Aptiv Q1 2022 Earnings Call Transcript

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Provided by Quartr
May 5, 2022

Key Takeaways

  • Aptiv reported Q1 revenues of $4.2 billion, up 4% year-over-year and 11 points ahead of industry production, with operating income of $324 million and EPS of $0.63 despite ongoing supply chain disruptions and inflation.
  • New business bookings reached a record $6.1 billion in Q1—driven by advanced ADAS, user-experience systems, a European central vehicle controller award and high-voltage electrification programs.
  • Across key segments, Aptiv outpaced the market with active safety up 9%, user experience up 10%, high-voltage revenues up 10% and non-automotive sales up 5%.
  • Material inflation and supply-chain issues cost roughly $80 million in Q1 (projected net $205 million for 2022), which Aptiv is mitigating via price recoveries, cost-reduction actions and over 100 product-redesign initiatives.
  • The full-year outlook remains unchanged: revenues of $17.75–18.15 billion, adjusted EPS of $4.35 and ~6% global vehicle production growth, with expected margin improvement in H2 from volume and cost recoveries.
AI Generated. May Contain Errors.
Earnings Conference Call
Aptiv Q1 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good

Speaker 1

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 speakers' remarks, there will be a question and answer session. Thank you.

Speaker 1

Chris Tillis, Aptiv's Director of Investor Relations, you may begin your conference.

Speaker 2

Thank you, Marion. Good morning, and thank you for joining Aptiv's Q1 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 ataptive.com. Today's review of our financials exclude amortization, restructuring and other special items And we'll 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 in the earnings press release.

Speaker 2

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 Reasons that we cite in our Form 10 ks and other SEC filings, including uncertainties posed by the COVID-nineteen 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 And with that, I'd like to turn the call over to Kevin Clark.

Speaker 3

Thank you, Chris, and thanks everyone for joining us this morning. Beginning on slide 3. Aptiv had a solid start to the year, showcasing our ability to continue to outperform in a volatile market. Revenues totaled $4,200,000,000 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 $324,000,000 $0.63 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.

Speaker 3

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 $6,100,000,000 The result of growing demand for our portfolio of industry leading advanced technologies. As the world continues to grapple with the ongoing COVID-nineteen pandemic And the related supply chain challenges, Aptiv's 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.

Speaker 3

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 4. Revenue growth across our key product lines continue to outpace the market. In our ASU X 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 results of the launch of key infotainment programs in Europe and North America. In our Signal and Power Solutions segment, High voltage revenues increased 10% during the quarter, driven by the accelerated launch of electric vehicle programs, particularly in Asia and Europe.

Speaker 3

In our nonautomotive revenues, which now represent roughly 16% of Aptiv sales, increased 5 The result of strong growth in the general industrial, semiconductor and datacom markets. Our portfolio of advanced technologies aligned to the safe, clean 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 5. 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.

Speaker 3

We've 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, This 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.

Speaker 3

As shown on slide 6, 1st quarter bookings totaled $6,100,000,000 the highest first quarter level over the last several years. Advanced Safety and User Experience bookings totaled $800,000,000 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 book For the ASU X segment, the balance of the year remains very strong with several ADAS user experience and smart vehicle architecture program And the second quarter is off to a strong start with over $3,000,000,000 of ADAS awards and a central vehicle control award With lifetime revenues totaling $1,500,000,000 Bookings for our Signal and Power Solutions segment reached $5,300,000,000 during the quarter, Including $1,200,000,000 in high voltage electrification awards, the strength of our competitive position and the size of our funnel for high voltage program gives us confidence in reaching over $4,000,000,000 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.

Speaker 3

And our unique position as the only provider 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 7. Revenues for the Q1 increased 7%, Fourteen points over underlying vehicle production, driven by strong product line growth in both active safety and user experience. As I referenced on the last slide, during the Q1, we received a new business award from a leading German OEM for a central vehicle controller on the next wave of its Leading EV Platforms. This award is another strategic win for our portfolio of smart vehicle architecture solutions And is a key building block for this OEM's new electric vehicle platform, which is fully aligned with Afta's design for smart vehicle architecture.

Speaker 3

Moving to slide 8. 1st quarter revenues in our Signal and Power Solutions segment rose 2%, 9 points better than the decline in global vehicle production, Reflecting increased demand for high voltage architecture solutions and continued strong revenue growth in non automotive markets. Our industry leading portfolio of power and data distribution, connectors, electrical centers and cable management solutions combined with our global scale Uniquely positions 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 the 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.

Speaker 3

The Q1's new business bookings validates the value we bring with our system level approach 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 Solutions segment for the next several years. Turning to slide 9. 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 safe, green and connected technologies, including expanding our portfolio software solutions To meet the increasing needs of our customers and intelligently diversifying our revenue base in the 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 optimization.

Speaker 3

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.

Operator

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 $4,200,000,000 were up 4%, 11% ahead of vehicle production, which was down 7% in the quarter. Adjusted EBITDA and operating income were $478,000,000 $324,000,000 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 loss, FX and commodities and material inflation. Earnings per share in the quarter were $0.63 Lastly, we had operating cash flows outflows of $203,000,000 Driven primarily by our decision to maintain a higher working capital investment to help in part mitigate the impact of supply chain disruptions.

Operator

Capital expenditures were $247,000,000 driven by investments to support program launches across our key product lines. Looking at the Q1 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 of the top line was minimal as the pass through of the higher copper prices for our customers Offset the impact of the lower Europe. As I previously noted, the negative impact of price downs was minimal, almost flat on

Speaker 3

a year over year basis.

Operator

From a regional perspective, North America revenue was up 7% on an adjusted basis or 8% above vehicle production, 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.

Operator

Segment adjusted operating income was $16,000,000 in the quarter, Down $52,000,000 compared to Q1 of last year. Volume growth contributed approximately $25,000,000 of adjusted OI in the period, Reflecting flow through of 35% and annual price downs were effectively flat to prior year. A reduction in supply chain disruption costs and the benefit of higher performance and cost actions partially offset the impact Of the previously mentioned material inflation. We are actively pursuing multiple paths mitigate and or offset the material inflation costs impacting ASU X. In addition to commercial and pricing negotiations with our customers, We are also pursuing product engineering and redesign.

Operator

A number of these activities involve the redesign of products to open up multiple supplier sourcing Primarily as it relates to semiconductors, including the sourcing of semiconductors from newer market entrants in all regions where we operate. Signal and Power Solutions revenues were up 2%, reflecting 9 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 twenty twenty one distribution channel replenishment we discussed last year. Adjusted operating income in the segment was down $98,000,000 as the flow through in incremental volumes and the benefits of improved performance and cost saving actions We're offset by COVID and supply chain disruption costs as well as the impact of FX commodity and material inflation, 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.

Operator

We expect the Wind River transaction to be neutral to 2022 earnings per share. We believe the material inflation and continued supply chain constraints We're substantially addressed in our original guidance. And although we are seeing current year 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 Q2 will be significantly impacted by the COVID related lockdowns in China. We are not providing a formal guide for the Q2.

Operator

However, we do believe it is possible that the Q2 is at or slightly below the Q1 revenue As it relates to China, assuming the COVID related lockdowns eased during the Q2, 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 impassioned. 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 $17,750,000,000 to $18,150,000,000 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 $2,600,000,000 $1,900,000,000 Midpoints.

Operator

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 We just over $2,000,000,000 with CapEx at approximately 5% of sales. Moving to Slide 14, before I turn the call back 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 $17,500,000,000 a 14.2 percent adjusted operating margin And assume global vehicle production of approximately 98,000,000 units. When adjusting for current vehicle production of 83,000,000 units, The forecast would now be $15,200,000,000 of revenue with an operating margin of 12.6%.

Operator

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, 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 $250,000,000 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 Apto's underlying cost structure is well situated to drive incremental margins from the recovery in global vehicle production over the coming years.

Operator

With that, I'd like to hand the call back to Kevin for his closing remarks.

Speaker 3

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' product production lines connected, while at the same time implementing initiatives to optimize our cost structure to help offset 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.

Speaker 3

Thanks again for your time and let's open up the line for Q and A.

Speaker 1

Thank We will take the first question from Emmanuel Rosner from Deutsche Bank. Please go ahead.

Speaker 4

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

Operator

On the you're on the inflation aspect of it, Emmanuel?

Speaker 4

Yes, please.

Operator

Yes. Total in the quarter, call it right around $80,000,000 for the entire business On a year over year basis, so that's the increase. Just the way the price increases started to come in Over the course of last year, we really didn't see price increases in Q1. Those tended to start at the end of Q2 and then build through the balance of the year, right? So The year over year is going to be higher in Q1 just given that we in the Q1 of last year, it was more of a constraint issue than it was Constraint and inflation that we saw in the back half of the year.

Operator

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 $200,000,000 a little over $205,000,000 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 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, Team across the board, the sourcing, engineering team, the business team is doing a really good job of holding the line at this point.

Speaker 4

Okay, great. And then looking forward, I guess, your final slide comparing with the previous framework given 2019 Seems to be somewhat optimistic around the ability to recover or eliminate or offset some of these pressure on In the midterm, are there I guess what would be the process for this? Are there any additional recoveries you can have? Some of it contractual? Is it negotiation?

Speaker 4

Is it mostly on the cost side? I guess, what would it be what will be required to sort of

Speaker 5

Eventually claw back this margin pressure?

Operator

Yes. No, listen, I don't think it's exactly what we've been saying really for the past 2 or 3 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, 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 And so that's 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 Part of it and again we've had this muscle in the company for the last as you know for the past 5 or 6 years where we're maniacal on the cost Sure.

Operator

And we're again continuing to look at the cost structure and find ways to if we can't directly mitigate the cost increases, Find other ways through manufacturing or SG and A performance to help offset them. So I don't think those levers have changed really over the past 3 or 4 quarters. Kevin, did I even

Speaker 3

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

Speaker 1

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

Speaker 4

Good morning, guys. Maybe just a follow-up on hey, guys. Just to maybe follow-up on this. I mean, the idea that the headwinds Has grown so dramatically since you last gave guys, been able to hold it.

Speaker 5

I understand there's a lot

Speaker 4

of actions and negotiations that are going on With your partners below you and above you. Could this lead to much higher incrementals or margins As the world normalizes and stabilizes over time or is there some of this that is somewhat temporary In dealing with the volatility at the moment.

Operator

John, I think It's going to evolve. As I said in my prepared comments, it's over the next couple of years as it relates to material inflation, right? It's not going to go away tomorrow. But I do think at least on the material inflation side, the COVID and supply chain disruption costs We've talked about those should abate as things normalize. So that'll be helpful to margin.

Operator

I quantify that at about $250,000,000 We've bumped that up A little bit from the original just given some of the disruption in Q2 in China, but still within a manageable number and it's Non structural, it's these types of sort of transaction costs that occur when you have to close plants quickly and such. As those costs abate and I think and 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. I think when you take it, I have an appreciation for the fact that our original 2022 estimate was at 98,000,000 units of production and we're now operating at 83 round numbers. 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 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.

Speaker 4

Yes, John. I think if you look at

Speaker 3

the mix of business and the flow on the mix The business, it's more profitable today when you exclude the material inflation and supply disruption Than what it was back in 2019. So to the extent you get normalization from an inflation standpoint and stabilization of the You should see improved incrementals and lower decrementals, quite frankly, to you extent you have weakness.

Speaker 4

Yes. 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 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.

Speaker 4

There's a lot going on in the world. This is kind of a similar question where everybody is a little bit distracted, but you're winning business Like crazy and that's even before Wind River comes on. I'm just curious, 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? 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?

Speaker 3

Yes. So it sounds like there's 2 parts to your question. So as you look at where we are from a From an old standpoint, new business opportunity standpoint, we did attribute it to a couple of factors. 1, When you think about our product portfolio and what we refer to as the brain and nervous system of the vehicle, The industry is aligned and virtually all OEMs out there are rethinking vehicle architecture and are on a path towards a software defined vehicle. So we're seeing an acceleration of that trend that given the nature of our product portfolio, we're benefiting from.

Speaker 3

In addition to that, 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 And the traditional portions of our business is stronger than it's ever been. And then you overlay on top of it A kind of second and third generation of advanced ADAS solutions, in cabin sensing solutions, User experience solutions that are more dependent on software capabilities, which inherently we have based on our legacy business. And then you overlay the incremental capabilities that Wind River has and that they'll ultimately bring when they're a part of Aptiv. There really isn't anyone out there with the same sort of competitive position.

Speaker 3

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 that trend.

Speaker 1

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

Speaker 5

Thanks so much team. I wanted to focus in on maybe the implied 2nd half margin first half. And obviously, I know you have a range, but given you To reiterate that 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 300 basis points better. And then the top end, which I think a lot of people will be curious since you kept would be almost 150 to 200 basis points better. So 500 basis points more, which would imply margins in the 13%.

Speaker 5

Can you just walk us through that, Since you said Q2 looks like Q1, what is so different about second half? We obviously get better volumes, but how much of it is known Price recoveries and the lag, which is hurting first half. Just any more qualitative on that because it's so stark second half versus first half?

Operator

Yes, 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. 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.

Operator

Some of it is comps. If you recall, just The back half of last year, August, September, October, COVID in Malaysia, those were the low points from a 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 days at a time, week after week after week. So we're picking up that benefit.

Operator

We're not assuming that's And in addition to that, you've got building volume growth as we go through building volumes as we start to go through some of the launches, around things like user experience and there's some high voltage launches in the back half of the year. And our price recovery, Just the way the negotiations have worked with customers over the past 3 or 4 months or tend to be somewhat back end loaded and that they start to pick up with The volume on the back half of the year. So not a surprise to us within and appreciate just given we didn't give quarterly guidance, it was harder for folks 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 Everything we're seeing at the moment on the ground over there, that's what we're assuming.

Speaker 3

Yes, Chris, maybe I'll just take a second Step back to Joe's comments, if I could just make one comment. So we managed through COVID in 2020 Supply Chain Challenges in 2021 and Q1 of 2022 and at the same time Continue to advance our or strengthen our product portfolio. And all of that activity You know 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.

Speaker 3

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 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 Price and all that is translated into significant improvement As we roll out through the balance of the year, now we run into particular periods where 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 reasonably manageable.

Speaker 5

Perfect. Kevin, Joe, I appreciate the Vodaf conference. Can we talk about a little bit by division? You referenced a lot of that, yes, but obviously we've been waiting for sort of the margin uptick in ASUE. And if I think about it on a 2 year basis, Your margins in second half of twenty twenty were in the call it 8% plus range for ASUE.

Speaker 5

That would seem to be implied again if I just do the midpoint of your second half because it's such a we've now been in the single digit low single digits for ASUE for 6 quarters. I just wanted to confirm that both divisions would see that uptick.

Operator

Yes. Both do, Chris. UX is a little bit more challenged obviously just given that is where a lot of the semiconductor spend is, right? So round Well, numbers, when I give an inflation number, I mentioned that $80,000,000 to Emmanuel, 2 thirds of that plus is hitting And what does hit in SPS, some of that is copper timing, because we're indexed on the metals by there. So, we would expect ASU X to finish the year, Call it back to mid single digits.

Operator

So just like it's bearing the cost a lot of that semiconductor pain at the moment, it's going Steve, the benefits of the commercial recoveries in price, so we are targeting mid single digit, for the full year in ASU X. So obviously, that would put us Closer to high single digits in the back half.

Speaker 5

Perfect. And just on the

Operator

bottom line The SPS has a bit more of a straighter trajectory. It's low double digits now or just about low double digits now and it moves to sort of mid double digits For the full year.

Speaker 5

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

Operator

Yes, it's growing really strong. It is a tough comp. I think we had a jump, what I don't know, it was 128% or something last year growth. So you got a Tough year over year, there's a couple of things there. Obviously, there was some European production disruption, which hits high voltage.

Operator

There was some China disruption in the back half, which obviously now it's hit high voltage. So those are sort of the transactional things in the quarter. There's 2 other things I'd probably highlight there. 1, as Kevin has 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.

Operator

We want to see them 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 and 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, We've got great content. We're on about 50% of the launches over the next 2 years. So that is what I'd sort of frame as the sort of the bigger picture 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?

Speaker 1

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

Speaker 6

Yes, good morning and thank

Speaker 7

you very much for taking the questions. I'm just starting 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 Aptu has to hold on to the recoveries. You're expecting to see in 2H as you head into 2023 and then hopefully make progress toward the 12

Speaker 3

Yes. Mark, I'm sorry, you were a little bit faint From a question standpoint, I think you were asking about structurally how we see a path back to more normalized Margins?

Speaker 7

Yes, I apologize if I had a bit of a cold.

Speaker 6

Yes. The recoveries you're seeing

Speaker 7

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. And I'm trying to get at to what extent can you hold on to this

Speaker 3

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

Speaker 7

Okay, that's helpful. And then something 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 the new chip. What kind of software rewrites might Be necessary, how long does that take?

Speaker 7

But then just give us a sense of how far along you are in this effort in 22, because again, you spoke to it multiple times now on the call. So it seems like you're having some good success with. Thanks.

Speaker 3

Yes. 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 6 months to a year plus.

Speaker 3

These have been initiatives that have Been underway for really since kind of early to mid-twenty 21, so we're well underway. We have it's close to 100 engineers today who are solely focused on that hardware redesign as well as 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 Most of it requires investment from an engineering standpoint and some element of time, but it's something that's been underway for A fairly lengthy period of time.

Speaker 1

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

Speaker 8

Thanks. Good morning, everyone.

Operator

Hey, Joe.

Speaker 8

Hey, how's it going? I just want to go back to Holistically, I'd like to talk about some of the parts here, because it sounds like there's more Pricing recovery is assumed in your outlook than prior. And your light vehicle production or your vehicle production outlook at 6% weighted to active Sort of unchanged. So it would seem like the to sort of hold the guidance, Somewhat like 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 like how much of the recoveries is really helping the top line in your guidance now versus prior?

Operator

Yes, not really changed, Joe. I mean, we did talk about at the time of the guide, we've The economics were always in the guide. They weren't on the price line. And I think we've talked about the reasons why We did that because we're not necessarily sure how are all of the recoveries are going to come from. But no, the economics Remain fairly consistent with what was in the original guide, which is in part how we're holding it.

Operator

Like I said, there are some Some increases we're seeing coming through during the current year, but we've obviously got activities and we're able to absorb a little bit more of that. So from a net economic basis, Really no change. Listen, on the top line assumption, we haven't moved. We're at approximately 6%. Understand there's a lot of movement.

Operator

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, they're most likely going to be some puts and takes in across regions. Our view was that we probably could the industry probably could have done more in North America to begin with if it wasn't for Some of the supply chain constraints, so to the extent you get some softening in Europe, parts availability, chip availability goes up because of softness in Europe. We think North America Potentially do more at least based on what we're hearing from our customers.

Operator

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 a 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.

Operator

We like I said, in the original guide and I sort of my Great comments. We try to think through what was realistically coming down on us in 2022 from an inflation perspective What we're going to have to go do from a recovery perspective.

Speaker 8

Okay. Thanks for that. And then Kevin, 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 I mean, are you really even though it's sort of not closed, are you really able to have those Discussions with the automakers, it sounds like you are. And again, like what maybe just a little bit more color on the receptivity So using a solution like Wind River because it's obviously a very important and complex decision for the automakers.

Speaker 3

Yes. 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 Wind River was really reaching a commercial arrangement, where we were partnering on the development of middleware and 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 AppTit brings as well as the capabilities that Wind River So those commercial engagements have been extensive with a very high level of interest.

Speaker 3

I would say separate from that given our capabilities in ADAS and user experience in the traditional areas Software kind of feature development, software building blocks 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 Wind River Or not. There's increasing demand of you of increasing need for support as it relates They're software activities. So it's as we talked about, Joe, it's a meaningful opportunity. A bulk of the industry is really struggling with it and we feel like we're very well positioned To assist in the transition to the software defined vehicle.

Speaker 9

Thank you.

Speaker 1

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

Speaker 9

Yes. Good morning. Just Follow-up on the related themes of Advent this morning. So first is around price recovery and second just further drilling down into the This is a Tier 2 issue, this is the semi firm. So the first on just general price discovery.

Speaker 9

If I'm running an OEM, it seems like I've been assaulted by or excuse me, requested by every Tier 1 on earth Forward recovery, there are 2 pressures coming through to the centers 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, to what extent is your C suite access, you're Talking about the economy, electrification, software defined vehicle, facilitate those cost recovery discussions.

Speaker 3

Yes. 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 the 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 It's a great area. Those discussions tend to take place at, to your point, the most senior levels within the OEM.

Speaker 3

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 The nature of what we do, whether it's battery electric vehicles, whether it's advanced ADAS systems or solutions, Those tend to be programs or initiatives that are much more long term in nature and require alignment between supplier and customer. And I'd say we're having more success with those particular customers we're in those relationships.

Speaker 9

And second, a follow on to the questions about semiconductor substitution and software. Is there actually a margin opportunity over the midterm Place that with Aptiv software that could be in a domain or a zone or even a central compute unit?

Speaker 3

Yes, 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 SBA strategy and our whole software strategy.

Operator

Brian, it's Joe. You might recall as well and this is a couple of years out, but we did talk about over $100,000,000 of 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 our the Wind River products once we own them. Now that's a couple of years out, but that is thematically consistent with what you're

Speaker 5

Okay. Thanks.

Speaker 1

The next question comes from Ryan Brinkman from JPMorgan. Please go ahead.

Speaker 2

Hi. Thanks for taking my question, which is on Power Electronics. Of course, the disposition of CellFi 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 RemainCo just prior to the spin. It's been winning a ton of awards and first for inverters and now yesterday for Battery Management Systems. So obviously, electrical architecture is very attractively levered to high voltage.

Speaker 2

Now you're getting into even higher margin. Other areas like software With Wind River, etcetera. 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 earth, I don't know maybe they're non competes or other obstacles Which

Speaker 4

could cause you to want

Speaker 2

to focus on other areas?

Speaker 3

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. And that's an area where we've built out Teams 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.

Speaker 3

So that's something that's been underway for, Frankly, the last couple of years.

Operator

Yes, 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 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 not we're not precluded in any way From participating in that part of the market.

Speaker 2

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

Speaker 1

The next question comes from David Kelley from Jefferies.

Speaker 4

Hey, good morning guys. Thanks for taking my questions. I think you mentioned non autos is now 16% of revenues. You clearly have Wind River closing soon. The macro has changed quite a bit since 2019, but you've been targeting kind of non O'Neill's revenue mix at 25%, I believe by 2025.

Speaker 4

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

Operator

Yes, David, it's Joe. So, I think over the next couple of years that we've got really good growth in that non automotive business. We think that closes The gap to call it almost 20%. Now, we've got the other product lines growing faster, so it doesn't quite get 20% organically. It's probably good news and that the other product lines have things like high voltage have continued to grow really fast.

Operator

But Still have some work to do on the inorganic side. We've talked consistently M and A strategy. We'll continue to include businesses like Winchester Interconnect, which was non automotive in a product line category that we understand really well For 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. As we've always said, that was a high level target.

Operator

That was an ambition. We're not going to take a big student bottom right just to hit that number, but we think we're on a really good trajectory to get there.

Speaker 4

Okay, got it. Thank you. And then maybe kind of one quick clarification on the Auto and Auto Business as well. I think you noted revenue growth of 5% and S and PS from non autos. And I think you also mentioned TV and industrial Growth of 1% elsewhere in the deck.

Speaker 4

So I guess bridging that gap, is that all datacom or is there Some other factor we should be considering there?

Operator

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

Speaker 4

Okay, perfect. Thank you.

Operator

Yes. The one other comment, I made it thanks, just reminded me. The one other comment just that I mentioned this, we did have that channel replenishment in Q1 last Here in the Engineered Components business, connectors and HellermannTyton, is that a part of that falls into that non automotive business. Obviously, we're replenishing So you got a little bit of a year over year comp that impacts non auto as well.

Speaker 1

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

Speaker 10

Great, thanks. Good morning everyone. Just two questions from me. Going back to the second half margin, 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 Yes, on 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, how big are those projects and maybe the timing for some of the savings from those?

Operator

Yes. Hi, it's Joe. Let me start with the question. Not going to quite at this point in the year get into sort of Exit margins or sort of run rates coming out of the end of the year. The way I would think about it more for 2023 Would be and what we're looking at is obviously how did the COVID and supply chain costs come down over the course of next year.

Operator

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 1 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, We would expect to sustain that go forward, but I think it's a little choppy at the moment to sort of Trying to go out and take a stab at 2023 margins.

Speaker 3

Yes. And Itay, 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.

Speaker 3

You think about the offset to the material inflation that we're seeing that we saw late last year 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 products replaced.

Speaker 8

That's all very helpful. Thank you.

Speaker 1

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

Speaker 6

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.

Speaker 6

Maybe you could just be a bit more granular on the impact to S and PS in Europe. Hey, do you have any remaining operations in Europe? And I know you mentioned customers are paying for the move production, but maybe you can give us a sense of How much volume you've lost or whether there's other leakages? And is there any potential to take additional business from perhaps Other competitors that are over indexed to Ukraine?

Speaker 3

Yes. 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. Elyse, as you believe customer schedules there, production should start picking up sometime late this quarter.

Speaker 3

That's something that We'll watch closely.

Operator

When you

Speaker 3

think of Ukraine, we've talked about this or you look at Ukraine, we've talked about this in the past, we have 4 manufacturing facilities. 2 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 2 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 just given where we were, just given economics, those weren't situations We pursued, and my guess as things continue to evolve, we'll have ongoing discussions with those OEMs whether or not it makes sense for us to take over that But it has presented some potential incremental revenue opportunities.

Speaker 6

Okay. So net net, it sounds like the actual impact from what's going on in Ukraine has actually been More limited, is that a fair assessment? Yes.

Speaker 3

I mean there's been a revenue and OII 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

Speaker 4

In Russia, it could be

Speaker 3

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 of 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.

Speaker 3

We had existing space. We're able to move production pretty easily and they supported us from a Cost and logistics standpoint naturally doing that.

Operator

And even the locations where we're in the western part sort of along the Polish Romanian border, We are 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. And to Kevin's point and one of the reasons we're not talking about this Some of the 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.

Speaker 6

Great. And maybe you could also give us a sense on more specifically what is In China right now, to what extent has your production been outright halted? Where does it stand today? And I think we've seen in the past your production is outright vaulted, 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 shutdown.

Speaker 3

Well, I think Joe said it is a pressure near term, depending on the length of the lockdowns. I'd say at this 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, it actually did.

Speaker 3

Those wire harness facilities are now on average Operating at a 50% to 60% capacity utilization level. So there is an element of production that's actually taking place. The question is, does the 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?

Operator

Yes, Dan, it's akin to what we talked about last year, just different timing, right? China's as I said in my prepared comments, we do expect Q2 to be heavily impacted. That is a market, Our business team and industry, our customers that have recovered quickly in the past, there's time left in the year where this is talking about a March, April, May not a November, December type disruption.

Speaker 4

And it was a

Operator

little bit of the same dialogue we had last year. 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. There isn't there is a desire by our customers to recover quickly. And just given where we are from a point in time of the year And from what we're seeing from customer desires and our capabilities, we think those 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.

Speaker 6

Great. Thank you.

Speaker 1

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

Speaker 3

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

Speaker 1

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

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