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, Sasha. Good morning and thank you for joining at this 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 excludes 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 will be providing certain forward-looking information which results -- which reflects Aptiv's current view of future financial performance.

And maybe materially different from our actual performance for reasons that we site 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 an impact on the supply chain and global economy.

Joining us today are Kevin Clark, Aptiv 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, Vicki, 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 $219.03 million 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 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 and 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 ride-sharing 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 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 [Indiscernible] manufacturing has 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 risk, reduced 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 technology 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 in 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 costs, 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 in market share gains translated into continued market outgrowth, despite the significant supply chain disruptions impacting the segment.

Consumers continue to demand more Aptiv safety and connectivity features in their vehicles, which are delivered through more advanced software features, leveraging the latest sensing and compute solutions.

This trend and 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 is evidenced by our third quarter Conquest Business Award with Mercedes-Benz to provide our multi-purpose interior sensing solutions on their next-gen electric vehicle platform.

This business award built on our recent in-cabin monitoring successes and advances our customer's road map 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 and 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 not automotive market applications.

We're the industry leader in electrical distribution systems with the engineering capabilities and global manufacturing scale necessary to rapidly build custom -- rapidly bring customers to market as they quickly adapt to the accelerating macro trends.

A great example is our recent business awards, [Indiscernible] an extension to our existing business to support design changes in content increases on the ramp truck. It was another strong quarter for our Signal and Power Solutions segments 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 tactically 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 lifecycle 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 domain, 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 details..

Great. Thanks, Kevin. And good morning, everyone. Starting with 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 levels.

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 Aptiv 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 OEM s and strong 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 in 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 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 sale 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 in the next slide, our revenues and operating margin remained unchanged from the outlook we provided in mid-October. We continue to expect revenue in the range of $15.1 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, this is now estimated to be $310 million for the year, up a $170 million over the prior year, and FX Commodity and other rising input costs of $195 million, mainly driven by semiconductor in [Indiscernible] 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 enabled us to convert more income to cash, generating higher operating cash flow.

We now expect the 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 activities.

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 connective 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 of valuations, 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 is 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 chain s and material availability improve over the course of 2022.

Finally, the actions we've taken over the prior years to drive underlying product line profitability and established 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-pursued activities.

As we've 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 will 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 's 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's 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 enabled 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. With that, let's open up the line for Q&A..

Thank you. [Operator Instructions] If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. In the interest of time, please limit yourself to one question and one follow up. [Operator Instructions] Our first question today comes from Rod Lache from Wolfe Research. Please go ahead..

Good morning, everybody..

Hey, Rod..

Was hoping maybe you could, first of all, clarify a little bit more what drove the 61% decremental on the volume in SNPS. And more importantly, if we take a step back and we think about for the overall Company for the year that the $310 million of supply chain and COVID cost and the effect -- 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 those that applies to SPS and implies overall to app to write Q3. I think obviously a very challenging quarter from a decremental perspective. Really there's a couple of things driving that and I will start by, obviously this is very lumpy when you just look at a one-off quarter.

I said there's two real drivers. We saw volume fall off significantly in the back half of Q3. Year-over-year, our view of vehicle production as 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 a 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 incremental and decremental are, and what we've historically talked about. So that incremental of 18% to 22%, and decremental of 25% to 30% again, depending on how quickly volumes comes down.

For the full year, I think the incremental 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 historically expect the business.

But it's -- I think in a given quarter, particularly when you see the sharp moves and volume, and this isn't different from what we saw actually during COVID last year. We are going to run heavier on those decremental. And again, it applies to -- it really applies to those segments..

And Rod, this is Kevin. I'll take the second part of your question. I would break our activities to offset into 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 a 100 program or product redesign activities that we have underway. We 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.

Then I would say as it relates to cost and cost structure, and it's important consistent with past, we continue to have -- 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 think it's important to continue to do so even in light of the decremental margins that you talked about to do 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 four actions? It's a pretty big number in aggregate, obviously..

Yeah, there is. We're working through that and 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 timeframe, so there will be some amount of working through it.

But as focused as we are on developing innovative solutions, we're, we have teams as, as focused on lowering overall costs..

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?.

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

I think it's a little bit -- it's difficult to be precise or to precisely answer that question. Like 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 it's the overall trend in adoption of Aptiv safety high-voltage electrification, it's less than precise calculus..

Thank you..

Our next question comes from Joseph Spak from RBC Capital Markets. Please go ahead..

Good morning, Joe..

Thank you. Good morning. Joe, just -- thanks for all the updated color again on all the costs.

I am just -- if I track this and I know you usually give it all on a year-over-year basis and sometimes a little bit sequentially, but is it -- it seems like if I back into just for the fourth quarter that COVID and [Indiscernible] supply chain [Indiscernible]. That's relatively flattish year-over-year.

Is that fair and is that what is causing maybe a little bit of the better margin sequentially third quarter to fourth quarter?.

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

And then just thinking out a little bit here with everything going on and lessons learned and as we sort of turned 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 sort of in the value chain will sort of carry a little bit more inventory, provide a little bit more buffer and.

weighing on working capital a little bit. And then, on CapEx, I know that sort of came down or flex down and I think you normally talk about 5% of sales.

So, should we expect like a catch-up next year for some of that might have been deferred or delayed or does it just return more towards that?.

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 as 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 through the supply base so that capital is more effectively deployed, and then a trade-off of -- there will -- 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 they'll be less.

So how that offsets are 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 [Indiscernible] that on certain parts or certain products, without committed volumes, JIT Inventory Management doesn't work for certain parts. Joe..

So, Joe, on capex, there was a small push into next year. [Indiscernible] -- I think that 5% as an overall range is still good. There's been years we've been a little under, there will be years where we're a little over by not more than half a base, a half percentage point. 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 comeback, [Indiscernible], 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 increase balance is, I would describe as really transactional. Production came down really fast in the back half of Q3. We were obviously given lead times. We were -- we had inventory on hand to produce to the original schedules.

That half I would describe as more transactional. 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 slip outs 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've 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 -- there's that type.

But certainly, the full investment that you see on the balance sheet, now, I would not think 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..

Thanks for the color..

Thank you. We're now moving on to David Kelley from Jefferies, please go ahead..

Hey, good morning, team. Thanks for taking my questions. Just 3Q outgrowth, another robust quarter here and realizing we aren't guiding to 2022, but you did reference in the slide decks and 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, as Joe mentioned, we're not giving '22 guidance obviously, at this point in time. But the nature of our product portfolio in 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?.

The drivers, they're very consistent with what we've been seeing. It's high-voltage and active safety of clearly leaders. SPS continues to benefit more broadly from the content ads 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. Thank you. And then maybe a question on the semi costs.

You noted specifically driver of the higher AS and UX input costs, can 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, and just curious how you're thinking about the potential price increases versus some of the offsets that you referenced?.

Yeah. 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 two-fold. 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'd describe it as a bit of a sort of spot -by market. So even if they haven't 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 -- [Indiscernible] are 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..

Got it. Thank you..

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

Yes. Good morning. And thanks very much for taking the question. 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..

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 predicting 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 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 billion, $21 billion, $22 billion so given what we see on the table today..

That's helpful. Thank you. 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 OEM's are talking about procuring semiconductors and other key components more directly and not just working with Tier 1 like Aptiv.

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

I -- 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 in a more strategic relationship, both from a technology and a supply chain standpoint..

Thank you. We're now moving on to Dan Levy from Credit Suisse with our next question. Please go ahead..

Hey, good morning everyone Thank you. Wanted to just see if -- and I recognize you've given us some directional comments on '22. I appreciate it. I wanted to see if maybe we could put a slightly finer point on the directional comments. 1.

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?.

Yeah. Let me -- Dan, It's Joe. Let me start. I think the best way, obviously, I'm not going to give any more information on 2022 where -- as I said in my comments were really -- it's very early days to be doing that.

But from our perspective and we've talked about this, 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 return to the normal, would 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 million plus 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 as we said even last quarter, we -- we're not treating the inflation as transitory, the 195, so I wouldn't -- I'm not going to add that back, but I 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've mentioned, we've got about $600 million again, we backed us 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 rates.

So again, just something to think about as you're working through the math. Right now, we see full-year material inflation of about a $195 million. A lot of that has 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, not going to speak to how much we're able to -- we're able to offset, but certainly start with that 195 we're talking about, that full-year numbers is certainly what we're working on at the moment..

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

And in 2018, revenues were $14.4 billion, this year we'll do $15.3 and when you look at our guidance as it relates to full-year EBITDA [Indiscernible] and EBITDA margins.

And you factor in the cost headwinds that Joe's walk 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 in the fact that, "hey, maybe quarters are 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..

Thank you and that's historical perspective certainly is helpful. Thank you. Second question, and I think it's a little -- a little more related, but it's specific to [Indiscernible] margin and I know there's a number of things that are moving up but it's been low, obviously, the volumes are quite weak and you have your Sunday cost inflation.

I guess I'm wondering though just broadly on the go-forward. This is the segment where you have your software exposure. Theoretically, this is a segment where margin should sharply benefit as that software type revenue starts to come in on aid as you've obviously got app 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 ASUX 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?.

Yeah, listen. I think predictability of schedules is 1. 2. The execution on -- of the launch of the existing programs that we have that we're launching today is 2. 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 then, 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 some areas potentially increase investment in..

Got it. Thank you. Appreciate it. Very helpful..

Thanks Dan..

Thank you. From Bank of America, we have John Murphy with our next question. Please go ahead..

Good morning, guys..

Hey, John..

Thanks for all the info and the shot at 20 -- what you've given us in '22, I know it's hard. Kevin, you mentioned one of the solutions to the issues that are going on right now is that automakers 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 [Indiscernible] volumes.

It's just hard to understand how an automaker could sit there and give committed volume number because they are at the whim of what's happening in the macro, then also now finding out that they're 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?.

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 and 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, they'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 for a more permanently address on some of the structural issues..

Okay. Sure, hope we get there. And it seems like you guys are in a good -- in a good spot to actually help manage up and manage down in some ways..

Yeah. 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're likely to 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's focused on how do we learn from it and how do we improve how we operate..

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 up their own EV, essentially AV platforms.

But ironically, there's a lot of stuff that they talk about that's very much sounds like set 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, crap, 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 leading in some of these platforms.

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

Yeah -- no. Listen, you got 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. We have 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 the car from a content standpoint, like software.

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

Great, thank you very much..

Thank you. Our last question today comes from Ittai Miceli from Citi. Please go ahead..

Great. Thanks. Good morning, everybody. Just two quick ones, a near-term question and a longer-term question. On the near-term question, maybe Joe, could you just give us the puts and takes on the implied Q4 revenue GOM? And then maybe a longer-term question for Kevin.

We heard recently with -- at the GM Investor Day their plans to launch consumer AV with the help of crews in about 5 years. I'm curious what Aptiv strategy is with respect to consumer AV, as well as your relationship with emotional and the potential fee, but to perhaps leverage that relationship in the next 5 or 10 years for our consumer AV..

yes, Ittai, let me go really 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 just a lack of visibility of customer schedules. We obviously saw it's hard to be overly precise at this point from a forecast perspective.

Having obviously seen anything that would suggest that it's a -- that there's going to be a meaningful change downward. We've introduced 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 market quarters, shut target, call an exact number at this point, And Ittai with respect to your question about AV and [Indiscernible] 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 driver-less vehicles being tested on roads today in Las Vegas, and elsewhere and we'll have fully driver-less vehicles and part of the Lyft network in 2023..

So, from a business standpoint, they're doing -- in technology advance standpoint, on the team, there's doing extremely well. A couple of comments broadly on AV is you know; we've always viewed autonomous driving as the furthest spectrum of full ADAS solutions.

And we use our partnership with Motional as an opportunity to continue to test, to validate, to future proof technologies 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 AF 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 plus. So, 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 plus 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 -- that that's from a cost or commercial standpoint, that's likely beyond 2025, but it's certainly technology that we're focused on. And then it's a capability we want to make sure that we're positioned to have..

That's all. That's very helpful. Thank you..

Thank you. 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..