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 us for 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 reflects Aptiv's current view of future financial performance and may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and impact on the supply chain and global economy. Joining us today are Kevin Clark, Aptiv President and CEO, and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business and Joe will cover the financial results and full-year outlook in more detail before opening the call to Q&A. With that, I would now like to turn the call over to Kevin Clark.

Sure. Thank you, Vicky, and thanks everyone for joining us this morning. Beginning on Slide 3, we experienced continued strong demand across the portfolio in the third quarter despite continued supply chain constraints negatively impacting vehicle production. Revenues of $3.7 billion declined 5% versus the prior year with a record 18 points of growth over market. New business awards of $5.8 billion brought 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 in 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 to proactively position Aptiv for the future, optimizing our cost structure while investing in high-growth, high-margin technologies that further enhance the resiliency of our business model, translating into greater value for both our customers and our shareholders. Moving to Slide 4, the relentless execution of our strategy over the past decade has positioned Aptiv as a more sustainable business, creating over $40 billion of value since our IPO in 2011. This represents an average annual return to shareholders of over 25% and a total return of more than 950% to date. As we transformed Aptiv, we built an industry-leading portfolio of advanced solutions that make vehicles safe, green, and more connected. To drive this transformation, we took several actions including making smart portfolio moves to put further operating leverage in our business model. We exited low-growth, low-margin product lines and spun off our Powertrain segment positioning Aptiv to focus on our unique capabilities around the brain and nervous system of the vehicle. At the same time, we completed a number of acquisitions which enabled our software and data management capabilities, increased our scale and leverage in engineered components, and expanded our presence in adjacent markets. Last year, we established Motional, our autonomous driving joint venture with Hyundai, which will be operating fully driverless vehicles on the Lyft 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 of which translates into continued outperformance and long-term value creation. Turning to Slide 5, we continue to successfully navigate the current challenging environment while proactively enhancing the strength of our competitive position. Our supply chain resiliency team is leveraging technology, data, and analytics to stress test our integrated supply chain network under multiple scenarios, helping us to proactively identify and address potential bottlenecks. At the same time, we're working through daily constraints by leveraging our proven cross-functional crisis management process. Our planning process around 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, reduce material costs, and increase functionality for our customers. 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 and collaborative approach to platform solutions set 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, and 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. This 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 roadmap of interior sensing features by further enhancing driver safety and improving the in-cabin user experience. The evolution of in-cabin sensing is playing out as expected, and our leadership position makes Aptiv a strong collaboration partner for our customers. Turning to Slide 8, revenues in our Signal and Power Solutions segment declined 4% during the quarter, 19 points better than the reduction in global vehicle production, reflecting the continued benefit from the acceleration in the production of electrified vehicles, resulting in greater demand for our high-voltage solutions and the continued strong demand for connector and cable management products for both automotive and non-automotive market applications. We're the industry leader in electrical distribution systems with the engineering capabilities and global manufacturing scale necessary to rapidly bring customers to market as they quickly adapt to the accelerating macro trends. A great example is our recent business awards, 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 integration and 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 allow us to continue to be a partner of choice for our customers across all vehicle domains, enabling our customers to offer greater flexibility for end-user differentiation and personalization, and further strengthen our competitive position as a leading provider of smart vehicle architecture that accelerates the transition to the fully electrified, software-defined vehicle. With that, I'll hand the call over to Joe to take us through the financials in more detail.

Great. Thanks, Kevin. And good morning, everyone. Starting 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 content 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 OEMs 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. This includes 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 $170 million over the prior year, and FX Commodity and other rising input costs of $195 million, mainly driven by semiconductor pricing. Product line level margins continue to be aligned with our expectations, validating the strength 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 content, software-enabled vehicles with increasing levels of active safety and Powertrain electrification. Although it is still early in the planning process for 2022, we are confident in our ability to outgrow the market driven by continued acceleration of the safe, green, and connected megatrends. With that said, we do believe 2022 vehicle production will be impacted by supply chain constraints and that the industry will not return to pre-pandemic production levels until post-2022. As it relates to material input costs, we continue to make traction on our mitigation initiatives, including supplier recovery strategies, engineering redesign, alternative source evaluations, as well as engaging in commercial discussions with our customers. Although we will see some benefit from these initiatives, it is unlikely that the full impact of the elevated input costs 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 chains 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 establish the Company's strong financial position will allow us to continue to invest in new technologies, both organically and inorganically, while supporting our new business-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 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 serves 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. If you're using a speaker phone, please ensure your mute function is off so your signal can reach our equipment. In the interest of time, please limit yourself to one question and one follow-up. Our first question today comes from Rod Lache from Wolfe Research. Please go ahead.

Good morning, everybody.

Hey, Rod.

Could you clarify what caused the 61% decrease in volume for SNPS? Additionally, considering the overall company this year, there have been $310 million in supply chain and COVID-related costs along with $195 million in commodity costs. What are the prospects for recovering those costs if they remain high? I'd appreciate any insights on how to approach this.

Sure, I'll start by discussing the decremental situation. It was indeed a difficult quarter from that perspective. There are a couple of key factors at play. First, it's important to note that looking at a single quarter can be misleading because of its variability. The two main drivers are significant volume declines in the latter half of Q3. Our outlook for vehicle production remains flat compared to 2020, but we expect a reduction of over 20% in the second half of the year. This rapid decrease in volume limits our ability to adjust the cost structure in a short timeframe. Additionally, we are still facing costs related to supply chain disruptions. Therefore, not only are we seeing a quick drop in revenue, but we also have substantial supply chain costs affecting this quarter and the latter half of the year. The quarter showed a pronounced decremental performance. However, if we consider the entire year, we are more aligned with our usual expectations for incremental and decremental performance, which we typically see in the range of 18% to 22% for incrementals and 25% to 30% for decrementals, depending on the pace at which volumes decline. For the full year, the incrementals align generally with those expectations, though we’re experiencing some impact from overall supply chain-related disruptions. This year is much closer to our historical business performance, but in specific quarters, particularly those experiencing rapid volume changes—similar to what we observed during COVID—we tend to experience more significant decrementals, and this is particularly relevant to certain 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 the supply chain, outside of the 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’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 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 have teams as focused on lowering overall costs.

Okay. The growth over market this year has been significantly stronger than anticipated, with 16% in the first half and now 18% this quarter. Have you been able to evaluate how much of this growth is due to long-term trends like high-voltage and Active safety, versus what is influenced by production mix and the priorities of OEMs with certain vehicles? Have you been able to analyze that to understand the underlying trajectory?

I think it's a great and fair question. It's tough to provide a precise answer. Over the last few years, we've experienced increased demand for AF solutions, high-voltage electrification, and other areas. It's challenging to determine how much of this demand is influenced by the current supply chain crisis compared to the overall trend of adopting Aptiv's safety and high-voltage electrification. Joe has previously mentioned that OEM customers seem to be producing a richer product mix, but it's difficult to quantify the exact impact.

Thank you.

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

Thank you. Good morning. Joe, I appreciate all the updates on the costs. If I can track this, I know you generally provide the information year-over-year and sometimes sequentially. It seems that for the fourth quarter, COVID and supply chain impacts appear relatively flat year-over-year. Is that accurate, and could that be a reason for the improved margin from the third quarter to the fourth quarter?

We are starting to compare against last year, which had $40 million in supply chain disruption costs in Q4. You're correct that for the first three quarters of this year, we primarily focused on those specific costs. This is the first time we are experiencing such significant costs. Looking ahead, considering the current situation and what we’ve learned, as we shift towards cash management and inventory levels, do you think carrying more inventory will become a more permanent practice? Will everyone in the supply chain maintain additional inventory as a buffer, affecting working capital? Regarding capital expenditures, I noticed there has been a decrease, and typically you allocate around 5% of sales. Should we anticipate a catch-up next year for what may have been deferred or delayed expenditures, or will it settle back to that usual percentage?

I'll let Joe provide a more detailed response. When considering the lessons learned, I wouldn't strictly call it that; rather, it's more about a general increase in knowledge regarding supply chain dynamics and a stronger emphasis on visibility from customers to suppliers. This includes a better understanding of sub-suppliers' capacities and ensuring more committed volume from the OEM through the supply chain, allowing for more efficient allocation of capital. However, with this enhanced visibility comes the reality that some areas may require greater investment in inventory, while others may see a reduction. Balancing these factors is likely challenging to quantify at this moment, but in the short term, it probably results in increased inventory. The key question is how much inventory is needed for specific components or products, as just-in-time inventory management does not work effectively for certain items without committed volumes. Joe.

So, Joe, regarding capital expenditures, there was a slight shift into next year. I still believe that a 5% range is appropriate. In some years, we've spent a bit less, while in others, we might exceed that by no more than half a percentage point. I maintain that 5% is a reasonable estimate. There has been some fluctuation as we navigate the disruptions related to the increase in volume, but I wouldn't characterize that as a significant change. On the topic of inventory, as Kevin mentioned, we are gaining valuable insights. If we normalize our inventory, about half of the increased balance can be viewed as transactional. Production dropped significantly in the latter half of Q3. We had the necessary inventory to adhere to initial schedules, but with volume decreasing, we now have elevated inventory levels. We typically utilize the same inventory for products like resins used in connectors and in the electric distribution business; we will use available chips as long as we have them. Therefore, this is mainly related to the timing of production setbacks for about half of that balance. Regarding the remaining inventory, we have stock due to lengthened lead times. We are ensuring we have enough product on hand; for instance, if a product requires 350 parts and we're waiting for one chip, we'll have the other 349 ready so we can proceed once that chip arrives. That is one type of scenario we are dealing with. However, the total investment reflected on the balance sheet does not fully represent the necessary future investments. As Kevin noted, there will probably be some adjustments, but they won't be at the current level, as half of that was driven by 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 I 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 are clearly leaders. SPS continues to benefit more broadly from the content adds into vehicles. Even if it's not our active safety system or other technology, that business has content on 1 out of every 3.5 vehicles manufactured globally. So, there's a really positive content tailwind there. And then the commercial vehicle and industrial businesses continue to be accretive to growth. We're having a really good year from a commercial vehicle perspective and would expect the product lines in that space to continue to grow and be accretive to growth over market.

Okay. Got it. Thank you. And then maybe a question on the semi costs. You noted specifically the 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 million. 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 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 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 OEMs 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.

That's a great question. I think, generally speaking, every participant in the supply chain is reassessing their role and exploring ways to adapt. After several discussions with the leaders of various semiconductor companies, one key issue that must be addressed is committed volumes. In a capital-intensive industry, predictability in production is crucial, particularly when faced with long lead times and current constraints. As we shift to a committed volume model for the medium term, we have options. This could mean continuing with our historical approach of engaging primarily with tiers, or having OEMs collaborate directly with semiconductor companies and tiers. Either approach can effectively address the challenge. For Aptiv, we are prepared to be flexible in either scenario. Moving forward, one notable change will be the establishment of more strategic relationships with semiconductor partners, which may lead to fewer relationships that can drive higher volumes through a more strategic framework, benefiting both technology and supply chain perspectives.

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

Good morning everyone. Thank you. I wanted to follow up on the comments you've made about 2022. Could you clarify the expected incremental margins purely from volume growth, excluding any performance or efficiency factors, particularly in a year where we might see double-digit recovery in the industry? Additionally, if commodity prices remain stable at current levels, do you have any early insights on the net impact of commodities for 2022?

Sure, let me start. It's still quite early to provide any more information on 2022. From our viewpoint, the disruptions caused by COVID and supply chain issues are not seen as structural; they are largely influenced by current events. As I mentioned in my comments, we anticipate that as supply chain and material flow return to normal, these costs will begin to diminish. Looking at 2021 as a reference, we have historically noted incremental margins in the operating income line between 18% and 22%. This year, those margins will be around 16% due to over $300 million in supply chain and COVID-related costs. If we exclude that $300 million, our margins would be closer to 24%, which aligns with our historical expectations when adjusted for these disruptions. It's important to note that we do not consider the inflation of $195 million to be transitory, so I won't account for that. However, we aim to return to the 18% to 22% margin range once we adjust for COVID costs. Additionally, we have around $600 million of incremental volume from commodities and foreign exchange that has a negative impact, which also affects the incremental rates. Currently, we forecast full-year material inflation at about $195 million, with much of this occurring in the latter half of the year. The rates we see in the latter half will likely influence what we manage for 2022. While I can't specify how much we will offset, that $195 million is an important figure we are currently focused on.

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 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 and EBITDA margins and you factor in the cost headwinds that Joe's walked through for 2021, be it supply chain or COVID and you look at the transition from where we were in '18 and where we are today in light of all these effectively macro challenges with incremental investment in advanced technologies, it just underscores the strength of the business model we've built 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 for your insights. My second question is related to margins. I understand there are several factors impacting them, including low volumes and cost inflation. Looking ahead, this segment includes your software exposure, which should ideally enhance margins as software revenue increases. However, you mentioned ongoing investments, which makes me think that we might experience mid to high single-digit margins in the near term. What are the key factors that need to be addressed for margins to significantly improve in this segment? I recognize that volume is crucial, but are there other aspects we should consider?

I believe that the predictability of schedules is important. The successful execution of our current program launches is also crucial. Additionally, the ongoing separation of software and hardware plays a significant role. There is strong demand for active safety, user experience, and data and connectivity solutions provided by this segment, which creates various advantages for us. On the flip side, we have identified future opportunities in areas such as SVA, high-performance computing, and software, where we see significant potential. If it makes sense, we will continue to invest and possibly increase our investments in these areas.

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 2022, 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 volumes. It's just hard to understand how an automaker could sit there and give committed volume numbers 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?

That's a great question, and it's a complex issue. Your point is valid, as it affects everyone in the supply chain, from the original equipment manufacturers to the wafer manufacturers. This issue impacts all areas of the supply chain. If there isn't a baseline commitment and a consistent supply of products for a certain period, everyone in the supply chain is forced to make estimates, leading to situations like the one we are currently facing. Moving forward, I believe we will take a more strategic approach to supply chain management with customers and their Tier 2, Tier 3, and Tier 4 suppliers. The supply chain will become more integrated, with increased visibility, and in exchange, there will be more commitments on certain products for agreed periods. This strategy is essential for resolving the structural issues we face.

Okay. Sure, I hope we reach that goal. It appears that you are in a good position to effectively manage both upward and downward adjustments in certain areas.

Yeah, we're making progress. Under Joe's leadership, we're collaborating more closely on the supply chain. We've always partnered with our customers and suppliers, but our cooperation is stronger than ever. There will be times where we need to hold more inventory, but other instances where we can reduce it. We're all becoming more knowledgeable in this area. Unfortunately, we faced challenges due to the COVID-induced situation in 2021. However, everyone is focused on learning from these experiences and improving our operations.

I want to follow up on the topic of vertical integration. We're hearing discussions on this from both new electric vehicle manufacturers and established companies that are developing their own electric vehicle platforms. Interestingly, some of the concepts they mention sound similar to what we refer to as satellite architecture or other technologies that we offer. When people hear about vertical integration, they might think that outsourcing is going to decline in favor of insourcing. However, it seems this might be more of a semantic issue, as a lot of your technology appears to be integral to these platforms. How should we approach this concept, considering there seems to be a semantic confusion regarding the true meaning of vertical integration?

You raise a valid point. We collaborate with several emerging battery electric vehicle companies, and overall, they show minimal vertical integration in their production processes. Typically, vertical integration represents an economic trade-off. We believe we are well-equipped in both software and hardware capabilities, including our architecture skills. Based on our discussions with these companies, it's clear that certain areas, particularly software, are experiencing rapid growth in vehicles. Both new and legacy OEMs will likely engage with fewer suppliers moving forward. Some of the newer battery electric vehicle companies we partner with have mentioned that more of their activities are currently outsourced, but they are also interacting with fewer suppliers. In our opinion, this trend is likely to continue, and we are committed to staying ahead of it to maximize our benefits.

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

Great. Thanks. Good morning, everybody. I have two quick questions, one for the near term and another for the longer term. For the near-term question, Joe, could you provide us with the factors influencing the implied Q4 revenue GOM? And for the longer-term question, Kevin, we recently learned about GM's plans to launch consumer AV with the help of crews in about five years. I'm interested in understanding Aptiv's strategy regarding consumer AV and your relationship with emotional and the potential fee, and how we might leverage that relationship in the next five to ten years for our consumer AV.

Certainly, Ittai. Let me briefly discuss our growth over market. We are experiencing similar dynamics as in previous quarters, primarily due to a lack of visibility regarding customer schedules. It's challenging to make accurate forecasts at this time. However, we have not observed any significant indicators suggesting a downward trend. We have introduced the 10 plus for the year, and if production remains steady and we maintain a strong mix, we anticipate another good growth over market quarter. That said, providing a precise number right now is more complicated. Regarding your inquiry about AV and our relationship, I can't speak to other partnerships since AV is utilized differently by various OEMs and suppliers. We are working closely with Motional, our joint venture with the Hyundai Motor Group, which is performing exceptionally well. They are currently testing driverless vehicles on the roads in Las Vegas and other locations, and we expect to have fully driverless vehicles integrated into the Lyft network in 2023.

From a business perspective, the team is performing exceptionally well in terms of technological advancements. Regarding autonomous vehicles, we have always regarded autonomous driving as the most advanced aspect of full ADAS solutions. Our collaboration with Motional allows us to continue testing and validating technologies, which we can integrate into our current ADAS offerings. We believe there is significant potential in the L0 to L3 ADAS framework, as currently less than 60% of vehicles are equipped with an AF solution. According to IHS forecasts, this will rise to 70% by 2025, but we actually anticipate it will exceed that figure, particularly with rapid growth in the L2 and L2 plus categories. This is our primary focus. We are leveraging Motional to enhance our solutions in the L2 and L2 plus areas while also collaborating with Motional and utilizing internal resources to advance L3 and beyond. From a cost and commercial perspective, we expect significant developments beyond 2025, but it's crucial that we remain focused on this technology and ensure we are well-positioned to capitalize on it.

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.