Aptiv PLC

Good day and welcome to Aptiv's first quarter 2022 earnings conference call. My name is Marion and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Thank you. Chris Tillett, Aptiv's Director of Investor Relations, you may begin your conference.

Thank you, Marion. Good morning and thank you for joining Aptiv's first quarter 2022 earnings conference call. The press release and related tables, along with the slide presentation, can be found at the investor relations portion of our website at Aptiv.com. Today's review of our financials exclude amortization, restructuring, and other special items, and will address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for our Q1 financials, as well as our full year 2022 outlook, are included at the back of the slide presentation and the earnings press release. During today's call, We will be providing certain forward-looking information which reflects Aptiv's current view of future financial performance and may be materially different for reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the COVID-19 pandemic, the ongoing supply chain disruptions, and the conflict between Ukraine and Russia. Joining us today will be Kevin Clark, Aptiv's Chairman and CEO, and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business, and Joe will cover the financial results in more detail before we open the call to Q&A. And with that, I'd like to turn the call over to Kevin Clark.

Thank you, Chris, and thanks, everyone, for joining us this morning. Beginning on slide three, Aptiv had a solid start to the year, showcasing our ability to continue to outperform in a volatile market. Revenues totaled $4.2 billion, up 4% from the prior year. driven by strong demand across our portfolio of safe, green, and connected technologies. Operating income and earnings per share totaled $324 million and 63 cents, respectively, reflecting continued revenue growth despite a decline in vehicle production in the quarter, more than offset by material inflation and increased operating costs associated with the ongoing supply chain disruptions. Highlights for the quarter include 11 points of growth over underlying vehicle production, with all regions reporting strong growth over market, driven by continued growth in our key product lines, which I'll touch on in more detail on the next slide. New business bookings reached $6.1 billion, the result of growing demand for our portfolio of industry-leading advanced technologies. As the world continues to grapple with the ongoing COVID-19 pandemic and the related supply chain challenges, Aptis Business has not been immune to the effects of the various disruptions. We continue to monitor the situation in Ukraine and lockdowns in China, which will impact the balance of the year. But at this point in time, we remain confident in our full year outlook. Our team is doing an exceptional job executing in a very fluid environment, working to mitigate the challenges we're facing. And our sustainable double-digit growth over market and pace of new business bookings during the quarter are a testament to our ability to continue to deliver for our customers. Turning to slide four, revenue growth across our key product lines continue to outpace the market. In our ASUX segment, active safety revenue growth remains strong, up 9% during the quarter, driven by the continued penetration of advanced ADAS systems. And user experience revenues increased 10%, the result of the launch of key infotainment programs in Europe and North America. In our signal and power solution segment, high voltage revenues increased 10% during the quarter, driven by the accelerated launch of electric vehicle programs, particularly in Asia and Europe. And our non-automotive revenues, which now represent roughly 16% of Aptiv's sales, increased 5%, the result of strong growth in the general industrial, semiconductor, and data comm markets. Our portfolio of advanced technologies aligned to the safe, green, and connected megatrends has uniquely positioned Aptiv to solve our customers' biggest challenges, which we've capitalized on to increase our market share with new customers, and expand our share of wallet with existing customers. Moving to slide five, consumer demand remains very strong, requiring us to proactively manage through the ongoing supply chain disruptions while also offsetting the increased material inflation. As I mentioned already, our team is doing an excellent job confronting these issues head-on and have taken several actions to offset the headwinds related to macro factors, including further reducing overhead costs, while selectively investing in initiatives related to high-voltage electrification, smart vehicle architecture, and software development. Our recently announced agreement to acquire Wind River, which we expect to close mid-year, has translated into several direct OEM engagements, including the commercial agreement with Hyundai that was announced earlier this week. We're also working closely with our supplier partners and our customers on several product redesign initiatives to both mitigate part shortages and offset material price increases, over 50 of which have already been implemented, and roughly another 50 will be implemented during the balance of the year. Lastly, we're making progress on other cost recovery initiatives, including price reductions from our suppliers and commercial recoveries from our customers, which have a more meaningful impact during the back half of the year. We continue to confront the supply chain and inflation challenges and are focused on strengthening the underlying resiliency of our business model and reaping the full benefits once these headwinds subside. As shown on slide six, first quarter bookings totaled 6.1 billion, the highest first quarter level over the last several years. Advanced safety and user experience bookings totaled 800 million for the quarter, in line with our expectations, representing the timing of customer program awards during the year. Notable customer awards during the quarter include a central vehicle controller for a European OEM. A funnel for new business bookings for the ASUX segment for the balance of the year remains very strong, with several ADAS user experience and smart vehicle architecture programs scheduled to be awarded. And the second quarter is off to a strong start, with over $3 billion of ADAS awards and a central vehicle control award with lifetime revenues totaling $1.5 billion. Bookings for our signal and power solution segment reached $5.3 billion during the quarter, including $1.2 billion in high-voltage electrification awards. The strength of our competitive position and the size of our funnel for high-voltage electrification programs gives us confidence in reaching over $4 billion of customer awards during 2022. Our strong track record of new business bookings is proof that our portfolio of advanced technologies is perfectly aligned to the areas of significant growth in vehicle content. And our unique position as the only provider of both the brain and nervous system of the vehicle is presenting Aptiv with opportunities to capitalize on the acceleration towards the electrified, software-defined vehicle. Turning to the highlights from our advanced safety and user experience segment on slide seven, revenues for the first quarter increased 7%. 14 points over underlying vehicle production, driven by strong product line growth and both active safety and user experience. As I referenced on the last slide, during the first quarter, we received a new business award from a leading German OEM for a central vehicle controller on the next wave of its leading EV platform. This award is another strategic win for our portfolio of smart vehicle architecture solutions and is a key building block for this OEM's new electric vehicle platform. which is fully aligned with APTA's design for smart vehicle architecture. Moving to slide eight, first quarter revenues in our signal and power solution segment rose 2%, nine points better than the declining global vehicle production, reflecting increased demand for high-voltage architecture solutions and continued strong revenue growth in non-automotive markets. Our industry-leading portfolio of power and data distribution, connectors, electrical centers, and cable management solutions, combined with our global scale, uniquely positions Aptiv to both design and manufacture optimized vehicle architecture systems for customers located virtually anywhere in the world. And as a proof point, a leading global electric vehicle OEM awarded Aptiv an additional vehicle architecture program to support their further expansion into Europe. In addition, we continue to support the growth of a German OEM's electric vehicle platform, and the award of this charging device underscores our strong market position in electric vehicle charging. The first quarter's new business bookings validates the value we bring with our system-level approach to optimizing vehicle architecture, which reduces vehicle weight and mass, thereby reducing costs for OEM customers. We remain confident that our competitive position, combined with the accelerating demand for electrified vehicles, positions Aptiv for profitable growth in the signal and power solution segment for the next several years. Turn to slide nine. Despite the current challenges, we remain focused on increasing the underlying resiliency of our business model to deliver sustainable value creation. Although the macro environment remains very challenging and difficult to navigate, we continue to focus on increasing the flexibility of our operating model by leveraging our advanced technologies for both the brain and nervous system of the vehicle, providing more content for the software-defined vehicles of the future, deploying capital to further strengthen our portfolio of faith green and connected technologies, including expanding our portfolio of software solutions to meet the increasing needs of our customers and intelligently diversifying our revenue base into less cyclical non-automotive markets, which will better position Aptiv for value creation from the acceleration of the trend towards a fully electrified software-defined vehicle, increased market share gains, and continued operational efficiency and cost structure optimizations. This translates into revenue growth, margin expansion, and cash flow generation, which can be reinvested in the business to create an even more resilient business model. With that, I'll turn the call over to Joe to go through the financial highlights in more detail.

Thanks, Kevin, and good morning, everyone. Starting with a recap of the quarter on slide 10, the business generated strong top-line performance while successfully navigating through several industry-wide operating challenges. Revenues of $4.2 billion were up 4%, 11% ahead of vehicle production, which was down 7% in the quarter. Adjusted EBTA and operating income were $478 million to $324 million respectively, reflecting strong flow-through on higher volumes and the benefit of savings and cost reduction actions. Price downs that were effectively flat year over year and the negative impact of supply chain disruption costs effects in commodities, and material inflation. Earnings per share in the quarter were 63 cents. Lastly, we had operating cash flows, outflows of $202 million, driven primarily by our decision to maintain a higher working capital investment to help, in part, mitigate the impact of supply chain disruptions. Capital expenditures were $247 million, driven by investments to support program launches across our key product lines. Looking at the first quarter revenues in more detail on slide 11, we saw growth over market in all regions, despite production disruptions in Europe from the Russia-Ukrainian war, as well as COVID-related shutdowns in China, which impacted the final weeks of the quarter. The FX commodity impact on the top line was minimal, as the pass-through of the higher copper prices to our customers offset the impact of the lower euro. As I previously noted, the negative impact of price downs was minimal, almost flat on a year-over-year basis. From a regional perspective, North America revenue was up 7% on an adjusted basis, or 8% above vehicle production, driven by our active safety, high voltage, and non-automotive product lines. European growth above market was 13%, despite a contraction in vehicle production of 18% in the quarter, led by strength in our active safety and high-voltage product lines, as well as the launch of several user experience programs. And lastly, in China, revenues were up 14% over a flat market as both segments posted strong double-digit growth despite the impact of COVID disruptions in late March. Moving to the segment recap on slide 12, advanced safety and user experience revenues increased 7% in the quarter, reflecting 14% growth over underlying vehicle production, including growth in both active safety and user experience. As we have discussed, the increase in material input costs, primarily semiconductors, has negatively impacted segment profitability. Segment adjusted operating income was $16 million in the quarter, down $52 million compared to Q1 of last year. Volume growth contributed approximately $25 million of adjusted OI in the period, reflecting flow-through of 35%, and annual price downs were effectively flat the prior year. A reduction in supply chain disruption costs and the benefit of higher performance and cost actions partially offset the impact of the previously mentioned material inflation. We are actively pursuing multiple paths to mitigate and or offset the material inflation costs impacting ASUX. In addition to commercial and pricing negotiations with our customers, we are also pursuing product engineering and redesign. A number of these activities involve the redesign of products to open up multiple supplier sourcing opportunities, primarily as it relates to semiconductors, including the sourcing of semiconductors from newer market entrants in all regions where we operate. Signal and power solution revenues were up 2%, reflecting nine points of growth over market, with meaningful outgrowth in all regions. We continue to see strength in high voltage, as well as our engineered components product lines. And the segment's reported growth comes despite a difficult year-over-year comparison, given the H1 2021 distribution channel replenishment we discussed last year. Adjusted operating income in the segment was down $98 million. as the flow-through and incremental volumes and the benefits of improved performance and cost-saving actions were offset by COVID and supply chain disruption costs, as well as the impact of FX commodity and material inflation, primarily copper pass-through timing and residence. The full-year outlook included on slide 13 remains unchanged from our original guidance provided in February. As noted in February, the full year outlook excludes Wind River, and that transaction is expected to close mid-year. We expect the Wind River transaction to be neutral to 2022 earnings per share. We believe the material inflation and continued supply chain constraints were substantially addressed in our original guidance. And although we are seeing current year increases to material costs, the actions we are taking with our customers, supply base, and cost structure are helping to offset the impact of these additional increases. As it relates to the more recent 2022 disruptions, we believe the second quarter will be significantly impacted by the COVID-related lockdowns in China. We are not providing a formal guide for the second quarter. However, we do believe it is possible that the second quarter is at or slightly below the first quarter revenue and earnings levels. As it relates to China, Assuming the COVID-related lockdowns ease during the second quarter, we currently expect that market to recover lost vehicle production in the second half of the year. With respect to Europe, as we have previously discussed, we have mitigated our direct production exposure to Ukraine, and barring a broadening of the conflict, we do not expect our other European production facilities to be impacted. Although we have seen softening in European vehicle production to date, We believe that lost production will either be rescheduled for later in the year in Europe and or offset by stronger North American production. Accordingly, we continue to expect revenue in the range of $17.75 to $18.15 billion, up 15% at the midpoint compared to 2021. This assumes global vehicle production growth of approximately 6%, with some shifting between regions from our original forecast. EBITDA and operating income are expected to be approximately $2.6 billion and $1.9 billion at the midpoints. We continue to estimate adjusted earnings per share to be $4.35 for 2022, an increase of 42% over the comparable 2021 total. And we expect 2022 operating cash flows to be just over $2 billion, with CapEx at approximately 5% of sales. Moving to slide 14, before I turn the call back to Kevin, we've received several questions recently regarding the long-term 2022 forecast we provided at our 2019 Investor Day. And we thought it would be helpful to lay out the changes relative to where we are today. As you may recall, our long-term forecast provided in 2019 estimated 2022 revenues of $17.5 billion, a 14.2% adjusted operating margin, and assumed global vehicle production of approximately 98 million units. When adjusting for current vehicle production of 83 million units, the forecast would now be $15.2 billion of revenue with an operating margin of 12.6%. Growth over market contribution was significantly higher than our 2019 forecast, driven by the strength of our key product lines, offsetting about 70% of the impact from the decrease in vehicle production. The combination of price, performance, labor economics, and investment are also favorable to the original long-term forecast. As a result, after adjusting for the change in global vehicle production, the combined impact of COVID and supply chain disruption costs and recent material inflation total the difference between our current outlook and the prior long-term forecast for 2022. While we are proud of our disciplined revenue growth and operating performance over the past several years, we understand the importance of long-term margin expansion. We are confident that the COVID and supply chain disruption costs, currently estimated approximately $250 million, will abate as conditions normalize. And as we have discussed, we are laser focused on developing offsets and mitigating the impact of material inflation over the next couple of years. In addition, we believe APTA's underlying cost structure is well-situated to drive incremental margins from the recovery of global vehicle production over the coming years. With that, I'd like to hand the call back to Kevin for his closing remarks.

Thanks, Joe. I'll wrap up on slide 15 before we open up for questions. Our commercial momentum is stronger than ever as we're able to leverage our unique brain and nervous system portfolio of advanced technologies to accelerate our customers' path to the fully electrified, software-defined vehicle of the future. We continue to closely monitor the current macros, including supply chain disruptions and material inflation, as well as the more recent war in Ukraine and lockdowns in China. Our team is doing an excellent job executing in this challenging environment, keeping our customers' production lines connected, while at the same time implementing initiatives to optimize our cost structure to help offset the macro headwinds. All while we continue to invest in the development of advanced technologies, which we're confident will further enhance our competitive position and increase the resiliency of our business model. Thanks again for your time, and let's open up the line for Q&A.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. Please ensure the mute function on your phone is switched off to allow your signal to reach or equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. But again, please press star one to ask a question. We will take the first question from Emmanuel Rosner from Deutsche Bank. Please go ahead.

Good morning, everybody. Thanks for taking the questions. First one is on the material side. Could you provide a little bit of some numbers, a little bit of color around what was the material pressure in the quarter on the net basis? What are you now expecting? for the full year and how that compares with previous expectations?

You're on the inflation aspect of it, Emmanuel?

Yes, please.

Yeah, total in the quarter, I call it right around $80 million for the entire business on a year-over-year basis. So that's the increase. You know, just the way the – Price increases started to come in, you know, over the course of last year. You know, we really didn't see price increases in Q1. Those tended to start at the end of Q2 and then build through the balance of the year, right? So the year-over-year is going to be higher in Q1 just given that we, you know, in the Q1 of last year, it was more of a constraint issue than it was constraint and inflation that we saw in the back half of the year. Okay. You know, as you can see, we're obviously doing a lot on a net basis to offset those costs. We talked about the original guide there being about $200 million, a little over $205 million of net inflation. That had sort of fallen through to the bottom of the guide that we were working to offset. Round numbers, that is still really what we're dealing with. As I mentioned in my prepared comments, we have had some price increases flow through during the current period. But we've also been able to do a lot on the pricing side. So at the moment, we're still really dealing with that net number, which was some of the longer-term product redesign, chip swap-out type initiatives that we needed to do. So, again, I think as Kevin mentioned in his comments, the team across the board, the sourcing, engineering team, the business team is doing a really good job of holding the line at this point.

Okay, great. And then looking forward, I guess your final slide comparing with the previous framework given 2019 seems to be, you know, somewhat optimistic around the ability to recover or eliminate or offset some of these, you know, pressure in the mid-term. I guess what would be the process for this? Are there any additional recoveries you can have? Is some of it contractual? Is it negotiation? Is it mostly on the on the cost side, I guess, what would be required to sort of eventually claw back this margin pressure?

Yeah, no, listen, I don't think it's exactly what we've been saying really for the past two or three quarters now. There's nothing's changed. There's obviously commercial discussions with our customers around recoveries and price, which you've seen us execute on in Q1. Continual pushback on the supply base just around the reasonableness of the overall cost increases, and the availability of parts. You know, that is now, I would say, moving in, as I just mentioned, to a redesign effort where if we can't get to reasonable economics with a supplier, we are looking at how to swap them out or at least introduce competition into that sourcing. And I think there's a number of – even in semiconductors, a number of what I'll call newer market entrants across the world that are going to provide some opportunity for that, and we're actively pursuing that on all fronts. And then, you know, part of it, and again, we've had this muscle in the company for the last, you know, as you know, for the past five or six years, where we're maniacal on the cost structure, and we're, again, continuing to look at the cost structure and find ways to, you know, if we can't directly mitigate the cost increases, find other ways through manufacturing or, you SG&A performance to help offset them. So I don't think those levers have changed really over the past three or four quarters. Kevin, did I... You know, you covered it.

I guess, I mean, the only thing I'd add to Joe's point is there's a portion of, when you look at that performance inflation, there's a portion of the supply chain disruption, the COVID costs that, you know, as things loosen up a bit, would normally fall away. To Joe's point... You know, the more challenging areas in and around material inflation, and that's an area where we have a high level of confidence based on our competitive position and our capabilities to be able to offset, whether that be through negotiations or through product redesign efforts.

We will now take the next question from John Murphy from Bank of America.

Good morning, guys. Maybe just to follow up on this, the idea that the headwinds have grown so dramatically since you last gave guys to be able to hold it, I understand that there's lots of actions and negotiations that are going on with your partners below you and above you. Could this kind of lead to much higher incrementals or margins in as the world normalizes and stabilizes over time? Or is there some of this that is somewhat, what, temporary, you know, in dealing with, you know, the volatility at the moment?

John, listen, I think, you know, it's going to evolve.

You know, as I said in my prior comments, it's over the next couple of years as it relates to material inflation, right? It's not going to go away tomorrow, right? But I do think, at least on the material inflation side, the COVID and supply chain disruption costs, as we've talked about, those should abate as things normalize. So that'll be helpful to March. And I quantify that at about $250 million. We've bumped that up a little bit from the original, just given some of the disruption Q2 in China, but still within a manageable number. And it's non-structural. It's these types of sort of transaction costs that occur when you have to close plants quickly and such. You know, as those costs abate, and I think, and, you know, when you take a step, and this is why we had a lot of questions on that slide 14 in the deck and why we wanted to put the numbers out there. You know, I think when you take, and I have an appreciation for the fact that, you know, our original 2022 estimate was at 98 million units of production, and we're now operating at 83 round numbers. You know, as we start to work our way back there, structurally, the business, I think, is set up very well from a footprint perspective. from a workforce cost perspective, you know, to drive incrementals as volumes go up. You never want to be a business that's completely reliant, obviously, on volumes to expand margins, but it's going to be a positive tailwind over the next couple of years as we start to get back into the 90s on vehicle production.

Yeah, John, I think if you look at the mix of business and the flow on the mix of business, it's more profitable today when you exclude the materials. what it was back, you know, in 2019. So to the extent you get normalization from an inflation standpoint and stabilization of the supply chain, you should see, you know, improved incrementals and, you know, lower decrementals, quite frankly, to the extent you have weakness.

Yeah, it just seems like you might be more of a coiled spring. I wouldn't put those words in your mouth, but I might say that then we might be appreciated. on the margin recovery as the world normalizes. That's, you know, that's some time off, right? We all know that. Just a second question. I mean, on the business bookings, I mean, you kind of highlight their record levels. You know, there's a lot going on in the world, and this is kind of a similar question where everybody's a little bit distracted, but you're winning business like crazy, and that's even before Wind River, you know, comes on. I'm just curious, you know, is this a timing issue or is there just – a surge of new programs coming, which it seems like is the case. They're driving those wins. And then also as we think about Wind River coming on, how do you think about the competitive set or you'd be going up against when you put Wind River products and software in front of your customers? Is it other suppliers or is it internal and really what's the competitive set as you go to market there?

Yeah, so it sounds like there's two parts to your question. So as you look at where we are from a funnel standpoint, new business opportunity standpoint, we did attribute it to a couple factors. One, when you think about our product portfolio and what we refer to as a brain and nervous system of the vehicle, you know, the You know, the industry is aligned, and, you know, virtually all OEMs out there are rethinking vehicle architecture and are on a path towards a software-defined vehicle. So we're seeing an acceleration of that trend that, given the nature of our product portfolio, we're benefiting from. In addition to that, you're seeing... You're seeing the acceleration of battery electric vehicles, which, again, given our vehicle architecture capabilities and some of the other product areas that we're working on, that we're seeing significant benefit from. So the commercial momentum in the traditional portions of our business is stronger than it's ever been. And then you overlay on top of it You know, a kind of second and third generation of advanced ADAS solutions, in-cabin fencing solutions, user experience solutions that are more dependent on software capabilities, which, you know, inherently we have based on our legacy business. And then you overlay the incremental capabilities that Wind River has and that they'll ultimately bring when they're a part of Aptiv. You know, there really isn't anyone out there with the same sort of competitive position. And as we've talked about from a software standpoint, all of our customers are challenged by the level of software that's going into the vehicle. All of them are looking for help. And, again, we feel like given our capabilities and the nature of our product portfolio, we're perfectly positioned to benefit from it.

We will now take the next question from Chris McNally from Evercore.

Thanks so much, team. I wanted to focus in on maybe the implied second half margin at first half. And obviously, I know you have a range, but given you reiterated the full year, just the quick calc, if I look at the midpoint, of your guidance, it implies sort of second half margins over first half are over, you know, 300 basis points better. And then the top end, you know, which I think, you know, a lot of people will be curious, you know, since you kept would be almost 150 to 200 basis points better. So 500 basis points more, which imply margins in the 13%. Can you just walk us through that, you know, Since you said Q2 looks like Q1, what is so different about second half? We obviously get better volumes, but, you know, how much of it is known price recoveries and the lag, you know, which is hurting first half? Just any more qualitative on that? Because it's so stark, second half versus first half.

Yeah, Chris, it's Joe. I'll start, then Kevin can obviously add. Listen, I think you're right. Order of magnitude, we'd agree with you. Yeah. It's not a change from where we saw the year, to be honest with you, in February. We obviously didn't know about the war in the Ukraine and China COVID, but it was tilted to that. Some of it is comps. If you recall, just, you know, the back half of last year, August, September, October, COVID in Malaysia, those were the low points from a... uh volume perspective they were the high points from a cost disruption perspective we had our eds plants closed the wire harness plants were closed for for days at a time week after week after week so you know we're picking up that benefit we're not assuming that's recurring and in addition to that You've got building volume growth as we as we go through Building volumes as we as we start to go through some of the launches particularly around things like User experience and there's some high voltage launches in the back half year and our price recovery Just the way the negotiations have worked with customers over the past three or four months or tend to be somewhat Back and loaded and that they start to pick up with the volume on the back half of back half of the year. So I Not a surprise to us, was in, and appreciate, just kidding, we didn't give quarterly guidance. It was harder for folks to see. But that tilt was there in the existing guide. Now we've got a little bit more pressure on it. If you assume a rough Q2 in China, which we are, but that market has demonstrated several times now its ability to rebound quickly. And from everything we're seeing at the moment on the ground over there, that's what we're assuming.

Yeah, Chris, maybe I'll just take a step back from Joe's comments, if I could just make one comment. So we managed through COVID in 2020 and supply chain challenges in 2021 and Q1 of 2022, and at the same time, continued to advance or strengthen our product portfolio. And all of that activity benefited our customers because we kept them connected. And quite frankly, our growth over market benefited our supply base, right? And all of that, as it relates to Aptiv, has created a tremendous amount of commercial momentum, which is in our bookings and our growth over market. And To Joe's point, as you think about it, we have some structural initiatives underway where we're quite frankly reengineering out alternatives and bringing in lower cost alternatives. We're also leveraging the significant volume we have with the existing supply base. We're selectively pursuing business, just given the strength of the funnel that's in front of us. We can be very selective about the business we pursue And we're really focused on those customers where we have a much more strategic relationship with. And it's not a tactical relationship where we're fighting day-to-day about, you know, price. And all of that is translated into, you know, significant improvement as we roll out through the balance of the year. Now, we run into particular periods where, you know, you know, like Q1 to keep customers connected. Maybe broker buys were higher than what we would like. But as we look at the balance of the year and how we sit from a supply chain standpoint, we think even those sorts of disruptions are, you know, are reasonably manageable.

Perfect. Kevin, I appreciate the vote of confidence. Can we talk about a little bit by division here? You know, you referenced a lot of SBS, but obviously we've been waiting for sort of the margin uptick in ASUE. And if I think about it on a two-year basis, you know, your margins in, you know, second half of 2020 were in the, you know, call it 8% plus range for ASUE. That would seem to be implied, again, if I just do the midpoint of your second half, because it's such a, you know, we've now been in the single digit, low single digits for ASUE for I just wanted to confirm that both divisions would see that uptick.

Yeah, both do, Chris. ASUX is a little bit more challenged, obviously, just given that that is where a lot of the semiconductor spend is, right? So round numbers, you know, when I give an inflation number, I mentioned that $80 million to Emanuel, you know, two-thirds of that plus is hitting ASUX. And what does hit in SPS, some of that is copper timing, right, because we're indexed on the metals by there. So we would expect ASUX to finish the year, call it back to mid-single digits. So just like it's bearing the cost of a lot of that semiconductor pain at the moment, it's going to receive the benefits of the commercial recoveries in price. So, we are targeting mid-single digit for the full year in ASUX. So, obviously, that would put us, you know, closer to high single digits in the back half.

Perfect.

And just – Because SPS has a bit more of a straighter trajectory. It's, you know, it's low double digits now or just about low double digits now, and it moves sort of mid-double digits for the –

for the full year.

Perfect. And, and just, this is a really super straightforward one. High, high voltage, the plus 30%, you know, the industry looks like it's growing, you know, 50 or 60%. Again, you have tough comps because of the great year last year. Just any color you can talk about, you know, sort of the potential to have upside in high voltage. And thanks so much, Steve.

Yeah, it's, it's growing really strong. It is a tough comp. I think what I don't know was 128% or something last year growth. So you've got a tough, Tough year over year. There's a couple things there. You know, obviously there was some European production disruption, which hits high voltage. There was some China disruption in the back half, which obviously now has hit high voltage. So those are sort of the transactional things in the quarter. There's two other things I'd probably highlight there. One, as Kevin's talked about and just referenced, we tend to be very selective, right, on who we're doing high voltage with. We want to make sure they're going to build the cars. We want to see OEs that are going to transform their portfolio, where we're committing long-term to those platforms. So as you see, particularly in other parts of the world, in China, as you see some of the smaller OEs, you see some of the other platforms kick in, we're selecting not to be on every car there, obviously. But we've got great content. We're on about 50% of the launches over the next few years. So that is what I'd sort of frame as sort of the bigger picture item. But you did have some transactional things in the quarter that just, given the importance of high voltage in Europe and China, that's going to impact that number now.

We will now take the next question from Mark Delaney from Goldman Sachs.

Please go ahead.

Yes, good morning, and thank you very much for taking the questions. To start, I was hoping to better understand how the recoveries that you're seeing this year are being structured, and is it more about surcharges that are maybe temporary or perhaps a more sustainable change in price? And I'm asking as I'm trying to better understand the ability that Afton has to hold on to the recoveries, you're expecting to see a 2H as you head into 2023 and then hopefully make progress toward the 12% plus longer-term EBIT margin targets you have.

Yeah, Mark, I'm sorry, you were a little bit faint from a question standpoint.

I think you were asking about, you know, structurally how we see a path back to more normalized margins.

Yeah, I apologize. I was fighting a bit of a cold. The, yeah, the recoveries you're seeing in the second half of the year, are those more surcharges that are maybe temporary? Or are you structuring these more as sustainable changes in how the products are being priced? Yeah, I'm trying to get at to what extent can you hold on to this better pricing?

Yeah, no, to the point that Joe made earlier when he walked through the several, they're all – They're all permanent structural initiatives that translate into either reduced costs from a permanent standpoint, and that could be done through price negotiations with suppliers or engineering in lower-cost solutions, which requires work between our engineering and sourcing organization, or it's price discussions, commercial recovery discussions with our customers. all of which would be permanent and structural in nature.

Okay, that's helpful. And the second thing I was hoping to follow up on was this redesigning of chip suppliers. You mentioned it several times on the call today. Maybe you can remind us what needs to happen to go ahead with that in terms of testing of the system with a new chip, what kind of software rewrites might be necessary, how long does that take? But then just give a sense of how far along you are in this effort. in 2022 because, again, you spoke to it multiple times now on the call, so it seems like something you're having some good success with. Thanks.

Yeah, it's a great question. It really varies by the nature of the product. There are some situations, although rare, where it's a fairly easy switch with a minimal amount of validation. Given the nature of where we play when you think about user experience, when you think about high voltage electrification, advanced ADAS solutions, the bulk of what we do requires some element of reengineering and validation activities that take place at Aptiv as well as with a customer. Those can range anywhere between six months to a year plus. These have been initiatives that have been underway for, you know, really since kind of, you know, early to mid-2021, so are well underway. We have, it's close to 100 engineers today who are solely focused on that hardware redesign as well as to the extent software needs to be changed, as you said, software redesign initiatives. I think we had a little over 100 programs underway, 50 as I mentioned in my prepared comments that have already been implemented, and then another 50 which will be completed and implemented through the balance of the year. So, you know, most of it requires investment from an engineering standpoint and some element of time, but it's something that's been underway for, you know, a fairly lengthy period of time.

We will now take the next question from Joseph Spake from RBC Capital Markets.

Thanks. Good morning, everyone. Hey, Joe. Hey, how's it going? I just want to go back to, you know, holistically like to talk about some of the parts here because it sounds like, you know, there's more pricing recoveries assumed in your outlook than prior. And your light vehicle production or your vehicle production outlook at 6% weighted to active is sort of unchanged. So it would seem like to sort of hold the guidance, some of the core or base outgrowth has to be a different assumption. So maybe you could just help us out with that sort of puzzle and how much of the recoveries is really helping the top line in your guidance now versus prior?

Yeah, not really changed, Joe. I mean, we did talk about at the time of the guide, we've, you know, the economics were always in the guide. They weren't on the price line. And I think we've talked about, you know, the reasons why we did that because we're not necessarily sure how all of the recoveries are going to come from. But no, the economics remain fairly consistent with what was in the original guide, which is, you know, in part how we're holding it. Like I said, there are some increases we're seeing coming through during the current year, but we've obviously got activities and we're able to absorb a little bit more of that. So from a net economic basis, really no change. Listen, on the top line assumption, you know, we haven't moved. We're at approximately 6%. Understand there's a lot of movement. You know, I think the world has effectively come down closer to 6%, right? We were, I think, probably a little bit more realistic at the start of the year. And listen, as I mentioned, there are most likely going to be some puts and takes across regions. You know, our view was that, you know, we probably could, the industry probably could have done more in North America to begin with if it wasn't for Some of the supply chain constraints, so to get some softening in Europe, parts availability, chip availability goes up because of softness in Europe. We think North America could potentially do more, at least based on what we're hearing from our customers. And then I said our assumption around China, which is our assumption based on the feedback we're getting from our teams on the ground and our customers there, is they're expecting to recover pretty quickly. from what is now a prolonged lockdown going into sort of mid-second quarter. It started mid-March, right? So it's been going on for a while. And that's a region and a part of the industry that has demonstrated several times now their ability to come back pretty quickly and pretty robustly. So that's what we're currently assuming. But really, no changes in sort of net economics. Like I said, in the original guide and some of my comments, we tried to think through you know, what was realistically coming down on us in 2022 from an inflation perspective and what we're going to have to go do from a recovery perspective.

Okay. Thanks for that. And then, Kevin, you know, you talked about Wind River a little bit and obviously all these automakers are undergoing big decisions about architecture and software. They want to make sure all the boxes can talk to each other. That's a refrain we hear quite, quite often. I mean, are you, are you really, even though it's sort of not closed, are you, are you really able to have those discussions with the automakers? It sounds like you are. And, and again, like what, what, maybe just a little bit more color on the receptivity to the, using a solution like Wind River because, you know, it's obviously a very important and complex decision for the automakers.

Yeah. No, it's a great question, Joe. So let's start with how we work with Wind River. So as we mentioned when we announced the transaction, our first step with Wind River was really reaching a commercial arrangement where we were partnering on the development of middleware and you know, a software tool chain. And today we operate under the terms of that commercial agreement. So we jointly go to customers discussing what we're developing and the capabilities that Aptiv brings, as well as the capabilities that Wind River brings. So those commercial engagements have been extensive with a very high level of interest. I would say separate from that, given our capabilities in ADAS and user experience, you know, in the traditional areas of software, kind of feature development, software building blocks, where, you know, where we have a legacy or history, there are separate discussions going on there as well, whether it's an OEM that we're also talking to about middleware and what we're doing with WindRiver. Or we're not. There's increasing demand, a view of, you know, increasing need for support as it relates to, you know, their software activities. So it's, you know, as we talked about, Joe, it's a meaningful opportunity. The bulk of the industry is really struggling with it, and we feel like we're very well positioned to, you know, assist in the transition to the software-defined vehicle.

Thank you.

We will now take the next question from Brian Johnson from Barclays.

Yes. Good morning. I just want to follow up on two of the related themes that I've had this morning. So first, first is around price recovery. Second, just further drilling down into the Tier 2 issue between the semis and farmers. So first, just general price discussion. If I'm running an OEM, it seems like I've been assaulted by or, excuse me, requested by every Tier 1 on Earth for recovery, Tier 2 pressures coming through to the extent it's directed by. So just at what level of the OEM are you having these discussions? And kind of related to that, as we've discussed over the years, so what extent does your C-suite access, you know, talking about autonomy, electrification, software-defined vehicle, facilitate those cost recovery discussions?

Yeah. Well, first, Brian, just to be clear, I mean, our focus is on both reducing the cost of the input, so there's a lot of activity. With a supply base, there's a lot of focus on how do we continue to reduce our own cost structure as well. And then there are discussions with the OEM about price increases, especially in those areas, where we're seeing a tremendous amount of price inflation. Semiconductor is a great area. Those discussions tend to take place at, to your point, the most senior levels within the OEM. I'd say we've had actually a fair amount of success in those discussions, especially with those OEMs, where we have a more strategic, long-term focused relationship. And, you know, The nature of what we do, whether it's battery electric vehicles, whether it's advanced ADAS systems or solutions, you know, those tend to be programs or initiatives that are much more long-term in nature and require alignment between supplier and customer. And I'd say we're having more success with those particular customers where those relationships.

And second, a follow-on to the questions around semiconductor substitution and software. Is there actually a margin opportunity over the midterm to the extent you swap out a semiconductor supplier with embedded firmware and replace that with active software that could be in a domain or a zone or even a central compute unit?

Yeah, absolutely, and those are some of the initiatives that we're working on now. We don't have any in play or in place at this point in time, but that is a part of our whole SVA strategy and our whole software strategy.

Brian, it's Joe. You might recall as well, and this is a couple years out, but we did talk about over $100 million in synergies from Wind River, which is in part taking out some of the middleware, the RTOS that we currently pay for from other suppliers and start to leverage the Wind River products once we own them. Now, that's a couple years out, but that is thematically consistent with what you're talking about as well.

Okay, thanks.

The next question comes from Ryan Brinkman from J.P. Morgan. Please go ahead.

Hi. Thanks for taking my question, which is on power electronics. Of course, the disposition of Delphi Technologies materially increased your overall growth and margin profile, although I've been noting over the past year that the power electronics piece of that spun powertrain business, which was, I think, transferred from the Remain Coaches prior to the spin, it's been winning a ton of awards, first for inverters and now yesterday for battery management system. So, you know, obviously electrical architecture is, you know, very attractively levered to high voltage. Now you're getting into even higher margin, other areas like software with wind river, et cetera, but just wanted to sort of gauge your appetite or ability to participate in some of these power electronics areas, which are high growth and were previously spun or I don't know, maybe they're non-competes or other obstacles, which could cause you to want to focus on other areas.

No, Ryan, it's a great question, and I mentioned in my comments areas where we're investing. So a number of customers, given our history and given our capabilities in software and even in high-voltage electrification, have come to us with interest in the power electronics and battery management system space. That's an area where we've built out teams that are actually in the process of working with OEM customers in developing those product solutions. So it's an incremental opportunity for us today, and we'd hope by the end of this year have more commercial activity to be discussing on calls like this. So that's something that's been underway for, quite frankly, the last couple years.

Yeah, Ryan, it's Joe. We're not precluded in any way from that space. And if you recall back in 2017, I'm sorry, 2019, when we spun the powertrain business, it was, you know, it was 2017. It was the right thing to do. I mean, we were focused on making sure that business had the ability to grow beyond its internal combustion footprint. And power electronics made sense there, just given at the time how it was sold into the customers. But We're not precluded in any way from participating in that part of the market.

Okay, great. Thanks. Sounds exciting. We'll be looking forward to updates.

The next question comes from David Kelly from Jefferies.

Hey, good morning, guys. Thanks for taking my questions.

I think you mentioned non-autos is now 16% of revenues. You clearly went river closing soon. The macro has changed quite a bit since 2019, but you've been targeting kind of non-Odo's revenue mix at 25%, I believe, by 2025. So I guess, could you update us on that goal and how you're thinking about the organic and acquisition opportunities to bridge the 16 to the 25?

Yeah, David, it shows. I think, you know, over the next couple of years that, you know, we've got really good growth in that non-automotive business. We think that closes the gap to call it almost 20%. Now, you know, we've got the other product lines growing faster, so it doesn't quite get to 20% organically. It's probably good news in that the other product lines have, you know, things like high voltage have continued to grow really fast. But You know, still have some work to do on the inorganic side. You know, we've talked consistently M&A strategy. You know, we'll continue to include, you know, businesses like Winchester Interconnect, which was non-automotive in a product line category that we understand really well, or businesses like HellermannTyton that have a really good balance of industrial and aerospace. and automotive. So continue to focus both on the organic and inorganic. You know, as we've always said, that was a high-level target. That was an ambition. We're not, you know, we're not going to take a big student body right just to hit that number, but we think we're on a really good trajectory to get there.

Okay, got it. Thank you.

And then maybe kind of one quick clarification on the not on autos business as well. I think you noted revenue growth up 5% and SMPS from non-autos. And I think you also mentioned CV and industrial product growth of 1%, you know, elsewhere in the deck. So I guess bridging that gap, is that all data comm or is there some other factor we should be considering there?

No, no, no. It's a little bit of a – the 5% is total active. So ASUX has some commercial vehicle business and some recent launches that are growing quite nicely, so it's total active. SPS was down 1% this quarter, which is low, but impacted by primarily the China shutdowns impacted that commercial vehicle space in the quarter.

Okay, perfect. Thank you.

Oh, yeah, the one other kind. I made it. Thanks. It just reminded me. The one other comment, just that I mentioned this, you know, we did have that channel replenishment in Q1 last year in the engineer components business, connectors in HellermannTyton. And that, a part of that falls into that non-automotive business. Obviously, we're replenishing the distribution channels. So you've got a little bit of a year-over-year comp that impacts non-auto as well.

We will now take the next question from Itai Micheli from Citi. Please go ahead.

Great, thanks. Good morning, everyone. Just two questions for me. Going back to the second half margin or implied margin, is that a good way to think about the go-forward margin beyond 2022? Are there any potential kind of one-time recoveries or benefits that we should be thinking about in the bridge beyond 2022? And then maybe for Kevin, on the 50 projects for product redesigns, Maybe talk a little bit about, like, what is, like, the cost savings from that. Like, how big are those projects and maybe the timing for some of the savings from those?

Yeah, I can tell you. It's Joe. Let me start with a question. Not going to quite at this point in the year get into sort of exit margins or sort of run rates coming out at the end of the year. The way I would think about it more for 2023 is, would be and what we're looking at is obviously how do the COVID and supply chain costs come down over the course of next year. And then obviously over the next couple of years addressing the material inflation. I think things are still a little choppy to sort of take one quarter or one period of time and try to extrapolate for a year. But the margin improvement that we talked about first half to second half, you know, we would expect to sustain that go forward. But I think it's a little choppy at the moment to sort of try to go out and take a stab at 2023 margins.

Yeah, and to your question about those initiatives, it varies, right? Some are longer term, as I mentioned, and more complex. Some are shorter term and less complex. When you think about savings, you think about the offset to the material inflation that we're seeing that we saw late last year and and this year, plus the benefit of incremental volume in the out years. So it's meaningful savings as the volume rolls out and the product's replaced. That's all very helpful. Thank you.

We'll now take the next question from Dan Levy from Credit Suisse.

Hi. Good morning. Good morning. Thanks for taking the questions. I want to ask a couple of questions on the disruptions you're seeing in Europe and China. So maybe we could just start with Europe. Maybe you could just be a bit more granular on the impact to S&PS in Europe. A, do you have any remaining operations in Europe? And I know you mentioned customers are paying for the move production, but maybe you can give us a sense of how much volume you've lost or whether there's other leakages. take additional business from perhaps other competitors that are over-indexed to Ukraine.

Yeah, we have, well, maybe let's break it down. So we have a facility in Russia. Russia is not operating at this point in time. At least if you believe customer schedules there, production should start picking up sometime late this quarter. That's something that we'll watch closely. When you think of Ukraine... We've talked about this, or you look at Ukraine, I think we talked about this in the past, we have four manufacturing facilities. Two of those facilities, production has been fully moved, again, paid for by the customer, up and running, whether it be in North Africa, Poland, or Serbia, an existing footprint, so supporting Western European OEMs. We have two facilities in the very western part of the Ukraine, that are operating at this point in time at very low production levels, but there's some production going on supporting one Western European OEM. A few OEMs have come to us asking us to pick up volume or pick up programs from other suppliers who weren't able to move as quickly as we were able to move. Those weren't, you know, just given where we were, just given economics, those weren't situations we pursued. And my guess is things continue to evolve. We'll have ongoing discussions with those OEMs whether or not it makes sense for us to take over that business. But it has presented some potential incremental revenue opportunities.

Okay, so... Ned, it sounds like the actual impact from what's going on in Ukraine has actually been more limited. Is that a fair assessment?

Yeah, I mean, there's been a revenue and ROI impact in the grand scheme of things. I wouldn't call it out separately. If we're in a situation where you have long-term China lockdowns and challenges in Ukraine – In Russia, it could be a bigger number, but at this point in time, I wouldn't get into specifics. We've managed through it. We started moving production before the conflict or war actually started, so we got ahead of it. As I said, we had a couple of OEMs who were very focused on it, and we partnered with them. We had existing space. We were able to move production pretty easily. And they supported us from a cost and logistics standpoint in actually doing that.

And even the locations where we're in the western part, sort of along the Polish-Romanian border, that production will be moved. There is the ability to manufacture those products in other locations. Those customers were just a little bit slower to respond. You know, to Kevin's point, and one of the reasons we're not talking about this, some other cost bucket, we just went with a, if you want to move, this is what it's going to cost. And customers have effectively agreed to that and are paying it.

Great. And maybe you could also give us a sense on, more specifically, what is happening in China right now, and to what extent has your production been outright halted? Where does it stand today? And I think we've seen in the past, when your production is outright halted, the decrementals start to get pretty ugly. So why isn't this more of a pressure to the business if you're having sort of outright production shutdowns?

Well, I think Joe said it is a pressure near term, depending on the length of the lockdowns. I'd say at this point in time, all of our facilities are up and operating, our engineered components facilities at a higher capacity utilization levels. We have several facilities that never shut down. We have a few in the Shanghai area from a wire harness standpoint that actually did. Those wire harness facilities are now, on average, operating at a 50% to 60% capacity utilization level. So there is an element of production that's actually taking place. You know, the question is, does the situation – How long does the situation stay as it is and we don't see ramp up in production or does the situation deteriorate? And we're just watching that very closely.

Yeah, Dan, it's akin to what we talked about last year, just different timing, right? China's, as I said in my prepared comments, we do expect Q2 to be heavily impacted. That is a market, our business team, an industry, our customers that have recovered quickly in the past. There's time left in the year where this is, you know, we're talking about a March, April, May, not a November, December type disruption. And it was a little bit of the same dialogue we had last year, you know, if depending on when the disruption occurs, demand is still strong, customers want to buy the cars, inventory, build the cars, inventory levels of the dealers are still low. So, you know, there is a desire by our customers to recover quickly and just given where we are from a point in time in the year and from what we're seeing from customer desires and our capabilities, we think we have the ability to, if it is Q2 and sort of stays contained within Q2, we do have the ability to recover the balance of the year.

Great. Thank you.

That will conclude today's question and answer session. I would now like to hand back to Kevin Clark for any closing remarks.

Thank you, everyone, for your time. We appreciate it. Have a nice rest of the day.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.