Aptiv PLC (APTV) 2023 Q3 法說會逐字稿

Good day, and welcome to the Aptiv Q3 2023 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jane Wu, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you, Madri. Good morning, and thank you for joining Aptiv's Third Quarter 2023 Earnings Conference Call. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at aptiv.com.

Today's review of our financials exclude amortization, restructuring and other special items, and will address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for our third quarter financials as well as our full year 2023 outlook, are included at the back of the slide presentation and the earnings press release.

During today's call, we will be providing certain forward-looking information that reflects Aptiv's current view of future financial performance, and may be materially different for reasons that we cite in our Form 10-K and other SEC filings.

Joining us today will be Kevin Clark, Aptiv's Chairman and CEO; and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business, and Joe will cover the financial results in more detail before we open the call to Q&A.

With that, I'd like to turn the call over to Kevin Clark.

Thanks, Jane. Thanks, everyone, for joining us this morning. Let's begin on Slide 3.

We delivered another strong quarter, exceeding our expectations despite some headwinds. Touching on a few of the highlights. New business bookings totaled $6.6 billion, bringing the year-to-date total to a record $27 billion. Revenues increased 7% to $5.1 billion, 2 points over the growth and vehicle production, reflecting double-digit growth in AS&UX revenues and S&PS revenue growth in line with global vehicle production, the impact of UAW strike in North America as well as customer mix.

EBITDA and operating income were both records totaling $727 million and $560 million, respectively, reflecting solid flow-through on volume growth and ongoing operating performance initiatives, partially offset by unfavorable FX, timing related to customer recoveries and the impact of the UAW strike. We expect continued sequential margin expansion as the headwinds related to supply chain disruptions continue to dissipate, customer recoveries are closed and the benefits from further cost structure actions take hold. The team remains laser focused on continuing this trend in the fourth quarter and into 2024 and beyond.

Turning to Slide 4. Touching on the key themes and macro trends that have had an impact on our operations this year. Our customer relationships and new business bookings are stronger than ever, driven by robust demand for smart vehicle compute and software, high-voltage electrification and ADAS solutions.

As automotive OEMs continue on the path toward fully electrified software-defined vehicles. We are their partner of choice, delivering unique full system solutions that provide enhanced features and greater flexibility, all at lower cost. We're also benefiting from the transition to the software-defined future across several other industries with opportunities in the commercial vehicle, telecom, A&D and industrial markets.

Global automotive vehicle production has been stronger than we initially forecasted as easing supply chain constraints have led to fewer disruptions enabling increased production. Our strong year-to-date results had put us well on our way to reach the top end of the full year guidance we laid out in early August. However, the UAW strike, which affected the production schedules of our top 3 North American OEM customers has had an impact on both our third and fourth quarter results.

While tentative agreements have been reached with all 3 North American OEMs, there remains some uncertainty on vehicle build schedules as the OEMs work to finalize their plans to ramp up production during the balance of the fourth quarter. Our operating teams in North America are working closely with our customers and supply chain partners to help accelerate the ramp-up of production and minimize any potential disruptions.

Moving to Slide 5. As already mentioned, new business bookings during the quarter were $6.6 billion, bringing our year-to-date total to a record $27 billion, on track for our target of $32 billion for the full year. Advanced Safety and User Experience bookings totaled $2.2 billion, driven by over $1 billion in active safety awards. Signal and Power Solutions bookings reached $4.4 billion, including $1.1 billion in bookings for our high-voltage electrification solutions split across geographies, bringing the year-to-date total to $4.3 billion, already surpassing last year's record of $4.2 billion.

As OEM strategies around their vehicle architecture platforms evolve, 1 constant will be the need for solutions that deliver improved performance at a lower cost. And Aptiv is perfectly positioned to leverage our full system capabilities to enable a fully electrified software-defined vehicle.

Turning to Slide 6 to review our Advanced Safety and User Experience segment's third quarter highlights. Revenues increased 13%, 8 points above vehicle production, the result of a 30% increase in active safety revenues reflecting strength across all regions as a launch of our Level 2 and Level 2+ ADAS solutions continue to ramp.

Operating income totaled $109 million, reflecting a 7.6% operating margin, an increase over the prior period, but sequentially lower than the second quarter due to the seasonality of Wind River revenues and the timing of customer recoveries. New business bookings totaled $2.2 billion and included $1.2 billion of active safety customer awards, including a major award with a large German truck manufacturer, underscoring the strength of our high-performance radar technologies and their applications outside of the automotive industry.

As demand continues to increase for more advanced Aptiv safety solutions, our unique insights, improved domain expertise position Aptiv to deliver differentiated value to our customers. To that end, we're excited to have recently launched our automated parking solution, an additional feature to our AI/ML enhanced Gen 6 ADAS platform to address complex parking scenarios.

Aptiv's unique solution enables fully modularized automated parking features that scale from Level 2 to Level 4, from auto parking assist and memory parking all the way to auto part relay. Automated parking is just 1 of the many features that we have under development in our Gen 6 ADAS technology road map which will scale to a full Level 3 ADAS platform in 2026.

Turning to the Signal & Power Solutions segment on Slide 7. The Third quarter revenues increased 5%, in line with global vehicle production. High voltage revenues increased 13%, reflecting strong growth across all product lines, partially offset by customer mix in Europe and Asia, and the impact of the UAW strike in North America. The $4.4 billion in S&PS bookings that I mentioned previously included a low-voltage architecture award with a Chinese OEM and demonstrating the progress we're making further penetrating the local Chinese OEMs.

Another strong quarter for Intercable Automotive with $400 million in new business awards, including a major award with a global customer in North America reflecting continued strong commercial traction and a high-voltage system award with a European OEM that includes products across our electrical distribution, connection systems and Intercable Automotive portfolios, demonstrating how our full system approach sets us apart from the competition.

Lastly, we're proud to announce that Aptiv has once again been recognized as an automotive PACE Award finalist. A Rapid Power Reserve solution is a groundbreaking technology that provides a highly reliable, redundant power source for a variety of critical functions, eliminating the need for a low-voltage battery in the vehicle significantly reducing weight, mass and costs. This recognition validates Aptiv's industry-leading technology as well as the value and impact our continuous innovation, provides our customers.

Turning to Slide 8. We're excited to showcase many of our new innovations at the Consumer Electronics Show in Las Vegas in early January next year. We'll bring our vision of the future to reality, including vehicles with Aptiv smart vehicle architecture, running applications for next-generation ADAS and in-cabin user experience. Vehicles with our complete portfolio of optimized electrical vehicle solutions purpose-built for demanding power requirements and Wind River's edge to cloud platforms, supporting the latest safe, green and connected applications from Aptiv. We'll be providing live demonstrations of how we're leveraging our deep insights into the brain and nervous system of the vehicle, along with Wind River's proven software technology to develop optimized and scalable solutions that meet OEM needs for performance, flexibility and lower costs.

Moving to Slide 9. In recognition of our strong commitment to innovation, operational excellence and sustainability, Aptiv was recently named by Newsweek as 1 of America's Greenest companies. At Aptiv, our business strategy is directly aligned with our sustainability goals. We provide solutions of the highest quality, designed, developed and manufactured responsibly that enable a safer, greener and more connected world. In doing so, we take care of our people and our communities while minimizing our carbon footprint. Sustainability is an enterprise-wide commitment, and I'm proud of our entire team for helping us to achieve our goals and ensuring that our company, our customers and our planet continue to thrive.

Moving to Slide 10. Before I turn the call over to Joe to walk through the financials, I wanted to touch on our current view of 2024. Building on the solid foundation we've established in 2023, we're well positioned for continued strong revenue growth and margin expansion despite the macro headwinds. Our safe, green and connected product portfolio is perfectly aligned to the demand for feature-rich electric vehicles as well as the acceleration of the software-defined future in adjacent markets. Our advanced technologies and capabilities will continue to drive strong performance across multiple industries.

While some macro uncertainties remain, we're confident in our ability to execute policy in a dynamic environment.

With that, I'll now turn the call over to Joe to go through the numbers in more detail.

Thanks, Kevin, and good morning, everyone. Starting on Slide 11.

As Kevin highlighted, Aptiv reported another quarter of strong financial results, exceeding our expectations despite the impact of the UAW strike in North America. Revenue was up 7% to $5.1 billion or 2% above underlying vehicle production, excluding the impact of acquisitions.

As I will discuss shortly, our growth over market was negatively impacted by the UAW strike in North America as well as customer mix and program timing in Europe and China. Active safety and high-voltage electrification reported strong double-digit growth of 30% and 13%, respectively, and the UAW strike had a negative impact on revenue in the quarter of approximately $80 million.

Adjusted EBITDA and operating income were $727 million and $560 million, respectively, reflecting strong flow-through on increased volumes, continued progress on our ongoing performance initiatives including reductions in supply chain disruption costs that more than offset higher labor costs. The UAW strike had a negative impact of approximately $30 million and foreign exchange was a headwind versus last year.

Earnings per share in the quarter were $1.30, an increase of $0.02 from the prior year, primarily driven by the higher operating income, partially offset by higher interest expense. Operating cash was $746 million, a significant increase over prior year, primarily driven by higher earnings and improved working capital levels. Capital expenditures were flat to prior year at $212 million.

Looking at revenue in more detail on Slide 12. Revenue in the third quarter was $5.1 billion, reflecting sales growth of $299 million, representing adjusted growth of 7%. The Wind River and Intercable acquisitions add at the $153 million of revenue and net price in commodities as well as foreign exchange were slightly positive in the quarter. From a regional perspective, North America revenues was up 10%, reflecting 2 points of growth over market at the UAW strike negatively impacted D3 customer volumes relative to overall North American vehicle production in the quarter.

In Europe, revenue grew 10% or 4 points above underlying vehicle production, driven by strong growth in active safety, partially offset by program timing and slowing growth for certain BEV platforms.

In China, revenue was in line with underlying vehicle production due to our customer mix and slowing BEV growth.

As noted earlier, despite the lower growth over market, our Q3 adjusted growth and revenue were in line with our expectations. The lower growth over market in North America is consistent with the strike impact we experienced in 2019. And as we have said in the past, growth over market will be lumpy given customer mix and program timing.

Moving to the AS&UX segment on the next slide. Revenue rose 13% in the quarter or 8 points over vehicle production. The outperformance was driven by strength in active safety, where revenue was up 30%. User Experience was down 5% in the quarter, reflecting the timing of certain customer programs and a more difficult year-over-year comparison. Price downs in the quarter were less than 1%.

Segment adjusted operating income was $109 million, up 35% when compared to the same period last year. Year-over-year AS&UX margins in the quarter were negatively impacted by the timing of certain material inflation recoveries from customers, which partially offset the flow-through on incremental volumes and improved performance. Also, AS&UX margins were lower on a sequential basis versus Q2 2023 due to expected seasonality in Wind River's Q3 results. We had noted the seasonality at the start of the year. The Q3 impact of this UAW strike on AS&UX was relatively minimal, reflecting approximately $10 million of revenue and $5 million of operating income.

Turning to Signal & Power on Slide 14. Performance in the quarter was strong despite a challenging operating environment. Revenue in the quarter was $3.7 million, an increase of 5%, in line with vehicle production despite a negative strike impact of approximately $70 million of revenue or 2 points of growth. High-voltage electrification grew 13% in the quarter, reflecting a slowdown in growth rate from prior quarters.

Despite the slowing of EV production, we continue to expect our high-voltage business to have a strong double-digit growth in 2023.

Price downs in the quarter were less than 1%. Segment adjusted operating income was $451 million in the quarter, up 2% from prior year, including a $25 million negative strike impact.

Operating performance, including lower supply chain disruption costs were positive in the quarter and offset the negative impact of higher labor costs. Customer recoveries offset material inflation and the negative commodity impact in the quarter, while foreign exchange, primarily the peso and RMB continue to present a headwind on a year-over-year basis. However, the FX impact is in line with the updated guidance we provided in August.

Adjusting for the impact of FX and the strike, adjusted EBIT margins for Signal & Power Solutions were 13.3% in the quarter.

Moving to cash generation and the strength of Aptiv's balance sheet on Slide 15. As we have discussed in the past, our focus on cash flow generation and cash conversion is as disciplined as our operational improvement efforts. The past quarter was a clear example of that as we saw the results of our efforts to reduce the higher working capital levels we maintained during the recent supply chain disruptions. Despite the operating challenges in North America, we were able to improve operating cash flow by over $300 million versus prior year resulting in cash flow conversion of 200% in the quarter and an ending cash balance of $1.8 billion.

Given this strong performance in October, we opportunistically paid down our $300 million term loan, Aptiv's most expensive borrowing, increasing our average tenure from 15 to 16 years.

As we have discussed in the past, our sustainable business model is enabling us to convert more income to cash, and we believe there is no shortage of attractive deployment opportunities as we continue to maintain a well-balanced approach to capital allocation, including prioritizing organic investment in the business to support our portfolio of advanced technologies and record new business awards, executing our M&A strategy by focusing on transactions that enhance our scalability, accelerate our speed to market with relevant technologies and access new markets, maintaining our current financial policy as it relates to our leverage profile and opportunistically returning cash to shareholders.

I will wrap up with our full year outlook on Slide 16. Given our continued strong performance and a higher outlook for global vehicle production, we are maintaining our full year outlook for 2023 despite the impact of the North American strike. Key assumptions now underpinning our outlook include global vehicle production up 6% plus for the year versus a prior estimate of 4% driven by higher expected production levels in Europe and China. No significant strike impact beyond October 2023.

During the month of October, we experienced a negative strike impact of $100 million in revenue and $50 million in operating income. Our outlook assumes a restart of customer production and a return to pre-strike production levels over the coming couple of weeks and no further meaningful disruptions.

Accordingly, we expect revenue in the range of $19.95 billion to $20.25 billion, including the impact of total loss strike revenue of $180 million. I would note that while our revenue and adjusted growth rate remain unchanged, given the Q4 strike impact, we are forecasting our growth over market for 2023 to be below our long-term forecast range of 8% to 10%. EBITDA and operating income are still expected to be approximately $2.8 billion and $2.1 billion at the midpoint, respectively, including total loss strike earnings of $80 million. No change to adjusted earnings per share of $4.75 at the midpoint and operating cash flow of approximately $2 billion.

As Kevin will discuss further in his closing remarks, despite the macro challenges of the North American strike and the significant foreign exchange headwinds, our relentless focus on improving operating performance and cash flow generation has allowed us to continue to deliver in a difficult operating environment.

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

Thanks, Joe. I'll wrap up on Slide 17 before we open the line for questions. As Joe and I have discussed, we experienced strong underlying business performance in the third quarter, driven by further easing of supply chain constraints, which partially offset lingering headwinds related to material and labor inflation, unfavorable FX rates and the UAW strike in North America. We continue to see tremendous momentum in new business awards and are well on our way to reaching our bookings target of roughly $32 billion by year-end.

While our teams continue to work tirelessly to mitigate the impact of the UAW strike in North America, including the ramp-up of North American production, we're executing on further cost structure actions to enhance our operational resiliency. Our portfolio of advanced technologies and strong operating execution gives us confidence in our ability to further strengthen our competitive position and deliver sustainable value creation for our shareholders.

Operator, let's now open the line for questions.

(Operator Instructions) While we build that queue, we'll take our first question from Joe Spak from UBS.

Kevin, Joe, just first on the growth over market for the quarter, and I guess, the outlook. I know you said it was in part driven by the UAW strike. I think it went from 9% to 5%. But that's -- that $180 million is like 1 point, I think, year-over-year. And part of that is obviously just the industry, not just your sort of growth over market. So can you sort of detail some of the other factors that are driving some of the lower growth over market for the year and in the fourth quarter?

Yes. Yes, Joe, that's a good question. So you're right. You're right. There is the sort of numerator effect of what we're doing. The bigger impact is the denominator, right? That's a calculation sort of that comes in after the fact relative to everything else that happened in the markets. So not only do we have the slowing of D3, where we do have about 65% of our North American business, but you have folks like Japanese manufacturers that we don't have a lot of content on in North America going up significantly. So you get the compounding effect of numerator coming down and the denominator going up. For instance, just the growth in the Japanese OEMs had a very strong Q3. That growth -- that impact was about 4.5, 5 points against our growth over market cap.

One of the things we look at to double check this math is sort of how did we do against the D3 stand-alone, where we were up about 14% with the D3 relative to their production. So definitely feel like, particularly in North America, it's more a market mix at the moment. I did caution on full year because we got to see how quickly that sort of unwinds.

The other places to look at, if you looked at Europe and China, I mentioned just high voltage is growing more slowly. That was probably worth about a point of growth to us on a growth over market basis. We're still -- it's still contributing to growth over market, but less than the prior quarters by about 1 point. And then some program mix, particularly in Europe, just infotainment is down a bit in the quarter, that's some program timing. We expect infotainment to finish the year mid-single-digit growth. So again, it was more of a quarterly impact. But you are right, the relative market component of that drives that growth over market calculation as well.

Okay. And then I guess just to follow up, as we think about some of your midterm targets and you pointed out some of the slowing BEV penetration in the U.S. and Europe, and I think this has been pretty well documented right now. Does that at all -- I know you've taken a more conservative view of that penetration, maybe than some third parties over the mid- to long term. So is this -- how does sort of the more recent trends, I guess, compare versus what you laid out back in the February Analyst Day?

Yes, Joe, it's Kevin. Listen, I think, as Joe highlighted and walked through the numbers. Q3 has a lot of unique circumstances in it as it relates to growth over market. And as we look at providing perspective on -- more precise perspective on our growth over market in the out years, we need to see how Q3 settles.

Having said that, we still strongly believe we're very well positioned as it relates to growth over market, given where we operate. Electrification and ADAS solutions are 2 of our higher growth areas, which we believe will continue to be high growth, understand the questions in and around high-voltage electrification and future growth rates. Certainly, Q3 was down relative to Q2 and Q1 this year. I think we would say that is largely related or a significant portion of that impact is the strike issue and some of the other items that Joe talked about.

And then as you highlighted, just a reminder, as we developed our electrification strategy, we very much focused on a select group of customers and had a much more conservative view on the overall market of electrification and the pace of penetration. So long-winded way of saying it's too early to answer your question more precisely, but certainly to say we feel very, very good about where we sit from a growth over market standpoint.

Next, we'll go to Rod Lache with Wolfe Research.

Just following up on Joe's question. I know you've been a lot more conservative on high voltage and BEVs than just about everybody in the market. You had a 35% penetration by 2030. But can you just give us a little bit of maybe additional color on what your customer mix looks like within that backlog that was propelling the 30% annual growth just to get a sense of -- is it -- are you more exposed to the companies that are slowing down a bit? Or are you sort of more dispersed amongst the faster growers?

Yes. So I'll start, Rod, and Joe can fill in any blanks. So when you look at where the majority of our exposure is, it's with the European and the Chinese OEMs. That's where the bulk of our battery electric vehicle exposure is. When we look at kind of nearer term and where we have those exposures, are by and large on platforms that are BEV platforms, those are dedicated BEV platforms.

When we look out into the fourth quarter and into early next year, we're seeing very stable schedules as it relates to production. There's 1 exception with a North American OEM who I think has been pretty public about their plan for electrification. So that will have some impact nearer term. But offsetting that are a number of OEMs who are in the midst of launching BEV programs that we're on.

So high level, Kevin, when you look at this in its totality, do you feel like there's a material change to that original 30% that you were looking at? Or is it -- I guess our question is not that specific, but how are you kind of viewing the expectation?

Yes, listen, Yes. No, it's a great. Yes, we feel really good about it. I think there's an element of -- I don't think we ever guided 30% forever. So there's a lot of large numbers, right, that we need to keep in mind. We'll do just under $2 billion of high-voltage electrification revenues this year, I think $1.8 billion or $1.9 billion. So that business has grown significantly. Q3 obviously was impacted by some of the dynamics that Joe talked about. Without a doubt we will see some impact in Q4 and early next year related to the OEM that I referenced to is reducing that schedules. On the flip side, we have a number of OEMs where we look at current production schedules, what they have in place for Q4 and early next year where those schedules remain strong.

And then in addition to that, we have a number of programs that are coming online during 2024. And the bulk of that activity is in China and is in Europe, 2 areas where we don't view any easing on CO2 emission regulations and customers really focused on how do they continue to launch new BEV platforms.

Okay. And just lastly, obviously, a lot of controversy around autonomous right now with crews slowing down. Just hoping if you can give us any updated thoughts on your investment plans there with Motional, whether that's influencing your thinking on that business at all? And then if Joe could just update us, you originally had a like a $1.7 billion performance and lower supply disruption kind of element to your 2022 to 2025 bridge. How much of that are you seeing this year?

Yes. So I'll start. So nothing new to report out. We're actively engaged with our partner, Hyundai, in terms of future funding. As it relates to Motional, as we said in the past, they're on track from a tech standpoint and a commercial standpoint. But we're engaged in discussions at this point in time, certainly well aware of what we're reading about and we're seeing in the market. Those are certainly things that we'll consider as we make our ultimate decision. Again, if we were to fund, we would fund half of their cash needs. We haven't determined our plan or finalized our plan at this point in time. We'll be in a position to report that out when we announce earnings in February of next year.

Rod, it's Joe. Just to answer your question, I think we're tracking well. If you recall, we had that on that walk. I think you're referring to in the Investor Day from the end of '22 to '25. We had a $1.7 billion of performance that was going to work to offset $900 million of labor inflation. We talked about that being fairly ratable over the 3 years. That wasn't sort of a 2025 thing. We were going to make progress on that through the year. I'd say '23 is tracking very much to that sort of ratable approach on both the cost side as well as the performance, the price recovery side. So things are tracking well. Obviously, as we sit here today, and it's sort of stated, obviously, within the comments I made, right. We do have some higher volumes helping offset the strike impact. But for the most part, those performance initiatives are coming through as planned, and we're seeing that particularly on the offset of the labor expense.

Next, we'll go to John Murphy with Bank of America.

I have another follow-up on this toggle on EVs and the penetration rate maybe being a little slower than people had expected. Kevin, as you look at this -- Kevin and Joe, I mean as you look at this, an optimist could say, hey, listen, your EVs are taking a little bit longer, and we're going to run our programs as they exist right now, get better margins and returns in the interim, generate more cash and be able to fund the future more robustly, might make gross over market a little bit, but our earnings and cash flow might be a bit better. Is that potentially true here? And as you're making these capital commitments to these programs, do you have the ability to kind of toggle down reasonably quickly? So it wouldn't dent your returns and you get that benefit of maybe a slower role.

Yes. It's a great question, John, and I'll start. Listen, we still are believers in electrification. And just want to remind everybody in the second quarter of this year, our high-voltage revenue growth on a year-over-year basis was 48%. And this quarter, it was 13%. And on a go-forward basis, we think it more normalizes relative to where we were in the third quarter.

Having said that, as we stated, we've been very focused on having an EV strategy that focuses on principally Europe and Asia Pacific, China, principally OEMs that have built BEV up platforms. Those OEMs who are taking global platforms from 1 region to another region and focusing our investment in those areas, which in reality allows us to scale. I mean that was 1 of our objectives, John, is to make sure that, to the extent we're putting in capital that it scales so we get significant revenue. On the bulk of those programs we have scaling price relative to volume. So to the extent an OEM does not achieve their particular targets we have the ability to adjust prices and that's contractual. So we've protected ourselves that way.

And then to the point you made, our baseline outlook has never been that 50% of the vehicles manufactured in 2030 were going to be battery electric vehicles. We had a much lower outlook. So we think we have it ring-fenced and balanced. Listen, there may be a couple of quarters where I mentioned there's 1 OEM who is backing off their original schedules where we'll see an impact on our growth rate. But as things normalize, we're still optimistic about our competitive position here and the growth opportunity and the margin opportunity it presents.

John, it's Joe. The only thing I'd add to, and we've talked about this for a while, right, particularly with the Electrical Architecture business. We were able to leverage existing facilities, existing equipment, existing supply chain, existing engineers, low voltage, high voltage, the products are different, but they're very complementary. So for us, and we've got obviously a very large architecture business. So I think leveraging that over the last couple of years has helped that product line get to segment accretive margins very quickly. But it's also held from a return perspective, right, because we had a lot of that capital and plant equipment in the ground.

Super helpful. Just 1 follow-up on the Wind River seasonality because it did seem to, we may have missed this in the quarter in our model and our estimates. Could you just -- Joe, just kind of run through the -- how do you think about seasonality for Wind River. I know you talked about it earlier in the year, but just if you can remind us?

Yes. We -- I mentioned it in passing on the guide. They are -- and it's in their business. I think it's somewhat of a software business phenomenon. Q3 is just a very slow quarter for them. Q2, Q4 tend to be the highest. It's a highly leveraged model like a software business would be, right? So software renewals, licenses, new instances tend to drop, it's an 80% gross margin business. So they tend to drop at pretty high incremental rates. So we had seen this. We've seen this in the prior years. That's why we cautioned in February and don't -- we're not surprised by this. So I think as you look at this and we talk about just the quarterly progression over the next couple of years, I think this will be something that we see as recurring.

We'll next go to Adam Jonas with Morgan Stanley.

So just look and follow up to Joe's and Rod's and Murphy's question, I'm going to hit on this team as well. This EV journey for legacy OEMs has just been an unmitigated disaster so far. I don't think you need to be pragmatic Bostonians to see that -- to see through that. With respect to like the inability to generate anything close to a reasonable return on capital, and I don't see a path to it. So just speaking for myself here, guys, but it wouldn't surprise me, and I suppose a lot of people on this call, if GM Ford and the Germans pulled back their EV spending a lot. I mean a lot.

And I know you're not going to -- you're not in a position to answer the exact impact yet. So I'll phrase the question this way. If they did, if in a world where the undisputed leader, Tesla is dialing back and barely profitable themselves and others follow and really just to reset because they can't sell, negative 100% margins forever. Can you tell us how much your -- those -- the 14.5% mid-decade operating margin target or the over 17% longer-term target, and I realize there won't be a straight path there, but how much of those targets really depend on the pace of EV adoption to continue the way you outlined, even conservatively outlined in February 14?

Yes. I'll take -- I'll start, Adam. Listen, I -- we can take a look at the scenario like that, just kind of peeling it back. This year, we'll do $1.8 billion in high voltage or EV revenues out of our roughly $21 billion in revenues. And clearly, the growth rate that we've attached to high-voltage electrification is higher than our overall average growth rate. So certainly, it would have some impact there.

I think as we've said, a lot of these EVs are replacing vehicles with internal combustion engines, most of which -- most of those OEMs where we actually have the vehicle architecture content. So the trade-off isn't dollar for dollar. The high-voltage content or margins related to the S&PS base margins is accretive by a couple of points from a margin rate standpoint. But it's not a matter where it's 2x.

So it's something that I think we would manage through. It would have an impact from a profit standpoint, I don't think it would have a huge impact just given what the margins look like, and we would be going again, if these OEMs aren't achieving their targets, their prices are going up to the extent they're significantly reducing. There are onetime payments from the OEM as it relates to us reducing our capacity to produce the product. So that's how I think about it.

Yes. I might agree with that, assuming unit production, total unit production stays in line, right? It would be -- we'd be swapping back to content on the low-voltage platforms, we've got content on 1 out of every 3.5 vehicles manufactured. And to Kevin's point, you're looking at 1 point or 2 of sort of accretive high voltage that we'd have to work through. But there are going to be dollars that replace that, assuming the world continues to build the total number.

Yes. And Adam, aside, I kind of -- I understand your question, and it's a fair one. It's a good one. I do wrestle with the industrial policies and they can always change of Europe, principally maybe U.S. secondarily and that can change. China, from an environmental standpoint, but from a national security standpoint, technology standpoint, the push for EVs and the impact on OEM profitability there's a question I would ask for a scenario that I would throw out where that the OEMs are going to be going to the governments wherever they are for support to continue the roll out so that they can achieve the industrial policies that those particular governments have, right?

Because all of this is tied to CO2 emission targets or national security. And if OEMs are uncomfortable or if the investment required is beyond which they can absorb and be profitable, ultimately, I think they're going to look for some support not too different from the semiconductor industry in the U.S. and Europe.

Appreciate that, Kevin and Joe. Just 1 quick follow-up, if I may. Just want to confirm that out of the $1.8 billion or almost $2 billion of high voltage -- sorry, electric portion of the -- was it $2 billion? Sorry, of the $2 billion number that you noted.

$1.8 billion. So Adam, $1.8 billion. I used round numbers.

Thank you. I just want to confirm that. Tesla is the single largest component of that? I want to confirm that. And then labor, remind us how much of your sales is labor and what rate of inflation you're seeing in real time?

Yes. On the customer piece, listen, we can't talk about -- speak about specific customers. So that's a question we're not going to respond to. As it relates to labor, I think I would focus on labor within the overall business. Joe?

Yes. We've talked about Adam, we had in the Investor Day $900 million of dollar increase this between -- evenly split over the 3 years, that was about 10% to 11% increase, and that's what we're seeing.

Next, we'll go to Chris McNally from Evercore.

If maybe we could just do a little housekeeping. Kevin and Joe, maybe I'm missing something, but the $1.8 billion in high voltage, what's the number you're using for '22? Maybe I -- maybe it's been restated, but I think you had $1.2 billion in some of your old slides. Could you just update those for '22 and '23?

Yes, that's obviously. (inaudible)

Okay. And so that's actually -- is that an increase? I mean because I think the previous number guided to on Q2 was maybe a 30% increase. So it looks more like a 50% increase for high voltage for this year?

Chris, it depends on what you're doing with Intercable, right? We closed Intercable end of last year. So it wasn't in last year, call that a little north of $200 million of revenue. So just thought -- if you pro forma for it, yes, it's growing, but if you didn't, you got very little that Intercable [has grown.]

That's exactly. Okay. Thank you, Joe. Intercable was exactly what I was asking for. And the second one, just a follow-up on Adam's. You forget about talking about the customer. But the $1.8 billion is only high voltage, right? So if there was a large EV player that you mostly did low voltage for that low voltage revenue, even though it goes to an EV would not be in the $1.8 billion. Is that correct?

Yes, that's right. We talked about that. We really wanted to focus on just the high-voltage product line, and that's when we started providing that guidance a few years back. So that's just high voltage. So the -- in the low voltages it's going in EV vehicle, right? So you don't really see a big difference.

Yes, absolutely. And then the last 1 for Q4 because, obviously, there's a lot of moving currents in Q3. On AS&UX, I think you talked about 8% to 9% rough margins for the year. It sounds like from the commentary, some of the recoveries were pushed from Q3 to Q4. The first, is that 8% to 9% still pretty good, even if it's the low end because it points to a nice material pickup in the AS&UX margins. And I think we've been sort of looking for that because that's a large portion of the drive towards the 2025 goals.

Yes. Full year, the current guide would have AS&UX at 8 and S&PS at [11.6.]

Next, we'll go to Itay Michaeli from Citi.

Just a couple of follow-ups for me. First, going back to the Q4 margin outlook. I was hoping you could just kind of dimension the seasonality factors in there. It looks like you'll be exiting closer to 13% ex strike. Just kind of curious how to think about the baseline as we look to bridge into 2024? And then second question, just about hoping to talk more about the ADAS wins you had in Q3, maybe content per vehicle? And also any updated discussions with customers for Gen 6?

Yes. Itay, I think as you look at -- and we'll obviously stay away from 2024 at this point. But I think if you looked at -- I'd sort of give our standard cautions, right? I'd focus more on versus H2 versus Q4 because Q4 can be heavy with things like engineering recovery. So I think it's more H2 adjusted for strike. But listen, as I -- as you just go through the progression here, and as I mentioned to Rod, we clearly have got the benefit of some volume increases offsetting strike. But our margin rates at the segments as well as total coal or total company are tracking to the original guide, and that's tracking to that Investor Day model. And as I mentioned to Rod, there's $1.7 billion of performance, the $900 million of labor are falling in. So if you go -- so I think we're on track. If you're going to start to look at back half, I would -- I think H2 is a better proxy than just Q4 and then you obviously have to adjust for the strike.

On conversation with customers about Gen 6 ADAS platform, I would say we're in active dialogue with roughly a dozen Asian, European and North American. So interaction there and strategic dialogue is very, very strong, going very well. As it relates to the Q3 bookings, the bulk of those bookings we're in and around radar solutions that were being -- that will be plugged into existing ADAS platforms with OEMs in Europe and in China.

Next, we'll go to Emmanuel Rosner.

I was hoping if you can help us frame and quantify the exposure to electric vehicles, either in terms of current revenue or more importantly, actually, in terms of future growth of a market or percentage of backlog, not just within high voltage, but generally speaking, because to your earlier point, you're selling low voltage components to like a very large EV manufacturer and obviously, a lot of the new programs over the next few years which probably have been on new EV platform. So any way to maybe quantify when you sort of like look at this outgrowth expected over the next few years, how much of that would have landed on EV platform?

Yes. Emmanuel, it's Joe. Listen, I think Kevin frame sort of how we're thinking about long term, right? We were conservative. I think we didn't sort of follow everybody down the path that is going to be 50% in the next couple of years. So -- from what we see now, remain confident in that outlook. We do expect growth to slow. We just get to the law of larger numbers, you get almost a $2 billion business. You're going to see growth rates slow over time.

As I mentioned earlier, if you look just over the past, call it, 8-plus quarters, high voltage has typically provided 2 points of growth over market, round numbers, a little bit higher in certain quarters, up to 2.5%, 3%. But on average, to this quarter, it provided a point of growth over market. So meaningful, but not -- certainly not all of it. And then 80% of the business at this point, including revenue and bookings is with the European and the Chinese OEMs. So we had not historically gone down the path of the North American products, at least the initial products, I think, were very niche, right? They were the high-end SUVs, as sort of more of the unique type vehicles. We have some content on them, but they were by no means the bulk of the business. So I think from -- I think that should help frame it at this point.

I appreciate it. Joe, the reason I'm asking for EV exposure outside of high voltage, there's a large seating supplier. That would be ideally the most powertrain agnostic product you could possibly sell, slashing their backlog by 20% because all these new seats are going to go on new EV platforms, basically, which are either being pushed out or at sort of like lower volume.

Yes. I can't speak to the seating business. Obviously, like I said, we're 80% European and Chinese concentration. I'm not sure who you're talking about or what their portfolio looks like.

No, no. My comment was EV exposure outside of high voltage and any way to frame that?

No. I think we've provided what we're going to provide, Emmanuel.

Yes. Emmanuel, from our perspective, vehicle architecture, just given the fact that we're in 1 of every 3 vehicles globally, if they're not building a BEV, they're building a vehicle with an internal combustion engine and more likely than that, we're on that vehicle. So with that low voltage vehicle architecture. So for us, I would say there's virtually no impact.

That's helpful. My follow-up is on -- I think you were mentioning your mix impact, there's sort of like a little bit of a headwind in the quarter outside of just the strike, obviously, in North America. Can you just elaborate a little bit more on the other region? Was it sort of like, I mean, customer mix, specifically and which region?

Yes. It was customer mix across really all regions and some examples where kind of outsized growth of the Japanese OEMs across North America, across Europe as well as some significant growth in parts of Eastern Europe that are either products manufactured in Eastern Europe or in places like China that are exported. So areas where we have less customer exposure. So a lot of that, we think, is related to semiconductor rebound and availability of chips for select OEMs and the other piece is the impact of -- or the opportunity as it relates to the UAW strike in North America for select OEMs to potentially gain share.

And we'll go to our last question from Dan Levy from Barclays.

I wanted to start with your Slide 10, just the perspectives on 2024 here. And in the bottom half of the slide says continued inflationary environment, geopolitical uncertainty. Maybe if you could just unpack the inflationary comment a bit. What is it that you're seeing that's incrementally worse? How does potential recovery on semiconductor cost factor in? And maybe you could just talk about the potential for better stability in production schedules to be a potential tailwind next year?

Yes. So it's Kevin. Listen, as it relates to stability in production schedules, we're seeing that now. I mean, there's some element of disruption in COVID that remains, but we've seen a significant improvement throughout the year, would expect availability to continue, obviously, into 2024. So should see some benefit there.

Material inflation was significant in 2023. We expect in some areas including semiconductors that will remain significant in 2024. We're doing a number of things to address that. One, changing semiconductor partners really across all of the semi categories from core semis, like SoCs, Analog Power, PMICs, to peripheral semis. So a lot of work being done by our engineering and sourcing teams establishing commercial agreements or partnership with the Chinese semiconductor space, which is ramping up capabilities very, very aggressively. And we're deep into that and are going to take advantage of that opportunity, both to serve the China market as well as to bring some of these into the 9 China market. So that will free up lower-cost alternatives for ourselves and our customers.

As it relates to customer recoveries, listen, those are always challenging discussions. But given where we have contracts, given where we are from a financial standpoint, we are passing 100% of those costs on to the customer. Again, it's not a simple discussion. It's not an easy discussion. But that's with the commercial team or how the operating team is operating. And that's something that will continue. To the extent, they're interested in some of these lower cost alternatives, there's an opportunity for us to jointly benefit, and we'll put those in front of them. But as of now, that's kind of the state. So the material inflation is relatively high. And then we're very focused on labor inflation in places like Mexico, Eastern Europe, North Africa. So those are areas that we're watching very, very closely.

And then last item, I should say, it's not related to the specific inflation on material or direct labor. We're very focused on continuing to prune our cost structure to provide additional room and ultimately, additional margin.

Great. And then just as a follow-up on the EV side, just 2 quick ones there. Can you just confirm -- I know you said you are overweight to the European and Chinese. China, we've obviously seen a lot of uptake, especially from BYD. How should we think about the mix impact if we see outsized exposure from the Chinese? And then can you just confirm that on SVA that, that is powertrain agnostic?

Yes, SVA is powertrain agnostic. It makes more sense if an OEM is rethinking and moving to a BEV platform that is the time to really -- it's an easier time to implement and make that architecture change. But it would be power train overall powertrain agnostic. As it relates to mix of BEV customers, I think it's relatively a wash, margins might be a little bit higher on our China OEM partners given we tend to do more system solutions there. So are able to kind of connect a broader portion of our overall portfolio, but it wouldn't be significantly different.

Yes. Dan, just current revenues, and it's gotten -- it's changed over the last few years. We're about 60-40 in global versus local OEs from a revenue perspective today, that would have been north of 75% global back in the 2018, 2019 time frame. Bookings are running 50-50. So we'd expect that to increase in favor of the locals. And obviously, just given what's being made over there, a lot of that EV.

Yes. I think actually, if you look at our revenue mix, I think 2024, it's almost 50-50 from a local multinational.

I'd like to turn the call back to Mr. Clark for any final remarks.

Okay. Thank you, operator. Thank you, everyone. We appreciate you taking your time this morning. Please let us know if you have any further questions. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference. We appreciate your participation. Have a wonderful day.