating income was $16 million in the quarter down $52 million compared to Q1 of last year.
Volume growth contributed approximately $25 million of adjusted ally in the period, reflecting flow through of 35% and annual price downs were effectively flat to prior year.
A reduction in supply chain disruption costs, and the benefit of higher performance and cost actions.
Partially offset the impact of the previously mentioned material inflation.
We are actively pursuing multiple paths to mitigate and offset the material inflation cost impacting a S. UX.
In addition to commercial and pricing negotiations with our customers. We are also pursuing product engineering redesigns.
A number of these activities involved the redesign of products to open up multiple supplier sourcing opportunities.
Primarily as it relates to semiconductors, including the sourcing of semiconductors from newer market entrants in all regions, where we operate.
Signal and power solutions revenues were up 2%, reflecting nine points of growth over market with meaningful outgrowth in all regions.
We continue to see strength in high voltage as well as our engineered components product lines and the segments reported growth comes despite a difficult year over year comparison, given the H, one 2021 distribution channel replenishment, we discussed last year.
Adjusted operating income in the segment was down $98 million as the flow through on incremental volumes and the benefits of improved performance and cost saving actions.
Were offset by Covid and supply chain disruption costs.
As well as the impact of FX commodity and material inflation, primarily copper pass through timing and resins.
The full year outlook included on slide 13 remains unchanged from our original guidance provided in February .
As noted in February the full year outlook excludes wind river as that transaction is expected to close mid year.
We expect the wind river transaction to be neutral to 2022 earnings per share.
We believe the material inflation and continued supply chain constraints, we're substantially addressed in our original guidance.
And although we are seeing current year increase system material costs. The actions, we're taking with our customers supply base and cost structure are helping to offset the impact of these additional increases.
As it relates to the more recent 2022 disruptions.
We believe the second quarter will be significantly impacted by the COVID-19 related lockdowns in China.
We are not providing a formal guide for the second quarter. However, we do believe it is possible that the second quarter is at or slightly below the first quarter revenue and earnings levels.
As it relates to China, assuming the Covid related lockdowns ease during the second quarter. We currently expect that market to recover lost vehicle production in the second half of the year.
With respect to Europe as we have previously discussed we have mitigated our direct production exposure to Ukraine, and barring a broadening of the conflict we do not expect our other European production facilities to be impacted.
Although we have seen softening in European vehicle production to date, we believe that loss production why there'd be rescheduled for later in the year in Europe and are offset by stronger North American production.
Accordingly, we continue to expect revenue in the range of $17 75 to $18, one 5 billion up 15% at the midpoint compared to 2021.
This assumes global vehicle production growth of approximately 6% with some shifting between regions from our original forecast.
EBITDA and operating income are expected to be approximately $2 6 billion and $1 $9 billion at the mid points.
We continue to estimate adjusted earnings per share to be $4 35 for 2022 and.
An increase of 42% over the comparable 2021 total.
And we expect 2022 operating cash flows.
Just over $2 billion with Capex at approximately 5% of sales.
Moving to slide 14, before I turn the call back to Kevin We've received several questions recently regarding the long term 2022 forecast we provided at our 2019 Investor day.
And we thought it would be helpful to lay out the changes relative to where we are today.
As you May recall, our long term forecast provided in 2019 estimated 2022 revenues of $17 5 billion.
A 14, 2% adjusted operating margin and assumed global vehicle production of approximately 98 million units.
When adjusting for current vehicle production of 83 million units the forecast would now be $15 $2 billion of revenue with an operating margin of 12, 6%.
Growth over market contribution was significantly higher than our 2019 forecast driven by the strength of our key product lines offsetting about 70% of the impact from the decrease in vehicle production.
The combination of price performance Labor economics, and investment are also favorable to the original long term forecast.
As a result after adjusting for the change in global vehicle production, the combined impact of Covid and supply chain disruption costs and recent material inflation total the difference between our current outlook.
And the prior long term forecast for 2022.
While we are proud of our disciplined revenue growth and operating performance over the past several years, we understand the importance of long term margin expansion.
We are confident that the COVID-19 and supply chain disruption cost.
Currently estimated at approximately $250 million will abate as conditions normalize.
And as we have discussed we are laser focused on developing offsets and mitigating the impact of material inflation over the next couple of years.
In addition, we believe that as underlying cost structure is well situated to drive incremental margins from the recovery in global vehicle production over the coming years.
With that I'd like to hand, the call back to Kevin for his closing remarks, thanks, Joe I'll wrap up on slide 15, before we open up for questions. Our commercial momentum is stronger than ever as we are able to leverage our unique brain and nervous system portfolio of advanced technologies to accelerate our customers' path to the fully electrified software defined vehicle in the future.
We continue to closely monitor the current macros, including supply chain disruptions and material inflation as well as the more recent war in Ukraine and Lockdowns in China.
Our team is doing an excellent job executing in this challenging environment, keeping our customers' product production lines connected while at the same time implementing initiatives to optimize our cost structure to help offset the macro headwinds all while we continue to invest in the development of advanced technologies, which we're confident will further enhance our competitive.
Position and increase the resiliency of our business model. Thanks again for your time and let's open up the line for Q&A.
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We will take the first question from Emmanuel Rosner from Deutsche Bank. Please go ahead.
Oh, good morning, everybody.
Thanks.
<unk>.
First one is on the <unk>.
The materials side could you provide a little bit of phone.
Some numbers in a little bit of color around.
What was the material pressure.
In the quarter on a net basis, what are you expecting.
For the full year and how that compares with previous expectation.
So on the year on the was inflation aspect of it Emmanuel.
Yes. Please.
Yeah total.
In the quarter call it right around <unk>.
$80 million.
For the entire business.
On a year over year basis. So that's the increase just the way the.
Price increases started to come in.
Over the course of last year, we really didn't see price increases in Q1, those tended to start at the end of Q2, and then build through the balance of the year right. So the year over year is going to be higher in Q1, just given that we.
In the Q1 of last year was more of a constraint issue than it was.
Constraint that inflation that we saw in the back in the back half year.
As you can see we're obviously doing a lot on a net basis to offset those costs. We talked about the original guide there being about $200 million little over 200 $205 million of net inflation.
That has sort of fallen through to the bottom of the guide that we were working to offset.
Round numbers that is still really what we're dealing with as I mentioned in my prepared comments, we have had some price increases.
Flow through during the current period.
But we've also been able to do a lot on the on the pricing sites at the moment, we're still really dealing with that net with that net number.
Which was some of the longer term.
<unk> redesign.
Chip swap out type initiatives that we needed to do so.
Again, I think as Kevin mentioned in his comments the team across the board the sourcing engineering team. The business team is doing a really good job of.
Of holding the line at this point.
Okay, Great and then looking forward I guess, you'll final slides comparing with.
Previous framework, given 2019 seems to be somewhat optimistic around the ability to recover or eliminated to offset some of these pressure on the NIM.
In the midterm.
Are there I guess what would be the process for this are there any additional recoveries you can have is some of it's contractual negotiation is it mostly on.
On the cost side I guess.
What would what would be required to sort of eventually claw back some margin pressure.
Yeah.
Yes, no listen I don't think it's exactly what we've been saying really for the past two or three quarters now there's nothing's changed is obviously commercial discussions with our customers around recoveries in price.
<unk> seen us execute on in Q1.
Continual pushed back on the supply base just around the reasonableness of.
The overall cost increases and the.
Availability of parts.
That is now I would say moving in as I, just mentioned to a redesign effort.
Where if we can't get to a reasonable economics with the supplier. We are looking at how to swap them out or at least introduce competition into that into that sourcing and I think theres a number of.
Even in semiconductors, the number of what I'll call a newer market entrants across the world that are going to provide some opportunity for that and we're actively pursuing that on all fronts.
And then part of it and again, we've had this muscle in the company for the last you know as you know for the past five or six years, where we're maniacal on the cost structure and we're again continuing to look at the cost structure and find ways if.
If we can directly mitigate the cost increases.
And other ways through through manufacturing or or <unk>.
SG&A performance to help offset them. So I don't think those levers of change really over the past.
Three or four quarters Kevin.
You covered it I guess the only the only thing I'd add to Joe's point is there is a portion of when you look at that performance inflation. There is a portion of the supply chain disruption that COVID-19 costs.
As things loosen up a bit would normally fall fall away to Joe's point.
The more challenging areas in and around material inflation, and that's an area, where we have a high level of confidence.
Based on our competitive position and our capabilities to be able to offset whether that be through negotiations or through product redesign efforts.
We will now take the next question from John Murphy from Bank of America.
Good morning, guys.
Hey, Jeff volatile Hey, guys just two.
Maybe a follow up on this I mean, the idea that the headwinds it has.
So dramatically and the <unk> guidance, you're able to hold it.
I understand there's lots of actions and negotiations that are going on.
Your partners below you on above you.
Could you kind of lead to much higher incrementals or margins.
As the world normalizes in stabilizes over time or is there some of this that is.
Somewhat temporary.
In dealing with.
The volatility at the moment.
Hi, Jonathan.
It's gone it's gone up a lot.
As I said in my prepared comments, it's over the next couple of years is that as it relates to material inflation right, it's not going to go away tomorrow.
But I do think at least on the material inflation side, the COVID-19 and supply chain disruption costs as we've talked about those should abate as things normalize so that'll be helpful to margin on a quantified that at about $250 million, we've bumped that up a little bit from the original just given some of the disruption in Q2 in China.
But still within a manageable number and it's non structural it's these types of sort of transaction costs debt.
That occur when you have to close plants quickly and such so.
As those cost debate and I think when you take a step and this is why we got a lot of questions on slide 14 in the deck and why we wanted to put the numbers out there.
I think when you've taken that have an appreciation for the fact that our original 2022 estimate was at 98 million units of production and we're now operating at 83 round numbers.
We start to work our way back there structurally the business I think is set up very well from a footprint perspective from a workforce cost perspective.
Five incrementals as volumes go up you never want to be a business thats completely reliant obviously on PON volumes expand margins, but it's going to be a positive tailwind over the next couple of years as we start to get back into the nineties on vehicle production, Yes, John I think if you look at the mix of business and the flow on the mix of business, it's more profitable today when you.
The material inflation and supply disruption.
One it was back in 2019, so to the extent you get normalization from an inflation standpoint, and stabilization of the supply chain you should see it.
Improved incrementals and lower Decrementals quite frankly, do you, saying yet weakness.
Yeah, Yeah. It just seems like you might be more of a coiled spring I wouldn't put those words in your mouth, but I might say that that might.
It might be appreciated on the on the margin recovery as the world Normalizes and that's that's some time off right.
We all know that.
Just a second question I mean on the business bookings I mean, you kind of highlight there record levels.
A lot going on in the World and just kind of a similar question, where everybody's a little bit distracted, but youre winning business like crazy and that's even before wind River.
It comes on I'm, just curious is.
Is this is this a timing issue or is there just.
A surge of new programs coming which it seems like it's the case youre driving those wins and then also as we think about wind river coming on.
<unk>.
How do you feel about the competitive set or you'd be going up against when you put wind river.
Products.
Software in front of.
Your your customers is it other suppliers or is it internal it and really what's the competitive set is your go to market there.
Yes, so it sounds like there's two parts to your question. So as you look at where we are from a funnel standpoint, new business opportunities endpoint.
Attributed to a couple of factors one.
When you think about our product portfolio and what we refer to as the brain and nervous system of the vehicle.
The via the.
Industry is aligned and virtually all Oems out there are rethinking vehicle architecture and are on a path towards a software defined vehicle. So we're seeing an acceleration of that trend that given the nature of our product portfolio. We're benefiting from in addition to that Youre seeing.
Youre seeing the acceleration of battery electric vehicles, which again, given our vehicle architecture capabilities and some of the other product areas that we're working on that we're seeing significant benefit from so the commercial momentum.
And the traditional portions of our business is stronger than it's ever been and then you overlay on top of it.
A kind of second and third generation of advanced Adas solutions in cabin sensing solutions.
User experience solutions that are more dependent on software capabilities, which inherently we have based on our legacy business and then you overlay the incremental capabilities that when river has an adult ultimately bring when they're a part of active.
There really isn't anyone out there with the same sort of competitive position and as we've talked about from a software standpoint, all of our customers are challenged by.
The level of software Thats going into the vehicle all of them are looking for help in and again, we feel like given the our capabilities and the nature of our product portfolio, where we're perfectly positioned to benefit from that trend.
We will now take the next question from Chris Mcnally from Evercore.
Okay.
Thanks, so much team.
I wanted to focus in on maybe the implied.
<unk> half margins versus first.
At first half and obviously I know you have a range, but you know given you.
You reiterated the full year, just the quick calc.
If I look at the.
At the midpoint.
Your guidance it implies sort of second half margins over first half or are over.
300 basis points better than the top end, which I think you know a lot of people will be curious since your cap would be almost a 150 to 200 basis points better so 500 basis points more which would imply margins in the 13% can you just walk us through that.
Since you said Q2 looks at Q1, what is so different about second half. We obviously you get better volumes, but how much of it is is known price recoveries and the lag.
It is hurting first half just any more qualitative on that because it's so stark second half versus first half.
Yes, Chris it's.
Joe I'll start and then Kevin can obviously add.
I think.
Youre right on order of magnitude.
I'd agree with you.
It's not a change from where we saw the year to be honest with you in February you, obviously didn't know about that.
Or the Ukraine in China, Covid, but it was tilted to that some of it is comps if you recall just.
The back half of last year August September October Covid in Malaysia, those were the low points from Ey.
Volume perspective, they were the high points from our cost disruption perspective, we had our eds plants closed the wire harness plants were closed for days at a time week. After week. After week. So we're picking up that benefit we're not assuming that's recurring and in addition to that.
You've got building volume growth as we as we go through building volumes as we as we start to go through some of the launches, particularly around things like user experience and there is some high voltage launches in the back half year.
And our price recovery.
Just the way the negotiations have worked with customers over the past three or four months or tend to be somewhat.
Back end loaded and that they start to pick up with the volume in the back half or back half of the year. So.
Not not a surprise to us was in and appreciate just given we didn't give quarterly guidance. It was it was harder for folks to say, but that that tilt was there in the existing guy now we've got a little bit more pressure on it.
If you assume a rough a rough Q2 in China, which we are but that market has demonstrated several times now its ability to rebound quickly and from everything we're seeing at the moment on the ground over there.
That's what we're assuming.
Yes, Chris maybe I'll add just taking a step back on Joe's comments, if I can just make one.
One comment.
So we manage through Covid, and 2020 and supply chain challenges in 2021 in Q1 of 2022 and at the same time.
Continued to advance our strengthen our product portfolio and all of that activity.
Benefited our customers because we kept in connected and quite frankly, our growth over market benefited our supply base right.
And all of that as it relates to active has created a tremendous amount of commercial momentum which has been in our bookings.
And our growth over market and.
To Joe's point as you think about it we have some structural initiatives underway, where we're quite frankly, reengineering, our alternatives and bringing in lower cost alternatives.
We're also leveraging the significant volume we have with the existing supply base.
We're selectively pursuing business just given the strength the strength of the funnel that's in front of US we can be very selective about the business we pursue.
And we're really focused on those customers, where we have a much more strategic relationship with and it's not a tactical relationship where we're fighting day to day about.
Yeah.
Price.
And all of that has translated into significant improvement as we roll out through the balance of the year and now we run into particular periods where.
Q1 to keep customers connected maybe broker buys were higher than than what we would like but as we look at the balance of the year and how we sit from a supply chain standpoint, we think even those sorts of disruptions are a reasonably manageable.
Perfect Kevin Joe.
Eight.
The vote of confidence can we talk about a little bit by division.
You referenced a lot of yet, but obviously, we'd be waiting for sort of the margin uptick in in.
And if I think about it on a two year basis your margins.
Second half of 2020 were in the call it eight 8% plus range for ASE.
That would seem to be implied again, if I just do the midpoint of your second half.
Because it.
We've now been in the single digit low single digits for ASU for six quarters I just wanted to confirm that both divisions would see that uptick.
Yes, both both do Chris Ias UX is.
It is a little bit more challenge, obviously, just given that that is where a lot of the semiconductor spend is right. So round.
Round numbers when I get it in place numbers, I mentioned that $80 million to Emmanuel.
Two thirds of that plus is hitting aas UX.
And what does head and Sps some of that is copper timing right because we're indexed on the metals by there so.
We would expect <unk> to finish the year.
Call it back to mid single digits.
So just like it's bearing a lot of that semiconductor.
Paying at the moment its going to receive the benefits of the commercial recoveries in price.
So we are targeting mid single digit for.
For the full year in <unk>, So obviously that would put us.
Closer to high single digits in the back half.
Perfect.
Yes, that's a bit more of a straighter trajectory.
Low double digits, now or just about low double digits now and it moves to sort of.
Mid double digits for.
For the.
For the full year.
And just as it relates super straightforward one.
<unk>, the plus 30% the industry it looks like it's growing 50%, 60% again, you have tough comps because of the great year last year, just any color you can talk about sort of the potential to have upside in high voltage and thanks, So much Steve.
Yes, it's growing really strong it is a tough comp I think.
<unk> was 128% or something last year growth, so you've got a tough.
Year over year, there's a couple of things there.
You know obviously, there was some European production disruption, which hits, which hits high voltage.
There was some China disruption in the back half, which obviously now has it hit high voltage.
Those are sort of the transactional things in the quarter Theres two other things.
I'd probably highlight there.
As Kevin talked about and just referenced we tend to be very selective right on who we're doing high voltage with.
We want to make sure theyre going to build the cars wanted to see them trends Oes that are going to transform their portfolio, where we're committing.
Long term to those platform. So as you see you know, particularly in other parts of the world in China as you see some of the smaller OE as you see some of the other platforms kick in.
Yes, we're selecting not to be on every car there obviously, but we've got great content, we're on about 50% of the launches over the next two years.
So that is what I would sort of frame as sort of a bigger picture item, but you did have some transactional things in the quarter that just given the importance of high voltage in Europe , and China, that's going to impact that number down.
Okay.
We will now take the next question from Mark Delaney from Goldman Sachs. Please go ahead.
Hi, Yes, good morning, and thank you very much for taking the questions I want to start with wind to better understand how the recoveries that you're seeing this year are being structured in a bit more about surcharges that are maybe temporary or perhaps a more sustainable change in place yes.
I'm, asking because I'm trying to better understand the ability of that Apple has to hold onto the recoveries you're expecting to see in two age as you head into 2023, and then hopefully make progress towards the 12% plus so longer term EBIT margin target yet.
Yes, Mark I'm, sorry, you were a little bit from a question standpoint, I think you were asking about.
Structurally how we see a path back to more normalized <unk>.
Margins.
Yeah, Paul I apologize I'm fighting a bit of a cold.
Yes, the recovery as Youre seeing in the second half of the year are those more surcharges that are may be temporary or are you structuring is.
More as a sustainable changes in how the products are being priced and I'm trying to get at.
To what extent can you hold on to this.
No no.
To the point that Joe made earlier when he walked through the several theyre all.
There are all permanent structural initiatives that that translate into either reduce costs from a permanent standpoint, and that can be done through price negotiations with suppliers.
Or engineering and lower cost solutions.
Which requires work between our engineering and sourcing organization or it's price discussions commercial recovery discussions with our customers.
All of which would be permanent and structural in nature.
Okay. That's helpful. And then I was hoping to follow up on was this redesign either chip suppliers you mentioned it several times on the call today, maybe you can remind us what needs to happen to go ahead with that in terms of testing of the system with a new chip.
Kind of software rewrites might be necessary, how long does that take.
But then you have just give me a sense of how far along you are in this effort in 2022, because again you spoke to multiple times now on the call. So it seems like you're having some good success.
Yes.
It's a great question it really varies by the nature of of.
The product.
There are some situations, although rare where it's a fairly easy switch with.
A minimal amount of validation.
Given the nature of where we play when you think about user experience. When you think about high voltage electrification advanced Adas solutions. The bulk of what we do require some element of reengineering and validation activities that take place at <unk> as well.
With.
Our customer those can range anywhere between six months to a year plus.
These have been initiatives that have been underway for.
Really since kind of early to mid 'twenty, 'twenty ones, who are well underway.
We have it's close to 100 engineers today, who are solely focused on that hardware redesign as well as to the extent software needs to be changed as you said software redesign.
Initiatives.
I think we had.
A little over 100 programs underway 50, as I mentioned in my prepared comments that have already been implemented.
And then another 15, which will be completed and implemented through the balance of the year.
So.
Most of it requires investment from an engineering standpoint.
And some element of time, but it's something that's been underway for.
A fairly lengthy period of time.
We will now take the next question from Joseph Spak from RBC capital markets.
Thanks, Good morning, everyone.
Hey, Joe.
How's it going.
I just want to go back to.
Holistically like to talk about some of the parts here because it sounds like.
Yeah.
There is more pricing recoveries assumed.
In your outlook than prior.
And your your light vehicle production or your via <unk>, 6% weighted to active sort of unchanged.
It would seem like the.
Sort of hold the guidance some of like the core or base our growth has to be.
A different assumption so.
Maybe you can just help us out with that with that sort of a puzzle and like how much of the recoveries is really helping the top line in your guidance now versus prior.
Yes.
Not really change Joe I mean, we did talk about at the time of the guide we've.
The economics were always in the guide they werent on the price line and I think we've talked about the reasons why we we did that because we're not necessarily sure. How are all of the recoveries are going to come from.
But no the economics remain fairly consistent with what was in the original guide which is in part how were are holding it like I said there are some some increases we're seeing coming through during the current year, but.
We've obviously got activities and we're able to absorb a little bit more of that so from a net economic basis really no change.
Listen on the top line assumption.
We haven't moved we're at approximately 6% understand theres a lot of movements.
<unk>.
The World is has effectively come down closer to 6% rate, we were I think probably a little bit more realistic at the start of the year.
And listen it's right yes.
As I mentioned.
They're most likely going to be some puts and takes in across regions.
You know our view was that we probably could the industry probably could have done more in North America to begin with if it wasn't for some of the supply chain constraints. So to the extent you get some softening in in Europe parts availability chip availability goes up because of the softness in Europe , We think North America could do potentially do more.
Or at least based on what we're hearing from our customers.
And then I said, our assumption around China.
As you know our assumption based on the feedback we're getting from our our teams on the ground and our customers. There is there they are expecting to recover pretty quickly.
From a you know what what is now a prolonged lockdown going into sort of mid mid second quarter. It started mid March right. So it's been going on for a while and that's that's a region and a part of the industry that has demonstrated several times now their ability to come back pretty quickly and pretty robustly. So that's that.
What we're currently assuming but really no no no changes in sort of net economics, we like I said in the original guide him I said in my prepared comments, we tried to think through.
What was realistically coming down.
[noise] coming down on us in 'twenty and 2022 from an inflation perspective, and what we're going to have to go do from a recovery perspective.
Okay. Thanks Rod.
And then Kevin.
You talked about.
The river, a little bit and obviously, you're always automakers are undergoing.
Big decisions about architecture and software they want to make sure all the boxes can talk to each other that's a refrain we're quite quite often I mean are you.
Are you really even though it's sort of not closed are you are you really able to have those discussions with the automakers. It sounds like you are and again like what maybe just a little bit more color on the receptivity.
Using our <unk>.
Solution like wind River, because you know, it's obviously a very.
Important and complex decision for the automakers, yes.
Yes.
So great question, Joe So.
Let's start with how we work with wind River. So as we mentioned when we announced the transaction our first step with Wood River was really reaching a commercial arrangement.
We are partnering on the development of.
Of middleware and.
Our software tool chain and today, we operate under the terms of that commercial agreements. So we jointly go to customers.
Discussing what we're developing and the capabilities that <unk> brings as well as the capabilities that wind river brands. So those those commercial engagements have been extensive.
With a very high level of interest.
I would say separate from that given our capabilities in Adas and user experience.
In the traditional areas of software kind of feature development software building blocks, where where we have a legacy or a history.
There are separate discussions going on there as well whether whether it's an OEM that we're also talking to about middleware and what we're doing with wind River.
Or not.
There is increasing demand of fuels.
Increasing need for support as it relates to their software activities.
So as.
As we talked about it it's a meaningful opportunity.
The bulk of the industry is really struggling with it and we feel like we're very well positioned.
To assist in the transition to the software defined vehicle.
Thank you.
We will now take the next question from Brian Johnson from Barclays.
Yes. Good morning, just wanted to follow up or two that related themes I've talked about this morning. So first first is around price recovery second just further drilling down into the.
Tier two issue.
So I'm just.
General price discovery.
If I'm running at OEM, it seems like I'm sorry.
Goodbye.
Requested by every tier one on Earth for recovery tier two pressures coming through to the extent, it's a direct Dubai. So just at what level of the OEM are you, having these discussions and kind of related to that as we've discussed over the years to what extent does your C suite access you're talking about the economy being able rectification.
Software defined vehicle.
Still retaining those cost recovery discussions.
Yes.
First Brian just to be clear I mean, our focus is on both reducing the cost of the input so theres a lot of activity.
With with our supply base. There is a lot of focus on how do we continue to reduce our.
Our own cost structure as well and then there are discussions with the OEM about price increases, especially in those areas, where we're seeing a tremendous amount of price inflation semiconductor is.
<unk> is a great area those discussions tend to take place at to your point the most senior levels within the within the OEM I'd say, we've had actually a fair amount of success in those discussions, especially with those Oems, where we have a more strategic long term folk.
<unk> relationship and.
The nature of what we do whether it's battery electric vehicles, whether it's advanced Adas Adas systems or solutions.
Those tend to be programs or initiatives that are much more long term in nature and require alignment between supplier and customer and I'd say, we're having more success.
With those particular customers, where we have those relationships.
And second a follow on to the questions of our semi conductor substitution in software is there actually a margin opportunity over the mid term to the extent you.
Swap out a semiconductor supplier with embedded firmware and replace that with active software that could be in that domain or zone or even a central compute sooner unit.
Yes, yes, absolutely and those are some of the initiatives.
We're working on now we don't have any.
In play or in place at this point in time, but.
That is a part of our whole SBA strategy and our whole software strategy, Brian . It's Joe you might recall as well and this is a couple of years out, but we did talk about you know over $100 million of synergies from wind River.
Which is in part taking out some of the some of the the middle where the.
Our task that we currently pay for from other suppliers and start to leverage or the wind river products. Once we own them now that's a couple of years out but that is somatic we consistent with what you were talking about as well.
Okay. Thanks.
The next question comes from Ryan Brinkman from Jpmorgan. Please go ahead.
Hi, Thanks for taking my question, which is on power electronics of course, the disposition of Delphi technologies materially increased your overall growth and margin profile, although I've been noting over the past year that the.
Power electronics piece of that fund powertrain business, which was I think transferred from the remain co just prior to the spin it's been winning a ton of awards and first for Inverters and now yesterday for battery management system. So obviously electrical architecture is very attractively levered high voltage now youre getting into even higher margin than other areas.
Like software with wind river et cetera, but I just wanted to sort of gauge your appetite or ability to participate in some of these.
Power electronics areas, which are high growth and where previously spawner, if I don't know maybe their non competes or other obstacles.
Good cause you to want to focus on other areas.
No Ryan it's a great question and I mentioned in my comments areas, where were investing so a number of customers.
Given our history and given our our capabilities in software and even in high voltage electrification have come to us with interest in the.
Power Electronics, and battery management systems space, and that's an area, where we've build out teams that are actually in the process of.
Working with OEM customers in developing those products solutions.
So it's an incremental opportunity.
For us today, and we would hope by the end of this year.
More commercial activity to be to be discussing on calls like this so thats something thats been underway for quite frankly, the last couple of years.
Yes, Bryan it's Joe we're not precluded in any way from that space and if you recall back in 2017.
I'm sorry in 2019, when we spun out.
Powertrain business. It was it was 2017.
Does the right. It was the right thing to do I mean, we were focused on making sure that business has had the ability to grow below.
Beyond its internal combustion footprint in <unk> and power electronics made sense there just given at the time, how it how it was sold into the customers, but not we're not precluded in any way from.
From participating in that part of the market.
Okay, great. Thanks sounds exciting what we'll be looking forward to update.
The next question comes from David Kelley from Jefferies.
Okay.
Hey, good morning, guys. Thanks for taking my questions.
You mentioned non autos is now 16% of revenues correlate with wind River closing soon the.
The macro has changed quite a bit since 2019, but you've been targeting kind of non out of those revenue mix at 25% I believe by 2025. So I guess could you update us on that goal and how youre thinking about the organic and acquisition opportunities to bridge the <unk> 16, but the 25.
Yes, David its shows I think over the next couple of years that we've got really good growth in that non automotive non automotive business, we think that closes the gap to call it almost 20%.
<unk>.
Now we've got the other product lines growing faster so it doesn't quite get to 20% organically. It's probably good news in that the other product lines or things like high voltage of continue to grow really fast but.
Still have some work to do on the inorganic side, we've we've talked consistently M&A strategy.
We will continue to include businesses like Winchester interconnect, which was non automotive and end up in a product line category that we understand really well or businesses like <unk> that have a really good balance of industrial and aerospace and.
And automotive so continue to focus both on the organic and inorganic.
We've always said that was a.
There was a high level target that was an ambition, we're not we're not going to take a big student body right just to hit that number but we think we're on a really good trajectory to get there.
Okay got it. Thank you and then maybe one quick clarification on banana autos business as well I think you noted revenue growth up 5%.
And S. NPS from non autos and I think you also mentioned CV and industrial product growth of 1%.
Elsewhere in the deck. So I guess bridging that gap is that all data com or is there. Some other factor we should be considering there no no no.
It's a little bit of a 5% total active.
Alright, so <unk> some commercial vehicle business and some recent launches that are that are growing quite nicely. So it's total active.
Sps was down 1% to 1% this quarter, which is low.
But impacted by primarily the China, the China shutdowns impacted that commercial vehicle space in the quarter.
Okay perfect. Thank you.
Yes, one other comment.
Just remind me the one other comment just that I mentioned this we did have that channel replenishment in Q1 last year in the engineered components business connectors and Halloween tightened.
Is that a part of that falls into that non automotive business. Obviously, we're replenishing the distribution channels. So you've got a little bit of a year over year comp that impacts non auto as well.
We will now take the next question from Italian Michelle Lee from Citi. Please go ahead.
Great. Thanks, Good morning, everyone. Just two questions from me going back to the second half margin.
Your implied margin is that a.
Good way to think about the go forward margin beyond 2022 are there any potential kind of onetime recoveries or benefits that we should be thinking about in the bridge beyond 2022, and then maybe for Kevin on the 50 projects for product Redesigns. It maybe.
Talk a little bit like what is the.
The cost savings from that and how big are those projects and the timing for some of the savings from those.
Yeah, Hi, it's Joe let me start with the question.
Not not going to quiet at this point in the year get into sort of exit exit margins are sort of run rates coming out of the end of the year I. The way I would think about it more for 2023.
Would be and what we're looking at is obviously, how does the COVID-19 in supply chain costs come down.
Over the course of next year.
And then obviously over the next couple of years addressing the material inflation I think things are still a little choppy to sort of take one quarter, one period of time and try to extrapolate for a year, but the margin improvement that we talked about first half to second half.
Would expect to sustain that go forward.
But I think it's a little choppy at the moment to sort of try to try to try to go out and take a stab at 2023 margins yes.
And to your question about those initiatives it varies.
Right.
Some are longer term as I mentioned in more complex some are shorter.
Shorter term and less complex when you think about savings do you think about the offset to the material inflation that we're seeing that we saw last late last year and in this year.
Plus the benefit of incremental volumes in the out years. So.
It's meaningful savings as the volume rolls out in the products replaced.
That's all very helpful. Thank you.
We will now take the next question from John Murphy from Credit Suisse.
Hi, good morning.
Morning, Thanks for taking the questions.
I wanted to ask.
Ask a couple of questions on <unk>.
On the disruptions, you're seeing in Europe , and China. So maybe we could just start with Europe .
Europe , maybe you could just be a bit more granular on the impact to us in PFS in Europe .
Hey, do you have any remaining operations in Europe , and I know you mentioned customers are paying for the move production, but maybe you can give us a sense of.
How much volume you've lost or.
Whether there's other linkages and is there any potential to take.
Take additional business from perhaps other competitors that are over indexed to Ukraine.
Yes, we have well maybe let's.
Bring it down so we have a facility in Russia, Russia is not operating at this point in time.
At least if you believe customer schedules their production should start picking up some time late.
Late this quarter, that's something that we'll watch closely.
When you think of Ukraine, and we've talked about this or you look at Ukraine, I think we talked about this in the past we have four manufacturing facilities.
Two of those facilities.
Production has been.
Fully moved again paid for by the customer up and running whether it be in North Africa Poland.
Serbia and existing footprint, so supporting Western European Oems.
We have two facilities in the very western part of the Ukraine.
That are operating at this point in time at very low production levels, but but but there is some production going on supporting.
One western European OEM.
Few Oems have come to us asking us to pick up volume pickup programs from other suppliers, who weren't able to move as quickly as we were able to move.
Those werent.
Just given where we were just given the economics of those werent situations. We we pursued and my guess is things continue to evolve we will have ongoing discussions with those <unk>.
And whether or not it makes sense for us to take over that business.
It has it has presented some potential incremental revenue opportunities.
Okay.
Net net it sounds like the the actual impact from.
What's going on in Ukraine has actually been more.
More limited is that a fair assessment, yes.
Revenue at Oi impact in the Grand scheme of things.
I wouldn't call it out separately, if we're in a situation where he of long term, China, Lockdowns and challenges in Ukraine and.
In Russia could be a bigger number but at this point in time.
Wouldn't get into specifics, we manage we've managed through it we started moving production before.
The constant from where actually started so we got ahead of it as I said, we had a couple of Oems who were very focused on it and we partnered with them we had existing space, we're able to move production pretty easily in and they supported us from a cost and logistics standpoint naturally doing that.
Even though locations, where we are in the western part of sort of a lot of the Polish Romanian border. We are that production will be moved there is there is the ability to manufacture those products.
In other locations those customers were just a little bit a little bit slower to respond in an.
To Kevin's point and one of the reasons, we're not talking about this as some other cost bucket. We just went with a if you want to move this is what it's going to cost.
And customers have have effectively agreed to that and are paying.
And maybe you could also give us a sense on.
And more specifically what is happening in China, right now and to what extent does your production than outright halted where does it stand today and I think we've seen in the past when your production is outright halted the decrementals start to get pretty <unk>.
Hughley, So why isn't this more of a pressure to the business. If you are having sort of outright production shut down.
I think Joe said it is a pressure near term depend.
Depending on the length of the Lockdowns I'd say at this point in time all of our facilities are up and operating.
Our engineered components facilities at a higher capacity utilization levels.
We have several facilities had never shut down we have a few in the Shanghai area from a wire harness standpoint, it actually did.
Those wire harness facilities are now on average.
Operating at a $50 to 60% capacity utilization level.
So there is an element of production that's actually taking place.
The question is does the situate.
How long do the situation stay as it is and we don't see ramp up in production or does the situation deteriorate deteriorate and we're just watching that very closely.
Yes, Dan it's akin to what we talked about last year, just different timing right. China's as I said in my prepared comments, we do expect Q2 to be heavily impacted.
That is a market our business team on industry are customers that have recovered quickly in the past.
There is time left in the year, whether this is this we're talking about a March April may not on November December type disruption.
And it was a little bit of the same dialogue, we had last year.
Depending on when the disruption occurs.
<unk> is still strong customers wanted by the cars inventory build.
Build the cars inventory levels at the dealers are still low so.
There isn't there is a desire by our customers to recover quickly and just given where we are from a point in time of the year.
And from what we're seeing from customer desires and our capabilities. We think we have.
Have the ability to if it if it is Q2.
And sort of stays contained within Q2, we do have the ability to recover the balance of the year.
Great. Thank you.
That will conclude today's question and answer session I would now like to hand back to Kevin Clark for any closing remarks.
Great. Thank you everyone for your time, we appreciate it have a nice rest of the day.
Okay.
Okay.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
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Sure.
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Okay.