Aptiv PLC (APTV) 2021 Q3 法說會逐字稿

Good day, and welcome to the Aptiv Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vicky Apostolakos, Director of Investor Relations. Please go ahead.

Thank you, Tasia. Good morning, and thank you for joining Aptiv's Third Quarter 2021 Earnings Conference Call.

The press release and related tables, along with the slide presentation, can be found on our Investor Relations portion of our website. at aptiv.com. Today's review of our financials exclude restructuring and other special items and will address the continuing operations of Aptiv.

The reconciliations between GAAP and non-GAAP measures for both our Q3 financials as well as our full year 2021 outlook are included in the back of the presentation and on the earnings press release.

During today's call, we'll be providing certain forward-looking information, which results -- which reflects Aptiv's current view of future financial performance and may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and impact on the supply chain and global economy.

Joining us today are Kevin Clark, Aptiv's President 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 and full year outlook in more detail before opening the call to Q&A. With that, I would now like to turn the call over to Kevin Clark.

Sure. Thank you, Vicky, and thanks, everyone, for joining us this morning.

Beginning on Slide 3. We experienced continued strong demand across the portfolio in the third quarter despite continued supply chain constraints negatively impacting vehicle production. Revenues of $3.7 billion declined 5% versus the prior year, with a record 18 points of growth over market.

New business awards of $5.8 billion bringing the year-to-date total to a record $17 billion, reflecting the relevance of our product portfolio as well as the trust our customers have on Aptiv, given our success executing for them in this challenging environment.

Operating income and earnings per share totaled $219 million and $0.38, respectively, negatively impacted by the significant headwinds from the ongoing supply chain tightness and the downstream impacts that Joe will cover in greater detail shortly.

While we expect vehicle production to improve on a sequential basis in the fourth quarter, we anticipate the headwinds related to supply chain constraints to persist well into 2022.

Setting the near-term challenges aside, the team is executing well and continues to proactively position Aptiv for the future, optimizing our cost structure, while investing in high-growth, high-margin technologies that further enhance the resiliency of our business model, translating into greater value for both our customers and our shareholders.

Moving to Slide 4. The relentless execution of our strategy over the past decade has positioned Aptiv as a more sustainable business, creating over $40 billion of value since our IPO in 2011. This represents an average annual return to shareholders of over 25% and a total return of more than 950% to date.

As we transformed Aptiv, we built an industry-leading portfolio of advanced solutions that make vehicles safe, green and more connected. To drive this transformation, we took several actions, including making smart portfolio moves to put further operating leverage in our business model. We exited low growth, low-margin product lines and spun off our Powertrain segment positioning Aptiv to focus on our unique capabilities around the brain and nervous system of the vehicle.

At the same time, we completed a number of acquisitions which enabled our software and data management capabilities, increased our scale and leverage in engineered components and expanded our presence in adjacent markets.

Last year, we established Motional, our autonomous driving joint venture with Hyundai, which will be operating fully driverless vehicles on the Lyft ridesharing network in 2023.

These proactive actions perfectly position Aptiv to benefit from the transition to the software-defined vehicle, while further increasing the robustness of our business model, all of which translates into continued outperformance and long-term value creation.

Turning to Slide 5. We continue to successfully navigate the current challenging environment while proactively enhancing the strength of our competitive position. Our supply chain resiliency team is leveraging technology data and analytics to stress test our integrated supply chain network under multiple scenarios, helping us to proactively identify and address potential bottlenecks. At the same time, we're working through daily constraints by leveraging our proven cross-functional crisis management process.

Our planning process and manufacturing have enabled us to support a record number of customer program launches. And we continue the intelligent automation of our manufacturing facilities to lower operating costs and increase product quality. All of which improves customer service levels.

Our engineering teams are proactively redesigning products to mitigate semiconductor supply risks, reduce material costs and increased functionality for our customers. And lastly, our culture of continuous improvement translates into the constant pursuit of opportunities to reduce costs and improve quality, enabling us to continue to strengthen our operating foundation and transform our business model despite the dynamic environment.

As shown on Slide 6, third quarter new business bookings reached $5.8 billion, bringing the year-to-date total to $17 billion. As I already mentioned, it was a record. Our unique portfolio of safe, green and connected technologies, combined with our flawless operating execution, continues to position Aptiv as a partner of choice for our customers.

Our capabilities around the vehicle brain and nervous system and collaborative approach to platform solutions sets us apart in the industry, enabling us to conceive, specify and deliver advanced architecture and software solutions that enhance systems performance while lowering the vehicle's total cost, positioning us to increase our share of wallet with both traditional and emerging OEM customers, and at the same time, strengthen our overall competitive position.

Turning to highlights from our Advanced Safety and User Experience segment on Slide 7. Third quarter revenues declined 7%, which was 16 points better than the reduction in global vehicle production. New program launches, content increases and market share gains translated into continued market outgrowth despite the significant supply chain disruptions impacting the segment.

Consumers continue to demand more active safety and connectivity features in their vehicles, which are delivered through more advanced software features, leveraging the latest sensing and compute solutions. This trend in strong consumer demand and our industry-leading capabilities presents us with additional market share opportunities and the ability to increase our customer share of wallet, and as evidenced by our third quarter conquest business award with Mercedes Benz to provide our multipurpose interior sensing solutions on their next-gen electric vehicle platform.

This business award builds on our recent in-cabin monitoring successes and advances our customers' roadmap of interior sensing features by further enhancing driver safety and improving the in-cabin user experience. The evolution of in-cabin sensing is playing out as expected. And our leadership position makes Aptiv a strong collaboration partner for our customers.

Turning to Slide 8. Revenues in our Signal and Power Solutions segment declined 4% during the quarter, 19 points better than the reduction in global vehicle production, reflecting the continued benefit from the acceleration in the production of electrified vehicles, resulting in greater demand for our high-voltage solutions, and the continued strong demand for connector and cable management products for both automotive and non-automotive market applications.

We are the industry leader in electrical distribution systems, with the engineering capabilities and global manufacturing scale necessary to rapidly build customer -- rapidly bring customers to market as they quickly adapt to the accelerating macro trends. A great example is our recent business awards for Stellantis, an extension to our existing business to support design changes and content increases on the Ram truck. It was another strong quarter for our Signal and Power Solutions segment in a very challenging environment.

Slide 9 provides an overview of some of the specific areas where we're focusing our software development capabilities.

As we've mentioned previously, our OEM customers are beginning to decouple software from the underlying hardware, both technically as they implement smart vehicle architecture and in how they source new programs. Our leading position in the design and development of high-performance, cost optimized, automotive-grade hardware as well as deep software development capabilities allows us to provide industry-leading interior and exterior perception solutions.

Modular software and features that lower system costs and accelerate speed to market through higher reuse; middleware solutions, which support up integration and the serverization of compute; vehicle life cycle management through data collection and data analytics; and full vehicle level integration, testing and validation services.

These capabilities, along with extensive collaboration with our customers and our supplier partners, allows us to continue to be a partner of choice for our customers across literally all vehicle domains, enable our customers to offer greater flexibility for end-user differentiation and personalization, and further strengthen our competitive position as a leading provider of smart vehicle architecture that accelerates the transition to the fully electrified software-defined vehicle.

With that, I'll hand the call over to Joe to take us through the financials in more detail.

Great. Thanks, Kevin, and good morning, everyone.

Starting on Slide 10. The business continued to outperform the market despite the challenging environment Kevin referenced. Revenues of $3.7 million were down 5%, with record 18% growth over market and market outgrowth in every region. Adjusted EBITDA and operating income were $412 million and $219 million, respectively, reflecting year-over-year headwinds, primarily COVID and supply chain disruption costs of $55 million and $40 million from FX, commodities and input costs. Earnings per share in the quarter were $0.38 and operating cash flow was $4 million, reflecting higher inventory levels resulting from customer schedule reductions and longer lead time requirements from certain suppliers as well as the lower earnings level.

Looking at the third quarter revenues in more detail on Slide 11. We continued to experience demand for higher contented vehicles driving strong growth over market across all regions despite lower vehicle production levels. Favorable FX and commodity movements were offset by lower production volumes in the quarter.

From a regional perspective, North America revenues were down 7%, representing 16 points of growth over market, driven by the ramp in active safety launch volumes and a favorable truck and SUV platform mix. In Europe, strong double-digit outgrowth of 19% due to robust customer launch activity and higher volumes in our high-voltage electrification product line. Lastly, in China, revenues reflecting 17 points of growth over market, resulting from growth with leading local OEMs and strong on high-voltage growth.

Moving to the segments on the next slide. Advanced Safety and User Experience revenues fell 7% in the quarter, translating to 16 points of growth over underlying vehicle production, including strong growth in active safety and somewhat lower market outgrowth and user experience, driven by the timing of new program launches. Segment EBITDA was down $46 million, driven by supply chain disruption and higher input costs, primarily related to semiconductors.

Signal and Power Solutions revenues were down 4%, representing 19% growth over market. The market outperformance was driven by a continued strength in our high-voltage product portfolio as well as strong outgrowth in commercial vehicle and industrial end markets. EBITDA in the segment was down $123 million in the quarter on lower sales volumes and additional costs from supply chain disruptions and higher FX commodities and input costs.

Turning to our outlook for the remainder of the year on the next slide. Our revenues and operating margin remain unchanged from the outlook we provided in mid-October. We continue to expect revenue in the range of $15.1 billion to $15.5 billion, up over 10% compared to the prior year. We expect global vehicle production to be roughly flat for the full year, translating into over 10 points of growth above market, demonstrating the relevance and diversity of our portfolio and product lines. EBITDA and operating income are expected to be approximately $2 billion and $1.2 billion at the midpoint, with strong year-over-year sales volume conversion.

Despite further COVID and supply chain disruption costs, which are now estimated to be $310 million for the year, up $170 million over the prior year, and FX, commodity and other rising input costs of $195 million, mainly driven by semiconductor and resin pricing. Product line level margins continue to be aligned with our expectations, validating the strength of our market -- of our portfolio of market-relevant technologies. Lastly, we expect earnings per share of $2.55 at the midpoint and operating cash flow of $1.2 billion.

Turning to Slide 14. As we have discussed, the combined benefits of our strong product portfolio and robust business model enable us to convert more income to cash, generating higher operating cash flow. We now expect operating cash flow of $1.2 billion in 2021, driven by increased earnings, offset by higher inventory investment and continued investments in growth.

As you can see in the middle of the slide, we ended the third quarter with $2.7 billion in total cash, enabling us to manage through the current environment, while supporting record year-to-date new business awards and launch activity. Lastly, our investment in working capital helps ensure we are ready to keep our customers running in this challenging environment, making Aptiv a key partner of choice.

Turning to Slide 15. Despite the variability and lack of forward visibility in customer production schedules, we wanted to provide some initial thoughts on the outlook for 2022. We continue to believe that the supply chain disruptions will impact overall vehicle production levels in the coming year, particularly in the first half of 2022. Despite these challenges, our strategy remains unchanged.

And we believe we are very well positioned to lead the continued transition to higher contented, software-enabled vehicles, with increasing levels of active safety and Powertrain electrification. Although it is still early in the planning process for 2022, we are confident in our ability to outgrow the market, driven by continued acceleration of the safe, green and connected megatrends.

With that said, we do believe 2022 vehicle production will be impacted by supply chain constraints and that the industry will not return to pre-pandemic production levels until post 2022. As it relates to material input costs, we continue to make traction on our mitigation initiatives, including supplier recovery strategies, engineering redesign and alternative source evaluations, as well as engaging in commercial discussions with our customers. Although we will see some benefit from these initiatives, it is unlikely that the full impact of the elevated input costs are offset in the coming year.

Additional costs related to supply chain disruptions, including elevated transportation and freight costs, as well as the costs associated with the intermittent production disruptions, will continue into next year. As we have discussed, these costs are not structural in nature and will ease as supply chains and material availability improve over the course of 2022.

Finally, the actions we have taken over the prior years to drive underlying product line profitability and establish the company's strong financial position will allow us to continue to invest in new technologies, both organically and inorganically, while supporting our new business pursuit activities. As we have consistently demonstrated, these investments will ensure that we continue to deliver disciplined revenue growth well beyond 2022 and the current industry operating challenges.

With that, I'll turn the call back to Kevin for his closing remarks.

Thanks, Joe. I'll wrap up on Slide 16 before we open it up for questions.

While near-term headwinds are expected to persist into 2022, as Joe has mentioned, we remain confident in our product portfolio aligned to the safe, green and connected megatrends.

As we reflect on our recent operating performance, it's clear to us that our relentless focus on innovation and flawless execution is allowing us to better support our customers and is resulting in increased momentum related to new business bookings and strong market outgrowth, a further widening of our competitive moat and a continued strong track record of delivering sustainable value creation.

As I mentioned at the start of our presentation, Aptiv has been on an exciting journey these last 10 years, but the team is even more excited about what we'll deliver over the next decade.

Beginning with providing our customers with new cost-effective, innovative solutions that enable the future mobility that serve to accelerate the trend to a more safe, green and connected world, and translate into continued outsized returns for our shareholders.

In summary, we remain laser-focused on continuing to build a more resilient business that consistently delivers for our customers and our shareholders over the next 10 years, effectively advancing our vision of the company in 2025 and beyond.

So with that, let's open up the line for Q&A.

(Operator Instructions) Our first question today comes from Rod Lache from Wolfe Research.

Was hoping maybe you could, first of all, clarify a little bit more what drove the 61% decremental on the volume in SPS. And more importantly, if we take a step back and we think about for the overall company for the year, the $310 million of supply chain and COVID costs and the commodity costs of $195 million, can you talk about what the prospects are for recovering that if they did remain elevated? So any thoughts on how to kind of frame that?

Sure. Why don't I start with the decremental? Rod, it's Joe. I think as it applies to SPS, it applies overall to Aptiv, right? Q3, I think, obviously, a very challenging quarter from a decremental perspective. Really, there's a couple of things driving that. And I'll start by -- obviously, this is very lumpy when you just look at a one-off quarter. I'd say there's 2 real drivers, right? We saw volume fall off significantly in the back half of Q3.

Year-over-year, our view of vehicle production is will be flat to 2020, but the back half is going to be down by a little over 20%. So there's a lot of volume coming out quickly. Obviously, there's only so much you can do with the cost structure given such the short period of time that it's come down.

But we have continued to incur the supply chain disruption costs. So you've got not only revenue coming down quickly, but you've got a fair amount of supply chain disruption costs that are hitting in the quarter and will hit in the back half of the year. So the quarter had a sharp decremental.

I think if you took a step back and looked at the full year, I think we're much more in line with our typical ranges of where we think incrementals and decrementals are and what we've historically talked about, sort of that incremental of 18% to 22% and decrementals of sort of 25% to 30%, again, depending on how quickly volume comes down.

So for the full year, I think the incrementals are generally in line with that. We're obviously picking up an impact from the overall supply chain-related disruptions, but much more in line with where we'd historically expect the business. But it's -- I think in a given quarter, particularly when you see the sharp moves in volume, and this isn't different from what we saw actually during COVID last year. We are going to run heavier on those decrementals. And again, it applies to -- it really applies to both segments.

And Rod, it's Kevin. I'll take the second part of your question. I would break our activities to offset into 4 -- 4 or 5 buckets. So as we always do, we're constantly reassessing, reevaluating our cost structure and looking for opportunities, both within supply chain, outside of supply chain to further reduce costs.

We're in active negotiations with the supply base. Situations like this, I guess one of the side benefits is becoming much more strategic with your customers as it relates to supply chain as well as more strategic with your supply base, which translates into, quite frankly, fewer supplier relationships, deeper supplier relationships, more strategic supplier relationships, which provide you with the opportunity to further optimize the supply chain and reduce costs.

I think in the past, we've talked about over 100 program or product redesign activities that we have underway, where we're substituting alternative inputs to platform solutions that will further lower those costs.

And lastly, but equally important, we're having active discussions with all of our customers with respect to the cost of doing business in today's environment and the support we've provided to ensure that they remain connected from a supply standpoint.

So those would be the 4 major buckets I would categorize things in. I would say as it relates to cost and cost structure, and it's important, consistent with past, we continue to invest in growth opportunities, technologies that support growth opportunities in areas like software, in areas like active safety, in areas like high-voltage electrification. And I think it's important to continue to do so, even in light of the decremental margins that you talk about due to production interruptions.

So maybe just to put a finer point on that, do you have a view on the extent to which this could be mitigated through those 4 actions? So it's a pretty big number in aggregate, obviously.

Yes, it is. We're working through that as a part of our guidance for 2022. We'll talk about it. I think it's safe to say that you don't mitigate all of it in a 12-month time frame. So there'd be some amount of working through it. But as focused as we are on developing innovative solutions where we have teams as focused on lowering overall cost.

Okay. And just second, the growth over market all year has been much stronger than you expected. It was -- I think it was 16% in the first half, now 18% this quarter. Have you been able to sort of assess the extent to which this is -- obviously, a lot of it is secular with high voltage and active safety. But there's some component of that which is just driven by production mix and what OEMs have done to prioritize certain vehicles. Have you been able to parse that out just to get a sense of what the trajectory really underlying this has been?

Yes. I think it's tough. Rod, I think that's a great question. It's a fair question. I think it's tough to do, right? Right? In reality, we've -- over the last few years, we've seen accelerated demand for ADAS solutions, for high-voltage electrification and other items.

So I think it's a little bit -- it's difficult to be precise or to precisely answer that question. Joe in the past has spoken to the fact that OEM customers, it appears as though, are producing an overall richer product mix. But to the extent that's driven from the current supply chain crisis versus some of its overall trend in adoption of active safety or high-voltage electrification. It's less than precise calculus.

Our next question comes from Joseph Spak from RBC Capital Markets.

I'm just -- if I sort of track this, and I know you sort of give it all on a year-over-year basis and sometimes a little bit sequentially. But is it -- it seems like if I sort of back into just for the fourth quarter, that COVID and sort of supply chain, or talking for the year, that's relatively flattish year-over-year. Is that fair? And is that what sort of causing maybe a little bit of the better margin sequentially third quarter to fourth quarter?

We do start to lap it, Joe. So we had $40 million of supply chain disruption costs in Q4 of last year. So you are right. We are picking up a lap, where for the first 3 quarters of this year, it was specific to supply chain disruption costs for the first time we were really incurring anything at that level.

Okay. And then just thinking out a little bit here, with everything going on and lessons learned and as we sort of turn to the cash, like you mentioned, the higher inventory, is that something that is going to be a little bit more structural for you that everyone is sort of in the value chain will sort of carry a little bit more inventory and provide a little bit more buffer, weighing on working capital a little bit?

And then on CapEx, I know that sort of came down or flexed down, I guess, here. And I think you normally sort of talk about 5% of sales. So should we expect like a catch-up next year for some of that, that might have been deferred or delayed? Or does it just return more towards that, 5%?

Joe, I'll let Joe give a more precise answer. I think as you look at lessons learned, I'm not sure I'd characterize it as lessons learned as well it's folks getting smarter overall about supply chain. And a bigger push for greater visibility from customer to supplier, a better understanding or visibility to sub-suppliers in capacity, more committed volumes from the OEM down to the supply base so that capital is more effectively deployed.

And then a trade-off of the -- with that increased visibility, the reality is there will be areas where there will be more investment in inventory, but there'll be other areas where there'll be less. So how that offsets is probably a little difficult to estimate at this point in time. But near term, it likely translates into more inventory. And I think the question is just how much in a conclusion that on certain parts or certain products, without committed volumes, JIT inventory management doesn't work for certain parts. Joe?

Yes. So Joe here, I mean on CapEx, there was a small push into next year. I think we're -- I think that 5% as an overall range is still good. There's been years where we've been a little under. There'll be years where we're a little over by -- but not more than 0.5 percentage point. So I still think 5% is a good proxy. There has been a little movement around just as we work through some of the disruptions in the volume come back, but I wouldn't say that's a material change.

On inventory, to Kevin's point, I think we're learning a lot. There is a fair amount -- if you just looked at sort of normalized our inventory, about half of the increased balance is -- I would sort of describe as really transactional. Production came down really fast in the back half of Q3. We were obviously -- given the lead times, we were -- we had inventory on hand to produce to the original schedules.

So that half, I would describe, as more transactional, right? Volume came down. We have higher inventory levels. We tend to be -- we tend to use the same inventory. If you think about what we make, resins for connectors, the electric distribution business, the chips we'll use to the extent we have them. So it's more of a timing related to the production slowdowns for about half that balance.

To Kevin's point on the remaining balance, there is inventory on hand. Because lead times have extended, we're focused on making sure we have stock. In some cases, you're -- if you got a product that has 350 parts and you're waiting for one chip, you tend to have the other 349 in stocks, so you're ready to go once you get that chip. So there's that type.

But certainly, the full investment that you see on the balance sheet now, I would not think is a -- is representative of the investment that needs to be made going forward. To Kevin's point, there probably will be some, but it's not going to be at that level. That was -- half of that was really the production disruptions.

We're now moving on to David Kelley from Jefferies.

Just 3Q outgrowth, another robust quarter here. And realizing we aren't guiding to 2022, but you did reference in the slide deck some sustained growth over market opportunity. Can you talk about some of the drivers into next year, the content, mix electrification, and how you're thinking about those relative to the steeper hurdle we're going to see into 2022?

Yes. Listen, I think as we've talked about -- I think as Joe mentioned, we're not giving '22 guidance, obviously, at this point in time. But the nature of our product portfolio in and around safe, green and connected. Obviously, there are macro trends that are driving significant demand for products in those 3 areas.

Clearly, this year, we've had a number of program launches that you should see the benefit of as we roll into 2022. But continue to be optimistic as it relates to outgrowth in the out years, in line with what we've seen over our past. Joe?

Yes. The drivers, they're very consistent with what we've been seeing, right? Its high voltage and active safety are clearly leaders. SPS continues to benefit more broadly from the content adds into vehicles. Even if it's not our active safety system or other technology, that business has content on 1 out of every 3.5 vehicles manufactured globally.

So there's a really positive content tailwind there. And then the commercial vehicle and industrial businesses continue to be accretive to growth. We're having a really good year from a commercial vehicle perspective and would expect the product lines in that space to continue to grow and be accretive to growth over market.

Okay. Got it. And then maybe a question on the semi cost. You noted specifically a driver of the higher AS and UX input cost. Could you give a bit more color on the semi impact in the quarter? And I guess, going into next year, do you see further semi price increases on the horizon? I'm just curious how you're thinking about the potential price increases versus some of the offsets that you referenced.

Yes. Obviously, still a lot of work in process as it relates to semiconductor pricing. It tends to be -- the price increases we're seeing now are really twofold. We have seen some price increases on what I'll call the constrained chips. That I think will continue into next year. The other thing we're seeing at the moment and I've described it as a bit of a sort of spot by market.

So even if they haven't sort of institutionalized the price increases, just given the constraints, you are paying up for semiconductors. Again, that total number is about 195. It's a mix, primarily semiconductor and resin. And as I made in my comments, we're obviously making progress on some of the offset initiatives that Kevin just talked about. But at this point, we're not -- like I said, I'm not ready to talk about how much of that we see rolling into 2022. Some of it will and when the offset actions start to take effect.

We're now moving on to a question from Mark Delaney from Goldman Sachs.

Bookings have been running very nicely year-to-date. The last couple of years, the fourth quarter in particular, has been quite strong. Maybe you can talk about how you see bookings tracking in the fourth quarter of this year.

Yes. Bookings have been strong year-to-date. We're running at record levels. Having said that, the timing of customer awards can be very lumpy. So it's sometimes a bit difficult to predict. And it's incrementally difficult to predict in situations like we're in now where you're seeing supply chain disruptions.

Several of the individuals from an OEM standpoint that are responsible for that activity are in -- are engaged to some extent in managing overall supply chain disruption. But I think with a fairly high level of confidence, we see bookings for the calendar year north of 20 -- $21 billion, $22 billion, so given what we see on the table today.

That's helpful. And then for my follow-up question was related to the supply chain disruptions, but more around how the industry may try to better deal with these longer term. And a number of the OEMs are talking about procuring semiconductors and other key components, more directly and not just working with Tier 1s like Aptiv.

I know those discussions are ongoing, but we've been at this for a while now. And I'm curious if you have an update you can share around how you think Aptiv's role in supply chain and working with your OEM partners that may evolve.

Yes. That's a great question. I think, by and large, every participant in the supply chain is reevaluating their role and potentially what they can do differently. Having spoken now several times to the leaders of all the semiconductor companies, one of the critical items that needs to be addressed is committed volumes, right? When you look at an industry that is highly capital intensive, predictability of production is extremely important.

And it gets compounded in an industry with long lead times that's currently constrained. So however, we transition to more of a committed volume model, at least for the medium term, whether that's operating the way we historically operated, with tiers being the primary face to the semiconductor players, or it's OEMs working with the semiconductor players as well as the tiers, either can solve that problem. I think for us, for Aptiv, we'll be flexible to operate in either scenario.

I would say the one thing that will be different as we move forward is, certainly, more strategic relationships on the semiconductor side, which likely translates into deeper relationships, fewer semiconductor relationships that drive more volume and a more strategic relationship, both from a technology and a supply chain standpoint.

We're now moving on to Dan Levy from Credit Suisse.

Wanted to just see if -- and I recognize you've given us some directional comments on '22. That's appreciated. I wanted to see if maybe we could put a slightly finer point on the directional comments.

So one, if you could just remind us, on just pure volume growth alone, stripping out the performance or other efficiencies or inefficiencies, what type of incremental margins you generally get?

What you might expect in a year where there could be double-digit industry recovery? And then if commodity prices just stay flat versus where they are today, what's -- is there an early sense on what the net commodity impact is into 2022?

Yes. Let me -- Dan, this is Joe. Let me start. I think the best way -- obviously, I'm not going to give any more information on 2022. As I said in my comments, we're really -- it's very early days to be doing that. But from our perspective, and we've talked about this, the -- certainly, the COVID and the supply chain-related disruption costs, we do not view as structural.

We think those are very much driven by the events of the day. And as I said in my prepared comments, as supply chain and material flow returns to normal, we'd expect those costs to go -- to start to go away as well.

If you look at 2021, I think it's a good proxy. We've historically talked about incremental margins on the OI line between 18% and 22%. This year, we'll be at 16%, carrying $300-plus million of supply chain and COVID-related costs. So if you backed out that $300 million, we'd be closer to 24%.

So very much within the historical range and the expected range when you adjust for the COVID and the supply chain-related disruption costs. Now we -- as we said even last quarter, we're not treating the inflation as transitory, the $195 million. So I wouldn't -- I'm not going to add that back. But I'd really focus on -- we get back into that 18% to 22% range with -- we're just adjusting for those COVID costs.

The other thing I'd mention, we've got about $600 million. Again, we backed this out of the adjusted growth rate. But there's about $600 million of incremental volume from commodity and FX that has a negative flow on it, right? So we've often talked about copper impacting margin rate, but it also obviously impacts the incremental rate. So again, just something to think about as you're working through the math.

Right now, we see full year material inflation of about $195 million. A lot of that is come in the back half of the year. I think the back half run rate is probably at least indicative of what we're managing for 2022. Again, I'm not going to speak to how much we're able to offset. But certainly start with that $195 million we're talking about, that full year number is certainly what we're working on at the moment.

Dan, if I can just chime in, just to underscore the points Joe makes, but maybe at a higher level. You take a step back. And in 2018, global vehicle production was close to 100 million units. And this year, global vehicle production will be under 80 million.

And in 2018, revenues were $14.4 billion, this year, we'll do $15.3 billion. And when you look at our guidance as it relates to full year EBITDA dollars and EBITDA margins, and you factor in the cost headwinds that Joe's walked through for 2021, be it supply chain or COVID, and you look at the transition from where we were in '18 and where we are today, in light of all these effectively macro challenges with incremental investment in advanced technologies, it just underscores the strength of the business model we've built.

And the fact that, hey, there may be quarters or short periods of time we go through macro disruption. But the underlying robustness of the business model, the cash conversion is extremely strong, if not better than what it was historically.

That historical perspective certainly is helpful. A second question, and I think it's a little more related, but it's specific to AS & UX margin. And I know there's a number of things that are moving that it's been low. Obviously, the volumes are quite weak, and you have your semi cost inflation.

I guess I'm wondering though, just broadly on the go forward, this is a segment where you have your software exposure. Theoretically, this is a segment where margins should sharply benefit as that software type revenue starts to come in on ADAS. You've obviously gotten half, but you'll get more.

But you're talking about continued investment. It just feels like there could be more of a period of mid-single-digit or high single-digit type AS & UX margins. And I guess I'm wondering what are the things that need to happen for the margins to really break out in this segment? I know volume is a big one, but what else needs to happen?

Yes. Listen, I think predictability of schedules is one; two, the execution of the launch of the existing programs that we have that we're launching today is two; the continued separation of software and hardware is three. And I guess the ongoing demand for the active safety, for the user experience, for the data and connectivity solutions that the segment provides. So there's all sorts of tailwind there.

Now having said that, Dan, we've talked about some of the areas of opportunity in the future, like SVA, like high-performance compute areas, like software, areas where we feel like there's tremendous opportunity. And if it makes sense, there are areas that we'll continue to invest in, and in some areas, potentially increase investment in.

From Bank of America, we have John Murphy with our next question.

Thanks for all the info and the shot at what you're giving us on '22. I know it's hard. Kevin, you kind of mentioned one of the -- whether the solutions to the issues that are going on right now is that automakers sort of give more committed volumes and there's greater visibility through the supply chain.

I'm just curious how you think that mechanically could work in an industry that is a slave to some degree to macroeconomic cycles and you have normal 20 to trough volumes. It's just hard to understand how an automaker could sit there and give a committed volume number because they are at the whim of what's happening in the macro, then also now finding out that they're sort of at the whim of what could happen deep in the supply chain. I mean how would you envision that committed volume from an automaker working?

Yes. Listen, I think it's -- John, it's a great question, and it's not easy. So you're -- the point you make is a legitimate point. But it's an issue everyone across the supply chain, right, has to deal with, from the OEM all the way through to the wafer manufacturers.

So it affects every aspect of the supply chain. And if there isn't some level of baseline commitment on some level of products for some period of time, there's an amount of estimating that everybody in the supply chain is doing, and ultimately, you end up in a situation like we find ourselves in today.

So I think on -- I think, again -- I think we're -- from a supply chain standpoint, will be more strategic with customers and then through to Tier 2, Tier 3, Tier 4 suppliers. The supply chain will be more integrated with more visibility. In exchange for that, there'll be more commitments at least on certain products for some agreed period of time. And that's the way the -- that's how we'll start to dig ourselves out of this or more permanently address some of the structural issues.

Okay. So I hope we get there. I mean -- and it seems like you guys are in a good spot to actually help manage up and manage down in some ways so.

Yes. I mean we're working at it. I mean under Joe's leadership from a supply chain standpoint, I'd say we're working more closely. We've always worked closely with our customers and our suppliers. I think we're working more closely than we ever have.

There are going to be areas where we likely carry incremental inventory, but there's likely areas where we'll actually have to carry less. And we're just -- we're all getting smarter about it. And unfortunately, we had the COVID induced perfect storm that we're going through in 2021. But I think everyone is focused on how do we learn from it and how do we improve how we operate.

Okay. And just a follow-up on vertical integration. I mean we're hearing about this from these new EV manufacturers as well as the incumbents that are building out their own EV, essentially AV platforms. But ironically, there's a lot of stuff that they talk about that very much sounds like your satellite architecture or SVA or other technologies that you bring to the table.

So when we hear -- when people hear vertical integration, they're like, oh, (expletive), outsourcing is going to reverse, and there's going to be in-sourcing. But it doesn't -- it seems like it's a question of semantics because it really sounds like a lot of your technology is landing in some of these platforms.

So how should we generally think about it? Because it really seems like there's a semantics issue here about what "vertical integration" really is.

Yes. No. Listen, I think that's a great point. And we do business with a number of the players that you'd refer to as new battery electric vehicle companies. And I think in reality, across all of them, there's very little in the areas of what they produce that kind of vertical integrations religion.

Vertical integration tends to be an economic trade-off. To your point, we feel like we're well positioned with both software and hardware capabilities, vehicle architecture capabilities. I think we would tell you, based on our discussion with all those players, the reality is, there are certain areas that are growing rapidly in a car from a content standpoint, like software.

And I think both in the software area and the hardware area, OEMs, whether they're new OEMs or legacy OEMs, in reality, you're going to be dealing with fewer suppliers. And a couple of the newer -- the battery electric vehicle companies that we have a relationship with, what they'll actually say is more of the activity is actually outsourced from a dollar standpoint today, but they're actually dealing with doing that with fewer suppliers.

And that's, in our view, likely the trend that takes place. And that's where we're working really hard to make sure that we're in front of that trend and we're able to benefit from it.

Our last question today comes from Itay Michaeli from Citi.

Just 2 quick ones, a near-term question and a longer-term question. On the near-term question, maybe, Joe, can you just give us the puts and takes on the implied Q4 revenue GOM? And then maybe a long-term question for Kevin. We heard, I think, recently at the GM Investor Day, the plans to launch consumer AV with the help of Cruise in about 5 years.

I'm curious kind of what Aptiv strategy is with respect to consumer AV as well as your relationship with Motional and the potential for you to perhaps leverage that relationship in the next 5 or 10 years for consumer AV.

Yes, Itay. Let me go a little quickly on the growth over market. Listen, it's a bit of the same dynamic we've really been wrestling with for the last couple of quarters, right? There's -- it's just a lack of visibility of customer schedules. We obviously -- so we're -- it's hard to be overly precise at this point from a forecast perspective.

Haven't obviously seen anything that would suggest that it's a -- that there's going to be a meaningful change downward. We've introduced sort of the 10-plus for the year to the extent the production holds at these levels and we continue to see strong mix. We're expecting another good growth over the market quarter. So it's hard to call an exact number at this point.

Itay, with respect to your question about AV and at least the Aptiv strategy, I can't comment on others because AV is used differently by different OEMs or different suppliers. So as you know, we have Motional, which is our joint venture with the Hyundai Motor Group, which is doing extremely well, has driverless vehicles being tested on roads today in Las Vegas and elsewhere.

And we'll have fully driverless vehicles as a part of the Lyft network in 2023. So from a business standpoint, they're doing -- and technology advancement standpoint, the team there is doing extremely well.

A couple of comments broadly on AV. As you know, we've always viewed autonomous driving as the further spectrum of full ADAS solutions. And we use our partnership with Motional as an opportunity to continue to test, to validate, to future-proof technology that we can pull into our current ADAS solutions.

And that's what we continue to do. We feel like at Aptiv, this is Aptiv, there's a lot of opportunity that remains in the L0 to L3 sort of ADAS framework. 60% of -- less than 60% of vehicles today have an ADAS solution on them. If you believe IHS, they forecast, that increases to 70% by 2025. We actually believe it will be more than that. And the fastest-growing area will be on L2 and L2+ I would tell you, that's our biggest focus area.

Having said that -- and we're using Motional as a resource to enhance the solutions that we use in the L2, L2+ sort of space. And then concurrently, we're working with Motional as well as have internal resources focused on L3 and beyond. Our view is that's -- from a cost or commercial standpoint, that's likely beyond 2025, but it's certainly technology that we're focused on, and it's a capability we want to make sure that we're positioned to have.

That concludes today's Q&A session. I'd now like to hand the call back over to you, Mr. Clark for any additional or closing remarks.

Great. Thank you, operator. Thank you, everyone, for joining us this morning. Take care, and have a great rest of the day.

Thank you.

Thank you. That concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.