Q3 2023 Aptiv PLC Earnings Call
Please standby.
Good day and welcome to the <unk> Q3, 2023 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Jean Luc Vice President Investor Relations and corporate development. Please go ahead.
Thank you good morning, and thank you for joining active third quarter of 2023 earnings conference call.
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 and will address the continuing operations of App just the reconciliation between GAAP and non-GAAP measures for our third quarter financials as well as our full year 'twenty 'twenty. Three outlook are included at the back of the slide presentation and the earnings press release.
During today's call, we will be providing certain forward looking information that reflects <unk> current view of future financial performance may be materially different for reasons that we cite in our Form 10-K and other SEC filings.
Joining us today will be Kevin Clark, <unk>, 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.
Call it to Q&A with that I'd like to turn the call over to Kevin Clark. Thanks, Jane Thanks, everyone for joining us. This morning, let's begin on slide three.
We delivered another strong quarter exceeding our expectations despite some headwinds.
On a few of the highlights new business bookings totaled $6 6 billion, bringing the year to date total to a record 27 billion.
Revenues increased 7% or $5 1 billion two points over the growth in vehicle production, reflecting double digit growth in <unk> revenues.
And S. P N S NPS revenue growth in line with global vehicle production.
The impact of the UAW strike in North America, as well as customer mix.
EBITDA and operating income were both records totaling $727 million and $560 million respectively, reflecting.
Solid flow through on volume growth and ongoing operating performance initiatives, partially offset by unfavorable FX timing related to customer recoveries and the impact of the UAW strike.
We expect continued sequential margin expansion as the headwinds related to supply chain disruptions continue to dissipate.
Customer recoveries are closed and the benefit from further cost structure actions take hold the team remains laser focused on continuing this trend in the fourth quarter and into 2024 and beyond.
Turning to slide four.
Touching on the key themes in macro trends that have had an impact on our operations. This year.
Our customer relationships and new business bookings are stronger than ever driven by robust demand for smart vehicle compute and software high voltage electrification and Adas solutions as.
As automotive Oems continue on the path toward fully electrified software to find vehicles.
We are their partner of choice delivering unique full system solutions that provide enhanced features and greater flexibility all at a lower cost.
We're also benefiting from the transition to the software defined future across several other industries with opportunities in the commercial vehicle telecom A&D and industrial markets.
Global automotive vehicle production has been stronger than we initially forecasted.
Easing supply chain constraints have led to fewer disruptions, enabling increased production.
Our strong year to date results and put us well on our way to reach the top end of the full year guidance. We laid out in early August however, the UAW strike, which affected the production schedules of our top three North American OEM customers has had an impact on both our third and fourth quarter results.
While tentative agreements have been reached with all three North American Oems there remains some uncertainty on vehicle build schedules as the Oems work to finalize their plans to ramp up production during the balance of the fourth quarter.
Our operating teams in North America are working closely with our customers and supply chain partners to help accelerate the ramp up of production and minimize any potential disruptions.
Moving to slide five.
As already mentioned new business bookings during the quarter were $6 6 billion.
Looking at our year to date total to a record 27 billion on track for our target of 32 billion for the full year.
Advanced safety and user experience bookings totaled $2 2 billion driven.
Driven by over 1 billion inactive safety awards.
Power solutions bookings reached $4 4 billion, including $1 1 billion in bookings for our high voltage electrification solutions split across geographies, bringing the year to date total to $4 3 billion already surpassing last year's record of $4 2 billion.
As William strategies around their vehicle architecture platforms evolve one constant will be the need for solutions that deliver improved performance at a lower cost and apt is perfectly positioned to leverage our full system capabilities.
To enable fully electrified software defined vehicle.
Turning to slide six to review, our advanced safety and user experience segment third quarter highlights.
Revenues increased 13% eight points above vehicle production. The result of a 30% increase in active safety revenues, reflecting strength across all regions as the launch of our level two and level two plus Adas solutions continue to ramp.
Operating income totaled $109 million, reflecting a seven 6% operating margin an increase over the prior period, but sequentially lower than the second quarter due to the seasonality of wind river revenues and the timing of customer recoveries.
New business bookings totaled $2 2 billion and included $1 2 billion of active safety customer rewards.
Putting a major award with a large German truck manufacturer.
Underscoring the strength of our high performance radar technologies and their applications outside of the automotive industry.
As demand continues to increase for more advanced active safety solutions are unique insights improve and domain expertise. So you shouldn't have to to deliver differentiated value to our customers.
Did that and we're excited to have recently launched our automated parking solution an additional feature to our AI ml enhanced <unk> platform to address complex parking scenarios.
<unk> unique solution enables fully modularized automated parking features that scale from level two to level four from auto parking assist and memory parking all the way to autopart delay.
Automated parking is one of the many features that we have under development and our Gen. Six Adas technology roadmap, which will scale to a full level three adas platform in 2026.
Turning to the signal and power solutions segment on slide seven.
Third quarter revenues increased 5% in line with global vehicle production.
High voltage revenues increased 13%, reflecting strong growth across all product lines.
We offset by customer mix in Europe, and Asia, and the impact of the UAW strike in North America.
The $4 4 billion in Sps bookings that I mentioned previously included a low voltage architecture award with a Chinese OEM demonstrating the progress were making further penetrating the local Chinese Oems.
Another strong quarter for Intercable automotive with $400 million in New business Awards, including a major award with a global customer in North America, reflecting continued strong commercial traction.
At a high voltage system award with a European OEM that includes products across our electrical distribution connection systems and inner cable automotive portfolios, demonstrating how our full system approach sets us apart from the competition.
Lastly, we're proud to announce that active has once again been recognized as an automotive pace award finalist.
Rapid power reserve solution is a groundbreaking technology that provides a highly reliable redundant power source for a variety of critical functions.
Eliminating the need for our low voltage battery and the vehicle significantly reducing weight mass and costs.
This recognition validates apt has industry, leading technology as well as the value and impact our continuous innovation provides our customers.
Turning to slide eight.
We're excited to showcase many of our new innovations at the consumer electronics show in Las Vegas in early January next year.
We will bring our vision of the future to reality, including vehicles without this after the smart vehicle architecture running applications for next generation Adas and in cabin user experience.
Vehicles with our complete portfolio of optimize electrical vehicle solutions purpose built for demanding power requirements and when rivers edge to cloud platforms supporting the latest safe green and connected applications from <unk>.
We'll be providing live demonstrations of how we're leveraging our deep insights into the brain and nervous system of the vehicle along with when rivers proven software technology to develop optimized and scalable solutions that meet OEM needs for performance flexibility and lower costs.
Moving to slide nine and recognition of our strong commitment to innovation operational excellence and sustainability. After was recently named by Newsweek as one of Americas greatest companies.
<unk> of our business strategy is directly aligned with our sustainability goals, we provide solutions at the highest quality designed developed and manufactured responsibly that enable a safer greener and more connected world in doing so we take care of our people and our communities, while minimizing our carbon footprint.
Sustainability is an enterprise wide commitment and I'm proud of our entire team for helping us to achieve our goals and ensuring that our company our customers and our planet continue to thrive.
Moving to slide 10.
Before I turn the call over to Joe to walk through the financials I wanted to touch on our current view of 2024.
Building on the solid foundation, we've established in 2023, we're well positioned for continued strong revenue growth and margin expansion. Despite the macro headwinds are.
Our safe Green and connected product portfolio is perfectly aligned to the demand for feature rich electric vehicles as well as the acceleration of the software defined future and adjacent markets.
Our advanced technologies and capabilities will continue to drive strong performance across multiple industries.
While some macro uncertainties remain we are confident in our ability to execute flawlessly in a dynamic environment.
With that I'll now turn the call over to Joe to go through the numbers in more detail.
Thanks, Kevin and good morning, everyone starting on slide 11.
As Kevin highlighted after we recorded another quarter of strong financial results exceeding our expectations.
The impact of the UAW strike in North America.
Revenue was up 7% to $55 $1 billion or 2% of underlying vehicle production, excluding the impact of acquisitions.
I will discuss shortly our growth over market was negatively impacted by the UAW strike in North America, as well as customer customer mix and program timing in Europe and China.
Safety and high voltage electrification reported strong double digit growth of 30% and 13% respectively.
And the UAW strike had a negative impact on revenue in the quarter of approximately $80 million.
Adjusted EBITDA and operating income were $727 million and $560 million respectively.
Reflecting strong flow through on increased volumes continued progress on our ongoing performance initiatives, including reductions in supply chain disruption costs that more than offset higher labor costs.
W strike had a negative impact of approximately $30 million and foreign exchange was a headwind versus last year.
Earnings per share in the quarter were $1 30, an increase of <unk> <unk> from the prior year, primarily driven by the higher operating income partially offset by higher interest expense.
Operating cash was $746 million a significant increase over prior year, primarily driven by higher earnings and improved working capital levels.
Capital expenditures were flat to prior year at $212 million.
Sure.
Looking at revenue in more detail on slide 12.
Revenue in the third quarter was $5 1 billion.
Reflecting sales growth of $299 million, representing adjusted growth of 7%.
The wind river and Intercable acquisitions added $153 million of revenue and net price and commodities as well as foreign exchange were slightly positive in the quarter.
From a regional perspective, North America revenues was up 10%, reflecting two points of growth over market at the UAW strike negatively impacted <unk> customer volumes relative to overall north American vehicle production in the quarter.
In Europe revenue grew 10% or four points above underlying vehicle production driven by strong growth in active safety, partially offset by program timing and slowing growth for certain platforms.
In China revenue was in line with underlying vehicle production due to our customer mix and slowing Bev growth.
As noted earlier, despite the lower growth over market, our Q3 adjusted growth and revenue were in line with our expectations.
The lower growth over market North America is consistent with the strike impact we experienced in 2019 and as we have said in the past growth over market will be lumpy given customer mix and program timing.
Moving to the <unk> segment on the next slide.
Revenue rose, 13% in the quarter or eight points over vehicle production.
The outperformance was driven by strength in active safety, where revenue was up 30%.
User experience was down 5% in the quarter, reflecting the timing of certain customer programs and a more difficult year over year comparison.
Price downs in the quarter were less than 1%.
Segment, adjusted operating income was $109 million up 35% when compared to the same period last year.
I need to expect our high voltage business to have a strong double digit growth in 2023.
Price down in the quarter with less than 1%.
Segment, adjusted operating income was $451 million in the quarter up 2% from prior year, including a $25 million negative strike impacts.
Operating performance, including lower supply chain disruption costs were positive in the quarter and offset the negative impact of higher labor costs.
Customer recoveries offset material inflation and the negative commodity impact in the quarter, while foreign exchange, primarily the peso and RMB continue to present, a headwind on a year over year basis. However.
However, the FX impact is in line with the updated guidance we provided in August.
Adjusting for the impact of FX in the strike adjusted EBIT margin for signal empower solutions were 13.3% in the quarter.
[noise] moving to cash generation and the strength the Baptists balance sheet on slide 15.
As we have discussed in the past or focus on cash flow generation in cash conversion is as disciplined as our operational improvement efforts.
The past quarter was a clear example of that as we saw the results of our efforts to reduce the higher working capital levels. We maintained during the recent supply chain disruptions.
Despite the operating challenges in North America, we were able to improve operating cash flow by over $300 million versus prior year.
<unk> cash flow conversion of 200 per cent in the quarter, and then ending cash balance of $1.8 billion.
Given the strong performance in October we Opportunistically pay down our $300 million term loan.
<unk> most expensive borrowing increasing our average tenor from 15 to 16 years.
As we have discussed in the past are sustainable business model is enabling us to convert more income to cash and we believe there is no shortage of attractive deployment opportunities as we continue to maintain a well balanced approach to capital allocation.
Including prioritizing organic investment of the business to support our portfolio advanced technologies and record the business Awards.
Executing our M&A strategy by focusing on transactions that enhance our scalability.
Accelerate our speed to market with relevant technologies and to access new markets.
Maintaining our current financial policy as it relates to our leverage profile and Opportunistically returning cash to shareholders.
I will wrap up with our full year outlook on slide 16.
Given our continued strong performance in a higher outlook for global vehicle production, we are maintaining our full year outlook for 2023, despite the impact of the North American strike.
Assumptions now under pending or outlook include.
Global vehicle production up 6% plus for the year versus the prior estimate of 4% driven by higher expected production levels in Europe and China.
No significant strike impact beyond October 2023.
During the month of October we experienced the negative strike in fact of $100 million in revenue and $50 million in operating income.
Alright, well consumes a restart of customer production and a return to priest prescribed production levels over the coming couple of weeks and no further meaningful disruptions.
Accordingly, we expect revenue in the range of $19 $95 billion to 22 $5 billion, including the impact of total loss striped revenue of $180 million.
I would note that while our revenue and adjusted growth rate remain unchanged give.
Given the queue for strike impact, we're forecasting our growth over market for 2023 to be below our long term forecast range of 8% to 10%.
EBITDA in operating income are still expected to be approximately $2.8 billion in $2.1 billion of the mid points, respectively, including total loss strike earnings of $80 million.
No change to adjusted earnings per share of $4.75 at the midpoint.
Operating cash flow of approximately $2 billion.
As Kevin will discuss further in his closing remarks, despite the macro challenges of the North American strike and a significant foreign exchange headwinds.
Let's focus on improving operating performance and cash flow generation has allowed us to continue to deliver in a difficult operating environment.
But that will have a call back to Kevin first closing remarks on Ah. Thanks, Joe I'll wrap up on slide 17, before we open the line for questions as Jonah of discuss we experienced strong underlying business performance in the third quarter.
Driven by further easing the supply chain constraints, which partially offset leering headwinds related to material and labor inflation unfavorable FX rates and the U a W strike in North America.
We continue to see tremendous momentum and new business awards and are well on our way to reaching our bookings target roughly 32 billion by year end while.
While our teams continue to work tirelessly to mitigate the impact of the U a W strike in North America, including the ramp up up North American production, we're executing on further cost structure actions to enhance our operational resiliency.
Our portfolio of advanced technologies, and strong operating execution gives us confidence in our ability to further strengthen our competitive position and deliver sustainable value creation for our shareholders.
Operator, now open the line for questions.
Thank you Mister Clark and you'd like to add.
Ask a question please signaled by pressing star one on your telephone keypads.
Using a speakerphone. Please make sure your immune function is turned off to allow your signal to reach our equipment.
Limit yourself to one question and one follow up question.
Taiwan, while we built that can we'll take our first question from jokes back from UBS. Please go ahead.
Hi, Thanks, everyone. Good morning.
Kevin show just first on on the the growth over market.
For the for the quarter and I guess I guess the outlook.
I know you said it was in part driven by the U a W. Strike I think it went from nine to five per cent that but that's you know that hundred million is like one point I think year over year and part of that is obviously just the industry not not just you're sort of growth over market. So.
Can you can you just sort of detail some of the other factors that are driving some of the the lower growth over market for the year and in the fourth quarter.
Yeah, Yeah. That's a good question so you're right you're right. There is the sort of numerator effect of what we're doing the bigger impact as the denominator right. That's a calculation so that that comes in after the fact relative to everything else that happened in the market.
So not only do we have the slowing of the D. Three where we do have about 65 per cent of our North American business.
But you have folks like jet that Japanese manufacturers that we don't have a lot of content on in in North America going up significantly. So you get you get the compounding effect of new afraid are coming down to the denominator going up you know.
For instance, just the the growth and the Japanese Oem's had a very strong Q3 that grow that impact was about four and a half five points against our growth over market <unk>.
One of the things we look at double check this math.
Sort of how did we do against the D. Three standalone, where we were up about 14% with the D. Three relative to their production so.
Definitely feel like particularly in North America is more of a market mix at the moment.
I did caution on full year, because we got to see how quickly that sort of unwind. The other places to look at if you look at Europe, and China. I mentioned, just you know high voltage is growing more slowly.
That was probably worth about a point of growth to us on a growth over market basis, we're still it's still contributing to growth over market, but less than the prior quarter's by about a point and then some program mix, particularly in Europe, just uhm infotainment down a bit and a quarter that some program timing, we expect infotainment to finish the.
E or mid single digit growth. So again it was more of a.
A quarterly impact, but you are right the relative market component of that drive that growth over market calculation as well.
Okay, and then I guess just to follow up as we think about.
Some of your you know mid term targets and you know you pointed out some of the slowing.
Bad penetration in the U S and in Europe, and I think this has been pretty well documented right now does that at all and I know you've taken a more conservative view of.
Penetration maybe than some third parties over the the mid to long term. So is this how does sort of the the more recent trends I guess compare versus you know what you you know laid out back into February animal style.
Yeah, Joe It's Kevin I listen I I think is Joel highlighted walk through then the the numbers.
Q3 has a lot of unique.
Circumstances, and it as it relates to growth over market and and and as we look at.
You know providing perspective on more precise perspective on our growth over market in the out years, we need to see how Q3 settles having said that.
You know, we still strongly believe we're very well positioned as it relates to growth over market, given where we operate.
You know electrification and Ada solutions are two of our higher growth areas, which we believe will continue to be high growth.
Understand the question in and around high voltage electron vacation and and.
And future growth rates, certainly Q3 was down relative to Q2 and Q1. This year I think we would say that is largely related or a significant portion of that impact is the strike issue and some of the other items that Joe talked about.
And then as you highlighted just a reminder, as we developed our electrification strategy, we very much focused on a select group of customers and had a much more conservative view on the overall market of electrification in the patient's penetration.
So long winded way of saying, it's too early to answer your question more precisely, but certainly to say we feel very very good about where we sit from a growth over market standpoint.
[noise], Thanks, I'll pass it on.
Thank you very much next we'll go to Rod Lash with Wolf Research. Please go ahead.
Good morning, everybody just you know.
Following up on on Joe's question, I know you've been a lot more conservative on high voltage in and then.
Then just about everybody in the market you had a 35 per cent penetration by.
By 2030, but can you just give us a little bit of maybe additional color on.
What your customer mix looks like within that backlog that was propelling the 30% annual growth just to get a sense of.
Is it.
Are you more exposed to the companies are are slowing down a bit or are you sort of more more dispersed among the amongst the faster growers.
Yeah, So I'll I'll start rod and Joe can fill in any blanks. So when you when you look at where where.
Where the majority of our exposure is with the European and the Chinese Oems, that's where the bulk of our.
Battery electric vehicle exposure is.
When we look at.
Near term.
Where we have those exposures are by and large on platforms that are bev platforms are dedicated embedded platforms. When we look out into the fourth quarter and into early next year, we're seeing very stable schedules as it relates to.
Production.
There is one exception with a north American OEM, who I think has been pretty public about their plan for electrification.
So that will have some impact nearer term.
But you know offsetting that are a number of Williams, who are in the midst of launching bed have programs that were on.
So high level, Kevin when you look at this.
In its totality do you do you feel like there's a material change to that original.
30 per cent that you were looking at or is it.
I guess, our question is not that specific but how how're you kind of viewing the expectation listen yeah. No. It's a great. Yeah, we feel really good about it I think there's an element of I don't think we ever guidance, 30% forever. So there's a law of large numbers right that we that we need to keep in mind will do just under $2 billion.
Of high voltage electrification revenues this year, I think a billionaire or billion nine. So so that business has grown significantly Q3, obviously was impacted by some of the dynamics of Joe talked about.
Without a doubt we will see some impact in queue for an early next year related to the OEM that I reference to his reducing.
That was scheduled on the flipside, we have a number of <unk>, where we look at current current production schedules what they have in place for queue for an early next year, where those schedules remains strong and then in addition to that we have a number of of programs that are coming online drink 2002.
Three four.
And the bulk of that activity is in China and is in Europe, two areas where.
We don't view any easier in C. O two emission regulations and customers really focused on how do they continue to to launch new best platforms.
Thanks for that and just lastly, obviously a lot of controversy around autonomous right now with cruise slowing down is hoping you can give us any updated thoughts on on your investment plans there with with emotional whether that's influencing your your thinking on that is this at all and then if Joe could just update US you originally had.
Like a 1.7 billion dollar performance and lower supply disruption.
Element to your 2022 to 2025 rich how much of that are you seeing this year.
Yeah, So I'll I'll I'll start so uhm nothing <unk>.
New to report out we're actively engage with our <unk>, our <unk> in terms of future funding.
As it relates to as it relates to emotional as we said in the past they are on track from a tech standpoint, and commercial standpoint, but we're gonna <unk>. We're engaged in discussions at this point in time, certainly well aware of what we're reading about we're seeing in the market. Those are certainly things that will will will consider as we make our ultimate decision.
Again, if we were to fund we would fund half of their cash needs. We haven't determined our plan are finalized our plan at this point in time I'm will be in a position to report that out when we announce earnings.
In February of next year.
Hey, Rhonda Jo just answer your question I think where.
We're tracking well if you you know if your call we had that on that walk I think you're referring to in the Investor day from the end of 22 to 25.
$1.7 billion a performance you know there was going to work to offset $900 million of flavor inflation, we talked about that being fairly fairly radical over the three years that wasn't sort of of 2025 thing. We're gonna <unk>, we're gonna make progress on that for the year I'd say twenty-three is tracking.
Very much to that sort of rateable rateable approach on both the cost side as well as the performance the price recovery side. So things are tracking well, obviously as we sit here today and I you know, it's it's it's sort of stayed at obviously within the comments I made right. We do have some higher <unk>.
Liam's, helping offset the strike impact, but for the most part of those performance initiatives are are coming through as plan and we're seeing that particularly on the opposite of the labour expense.
Thank you.
Thank you and next will go to John Murphy with Bank of America. Please go ahead.
Good morning, guys I've. Another another follow up on this <unk> <unk> I'm doing the penetration rate maybe be a little slower than people would expect it uhm Kenny you looked at Kevin and Joe I mean, as you look at this.
You know an optimist could say, hey, listen you know <unk> take a little bit longer and we're gonna run our programs as they just right now get better margins and returns in the interim generate more cash and be able to fund the future.
More robustly might.
<unk>, you know crossover market, a little bit but are already using casual might be a bit better.
That potentially.
True here and as we're making a capital commitments to these programs. You are you have the ability to kind of pago down reasonably quickly. So it wouldn't dent your returns and you'll get that benefit of maybe a slower role.
Yeah.
It is a great question, John and I'll start listen I, we still are believers in electro vacation and just.
Want to remind everybody in the second quarter of this year or high voltage revenue growth on a year over year basis was 48% in this quarter. It was 13.
And on a go forward basis, we think it more normalizes relative to where we were in the in the third quarter having.
Having said that you know as as we stated we've been we've been very focused on.
Having a a E V strategy that focuses on principally Europe and Asia Pacific China.
Principally Oems that have built <unk> platforms.
Those Oems who are taking global platforms from one region to another region in <unk>, focusing our investment in those areas, which in reality allows us to scale I mean, that's what that was one of our objective is just to make sure that to the extent, we're putting a capital that it scales that we get significant revenue.
And the bulk of those programs, we have scaling price relative to volume so to the extent and OEM does not achieve their particular targets, we have the ability to adjust prices.
And that's contractual so we protected ourselves that way and then to the point you made in our baseline outlook has never been that 50 per cent of the vehicles manufactured in 2030, we're gonna be battery electric vehicles.
We have a much lower outlook.
So we think we have it.
Ring fenced in balanced listen there may be a couple of quarters, where I mentioned, there's one O M. Who is is backing off their original scheduled where we will see any impact on our growth rate, but if things normalize we're still.
We're still optimistic about our competitive position here and and the growth opportunity in the margin opportunity presents.
John It's Joe the only thing I would add two and we've talked about this.
For a while right, particularly with the electrical architecture business.
You know, we we were able to leverage existing facilities existing equipment, an existing supply chain existing engineers logo with a high voltage the products are different but they're very complimentary. So you know for us and we've got obviously very large architecture business. So you know I think.
Leveraging that over the last couple of years has helped you know that product line get to segment of creative margins very quickly.
But it's also help from a return perspective right because we had a lot of that capital in plant and equipment in the ground.
Super helpful. Just one follow up on the wind river seasonality cause it did seem to we may have missed this and a quarter in our model and on our estimates could you. Just joke is kind of went through that I would just think about seasonality for wind River I know you talked about it earlier in the year, but just if you could remind us.
Yeah, we I mentioned it in passing in the guide they are and it's it's been there. It's in their business I think it's somewhat of a software business.
Phenomenon Q3 is just a very slow quarter for them Q2, Q4 tend to be the highest it's a highly leveraged model like a software business would be right. So software renewals licenses.
Tend to drop it you know it's.
80 per cent gross margin business. So they tend to drop it pretty high incremental rates. So we we had seen this we'd seen this in the prior years. That's why we cautioned in February and you know don't don't.
We're not we're not surprised by that so I think as you as you look at this and we talk about you know just you know the quarterly progression over the next couple of next couple of years I think this will be something that we see is recurring.
Okay. That's helpful. Thank you very much.
Thanks, Thank you will in Mexico to Adam Jonas with Morgan Stanley. Please go ahead.
Alright, Thanks, guys. So just look and follow up to.
Joe is an rods and merce question I'm Gonna head on this name as well the C V journey.
Legacy so it's just been an unmitigated disaster. So far I don't think you need to be pragmatic bostonians to see that to see through that.
With respect to like the inability to generate anything close to a reasonable return on capital and I don't see a path to it. So I'm just speaking for myself here guys, but.
It wouldn't surprise me and I suppose a lot of people on this call F. G M foreign and the Germans pull back there he'd be spending a lot time.
<unk> and I know, you're you're not gonna you're not in a position to answer.
The exact impact yeah. It's all it's all praise the question. This way if they did if in a world where they will be undisputed leader Tesla.
Dialing back and barely profitable themselves.
And others fall out and really just reset cause they can't sell what negative hundred per cent margins forever.
Can you tell us how much your those the 14th five per cent mid decade operating margin target or the over 17% longer term target.
There won't be a straight path there, but how much of those targets really depend on the pace and easy adoption to continue the way. It's the way you outlined even even conservatively outline in February 14th.
Yeah, I'll take a I'll I'll I'll start Adam I listen I I.
Alright.
We can we can take a look at a certain scenario like that just kind of feeling killing it back this year will do one for $1.8 billion in.
And high voltage R. E V revenues out of our roughly $21 billion in revenues and clearly the growth rate that we've attached to tie voltage electrification is higher than than our overall average growth rate. So certainly it would have some some impact.
Back there I think as we've as as we said a lot of these eev's Ah replacing vehicles.
Vehicles with internal combustion engines, most of which most of those Oems.
Where where we actually have the vehicle architecture content. So the trade off isn't dollar for dollar.
The high voltage content roll our margins related to the S. S. P. N F base margins is accretive by a couple of points from a margin right standpoint.
But it's not a matter where it's to ask.
So it's something that you know I I think we would manage through it would have an impact from a profit standpoint, I don't think it would have a huge impact.
Given with the margins look like and we would be going again, if these oem's aren't achieving their targets their prices are going up to the extent or significantly reducing their a one time payment from the <unk> as it relates to us reducing our capacity to produce the product.
So that's how how I think about it yeah I might agree with that assuming unit.
Production total unit production stays in line right it would be <unk>, we'd be swapping back too.
Content on the low voltage platforms, we've got content on one out of every three and a half vehicles manufactured into Kevin's point, you're looking at a point or two of sort of accretive high voltage that we'd have to work through but.
You know it there there are gonna be dollars that replaced that assuming the world continues to build the total number yeah <unk> inside I I kind of I I understand your question and it's a fair one <unk>. It's a good one I I do Russell with the industrial policies and they can always change.
Of.
Europe, principally maybe U S secondarily and that can change China, you know from a environmental standpoint, but from a national security standpoint technology standpoint.
But push for E d's and the impact on OEM profitability.
Yeah. There's a question I would ask for a scenario that I would throw out where.
That the Oems are going to be going to the government's wherever they are for support to continue the rollout so that they can achieve.
You know the industrial policies that those particular governments have right because all of this is tied to C. O two emission targets or national security and if Oems are uncomfortable or if the investment required is beyond which they can absorb and be profitable ultimately I think they're willing to look for some support.
Not too different from the semiconductor industry in the us and Europe.
I appreciate that Kevin and Joe just one quick follow up if I may I.
I just want to confirm that added on $1.8 billion are almost 2 billion of.
Well that of a high voltage sorry electric.
Portion of the.
Was it wasn't too sorry, other 2 billion more than you got one at 1.8, yeah. So at 1.8 I in a round number. Thanks Yep. Thank you just Wanna confirm that Tesla is the single largest component of that want to confirm that and then labor might've, how much of your sales of labor and what rate of inflation, you're seeing in real time. Thanks guys.
Yeah, I'm, the customer piece listen, where we can't talk about speak about specific customers. So so that's a question we're not going.
Going to respond to as it relates to labor I think I would focus on labor within the overall business drawing yeah, we've talked about it out and we add in the Investor Day 900 million dollar increase.
Between.
Evenly split over the three years that was about 10 or 11% increase and that's what we're saying.
Thanks, a lot.
Yep.
Next we'll go to Chris Mcnally from Evercore. Please go ahead.
Thanks, so much team.
Maybe we could just do a little housekeeping.
Kevin and Joe maybe I'm missing something but the 1.8 billion in high Eiffel <unk>, what what's the number you are using for for 22, maybe I, maybe it's been restated, but I think he had 1.2 billion in until you're old <unk> old slides could you just update though that's not guarantee two and 23.
Yeah, Okay. So that's gonna be revealing too.
Okay, and so that's actually and is that an increase any cause I think the previous number guided two on two two with maybe at 30 per cent increase so it looks more like a 50 per cent increase for high voltage for this year.
Chris It depends on what you're doing with Intercable right. We closed intercable end of last year. So.
Wasn't in last year call that a little north of $200 million of revenue. So.
Just thought if you're pro forward for it yeah, it's growing fast that if you did it and she got up so.
Oh that entertainment Yep.
Nope.
That's exactly okay. Thank you Joe Intercable, that's exactly what they're asking for and the second one just to follow up on on on that and you'll forget about talking about the the customer but the 1.8 is the only high voltage right. So if there was a large GB player that you mostly did low voltage for that that low voltage rep.
Even though it goes to an E b would not be in the $1.8 billion is that correct. Yeah. That's right. We talked about that we really wanted to focus on just the high voltage product line and that's when we started providing that guidance appears back. So that's just high voltage to the low and the low voltages.
Going in either vehicle right. So you don't really see a big either vehicle.
Yeah, absolutely and then and then the last one for Q4 cause I mean, obviously, there's a lot of movie currents in Q3 on on a S. U X I. Thank you you've talked about 89% margin for the year. It sounds like it's from the commentary extended.
Recoveries.
Put from Q3 to queue for the first is that 8% to 9% still pretty good even if it's the the low on because it it points to a nice material pick up in the I S. UE margins and I I think we've been sort of looking for that because that's a large portion of the the drive towards the 2025 calls.
Yep Yep Yep full year, the the current guide.
Would have asked you exit a and Sps at 11 six.
Perfect <unk> really appreciate it.
Thanks, Thanks for asking.
Next we'll go to each time and Shelley from city. Please go ahead.
Oh, great. Thanks, Good morning, everyone. Just a couple of thoughts for me first going back to the queue for March outlook I was hoping you could just kind of dimension.
Malady factors and then it looks like it'll be exiting closer to 13 per cent next strike just kind of curious how to think about the the baseline as as we looked at <unk> 2024.
And then the second question just I'm, hoping to talk more about the <unk> wins you had in Q3, maybe content per vehicle and also any updated discussions with customers Virginia six.
Yeah, I think if you look at you know.
Obviously stay away from 2024 at this point, but I think if you looked at.
I I sorta give our standard cautions right that focus more on H two versus Q4, because Q4 can be heavy with things like engineering recovery. So I think it's more H two adjusted for strike well listen as I you know if I.
You just go through the progression here and as I mentioned, a rod were clearly got the benefit of some volume increases offsetting strike.
But our margin rates at the segments.
As well as total call a <unk> total company, you're tracking to the original guide and that's tracking to that Investor day, Motorola and as I mentioned to Rod you know the the 1.7 billion of performance the $900 million flavor of falling and so.
If you go so I think we're on track if you're gonna start to look at back half I would I think H tunes, a better proxy than than just Q4, and then you obviously have to adjust to the strike.
And on conversations with customers about <unk> platform.
I would say we're in active dialogue with roughly a dozen.
Asian.
European and and North American.
So so ah interaction there in strategic dialogue is very very strong going very well as it relates to the Q3 bookings the bulk of those bookings were in a in a round radar solutions that were being there'll be plugged into to existing <unk> platforms with.
With Owens in in in Europe, and in China.
Perfect. That's all very helpful. Thank you.
Thinking next we'll go to a manual rosner. Please go ahead.
Oh. Thank you very much I was hoping you can help us frame and quantify the exposure to.
Electric vehicles, either either in terms of current revenue or more importantly, actually in terms of.
In the future growth of a market or a percentage of the backlog not just within high voltage, but generally speak English to your earlier point, you're selling global such components to like you know very you know very large easy manufacture and obviously a lot of the new programs over the next few years would probably have been a new on your <unk>.
For them, So and you wait you may be quantified when you're sort of like look at this outgrowths expected over the next few years, how much of that would have landed on the <unk>.
<unk>.
Yeah.
Oh, it's <unk>.
Kevin frame sort of how we're thinking about longterm right we were conservative.
I think we didn't sort of follow everybody down the path that is gonna be 50 per cent in the next couple of years. So from what we see now remain calm remain confident in that outlook. We do expect growth to slow. We we you know just get to the law of large numbers you can almost the 2 billion dollar business.
You know you Gotta see you're gonna see growth rate slow over time as I mentioned earlier.
If you look just over the past call at eight plus quarters high voltage is typically provided two points of growth over market round numbers, a little bit higher in certain quarters up to two and a half three but on average to this quarter. It provided a point of growth over market so meaningful but.
Not certainly not all of it.
And then you know 80% of the business at this point, including revenue with bookings as with the European and the Chinese So yeah. So we you know we had not historically gone down the path of the North American products. So at least the initial products I think we're very nishi right. They were the high end suv's is sort of more of the unique type vehicles, we have some.
Content on them, but they were by no means the bulk of the business. So I think I I think that should help that should help frame. It at this point.
Okay I I appreciate it.
The reason I'm asking for easy exposure outside of high voltages. There's a large seating supplier you know that would be the ideal lead the most powertrain ignostic product you could possibly so.
Slashing their backlog by 20 per cent because all these new seats. We're gonna go on you easy platforms, basically which are either being pushed out, though it's sort of like lower volume.
Yeah, I I can't speak for the sitting business, obviously like I said, we're 80 per cent European and and.
And Chinese concentration I'm, not I'm, not sure, who you're talking about or what their portfolio looks like no.
My comment was easy.
<unk> exposure outside of high voltage in any way to to frame that.
No I think we've provided what we're going to provide a minimum of.
Emanuel from our perspective vehicle architecture, just given the fact that we're on one of every three vehicles globally, if they're not building above they are building a vehicle with a internal combustion engine and more likely than that were on that vehicle so would that low voltage.
Would that low voltage vehicle architecture. So.
So for us I I would say that there's virtually no impact.
That's helpful. If I follow up is on I think you mentioned you can mix impact is sort of like a little bit of a headwind.
A quarter outside of just the the strike obviously in North America can you give <unk> a little bit more than the other region was it sort of like I.
I've been a customer mix, specifically and which region.
Yeah. It was it was customer mix Ah cross really all regions and some examples were kind of outsides outsized growth of the Japanese Oems across North America across Europe.
As well as some significant growth in parts of eastern Europe that are either products manufactured in eastern Europe or.
Or in places like China or export it so areas, where we we have less customer exposure.
So a lot of that we think is related to semiconductor rebound and availability of chips for select Williams.
And the other pieces the impact of or the opportunity as it relates to the U a W strike in North America for select Oems stuff, you know potentially gainshare.
Great. Thank you for the call.
Okay. Thank you and we will go to our last question from Dan Levy from Barclays. Please go ahead.
Hi, good morning, Thanks for <unk>.
Wanted to start with your fly 10, just that perspective on 2020 Ford here and and the bottom half. The size has continued inflationary environment geopolitical uncertainty maybe.
Maybe you could just unpack the inflationary comment that day, what is it that you're seeing that incrementally worse.
How does potential recovery on semiconductor cost factor in and maybe you can just talk about the potential for better stability and production schedules to be a potential tailwind next year.
Yeah. So yeah, it's Kevin I listen as it relates to stability in production schedules, where we're seeing that now I mean, there's some element of of disruption in COVID-19 that remains but we've seen a significant improvement throughout throughout the year.
Would expect availability continue obviously into 2024, so so should see some benefit there material inflation was significant in 2023, we expect in some areas, including semiconductors that will remain significant in 2024.
We're doing a number of things to address that one changing semiconductor partners really across.
All of the semi categories from <unk> like Soc's analog power P. Next to peripheral semi so a lot of work being done by our engineering and sourcing teens, establishing a commercial agreement through partnership with the.
The Chinese semiconductor space, which is ramping up capabilities very very aggressively and we're deep into that are going to take advantage of that opportunity both to.
To serve the China market as well as to bring some of these into the nine China market. So that will free up lower cost alternatives for ourselves and our customers.
As it relates to customer recoveries.
Listen those are always challenging discussions.
You know, but but given where.
Where we have contracts given where we are from a from a financial standpoint, we are passing 100 per cent of those costs on to the customer again, it's not a simple discussion it's not an easy discussion, but that's with a commercial team or how the operating teen is operating and that's something that will continue.
Due to the extent they are interested in some of these lower cost alternatives, there's an opportunity.
For us to jointly benefit and we'll put those in front of them.
But you know.
As of now that's kind of the states. So the material inflation is relatively high and then we're very focused on labour inflation.
In places like Mexico, Eastern Europe, North Africa. So those are is that we're watching very very closely.
And then last time I should say, it's not related to the specific inflation I'm material or drug labor, we're very focused on continuing to prune our cost structure to provide additional additional room and ultimately additional margin.
Great. Thank you and then just as a follow up on the <unk> side <unk> <unk>.
Two quick ones. There can can you just confirm and then you said, you're you're overweight to the European and Chinese China, We've obviously seen a lot of uptake, especially from B y D. How should we think about the <unk>. The Knicks impact if we see outsized exposure from the Chinese and then can you just confirm that an S V. A that that is.
Powertrain agnostic.
Okay.
Yeah S. C E is powered train ignostic.
It makes more sense, if an O M is rethinking and moving to a bad platform that is the time to really it's an easier time to implement in in and make that architecture change, but but it would be it would be.
Powertrain overall power trained ignostic as it relates to mix of <unk> customers I think it's relatively awash margins it might be a little bit higher.
<unk>, China OEM partners, given we tend to do more system solutions. There. So are are able to kind of connect a broader portion of our overall portfolio, but it wouldn't be it wouldn't be significantly different yeah. They're just current revenues and it's it's gotten it's changed over the last few years worry about 64.
<unk>.
Global versus local always from a revenue perspective today, you know that would've been north of 75 per cent global back in the 2018 2019 time frame bookings are running 50, 50, so we'd expect that to.
The increase in in favor of the locals and obviously just given what's being made over there are a lot of that's easy you know I think actually you'll get a revenue to mix I think 2024, it's it's almost 50 50 from a local multinational.
Great. Thank you.
And I'd like to I'd like to turn the call back to Mister Clark for any final remarks.
Mmk. Thank you offered thank you everyone. We appreciate you taking your time. This morning. Please let us know if you have any further questions. Thank you.
Thank you ladies and gentlemen that does conclude today's conference. We appreciate your participation have a wonderful day.
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