Q2 2022 Aptiv PLC Earnings Call
Please standby were about to begin.
Good day and welcome to the second quarter 2022 earnings call. My name is Jennifer and I will be your conference operator today.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you Jessica Caracas, Vice President of Investor Relations and ESG you May begin your conference.
Thank you Jennifer good morning, and thank you for joining after the second quarter 2022 earnings conference call. The press release and related tables, along with the slide presentation can be found on the Investor relations portion of our website at <unk> Dot Com today's review of our financials exclude amortization restructuring and other special items.
I will address the continuing operations of Afghan.
The reconciliations between GAAP and non-GAAP measures for our Q2 financial as well as our full year 'twenty financial 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 maybe even she really different for reasons that we cite in our Form 10-K and other SEC filings include uncertainties.
By the COVID-19 pandemic, the ongoing supply chain disruption and the conflict between Ukraine and Russia.
US today will be Kevin Clark after the 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 with that I'd like to turn the call over to Kevin Clark. Thank you Jessica and thanks, everyone for joining us this morning.
Beginning on slide three.
Half of the year two themes stand out first is strong broad based demand across our portfolio of product offerings.
Reflected in over 20 billion in bookings during the first half of 2022, including a record 14 billion in the second quarter alone almost double where we were at this time last year.
The growth in bookings showcases our strong portfolio of technologies and the increasing strategic value, we're providing our customers as they transform to meet the consumer demand for the electrified software defined vehicle the <unk>.
Second theme relates to the persistent COVID-19 and supply chain issues that continue to constrain automotive production impacting our first half revenue growth and our profitability.
Looking ahead, we believe that these constraints on production and the record levels of inflation will continue for several more quarters it'll be addressed with actions that we already have in place.
Your challenges in Europe are being addressed with incremental measures, including another round of customer price increases and increased number of product Redesigns further consolidation of our supplier base and additional structural cost reductions all of which will significantly improve our profitability in the short and long term.
Setting aside the near term constraints I can confidently say that our competitive positioning reflected in our bookings momentum has never been stronger and will drive the acceleration of our revenue and earnings growth as vehicle production stabilizes.
So we're balancing improving our profitability and cash flow over the short term, while continuing to invest in those growth initiatives that will drive more meaningful margin expansion in the years ahead.
We'll talk more about these at our upcoming Investor day in Boston on February 14th by then or 2022 results and 2023 guidance will be out and we can update investors on our strategy to enable the fully electrified software software defined vehicle of the future and how that will accelerate profitable growth and improve.
Through cycle resiliency in the years ahead.
Let's now turn to our second quarter results revenues totaled $4 1 billion up 9% from the prior year driven by strong demand across our portfolio of safe Green and connected technologies.
Operating income and earnings per share totaled $213 million.22, respectively, reflecting strong revenue growth more than offset by material inflation incremental costs related to supply chain disruptions and shutdowns in China and some softening in vehicle production schedules in Europe .
Turning to slide four.
Revenue grew eight points over underlying vehicle production, which increased 1% in the quarter North America.
Production remained strong while Europe experienced significant weakness from a combination of semiconductor chip supply and macroeconomic factors.
China had a very strong finish to the second quarter. Despite a slow start due to COVID-19 related production disruptions.
While our team is doing an excellent job keeping production going in this very volatile environment. The challenges. We're facing continued to have a meaningful impact on our business with.
With supply chain disruptions and persistent inflation continuing to translate into incremental costs and the increased likelihood of disruption of the gas supply into Europe , we've accelerated several initiatives to increase our agility and resiliency and improve our profitability in the near term.
Moving to slide five the tremendous customer pull for our products has positioned us well in our pricing discussions for both new program awards as well as cost recoveries.
The pricing on new business bookings support our long term margin framework and as these bookings move into production it will naturally improve our margin profile.
Over the near term cost recoveries, we've already negotiated with customers and are coming in above plan will have a more significant impact on second half profitability for.
For context the <unk>.
<unk> of cost recoveries for semiconductor broker buys negatively impacted <unk> margins by 300 basis points in the second quarter.
It will benefit our results in the second half of the year.
And going second half of the year going forward all future premiums will be passed on to customers at the time of the transaction.
We continue to validate more second sources on key components and our passing through increased input costs to improve profitability in.
In addition, we're implementing additional overhead cost reductions and further rationalizing our footprint, which we expect to yield 100 million in savings in 2023.
We've also been working on several product redesign initiatives to both increase our sourcing flexibility and mitigate the impact of inflation. The benefits from these redesign initiatives will accelerate during late 2022 and into 2023.
We believe the current macro headwinds will along with your automotive growth cycle. So we are further optimizing our cost structure.
To position us for success in both the short and the long term.
That means executing these cost reduction actions, while still preserving investments in our highest growth opportunities including.
Including high voltage electrification active safety and smart vehicle architecture.
As well as our product redesign and validation initiatives that are important for increased resiliency and improve profitability.
Lastly, we're also excited about our software strategy and the many opportunities we see with the acquisition of wind River.
In summary, the resiliency of our business model has put us in a strong competitive position to capitalize on the megatrends of safe Green and connected.
Turning to slide six as reflected in the momentum of our new business bookings App does is clearly gaining a lot of transit traction.
Our unique position as the only provider of both the brain and nervous system of the vehicle has translated into significant towards significant competitive moat.
Allowing <unk> to provide full system level end to end solutions that enable an efficient path to the fully electrified software defined vehicle.
Our full vehicle, our full system level solutions and capabilities.
Optimizing vehicle architecture and allow for reduced vehicle complexity flexible and scalable platforms improve quality reliability and performance and translates into significant way mass and cost savings.
They also accelerate the vehicle development efforts of our customers positioning us to launch the first to market zone controller with volatile early next year.
Our smart vehicle architecture solution, not only creates accretive value for active but also lowers total systems costs for our customers.
Enabling more vehicle automation and the seamless integration of new features and functionality.
The recognition of the need for smart vehicle architecture is accelerating and is reflected in the 20 engagements with 10 customers and almost $5 billion of new business bookings today.
Demonstrating how active is uniquely positioned to lead the industry as a fully electrified software defined vehicle.
Moving to slide seven.
The momentum of our new business bookings during the first half of the year gives us confidence in our ability to sustain strong above market growth at or above our long term margin framework across both of our business segments.
Second quarter bookings totaled $14 2 billion a record for any quarter in the company's history.
<unk> safety and user experience bookings totaled a record $8 8 billion during the quarter, bringing the year to date total to $9 6 billion also a record for the full year.
Even though we're just halfway through 2022.
As we discussed on the previous slide we continue to make significant commercial progress at our smart vehicle architecture solution.
The advanced development programs, we've been involved in are translating into new business awards as evidenced by the large advanced zone controller booking during the quarter from a leading German OEM.
In addition to the Central vehicle Controller Award received in the first quarter from the same customer.
We're extremely excited about our continued deep strategic partnership with this customer as we redefine vehicle architecture with a full adoption of our SBA solution.
Bookings for our signal and power solutions segment reached $5 4 billion during the quarter, including another strong quarter for our high voltage product line with $1 billion in customer awards, bringing the year to date total to over 2 billion.
Our bookings momentum 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.
There is also a testament to our strong customer relationships are one active approach and our portfolio of advanced technologies, which is perfectly aligned to the safe green and connected Megatrends.
I'm truly proud of the work the team has done to continue to build strong relationships with our customers as a partner of choice for both the brain and the nervous system of the vehicle.
Turning to slide eight and our advanced safety and user experience segment active.
Active safety revenue growth remained strong up 21% during the quarter.
Driven by the continued penetration of advanced Adas systems, partially offset by semiconductor shortages impacting production in Europe , and North America and user experience revenues were down 6% in the quarter, primarily the result of continued chip chip supply constraint in Europe , and the impact of China shutdowns on volume, but we.
We expect to finish the year with approximately 10% revenue growth.
As mentioned, we continue to experience increased demand for smart vehicle architecture, and see a very strong pipeline of customer activity for the made for the remainder of this year and into 2023.
We've leveraged our competitive position to enter into strategic dialogues with several Oems and redesigning their software architecture. In addition to optimizing their vehicle architecture.
We offer unique capabilities to modernize software development and deployment to help our customers migrate to the software to five vehicles of the future, which unlocks additional opportunities to further enhance the value of actives and our customers' software solutions.
Active safety also continues to show strong momentum with more than $4 billion of awards in the quarter, including just under a 3 billion dollar award with a global OEM for their next Gen level two level three Adas system, reinforcing our leading position as the supplier of choice for this customer.
Moving to slide nine.
Second quarter revenues in our signal and power solutions segment rose, 10% nine points better than global vehicle production, reflecting high voltage revenues that increased 22% during the quarter driven by the launch of new electric vehicle programs, particularly in Asia, and North America and revenues in non automotive markets that increased 14%.
The result of strong growth in general industrial semiconductor Datacom and commercial space 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 to both design and manufacturer optimize vehicle architecture systems for customers located anywhere in the world.
In the quarter, we were awarded a high voltage architecture award with a major European OEM positioning us for substantial growth with this customer as they increase our electrification offerings over the next several years.
The strength of our competitive position and the size of our funnel for new programs gives us confidence in reaching over 4 billion of high voltage electrification new business bookings during 2022.
Moving to slide 10.
We continue to execute on our plan to build a business that delivers outsized results in any market.
We have the right safe green and connected product portfolio, the right regional and customer mix, the right cost structure and track record of execution and the financial flexibility that translates into a more resilient business model.
We'd hope Covid, it's associated supply chain constraints and production disruptions would be in the rearview mirror by now and that we'd be experiencing steady economic growth, but macro headwinds and other challenges do remain.
While these may persist for several more quarters, we expect to end the year with strong growth, while also expanding margins and I am confident we've taken appropriate actions that will allow us to finish the year on a strong footing with an even more resilient business model.
Any improvement in the macros or the supply chain will present potential upside from here.
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 second quarter financials on slide 11.
As Kevin highlighted the business reported another quarter of strong growth over market, despite the difficult operating environment.
Revenues of $4 $1 billion were up 9% with eight points of growth above underlying vehicle production, despite prolonged COVID-19 shutdowns in China.
The China shutdowns, which disproportionately impacted our Shanghai based customers negatively impacted our growth over market by approximately 1% in the quarter.
Adjusted EBITDA and operating income were $365 million and $213 million, respectively, reflecting flow through on incremental volumes and positive price in the quarter.
Offset by an increase in supply chain disruption costs related to the China shutdowns as well as higher levels of material inflation.
And the negative impact from FX and commodities, primarily related to the lower euro and changes in copper prices.
Earnings per share in the quarter were 22.
Reflecting lower operating income levels, while the EPS impact of higher interest cost was substantially offset by tax favorability.
The equity income loss of emotional had a 26% negative impact.
Lastly, operating cash flow was $95 million capital expenditures, increasing $80 million year over year to $207 million for the quarter.
Looking at the second quarter revenues in more detail on slide 12.
Increased volume was driven by strong growth over market across all regions.
Rising activity in the quarter was positive as we continue to make progress recovering higher input costs from our customers and as noted FX and commodity movements were net negative to revenue as compared to the prior year.
From a regional perspective, North American revenues were up 21% representing nine points of growth over market driven by continued strength in our active safety product line and our signal and power segment.
In Europe , we saw outgrowth of 9% as our active safety and high voltage product lines continue to benefit from strong demand.
However, during the quarter, we did start to see decreases in European production schedules, resulting from what we believe is a combination of supply chain constraints around semiconductors and macroeconomic concerns.
As I will discuss in a moment, we have also seen a reduction in European customer schedules heading into the second half of the year.
In China revenues decreased one 9% as a result of the shutdowns. However, we grew seven points above the market, reflecting the strength of our underlying product portfolio as well as the resiliency of our Chinese operations.
Moving to the segments on the next slide advanced safety and user experience revenues rose, 7% in the quarter, reflecting six points of growth over underlying vehicle production.
This includes growth in active safety, where revenues were up 21%. Despite the semiconductor supply shortages driven by program ramps in North America and Europe .
User experience was down for the quarter, primarily due to the impact of the China shutdowns and semiconductor constraints on certain larger programs.
As we've previously discussed the increases in semiconductor costs have significantly impacted the segment's profitability.
Segment, adjusted EBITDA was $14 million down $54 million compared to Q2 of last year.
Volume growth contributed approximately $18 million of incremental earnings representing a flow through of 33% and price was a positive one 1% versus prior year.
Offset by increased material input costs.
Signal and power solutions revenues were up 10%, representing 9% growth over market.
Our market outperformance was driven by continued strength in several product lines, including high voltage and engineered components.
Also our non automotive product lines, including commercial vehicle saw revenue growth of 14% for the quarter.
EBITDA in the segment was down $79 million in the quarter as flow through on volume growth and the impact of positive pricing in the quarter were offset by higher disruption costs, the impact of FX and commodities and inflation.
Turning now to slide 14, and our updated 2022 macro outlook.
We have lowered our estimate for global vehicle production to $81 5 million units on an active weighted basis, an increase of 3% over 2021.
The reduction of approximately $1 6 million units from our prior estimate primarily reflects decreases in second half customer schedules in Europe .
Smaller movements in North America, and China schedules substantially offset and do not have a significant impact on our outlook.
We believe schedule reductions in Europe reflect both macroeconomic concerns as well as constraints, resulting from semiconductor availability.
Although overall supply chain constraints Haddon and second half European production is up year over year sub component availability is a limiting factor on the pace of vehicle production ramps.
We would note that our European production estimate does not reflect any prolonged industry shutdowns related to energy or natural gas conservation actions.
We understand that there are contingency plans within Europe to slow or stop manufacturing operations for certain periods of time should there be a need to increase energy conservation heading into the winter.
Today, we have not received any direct communication from our customers regarding planned shutdowns and have not seen such actions reflect in customer schedules.
In addition, our resiliency teams are taking proactive steps to help mitigate the potential impact on our operations and supply chain for potential shutdown of <unk> European manufacturing sites and supply base.
Slide 15 summarizes our updated 2022 outlook, which excludes the impact of the wind River acquisition.
In addition to the changes in European vehicle production, we have increased our estimate of the total price recover recovery, we expect to receive in 2022 by $260 million, bringing the full year recovery to approximately $500 million.
We have also update our outlook for the lower euro and copper price both of which are down significantly from the original guidance.
As a result, we now expect revenue in the range of 17% to $17 $3 billion.
EBITDA and operating income are expected to be approximately $2, two and $1 $6 billion at the mid points.
We estimate adjusted earnings per share to be $3 30.
This estimate includes the impact of the wind River financing completed in February but excludes the wind River acquisition itself.
And we expect 2022 operating cash flow to be approximately $1 5 billion with capex continuing to be roughly 5% of sales.
Slide 16 bridges, our prior guidance to the current outlook.
Starting with revenue we have already discussed the progress we are making with price recovers.
<unk> offset by lower production volume of $505 million the.
40 of which reflects the European scheduled reductions we previously discussed.
Partially offset by our growth over market.
In addition, we're working plans to exit our Russian joint venture and have appropriately reflected this business as held for sale in the U S. GAAP.
Our original guidance included revenues of approximately $75 million for the JV.
The weaker euro and lower copper pricing represent another $480 million headwind to revenues and.
And as noted on the slide this assumption is based on the euro at parity and a $3 40 copper price.
Turning to adjusted operating income the incremental price recovery recovery effectively offsets the material cost inflation for the full year.
And although further input cost increases where possible we remain committed to offsetting such costs with additional customer customer price increases.
The decremental flow through in the near term schedule reductions of approximately 40% is consistent with prior short term production slowdowns.
And although significant to the revenue line, the FX and commodity moves have a relatively small impact on earnings.
Lastly, we have included incremental supply chain disruption costs, new or revised outlook, including the $30 million incurred in China in the second quarter.
As Kevin noted, we have taken cost reduction actions that have an annualized benefit of $100 million and start to take effect in the second half of this year.
In summary, although negatively impacted by vehicle production other macro factors and supply chain constraints, we continue to drive strong top line growth and improved performance.
With revenues of $17 5 billion up 13% from 2021 operating.
Operating income growth of 16% was 50 basis points of margin expansion.
EPS growth of 8% and operating cash flow growth of 25%.
Moving to slide 17, we wanted to finish with a comparison of our first half to second half performance.
Despite the difficult operating environment forecasted vehicle production is higher in the second half of the year and our leading technology portfolio will allow us to continue to drive growth over market.
Flow through on price recovery is higher in the second half of the year.
Results settlement timing with certain customers.
The FX and commodity impact reflects the previously discussed changes in the euro and the copper pricing.
And we expect strong performance, primarily resulting from the improvement in supply chain disruption costs versus the first half and the benefit of certain cost savings actions that began to take effect in Q3.
Consistent with prior years, the second half operating margin is not indicative of a full year run rate as the fourth quarter is historically stronger given the timing of certain customer reimbursements and some regional trends.
In addition, as noted certain price recovery and cost saving actions are higher in the second half versus a normalized annual run rate.
Our 2022, we would estimate the discrete second half benefit totals approximately $150 million, implying a more normalized operating margin rate of 10% to 10 10, 5%.
With that I'd like to hand, the call back to Kevin for his closing remarks, thanks, Joe turning to slide 18.
I'm happy with the bookings momentum, which will yield strong profitable growth in the years to come we.
We have work to do but we're making a lot of progress on several initiatives that will improve both earnings and cash flow in the near and long term.
As Joe discussed we are further optimizing our cost structure, increasing prices to offset inflation and attacking anything else that we can control or we can influence I'm confident these actions will translate into a significant improvement in second half margins and cash flow and provide a solid access point as we move into 2023.
More details around the progress on these initiatives will be presented when we provide 2023 guidance, but we clearly expect meaningful improvements in profitability during the coming months and relatively low vehicle production assumptions.
Thanks again for your time, and let's open up the line for Q&A.
Thank you if you'd like to ask a question signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to wire signal to reach our equipment again press star one to ask a question.
We will now take our first question from Joseph Spak with RBC capital markets.
Thanks, Good morning, everyone and thanks as always for the color.
Can we start on slide 17.
The first half second half.
Two things one.
<unk>.
The.
What's the confidence in sort of the 32% sort of incremental conversion.
Given some recent performance and then you know in the.
In the half over half performance.
Lower disruption costs of 166, I think thats, the right $50 million from China, We know right off the bat I guess whats the rest is that some of those discrete.
Recovery items, you talked about or if maybe you could sort of help.
Angola those buckets.
Sure. So Joe it's Joe I'll start so a 32% incremental I mean, we've been running.
Close to 30%, obviously more volume helps even as UX on at a volume level was 35% in Q1, 33% in Q2.
So at the volume level the product lines are flowing well.
And continue to high voltage is now a big contributor for Sps. So I would say that that level of flow through very consistent with what we've seen over the last few quarters.
Couple of things there.
On your 160 <unk> the question on the disruption caused the performance lower disruption costs.
We've got about $80 million of improvement first half to second half and disruption costs.
$30 million China.
<unk> is just the overall improvement and as you know we've talked in the past that.
The supply chain improves things like premium freight and some of those other costs, we will get better so that's $80 million in total.
Including the <unk> and you've got about 40, plus right around $40 million to $45 million of the cost saving actions hitting in the back half of the year.
Get us there and then you've got additional.
Additional performance improvements on some of the other initiatives, we are working at as well as.
Just sort of that natural back half favorability, we have in the business around things like NRA in some some stronger regional performance in Q4.
Okay, but you said those total.
150, so I guess I'm, having a little bit of trouble sort of understanding.
Totaling to the 166, unless I misunderstood the 150 comment.
You'd have 80 from supply chain disruption about 40 to 45.
The cost savings kicking in and then the others. The other sort of Q4 it strengthens the difference.
So volume.
Some timing as it relates to NRG and other items Joe Yes.
Okay.
I guess moving on just on <unk>.
On <unk>, so it sounds like going forward.
<unk> got more immediate recoveries for some of those open market purchases.
On semi.
And I think you said that was about a 300 basis point.
Headwind here in the quarter, so as we sort of go through to the back half of the year.
I mean, I think in the past you've sort of said that can get back to.
Mid single digits, or maybe even high single digits in the back half is that.
Everything else sort of going on and now that youre getting recoveries is that still sort of the the second half level for that segment.
Yeah, we back half achieve.
To achieve a high mid to high single digits for back half and exit the year.
Including Q1, and Q2, it kind of mid mid to slightly higher single digit margins for <unk>.
Okay. Thanks, I'll pass it on.
We'll go next to Rod Lache with Wolfe research.
Buddy.
<unk>.
So look there.
There's no question that the secular growth I, just wanted to get a better.
Sense of.
Margin trajectory from here.
<unk> previously talked about.
Bridge from your original margin targets, which I think were around 14%.
And obviously the numbers are pretty low right now, but was hoping you can maybe just give us a high level.
How these these margins recover.
Sort of Zip code.
Presumably part.
Part of that is a recovery to something like 99 point showed like $40 million of EBIT for 1 million units of upside in.
You've got growth over market, we add three over the next two years and 30%.
Just additional color either from that to $1 6 billion year or the 181 9 billion that you are implying is.
A normal run rate for the back half.
Yes, listen that Youre, breaking up a little bit so just.
Make sure that I fully understand your question with respect to margin trajectory.
Listen I think as it relates to the business model and flow through.
Nothing has changed we're in a period of time, obviously, where we're operating at much lower <unk>.
Vehicle production rate 81 million 81 million units material cost inflation is at record levels.
We're confident in our ability to get back to our old targets for overall margin our margin performance.
That's going to happen through continued revenue growth one to pushing through more material cost increases to customers.
Three from a supplier management standpoint, we're going through a significant amount of.
Supply chain activity, where we're consolidating the supply base.
We're engineering out.
Older solutions with new us principally semiconductor chip solutions, we're validating second sources, so that we have more optionality or choices for both our customers.
Yes.
As well as off for ourselves in selecting and selecting product.
And then we're aggressively going after our own cost structure.
So with all of those initiatives underway, we have confidence in our ability to ultimately hit those targets.
Say the aspect that that right now it's difficult to predict in this environment is the macro trends, especially as it relates to <unk>.
Vehicle production, what we see in Europe today versus what we've seen in Europe previously and continued strength in North America and a rebound in continue.
Continued rebound in China production.
So maybe you can clarify for us either from the full year guidance and.
Hopefully you hear me the $1 6 billion midpoint or you implied like $1 billion $98 billion nine.
At a tenant a tenant at percent sort of normal run rate in the back half.
So what what is the actual supply chain and COVID-19 costs that you're absorbing in those kinds of things.
Unusual engineering or absorbed material that has not yet been reimbursed.
Yes, right now rod.
The disruption costs with the increase in China, and some assumption in the back half a little bit more.
Is right around $300 million, obviously, a lot of that has been.
Incurred in the first half as I, just mentioned to Joe we're expecting an $80 million improvement first half the second half.
As that gets better but round numbers about $300 million.
Inflation that is I think still sort of flowing through.
That that we need to continue to get after is about $100 million. We've obviously got a lot of probably got a half a billion of price.
Built in.
And from that perspective of that $500 million price built into outlook, we've got customer commitments for 400 of it.
And 300 millions already under P O.
So obviously as Kevin said, we just got a little bit of work to do to finalize that but certainly.
That's a that's a big step forward from where we were at the end of the first quarter from a customer perspective.
And it actually we've been in corporate we've seen a fair amount of inflation occur over the course of the second quarter that to Kevin's point, where we're more real time now in terms of passing through those price increases so where we're able to start to get commitments from customers to offset that more quickly.
Okay.
That's helpful and then just lastly.
Can you talk a little bit about emotional.
Still a pretty big drag on the numbers as you pointed out.
Wanted to get a sense of your commitment to that and.
How should we should be thinking about that.
Sort of.
A year or two from now.
Should we be anticipating a larger drag should we be assuming that something changed structurally in that kind of timeframe.
Well, we're obviously still very committed.
Promotional from a from an <unk>.
Trajectory related to investment it will continue at current sort of run rates with.
With respect to commercialization.
I'm sure you've seen the Uber eats announcement, you know that we have the.
Lyft relationship you know that the <unk>.
Then two vehicles beyond the Lyft network.
In 2023 fully autonomous so from up from a overall technology and commercial standpoint.
<unk> remain on track, we continue to work closely with them on advancing our own internally des <unk>.
Solutions as well as providing them with <unk>.
Certain product and software solutions.
Enable.
Their autonomous driving stack so.
They remain on track we remain very committed.
You'll see a fully driverless vehicle on the Las.
Las Vegas strip in 2023, and the team is working on a number of other commercial opportunities to bring into fold with the technology on.
And we will continue continue to evaluate what we do from an overall monetization and funding standpoint.
The medium and longer term.
Okay alright, thank you.
Yeah.
We will go next to Emmanuel Rosner with Deutsche Bank.
Thank you very much.
First question I was hoping you can give us a little bit more color or final cornerstone.
What exactly you've been seeing in Europe , and what sort of like embedded in your outlook in terms of headwinds I guess surprises that going through this earnings season. So far this hasnt really been a message from sort of other automotive players in terms of.
This level of risk certainly if there is an energy crisis. This would be something else. But this is also not your base case scenario.
I am fairly major European automakers sounding more confident about.
Auto is recovering in the second half. So just was hoping if you could just give us a little bit of a finer point is it a function of your customer mix. It is a function of some of the chips you buy or is it really reflects.
<unk> seen a slowdown in Europe .
Yes.
Kevin and Joe.
To provide additional detail listen I. Thank.
Youre hearing mixed narrative on Europe right. The reality is there are Oems, who have raised significant concerns as it relates to <unk>.
So their outlook on the European macro situation and the impact on vehicle production. So I think as a general view in terms of what's going on in Europe .
There may be different players who have different views.
We obviously have concerned we obviously saw a significant downturn as the quarter rolled out.
Our played out in the second quarter of this past year.
So I would say underlying macro is a big piece. There is some element that relates to specific semiconductor availability that impacted us during the quarter. So that has some impact but we do think there is there is an underlying macro issue there that we need to keep our eye on and that's what's reflected.
In our outlook for Europe , which which are annualizing somewhat reflects that downside outlook that IHS actually.
Presented.
I'll just add a couple of things one on the semiconductor.
And the way the industry has been working through escalation, how you escalate with customers and how the customers engage with the semiconductor companies, it's pretty clear, it's just not us as the as the customers are raising concerns we know theyre talking to our suppliers and more broadly around that.
Escalating more issues in our availability, so I would say, it's not something specific.
Specific to App.
And.
As I mentioned in sort of the June update one of the things that <unk>.
Somewhat hard to tell at the moment is the split between semiconductor availability at macro one of the things. We are seeing is to the extent.
We ended the period with what I'll call back orders.
We are not seeing those back orders rescheduled into the second half of the year right. So it depends on what you want to call that that's getting that's inherently on a full year basis the schedule call down.
Theyre not theyre not looking to pick up the extra volume in a lot of cases in the back half that would have come from some of the supply chain constraints in the first half so.
We're seeing that we're all we are also seeing schedule reductions again, we don't think they're related to energy shutdowns at this point for my comments.
But we do have a number of European Oes that are lowering scheduled for the back half of the year at this point.
Okay I appreciate the color and then just following up on this.
Very big picture question is I'm still trying to understand really the outlook, you're describing but essentially if I look at your new outlook versus old one on slide 16, basically the biggest driver.
The lower operating income is essentially the market in primarily Europe as you're still reflect described but.
At the same time, you're still calling for a fairly strong second half.
And I would argue that the miss versus expectations, probably happened in the second quarter, where this sort of maybe operating income was maybe $100 million below where the street looked at and so it seems like on a full year basis, youre, describing some saying that at the macro level was getting worse in the second half.
In terms of your own dynamics and microeconomics. It seems like the second half is supposed to be actually particularly strong while a lot of the headwinds that have already happened.
Can you just go back over this and explain.
How you see things.
I don't think we're saying in its entirety of the second half is getting worse I think we're saying vehicle production as Joe said.
On a sequential basis and year over year in the second half will be better.
Europe .
We'll be week, okay. So so so and we believe you'll continue to see strength in North America and in China. There is a second half impact versus prior expectation as it relates to semiconductor chips of supply availability, so that puts some downward.
Word pressure on the amount of that sequential increase each one to age two but we're going to see improvement.
Disruptions will be down based on increased semiconductor availability, we're expecting inflation actually to be muted.
Second half versus first half again on a sequential basis. So it won't be a headwind like it was in the first half of the year.
Significant increase in cost recoveries from customers that Joe walked through and then the benefit from incremental cost reductions or cost actions that took place in the first half of the year.
So I.
I would characterize it as our outlook for the second half of the year is not as strong as it was previously.
From an overall volume standpoint, there are some markets that continue to be strong Europe , we think will be very weak and there are certain actions that were taken in the first half of the year that will flow through in the second half as well as certain things such as disruptions.
And inflation that will either be a tailwind in the second half or at least not a headwind.
Yes.
I understand your question, it's sort of the high level when you take a step back when you look at the individual regions.
And that's why we're calling out Europe , China was obviously down due to the shutdowns were actually making up a little less than half of the missed revenue from China in the back half of the year.
That's being offsetting some of the some of the deterioration in Europe North America is a little stronger in the back half of the year than we originally forecasted but again being.
You know being offset by by Europe . So.
Appreciate the comment, but I think when you look by region.
There is either sort of missed revenue being made up for in China Q2 versus <unk> and.
Some strengthening in North America that the downside is really within the European revenue number.
Yes, thanks, so much for all the color.
We will go next to Chris Mcnally with Evercore.
Thank you sorry to be a it's going to be a little repetitive, but I just wanted to kind of put together some of the comments and the questions have been asked so far so.
Pacifically on on Europe .
You are saying weak second half.
From Europe down 5% comment.
Most people are getting something like down production, 8% to 10% second half over first half is that sort of align with with what you have and then obviously the same for China I'm also getting down second half over first half something like <unk>, 3% when some forecasters have up 20% to 25%. So just want to make sure we're.
All on the same same page here because I think we're all would be asking the volume question over and over again.
Yes, so for the full year.
We have Europe at this point down 5%.
Which is a big move it would have been up 10 in the original guide.
So we have five.
Yeah.
Showing that we have down four.
We had that down in the original guide about a point and a half Chris So like I said, we're seeing some recovery.
From a revenue perspective, a little less than half of the revenues missed in the first half.
Scheduled to make up in the second half in China vehicle production is a little less than that obviously, we're given our growth over market will run higher on revenue.
And then North America is up approximately 10, we added up approximately 9% in the prior guide yes.
Yes.
I guess, Joe the main question and respecting that active has good insight into production you are one of every three vehicles right on on electrical I guess is a question.
Some of these the weakness that you are talking about when will sort of the.
The ground truth come out.
Is this Q3, where you think everyone else comes to you, but I will echo what Emmanuel just said as you are materially weaker than forget about the forecast is right that they're always wrong, but everyone else sort of right now on on Europe , and China in the second half. So just curious on that timing when do you think.
You will be proven right or others proven wrong is that is that in the next couple of months.
Yes listen we.
I think we operate off of what we received from our customers. Those that is what we use to forecast over a three or six month timeframe. So what we're signaling by region is what we're seeing in terms of the build schedules there are others, who use sources like IHS.
<unk> to build their operating or financial forecast, we use that for the long term, we don't use that for near term, where we actually have actual build schedules. So our view is you will see that play out.
During Q3 and Q4.
Okay.
Clear.
And then if we could follow up on on Slide 17, obviously the performance pocket the $1 66.
It is a big aspect of getting through the second half margins can you. Just I think the question was asked slightly different from RBC EBIT, how much of that would you say is sort of in the bag something like Covid in China, you know what that disruption cost was in Q2 and you're assuming it doesn't come back could you just kind of walk through to your confidence in that 166 number.
Which would.
Help us get to the sort of 12%, 12% plus margin number in the second half.
Yeah. So.
166, if you look at 80 is.
<unk> and Covid and supply chain disruption costs versus first half the second half, 30% is China going away 30, millions, China going away. So 30 of the <unk>, China going away.
Other 50 as a decrease in run rate from the first half.
Which again the world.
There's a lot we can still happen in the world, but based on what we've seen from the level of supply chain disruption and trends in premium freight trends and labor and downtime.
Yes, we obviously feel confident enough to put that 50 in the forecast. So that's 80 of that.
40, plus is cost savings. So those are basically head count that's come out over the course of the second quarter that will not be there in the in the third and fourth quarter in the back half so high confidence there.
Our balance.
Is what I'll call sort of the normal.
<unk> uplift in back half performance in the businesses things like customer NRA.
There is some strength in material and manufacturing performance in the back half of the year that just comes with some of the.
Sort of how volume flows through the plants and particularly in China at that time of year. So those are very consistent trends. We see every Q4 nothing to do with Covid and nothing to do with supply chain disruption not new that sort of normal business trends so on.
Obviously.
Fair degree of confidence in that number to put it in the hope I can't understand what to expect on the slide button, Okay, Chris It's Kevin.
Would say very very high level of confidence in all of those cost items that have executed or we've already executed or we're executing Joe said there is another roughly $100 million of price that we need to go after in the back half of the year, but we have enough confidence to put that into the forecast we've made a lot of progress.
Year to year to date.
We've brought the vehicle production outlook down to what we see from our customers schedule standpoint, so a high level of confidence in where that fits.
What could be.
A potential take would be.
Does the energy issue in Europe further impact vehicle production.
And bring those levels down beyond what we assumed that would would would be.
A headwind on the flip side to the extent, we see stronger growth in North America or in China, or we see a free app or additional supply of select semiconductor parts.
That would be a tailwind.
Where are we settled we have a very high level of confidence.
Okay. Thanks, Steve I'll follow up on the rest of the point.
Thanks, Chris.
We'll go next to David Kelley with Jefferies.
Hey, good morning, Kevin and Joe Thanks for taking my question, maybe following up on the SME issue discussion you noted the broker by step up I'm, assuming some of that was China disruptions.
But if we take a step back I guess are you seeing the number of problem category shrink at this point and maybe the shortages are increasingly isolated but still meaningful where we have them or is this kind of a broad step back and component availability that's taken place over the last couple of months.
But by and large.
Availability is improving.
We have one semiconductor supplier that I would say has been a challenge for us as well as others.
But I believe that's been an ongoing issue.
But overall, we're seeing the market and available availability actually improve we have seen inflation increase Joe talked about that.
That's something we're working through as it relates to Resourcing and.
I am pushing increased prices to customers.
But overall balance of availability the trend has been positive in general.
Okay. That's helpful. Thank you and then in light of the scheduled reduction you held the high voltage growth outlook here. So.
Maybe if you could speak to the customer prioritization there versus component availability, specifically in Evs, Joe you mentioned that the strong flow through you're seeing from high voltage. So how should we think about margin contribution from that relative outperformance.
Yes, I think no change relative to what what we've talked about Joe certainly has talked about in the past you will see very strong demand.
For high voltage electrification.
Solutions all of our customers are accelerating their plans as it relates to battery electric vehicles.
And the margin profile of that business continues to be.
Very attractive certainly higher than the average the weighted average from an Sps overall margin standpoint.
Yes, I think David from a margin contribution perspective, we talked about it before is it hit sort of a $1 billion at the.
The high voltage product lines that are got to segment average and would expect that to move up over time as you know you get to sort of 1 billion $5 $2 billion, Mark Sps segment average.
Okay got it thanks guys.
Thank you.
We'll go next to Eli Michelle Lee with Citi.
Great. Thanks. Good morning, everyone. Just two questions for me first going back to the go forward margin discussion I think you mentioned second half normalized rate of 10 to 10, 5% is that a good base to think about for go forward globalized app with incremental margins, maybe with some benefit from the restructuring.
Second Kevin I think in your prepared remarks, you mentioned that the bookings were coming at or above the long term margin framework I was hoping you could maybe elaborate a bit more on that kind of what youre seeing in the other terms and conditions of your bookings.
Sure.
I'll start.
That was a very specific comment that 10 10, five because we get that question a lot of we do run hot in the back half of the year from a margin perspective for a few sort of normal business things. So we wanted to provide people with what we thought a better baseline was on second half.
And sort of taking out the unique second half attributes and as it relates to new programs, we have a process as we pursue and.
And ultimately contract on these programs, where we roll through the <unk>.
Current environment from an inflation pricing cost cost standpoint.
The agreements or contracts are structured in a way where we have in the current environment more flexibility to change out.
Components or alternatives in far more flexibility to push price through to customers increased cost customers.
Doug.
Thats helpful. Thank you.
We will go next to it.
John Murphy as our last question from Bank of America.
Good morning, I'll ask two quick ones here guys. Just you mean first we think it's about slide 17 year. Joe you mentioned at 10 to 10, five you just alluded to with a tie.
The somewhat normal normalized second half margin.
If we think about what's going on in the World I mean forget about sort of the walks youre still at close to recessionary level volumes cost or inflation on raws is still near multi decade highs you have supply chain disruptions shortages of semiconductors.
The fact that you are putting up 10 to 10, five sort of normalize or even 11 nine 9% as you say you might print I mean shouldn't that give you actual really good confidence in the long term targets as opposed to some skepticism I think theres a lot of people are worried about these short term moving parts, which we have to worry about but it just seems like that kind of basis gives you should give you a lot more confidence in your.
Long term targets not skepticism.
Yes, I'll start Kevin can chime in I mean listen we're I.
I don't disagree with that comment John I mean, we're working through a lot and I understand there is.
There's a lot going on and we're sort of in year three of various forms of disruption, but I think we're as I mentioned it at the end of my comments I think to be able to grow at the rate we're growing.
There is the.
The margin expansion, we're seeing flow through on volumes remain very strong and.
The prices, we talked about the price discussion with customers. As you know has been a bit of a balancing act in terms of making sure. We maintain the relationships that can still with business while.
While protecting active so.
It is hard with everything going on but.
I mean that was certainly the attentions of my my final comments there in the prepared remarks I think we're.
We view the business given the conditions as performing well with that said, obviously you know us we would want to do better and we will work to do better as we go into next year, but there.
There is progress there is a lot of progress through difficult environment I don't know, Kevin if listen Joe I think Joe hit the nail on the head listen.
The team has made a lot of progress.
And is performing well in a challenging environment, however to Joe's point, we don't make excuses.
And.
We want to make sure that we're on a good exit point for 2022, so that.
We're able to deal with any other challenges that appear in 2023 and if they don't you see significant revenue growth and flow through on that incremental volume and we continue to work on our cost structure. We continue to work on our product portfolio and our value proposition to our customers.
We would tell you the pull from our customers in terms of our solutions, whether its smart vehicle architecture high voltage electrification and we would tell you now increasingly requests.
Our opportunities.
To present software solutions all of that is highly attractive.
But we're dealing with the near term near term macro challenges in Haiti.
That's what we need to deal with.
Okay, and then just a second question real quick on the bookings, which didn't get a lot of airtime here in Q&A.
Pretty massive.
Curious is there anything specifically or unique that you think was going on or should we start thinking about a run rate.
Something more more like with like this.
And what's the booking to realization sort of timing is that actually sped up versus history.
It's probably sped up a little Jon it's probably those bookings directly correlate to some of the advanced development programs, we've had on smart vehicle architecture with.
What we would say one of the leading Oems as it relates to rethinking vehicle architecture and the software defined vehicles. So it's the benefit of all of the work that we've done in the past we think it's likely there is more to come.
They are on a fast path to get that on vehicles launched over the next couple of years. So what used to be maybe a four year sort of cycle is now probably closer to a three year <unk>.
Cycle.
We're excited about it and again, we think it reflects the benefit of our broader portfolio and ultimately we're going to be able to drag with its software, which which again is higher margin and higher growth.
Great. Thank you very much.
And that's okay.
Thanks Mark.
Okay. Thank you very much everyone for your time today, we really appreciate it take care.
That completes our call. Thank you for joining.
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