Aptiv PLC

Good day and welcome to the Aptiv Q4 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jessica Caracos, Vice President of Investor Relations and ESG. Please go ahead.

Thank you, Lynette. Good morning and thank you for joining Aptiv's fourth quarter 2022 earnings conference call. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at 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 Q4 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, Aptos Chairman and CEO, and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business, and Joe will cover the financial results in more detail before we open the call to Q&A. With that, I'd like to turn the call over to Kevin Clark.

Thanks, Jessica, and thanks, everyone, for joining us this morning. Let's begin on slide three. 2022 was another year with record new business bookings and strong growth over market, driven by our industry-leading portfolio of advanced technologies, as well as our continued flawless execution that's kept our customers connected in this challenging environment. Highlights for 2022 included $32 billion of new business bookings, driven by significant active safety, high voltage, and smart vehicle architecture awards. $17.5 billion of revenues, representing 15 points of growth over vehicle production during the quarter, bringing our full-year growth over market to 11 points. Operating income and earnings per share for the full year of just under $1.6 billion and $3.41 respectively reflected the benefit of strong revenue growth and customer recoveries, partially offset by costs related to COVID and ongoing supply chain disruptions, which Joel will cover in greater detail a little later. We also enhanced our portfolio of safe, green, and connected technologies with the additions of Wind River and InterCable Automotive, both of which closed during the fourth quarter. I'll expand on these as well as our enhancements for our operating model on the next slide. As the industry transitions to fully electrified software-defined vehicles, we continue to enhance both our operating model and industry-leading portfolio to further strengthen our capabilities to solve our customers' toughest challenges. As legacy functional and domain-based architectures are increasingly replaced by approaches aligned to Aptiv's smart vehicle architecture, it impacts both the way we design and sell our solutions. This means further strengthening our one Aptiv account-based model, positioning us to engage earlier in the development process and therefore more effectively design, specify, and deliver optimized solutions across our portfolio, resulting in stronger customer relationships, and greater ability to capture value from all our full system solutions. We further enhanced our regional operating model by increasing local capabilities and empowering those closest to the customer to address their needs quickly and efficiently. Additionally, the continued rollout of our net promoter system has resulted in actionable insights to improve our efficiency, our resiliency, and service levels, thereby increasing customer intimacy. Lastly, Proactive initiatives and risk mitigation actions related to our supply chain have contributed to our ability to keep customers connected through significant disruptions, giving them confidence in our ability to execute on current and future platforms. At the same time, we recognize that the software-defined electrified vehicles consumers are demanding will require innovative new solutions, and we're investing organically and inorganically to position ourselves for that future. Our acquisition of Wind River significantly strengthens our capabilities in software with an industry-first cloud-data software platform that speeds development, streamlines deployment, and enables full lifecycle management for the software-defined vehicle, significantly reducing cost and time to market for our customers while also unlocking new business models. The acquisition of InterCable Automotive enhances our portfolio of high-voltage bus bar and interconnect technologies. and provides near-term synergies as we expand InterCable's manufacturing capacity in North America and in China. Lastly, we're also investing organically in solutions that further expand our portfolio of industry-leading high-voltage electrification solutions, such as integrated power electronics and battery management systems. To help fund these initiatives, we've implemented structural cost reductions that will save roughly $100 million in annual expense, which will take full effect throughout 2023. These actions further improve the efficiency of our underlying cost structure while allowing us to make investments that better position Aptiv for long-term outperformance. As shown on slide five, nowhere is the strength of our track record and portfolio more evident than in our new business bookings performance. 2022 bookings reached a record $32 billion, an increase of over 30% from last year's record of $24 billion. Advanced safety and user experience bookings total a record $12 billion, driven by $4.2 billion of customer awards for our smart vehicle architecture solutions across three different OEMs, including central vehicle controller and power data central bookings with the Volkswagen Group, bringing cumulative customer awards for SVA products since our launch to over $5 billion with five different OEMs. Active safety bookings of $5.2 billion, representing a combination of next-gen hardware and perception software building blocks, as well as full-system turnkey awards, including an award from a large European-based global OEM, as well as a Chinese OEM, BYD, which represents the seventh customer to select Aptiv's scalable platform to efficiently support a wide range of advanced safety features. The strength of our portfolio of active safety solutions is reflected in the $20 billion of cumulative bookings since 2018. Signal Power's solution to business bookings reached a record $20 billion for the year, the result of strong growth in low-voltage vehicle architecture, including a $2 billion light commercial vehicle booking with a major North American OEM in the fourth quarter, and continued strong bookings in adjacent markets. A record $4.2 billion in of high voltage electrification bookings up from roughly $2 billion just a few years ago, including awards from several North American, European, and China-based OEMs, representing both traditional and new mobility providers across our electrical architecture and engineered components product lines, bringing cumulative high voltage customer awards to $14 billion since 2018. Our industry-leading portfolio, combined with our unparalleled ability to execute highly complex programs, even in today's challenging environment, positions us to continue to win new business, resulting in clear line of sight for roughly 32 billion of business awards in 2023. Moving to slide six to review the segment highlights. Beginning with the advanced safety and user experience segment, this past year we became the first technology provider to successfully launch a full-stack, hands-free Level 2 plus ADAS system with a European-based global OEM. This is a great example of our full system capabilities applied to active safety, as well as our flexible business model and open platform approach, which allows OEMs to leverage their own innovations, as well as those from Aptiv and other third parties, to deliver a unique, high-performing driving experience. We're also deeply engaged with several customers regarding Wind River's cloud-native software platform, which we're confident will lead to commercial awards over the course of 2023. Turning to the signal and power solution segment, we continue to be perfectly positioned with an industry-leading portfolio of electrification solutions that span multi-voltage distribution, connection, and cable management. Reflecting the accelerated demand for battery electric vehicles, The $4.2 billion of high-voltage new business bookings I referenced on the prior slide accounted for over 20% of the segment's total bookings, and high-voltage revenues increased 33% over the prior year, 28 points over vehicle production. In addition, our new offerings in power electronics and battery management systems are gaining traction, as demonstrated by a significant integrated power electronics and BMS award from a North American-based global OEM, where a solution will be used across all their best platforms beginning in 2025, and the pipeline of customers evaluating the deployment of a similar solution is growing. Our customers recognize our track record of flawless execution, which is the driver behind the customer service, quality, and supply chain awards we've received, the cost recoveries we negotiated, and the record level of new business bookings we've been awarded. Our full-system, edge-to-cloud vehicle architecture solutions have enabled us to pursue high-growth, margin-accretive opportunities that position us to continue to deliver outsized revenue growth and margin expansion for years to come. Moving to slide seven, at this year's CES event in Las Vegas, we brought the software-defined vehicle to life, showcasing Aptiv's unique full-stack capabilities. We debuted Wind River's software platform, fully integrated with a vehicle powered by FCA. This on-vehicle demonstration of the industry's first end-to-end cloud-native DevOps toolchain and vehicle software platform showed how these solutions improve development speed, quality, and efficiency, unlock new business models, and enable software functionality to evolve and improve over the life cycle of the vehicles. We also showcase our turnkey Gen6 ADAS platform, including differentiating KPIs and a public road demonstration. Our radar-centric solution, which is vision agnostic, utilizes artificial intelligence and machine learning to increase the availability, robustness, and efficiency of the perception system, resulting in a solution that can be up to 65% more energy efficient and 25% more cost-effective than equivalent vision-centric solutions. Lastly, we continue to highlight the commercial readiness of our smart vehicle architecture solution. First, by deeply integrating it into a production vehicle, which enabled us to demonstrate a wide range of the in-cabin user experience features, as well as the fusion of our interior and exterior sensing, resulting in greater safety, comfort, and convenience for passengers. And second, through our SVA demonstrator, which enabled guests to see firsthand how these advanced architectures reduce complexity, weight, and mass, while also showcasing our latest high-voltage electrification solutions. With over 400 customers, 150 partners, and 75 suppliers visiting the AptoCS pavilion this year, we reinforced our growing pipeline of commercial opportunities and set the stage for the deeper, more tailored engagements, which I referenced earlier. Moving to slide eight, before I turn the call over to Joe, I wanted to touch on our outlook for 2023, which Joe will cover in more detail. Building on the foundation from 2022, we expect a very strong year for new business bookings, revenue growth over market, and margin expansion. Our robust business model and portfolio of advanced technologies are resulting in sustainable value creation. We continue to widen our competitive moat with investments in advanced technologies and capabilities that drive our operational excellence. This has enabled us to demonstrate strong outperformance, even in a weak production environment. As demonstrated by our 2023 outlook, where we continue to expect 8 to 10 points of growth over vehicle production and 140 basis points of operating margin expansion and strong cash flow growth. With that, I'll now turn the call over to Joe to go through the numbers in more detail.

Thanks, Kevin. Good morning, everyone. Starting with a recap of the fourth quarter on slide nine. As highlighted earlier, the business drove strong growth in the quarter, with revenues of $4.6 billion, up 19% over prior year, and representing 15 points of growth above underlying vehicle production. The outgrowth was across both segments, despite continued semiconductor supply chain constraints and COVID disruptions in China that negatively impacted customer production. Adjusted EVTA and operating income were $674 million and $523 million, respectively. OI margins expanded 380 basis points versus prior year, reflecting strong flow through on incremental volumes. The benefit of customer recoveries of direct material cost increases and cost reduction actions taken earlier in 2022. Supply chain disruption costs were favorable by approximately $25 million from the prior year, and foreign exchange was negative in the quarter, reflecting approximately 20 basis points of headwind. EPS in the quarter was $1.27, an increase of 87% from the prior year, driven by overall earnings growth and interest income from higher cash balances maintained prior to the closing of Wind River, partially offset by interest expense and tax expense on higher earnings. The emotional EPS impact was a loss of $0.29, an $0.08 increase over last year. Lastly, operating cash flow totaled $933 million, and capital expenditures were $178 million for the quarter. Looking at the fourth quarter revenues in more detail on slide 10, outgrowth was broad-based across all regions, despite the disruptions in China and continued supply chain constraints. Price downs, net cost recoveries, and commodities was favorable by approximately $100 million. Foreign exchange negatively impacted revenue by approximately $300 million in the quarter, and late quarter shutdowns in China was a negative $60 million. From a regional perspective, North American revenues were up 21% or 13% above market, driven by our active safety and high-voltage product lines. In Europe, which continues to be impacted by acute supply chain constraints and macro concerns, adjusted growth was 22%, driven by strength in both segments. And in China, revenues are up 8%, or 14 points over market. Moving to the segments on the next slide. Advanced safety and user experience revenues rose 15% in the quarter, or 11 points of growth over underlying vehicle production. Segment-adjusted operating income was $77 million, up over 100% year-over-year, reflecting strong flow-through on incremental volumes as well as favorable net price and recoveries, partially offset by the negative impact of foreign exchange in the quarter. Signal and power revenues rose 20% in the period, or 16 points above market. Segment operating income improved by 64%, driven by strong flow-through on incremental volumes, favorable net price, recoveries, and commodities, and lower supply chain disruption costs that partially offset the negative FX impact. Turning now to slide 12 and our expectations for global vehicle production in 2023. Based on customer schedules, we are forecasting a decrease of 1% for the year, reflecting approximately 85 million units of global production. Regionally, we expect North America flat at approximately 15 million units, Europe down 2% or approximately 16 million units, and China flat at approximately 27 million units. As we discussed during the fourth quarter of last year, we remain cautious about the impact of macroeconomic considerations, particularly in Europe, as well as the impact of customer supply chain disruptions, including continued constraints of certain semiconductors. Although the overall supply of semiconductors has improved sequentially, we continue to see acute constraints, particularly in Europe and North America, that impact overall customer production levels. Moving to slide 13, you'll find our 2023 full-year outlook, which now includes Wind River and InterCable Automotive. We expect revenue in the range of $18.7 billion to $19.3 billion, up 8% at the midpoint compared to 2022, with nine points of growth over market. Note that our growth over market excludes the impact of acquisitions. As noted previously, we remain confident in our multi-year growth over market target of 8% to 10%, supported by continued success in our key product lines and high demand for our portfolio of advanced technologies. EBTA and operating income are expected to be approximately $2.7 billion and $2 billion at the midpoint, reflecting strong flow-through on volume growth, continued margin expansion in high-growth product lines, and lower COVID and supply chain disruption costs. Adjusted earnings per share, excluding amortization, is estimated to be $4.25. EPF's growth of 25% is driven by strong earnings growth, partially offset by an increase in the expected tax rate to 14.5%, and higher net interest expense. The loss related to Motional of $310 million represents a 7-cent increase over last year. We expect 2023 operating cash flows of $1.9 billion, reflecting the higher earnings as well as improved working capital during the year. Capital expenditures are expected to be approximately 5% of revenues or $950 million for the year. With respect to capital deployment in 2023, we will continue to maintain a well-balanced approach to capital allocation as we continue to prioritize organic investments in the business to support our portfolio of advanced technologies and record new business awards. Execute our M&A strategy and focus on transactions that enhance our scalability across both the brain and nervous system of the vehicle. Accelerate our speed to market with relevant technologies and access new markets. And while we will continue to maintain our current financial policy as it relates to our balance sheet leverage profile, to the extent we can take advantage of market disconnects, we will be opportunistic in our share buybacks, returning cash to our shareholders. To that end, our 2023 guidance assumes we offset the impact of stock compensation dilution in 2023 via share repurchase, a practice we had in place prior to 2020. On slide 14, we provide a bridge of 2023 revenue and operating income guidance as compared to 2022. Starting with revenue, our growth over market combined with a decrease in global vehicle production results in a net contribution to revenues of over $1 billion. The full-year benefit of direct material cost recoveries will effectively offset changes in index commodity and price downs. FX is estimated at a negative $300 million. And lastly, we expect Wind River and Intercable to contribute approximately $700 million for the year. Turning to adjusted operating income, we expect margin expansion of 110 basis points before the benefit of acquisitions. Driven by continued strong flow-through on incremental volumes of approximately 30%, the negative impact of price downs, commodities, and incremental inflation are partially offset by customer cost recoveries, and higher direct labor and other indirect costs are more than offset by increased operating performance, including the benefit of cost-saving actions, improved manufacturing performance, as well as a reduction in supply chain disruption costs. which are estimated to be $180 million in 2023. The addition of Wind River and InterCable will increase 2023 operating income to $2 billion, or 10.5%, reflecting margin expansion of 140 basis points and incremental margins of over 27% for the year.

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 opening the lineup for questions. As the management team reflects on 2022, it's clear that we've strengthened our competitive moat and accelerated our commercial momentum, supported by a highly differentiated portfolio of safe, green, and connected technologies. Together with our strong track record of operating execution, Aptiv has never been better positioned to provide our customers with full system solutions that advance the industry's vision of the software-defined vehicle. As a reminder, we're hosting our 2023 investor day on February 14th in Boston. where we'll provide our view on the industry and how we plan to usher in the next phase of our business strategy. In closing, I'm proud of what the Aptiv team accomplished during 2022 and have never been more excited about what we will deliver in the years ahead. As you'll see in here on February 14th, the best is yet to come. Operator, let's now open the line up for questions.

Thank you. If you would like to ask a question, please press the star key followed by the digit 1 to place your line in the queue. we do ask that you please limit yourself to one question and one follow-up today. That is the star key followed by the digit one. If you have a question or a comment, we'll pause for a moment.

And we'll take your first question from Rod Lash.

Good morning, Rod.

Yeah, so I guess my first question is, on your bridge for 2023, you have $400 million of additional labor depreciation, economics, price. You offset that with $400 million of performance, and it was either $135 or $180 million of lower disruption costs. I'm just wondering about, just in light of the still inflationary environment that we're seeing, pricing is still negative. And at what point do you think you start to kind of get ahead of this and recover some of these disruption costs or headwinds?

Well, Rod, it's Joe. I'll start. I mean, I feel like I think we have gotten ahead of it, to be honest with you. I mean, our business equation is working, right? Performance is offsetting. labor inflation, and the pricing and the material inflation you see in that $100 million. We've met it out from a top-line perspective, customer recoveries this year, which are obviously benefiting from a full year effect or effectively offsetting price downs on the top line. So I think our view, and Kevin can jump in, I think our view is that, you know, the team's done a great job of pushing direct material costs through, and we've started to get performance up, including... you know, working hard to get the supply chain disruption costs out of the P&L.

Yeah, I guess just to just maybe clarify my question, Joe, like I think that you had talked about $295 million of disruption that you'd start to recover over six quarters. And when I say ahead of it, in my mind at least that means the positives are greater than than the negatives. It looks like they're sort of matching, at least optically when you look at the bridge.

They're certainly offsetting. Yeah, we ended 2022 with about $330 million of supply chain disruption costs. We've taken that down to $180 in the outlook, so we're still assuming $180 million of disruption costs. It continues to be a difficult operating environment for certain customers, and we're still seeing some Some disruptions, obviously, China in Q4, December in particular, was heavily disrupted with COVID. So, listen, I think we continue to work through it. I think you're right. We had always talked about sort of four to six quarters. So, you know, we've got some to continue to work through. But I feel like we've made a pretty big step here in 23.

Yeah, maybe if I can add, Rod, I think that's a great question. I think one of the challenges, when you talk about getting full ahead of it, you need to have better predictability of what you're getting ahead of. And I think Joe's point on In the fourth quarter of 2022, in December specifically, to give you an example, roughly 90% of our employee base in China was suffering from COVID. That's tough to predict. Yet at the same time, we were able to keep our factories running and keep our customers connected, which has been our ultimate objective, right? So operating in a less efficient way and being somewhat reactive in an environment where we can't always predict what's going to happen from a supply chain standpoint or COVID standpoint.

Thanks for that. And just secondly, when you announced the closing of the Wind River deal, in your release, you talked about some recurring operating expenses and costs that led to changes in the terms. I was hoping you can maybe talk a little bit about what what you meant by that and, you know, what were the implications financially going forward?

Yeah, I think the net results for Wind River from a revenue growth standpoint, margin standpoint, accretion, dilution standpoint remain largely unchanged. We're not going to get into all the specifics, but operationally there were some changes that we needed to make, and in light of that, we were in a position to renegotiate the transactions.

Yeah, Ron, the only thing, and it's a nuance, but I think it's important, particularly as it relates to the magnitude of the cost. The price reduction, we said, was in part due. So it's not a direct correlation between sort of the increase in expenses and the amount of the reduction. So to Kevin's point, it gave us an opportunity to to talk to the sellers about pricing. We did. But the deal remains a creative in this year. And, again, as we said in that press release, it's, you know, no changes in sort of the strategic outlook or our view on the long-term, you know, long-term opportunities in Wind River.

Thank you.

We'll hear next from Adam Jonas from Morgan Stanley.

Morning, Adam. I just want to follow up on Rod's question about production disruption, because the guide for down 1% does seem, it seems surprising to some people, given if you look at like the PMI shipping index back to pre-COVID levels in terms of, you know, implying logistics costs and shipping timing, you know, more back to normal chip companies or are taking down supply because they've seen that kind of just in case channel buildup is kind of running its course. And so you are highlighting a couple of companies and I respect that there's still some choppiness, but it seems like you're implying that production disruption in 2023 gets worse. I mean, you're implying net headwinds, right? So you're implying it gets worse than in 2022. Help me understand that because that's a pretty weak comp, pretty shitty comp in terms of how bad things were last year.

Yeah, Adam, listen, as we've talked about in the past, when we provide our guidance and build our forecast, it's off customer schedules. And when you look at the nature of our business, especially our SPF business, we're on one in every three, three, three and a half vehicles globally. So we get a very good view to the underlying market. We also, given the nature of our AS2X business, get a very good view to what's going on from an overall semiconductor availability and supply chain standpoint. And I think when you look at the semiconductor challenges as they've evolved from 2021 to 2022, then 2022 to 2023, it's really much more focused on, rather than a general supply constraint standpoint, are causing constraints. And we expect that to continue to continue into 2023. It certainly was the case in 2022. And, you know, those two factors are, you know, effectively, they're impacting our overall outlook for the full year, which, again, as Joe said in the past, is based on the customer schedules that we receive.

All right. Appreciate that. And just a follow-up, imitation is the ultimate form of flattery. Qualcomm wants in on software defined and kind of the kinds of products you're doing and safe and connected. Mobileye wants to compete with you. I seem to recall you used to quote a 70% type win rate in ADAS and ASUS broadly. I think that sounds familiar, right? I always felt that was a bit too high, you know, kind of a high watermark. But how has that trended in recent quarters now that you're seeing competition maybe creeping in on the forward?

Thanks. Yeah, I think it depends on your baseline and what comparison you're trying to make, whether it's a full system solution, you know, a platform solution. or it's unique to a perception system, as an example, or a radar solution. Obviously, ADAPT penetration has accelerated and continued to increase over the last several years. I haven't seen, or we haven't done the math on the pursuit relative to when I'd say it's still relatively high on a platform basis. I would say we're very focused on... on investing our efforts in those areas where we have a high likelihood of winning. So based on that sort of approach to pursuing ADAS platforms, I would say it would continue to be relatively high. I'm not sure if it's quite at 70%. But we still, you know, continue to have a very strong position. And, again, it's reflected in our bookings in 2022, our outlook in bookings for 2023. and our revenue growth relative to market. And, you know, I mentioned in my comments the NextGen Gen68S platform, which will launch in 2025 or be available for SOPs in 2025. We've already had one customer award. It's an open system. It provides – it's modularized. It provides a lot of flexibility for ourselves as well as for our OEM customers. And importantly, it's very cost-effective. So we believe we're going to continue to see significant demand.

Thanks, Kevin. See you guys on Valentine's Day. I'll bring the chocolate.

We'll hear next from John Murphy from Bank of America.

Good morning, guys. There's been a lot of price action recently by some of your customers on EVs that are probably going to drive significantly higher volume relative to initial expectations. I'm just curious how you think about that and what kind of opportunity there might be here in 2023.

Well, you know, listen, we've been talking about high-voltage electrification and what we've been doing from a portfolio standpoint. Bookings continue to be strong, right? Obviously, we had another year of record bookings, and it wouldn't surprise us if we had 2023 even stronger bookings from a high-voltage electrification standpoint. So, you know, we'll see. We're optimistic having said that. As we've said in the past, we're very, very focused on pursuing opportunities with those OEMs who have battery electric vehicle platforms that they're taking globally, that we have a high confidence level that they're going to meet their schedules and effectively generate significant revenues over a platform. which ends up a better financial proposition for ourselves and obviously lower risk.

John, it's Joe. I'll just add, we've talked a lot about being north of a 30% growth rate and high voltage. 2023 is as well north of 30% based on the customer schedules we're seeing today. And obviously got additional opportunities as we add in the inter-cable portfolio. So Continue to see it very strong with schedules today to extend the price actions, you know, sort of increase the mix or increase the take rates on that technology. I think we'll be very well positioned to take advantage of it.

Gotcha. Okay. I mean, if you look at stuff like the Model 3 and the Y, I mean, it's kind of the here and now. I mean, given the price cuts, I mean, these guys might be doing another 500,000 units relative to expectations. I mean, are you thinking – you know, that that's, you know, that's possible and that's in your numbers at this point? No, that's, yeah. I mean, there's some real heady stuff here. I mean, we're not talking about, like, three to five years on backlogs. We're talking about, like, hundreds of thousands, I mean, if not, you know, millions more EVs this year than expected.

Yeah, I think as you heard me say and Joe say in the past, our forecast is based, Schedules go up, we'll benefit from a revenue standpoint. But when we pursue business, when we put initial capacity into the ground, obviously there's some flexibility. It's based on what we see from a customer standpoint, customer schedule standpoint. And again, so if we see a big uptick in demand for players like Tesla and others, our volume will scale with them.

And to date, John, those actions have happened in the last couple weeks. We have not seen big schedule moves yet. I'm not saying they won't happen, but... Okay. You know, haven't seen material changes at this point.

And then just one quick follow-up on the bridge. I mean, on the recoveries, I mean, it does seem like, you know, some of the automakers have almost a little bit remorse that recoveries were a little bit high last year, whether it be, you know, for commercial settlements around volatility on schedules or RAS. You know, what, you know, I mean, are you... What is your kind of expectation there in these customer discussions this year? Do you expect them to be a little bit tougher? I mean, they were – I wouldn't call them generous last year, but they were more realistic last year than they have been in decades. Do you think they're going to be a little bit tougher this year and there might be some reversal there? I mean, what are those discussions like at the moment?

John, as you said, they're always tough. It's an industry with a tough pricing environment, you know, all the time. So those conversations are – they're never easy. And what we've done in the past and what we are really focused on continuing to do is to bring value to our customers, one, by keeping them connected, and then, two, providing them with, you know, solutions that solve their toughest challenges that are cost-effective solutions. And to the extent you're able to do both of those, I would say those conversations are less difficult, but they're never not difficult. And You know, our outlook, the team did a great job. Joe mentioned the team did an outstanding job in 2022, both having those discussions and negotiating those, you know, those price increases, and at the same time, you know, delivering record bookings. And that's a process we'll continue to go through in 2023. Great. Thank you very much, guys.

Thanks, Joe.

Emmanuel Rosner from Deutsche Bank, your line is open.

Thank you very much. Good morning. Hi, Emmanuel. A couple of questions on margins, if I can. First one, for the quarter, I think the margins were quite a bit softer than we had anticipated, especially You had a very solid revenue outcome for the quarter. Can you please go back over some of the factors of this? I obviously heard you speak about COVID disruption in China. Anything else? And specifically within AS and US, it seems to be quite pronounced.

Yeah, Manuel, it's Joe. You're right. I mean, we continue to deliver on the top line, and I think this speaks to sort of a little bit of around Rod's question. It just continues to be a very disruptive environment, right? So we're, you know, working through China, $20-plus million of impacts at the very near end of the quarter from both customer shutdowns as well as just us You know, as Kevin mentioned, we had, you know, 90% of our staff of 30,000 people come down with COVID in the fourth quarter. So, you know, it was a very disrupted production environment. We saw some of that in the U.S. as well as customers wrestled through the supply chain challenges. And we still got a lot of this stop-start production situation. So that combined with sort of the FX impact, you know, call that, you know, I think you mentioned 20 basis points, call that about $40 million in the quarter. And again, some of those disruptions fall heavily into ASUX. So I think to some extent it's more than the same. I think what you saw us be able to do this year, which to some extent compounds the disruption cost perspective, we were able to come back, you know, run overtime, run the businesses hard and you know, push the revenue out at the end of the day or most of the revenue out at the end of the day. But, you know, it's just an inefficient operating environment. And that's just part of the guide. Again, you know, north of $300 million of disruption costs in 2022, you know, we left about – we certainly don't think it will be as bad next year, right? We're hoping for sequential improvement. We're seeing sequential improvement. But we did leave $180 million of COVID and disruption costs in the P&L for 2023, just to give ourselves some room to continue to deal with this.

Okay, that's helpful, Colin.

And then I guess as a follow-up, I think one of the ways you'd, I think, encourage us to look at it, I guess, at this upcoming year was maybe comparing the performance versus the second half of 2022 to the extent that some of the price recoveries and commercial agreements you had with customers were benefiting you more in the second half of 22. I guess what do you feel is sort of like a good clean base in terms of second half margin for which to build off, you know, as we try to understand your 2023 guidance and what would sort of like be the puts and takes versus that?

Yeah, I think that's a good question. And we spent time looking at that. You know, I think the way to think about it, We talked about originally 10 to 10 and a half, and then with some of the FX, nine and a half to 10. So we think about probably 10 as a good jumping off point. I think what you see with, you know, you can sort of, and I think we've sort of captured it quite honestly within the range of the guide, right? We can sort of, if you look at some of the benefits of pricing, you look at the reduction in the COVID supply chain costs, you can get up to sort of that, call that that 10.7, 10.8 level. You then work down some of the FX and some of the volume changes, which is really how we sort of think about that sort of mid-10, that 10.5. So I think we're sort of there. I think 10 sort of ended at the right jumping off point, and we sort of built back from there and, you know, think we have it covered, generally speaking, within the guide.

Okay. Thank you very much.

We'll hear next from Etai Michele from Citi.

Great. Thanks. Good morning, everyone. Just two questions for you. One, Joe, I was hoping you could share expectations for margin cadence throughout the year. And secondly, on active safety, maybe talk about what you're expecting this year for both top-line growth as well as if you talk about booking expectations after a very strong 2022.

Yeah, let me start with bookings, and I'll work my way down. As Kevin mentioned, you know, we think it was in Kevin's presentation, you know, we see line of sight to, you know, call it another 32 million of bookings, 32 billion of bookings in 2023. I would say mix should be generally consistent with 2022. You know, they always can be a little lumpy, but continue to expect growth in SCA and active safety, obviously in high voltage. But I think that profile, sort of the current profile, is probably a pretty good proxy. Again, bookings are lumpy. They always have been. But, you know, that I think is probably the best proxy. And we did want to provide a target, obviously, for next year, which is, you know, something new. But we've got a lot of confidence in what we're seeing. From a segment perspective, you know, if you want to talk sort of growth or growth over market – Full year, I'd have ASUX at around 12% growth over market full year. SPS at about 8% growth over market full year. And then, you know, I'll give you, I'm not going to go quarter by quarter, obviously, on the margin cadence. But if you think about sort of full year margins by segment, and again, got to work through the disruption costs and some of the effects we've talked about. But I would think about SPS in that 11% to 12% range. And ASU acts in that 8% to 9% range, full year OI margin.

Terrific. That's all very helpful. Thanks so much.

As a reminder, this is Starkey followed by the digit 1. If you find that your question has been answered, you may remove yourself from the queue by pressing the Starkey followed by the digit 2. We'll move next to Mark Delaney from Goldman Sachs.

Yes, good morning. Thank you for taking the questions. First on margins, to the extent that stop-start schedule volatility and the input cost inflation environment were to moderate, do you think Aptiv could get back into that historical target of 12% to 14% type EBIT margins, or given how pricing discussions with customers have evolved in the last few years, more things now on pass-throughs, do you think some of those lower costs may actually have to get passed on to the OEMs?

Listen, I think if the disruptions and the significant material inflation that's occurred over the last couple of years goes away, we definitely get back to what our historical margin trajectory was. And then when you overlay what we've done from a portfolio standpoint and where we sit, whether that's a mix of more high-voltage electrification, more advanced ADAS solutions, the benefits of Wind River and InterCable, actually have the ability to go above that. So it's a combination of both.

That's helpful, thank you. My second question was on Wind River. You spoke a bit on this already in the prepared remarks, but could you elaborate more specifically on what Aptiv will do this year to help Wind River have improved customer dialogue with the automotive types of companies in particular, given all of Aptiv's expertise and relationships with that industry? Thanks.

Sure. So, you know, in reality, going back, we signed a commercial agreement with Wind River over a year ago, and well over a year ago. And in reality, our teams have been working closely together both in terms of developing the final product for automotive applications as well as in commercial discussions. I'd say the traction we've hit over the last quarter or so has hit a time. So a number of introductions across the various regions. As I mentioned in my prepared comments, there's a deep level of engagement with several OEMs in every region at this point in time. And we're very optimistic and very confident that you'll see meaningful announcements in 2023 with respect to Wind River's penetration of the automotive space.

Thank you.

We'll move next to Chris McNally from Evercore.

Thanks so much, Kim.

Basically, just a follow-up to what's been already asked. On the ADOP win, $20 billion, could you talk about just the diversification of some of the tier twos? I think historically, you know, you've been a majority installer of one perception compute system, but, you know, obviously there's various out there. $20 billion is such a big number, it seems like you're probably winning business with multiple computer perception providers. I just want to confirm that.

Yeah, Chris, just to be clear, our ADAS business I put into kind of two buckets. One bucket is a platform solution, which to date has traditionally been with the mobile iVision solution. Then there's another bucket where our perception system – perception systems are integrated into an ADAS solution. And in those particular cases, it could be a variety of vision providers and, in fact, actually, you know, is. So it's a real mix. The Gen6 ADAS platform is a platform that we've developed. First, we've developed to be vision agnostic. So OEMs have the ability to select what vision provider they would like to utilize for the overall platform.

And, Kevin, is it fair to put – Yeah, no, that's great. Is it fair to put the bucket one versus bucket two as sort of 70-30?

No, I would say it's probably a little bit closer to 50-50. I'd say it's 50-50. If you go back four years ago, we had roughly 14 8S customers. Today we have 21 8S customers, and that's a mix of growth in that platform solution as well as – providing a portion of the overall ADAPT solution to OEMs.

Okay, that's super helpful. And then just on the production, a question for Joe, and this is going to be a little bit of a nitpick. Just can you remind us how you guide global production? Is it a weighted average by your customers, by your revenue? One of the reasons, obviously, minus one looks maybe low to what we all think, But when I look at also 2022, you call production 4%. We look at a global average of six or weighted average of five. So I just wanted to sort of understand if we get a 3% or 4% global production, am I able to flow through a full 4%, 5% type revenue upside?

Yeah, it's weighted towards our production. That basically means for us, Chris, high level taking out Japan production basically and weighting it towards the markets where we're strong. We obviously don't do a lot on, for Japanese OEs in Japan. So that, you know, and call that, you know, 20 plus million units, right, that we sort of wait away from that. And that's the same, we've been calculating that the same way for, you know, since the IPO for 11 years now. Very consistent calculation. Yeah.

Yeah, that's very helpful, and I think that weighted number obviously is for most Western suppliers who don't have the Japanese customers the same weight. Okay. Thanks so much, team. Appreciate it. Thanks, Chris.

We'll hear next from David Kelly from Jefferies.

Hey, good morning, guys. Also a couple follow-ups from my end, and maybe starting with kind of the semiconductor discussion and impact on AS and UX. You know, curious if you're seeing any signs of plateauing pricing there or even potentially to take back some price from your suppliers. And, you know, obviously timing is difficult to predict, but given your traction and value add with customers, is there maybe an emerging opportunity where you could see some sticky pass-throughs for AS and UX as your own pricing starts to come down?

Yeah, David, that's a great question. I'd say with respect to the level of bookings we were awarded in 2022, we've been put in the position to have discussions about no price increases, and in some situations that's been effective. I'd say we're not at a point, though, where we're actually seeing year-over-year productivity or loss. increases from the semiconductor players. We'll see how that plays out as, you know, based on volume outlook for automotive and the other places that those players play. But at this point in time, we're not seeing it, and it's not in our numbers.

Okay, got it. Thank you. And a quick follow-up on SMPS, the product line margin expansion you referenced, I think you mentioned kind of in high growth areas. So, A, can you confirm that that's high voltage or maybe it's kind of non-autos or CVs or maybe just give us a bit more color on some of the specific product lines or were your things in nice movement?

Yeah, I would sort of carry that as David. I mean, the margin profile in that business overall is very strong. But high voltage, the adjacent market, particularly commercial vehicle, accretive – But also, you know, we're very strong. If you think about engineered components, right, sort of the interconnect type business, you know, that business just has traditionally a very strong margin profile and certainly scales well with volume and is accretive with additional volume. So it's really a, you know, it's a pretty balanced portfolio in that business.

Okay, got it. Thanks, guys. Thanks, David.

Operator?

At this time, we have time for one more question. We'll move to James Piccarelli with BNP Paribas.

Hi, guys. Just a quick one on the key business vertical growth. So, you know, active safety, user experience, high voltage electrification, non-auto. Can you share what the growth rate expectations are for this year within the guide?

Yeah, sure. No, generally very consistent, James. I mentioned high voltage to John. You know, we still continue to see that north of 30%. That's excluding intercable. As you mentioned at the time of the deal, intercable, you know, obviously the M&A deals aren't in the organic growth numbers at this point. But intercable in and of itself grows well above 30% per year, so consistent with our high voltage business. We're actually seeing some active safety – acceleration growth this year. It had been in, call it, the low to mid-20s over the last couple of years. We're actually seeing that accelerate close to 30% in 2023 as we launch, to Kevin's comments, just launch a number of new full systems. So, you know, I think those, you know, we've talked in the past about what the multi-year CAGRs for those product lines are, sort of high 20% to 30% for active safety, north of 30% for high voltage. Those continue to be – that continues to be the case. Infotainment, we've talked about it. User experience, you know, we are going through a product transition there. You know, we expect that business to grow sort of high or high single digits this year as we move from – you know, legacy systems to these more robust integrated cockpit solutions. And eventually we, you know, we see infotainment being sort of up integrated into the SBA systems, which is what we're working on with our customers now. So, but again, continue to grow above market. And it's, you know, it's an important part of the business, but obviously the higher growth coming from active safety and high voltage.

Got it. That's super helpful. And then, Just with respect to the $135 million in lower disruption costs for this year, can you confirm what that overall cumulative impact is entering this year? I believe the number was something like $295 million was the expectation as of last quarter. It seems as though the fourth quarter incurred some additional challenges tied to China. So, yeah, if you could share maybe the timeline to fully recapture this all-in bucket, what that is, that would be great.

Yeah, I wish I could give you the timeline of recapture. We have 180 in. We finished last year a little over 300 million, so that's what's coming down from. We're taking the 135 down to the 180.

Okay, and then over time, these cost challenges are fully addressable.

Yeah, no, listen, and Rod, you know, Rod and his comment was correct, right? We said at the beginning, you know, we think four to six quarters from the beginning of 2023, we're going down over the next four quarters that $135 million. Working hard to get them down, again, it's – It's things like premium freight. It's things like plant downtime that are either either COVID or supply chain disruption related. We're seeing sequential improvement, but expect to continue to see sequential improvement. But, you know, it's what you saw in the fourth quarter this year, right? There are things that pop up that make it an expensive operating environment.

Yeah, I think it's important to note, setting aside fourth quarter COVID, when you think about car and inputs to a car, Supply chain disruption can start with just, you know, a shortage of one part. And the issues related to excess labor, premium shipments, manufacturing, loss of manufacturing productivity. And that's all it takes. And there's a ripple effect. And those dollars obviously, or those inefficiencies and costs, obviously add up. So... Although it does, to Joe's point, overall the supply chain situation is improving. There are still, continue to be, some unique situations that were outstanding or occurred in 2022 that are going to continue in 2023 with specific semiconductor suppliers. And then periodically there are surprises that affect the industry that players like ourselves need to react to. And our real focus has been how do we make sure we keep our customers connected? So we've consciously made the decision to absorb a portion of that cost near term, go back to the customer for relief once we've, you know, once we've addressed the issue and we've kept them connected. And we think that's translated into the, you know, quite frankly, the bookings that we've had in 2022, expect to have in 2023. And quite frankly, their posture on price recovers. So... It's tough to predict it.

Thank you. Thanks, Jeff. Thanks.

That does conclude the Q&A portion of today's call. At this time, I would like to hand the conference back over to Kevin for any additional or closing remarks.

Thanks, Operator, and thanks, everybody, for your participation today.

Take care, and we'll see you on the 14th.

That does conclude today's teleconference. We thank you all for your participation.