Kevin Clark: Thanks.
Operator: Thank you. We’ll next go to Adam Jonas with Morgan Stanley. Please go ahead.
Adam Jonas: Thanks, guys. So just look and follow-up to Joe’s and Rod’s and Murphy’s question. I want to hit on this theme as well. This EV journey for legacy OEMs has just been an unmitigated disaster so far. I don’t think you need to be pragmatic Bostonians to see that, to see through that. With respect to like the inability to generate anything close to a reasonable return on capital. And I don’t see a path to it. So just speaking for myself here, guys, but it wouldn’t surprise me, and I suppose a lot of people on this call, if GM, Ford, and the Germans pulled back their EV spending a lot, I mean, a lot. And I know you’re not going to — you’re not in a position to answer the exact impact yet, so I’ll phrase the question this way.
If they did, if in a world where the undisputed leader Tesla is dialing back and barely profitable themselves. And others follow and really just reset because they can’t sell negative 100% margins forever. Can you tell us how much your those — the 14.5% mid-decade operating margin target or the over 17% longer-term target? And I realize there won’t be a straight pass there, but how much of those targets really depend on the pace of EV adoption to continue the way you outlined, even conservatively outlined in February 14?
Kevin Clark: Yes. I’ll take it, I’ll start, Adam. Listen, I — we can take a look at a scenario like that, just kind of peeling it back. This year, we’ll do $1.8 billion in high voltage, or EV revenues out of our roughly $21 billion in revenues. And clearly, the growth rate that we’ve attached to high voltage electrification is higher than our overall average growth rate. So certainly it would have some impact there. I think as we said, a lot of these EVs are replacing vehicles with internal combustion engines. Most of which — most of those OEMs where we actually have the vehicle architecture content, so the trade-off isn’t dollar for dollar. The high voltage content or margins related to the SP&S base margins is accretive by a couple points from a margin rate standpoint, but it’s not a matter where it’s 2x.
So it’s something that I think we would manage through. It would have an impact from a profit standpoint. I don’t think it would have a huge impact just given what the margins look like. And we would be going again if these OEMs aren’t achieving their targets; their prices are going up to the extent they’re significantly reducing. There are one-time payments from the OEM as it relates to us reducing our capacity to produce the product. So that’s how I think about it.
Joe Massaro: Yes. Adam, I’d agree with that. Assuming unit production, total unit production stays in line, right? We’d be swapping back to content on the low voltage platforms. We’ve got content on one out of every 3.5 vehicles manufactured. And to Kevin’s point, you’re looking at a point or two of sort of accretive high voltage that we’d have to work through. But it’s — there are going to be dollars that replace that assuming the world continues to build the total number.
Kevin Clark: Yes. And Adam aside, I kind of I understand your question, and it’s a fair one, it’s a good one. I do wrestle with the industrial policies and they can always change of Europe, principally maybe U.S. secondarily and that can change. China from an environmental standpoint, but from a national security standpoint, technology standpoint, the push for EVs and the impact on OEM profitability, there’s a question I would ask or a scenario that I would throw out where that the OEMs are going to be going to the governments, wherever they are, for support, to continue the rollout so that they can achieve the industrial policies that those particular governments have, right? Because all of this is tied to CO2 emission targets or national security.
And if OEMs are uncomfortable or if the investment required is beyond, which they can absorb and be profitable, ultimately, I think they’re going to look for some support not too different from the semiconductor industry in the U.S. and Europe.
Adam Jonas: Yes. Appreciate that, Kevin and Joe. Just one quick follow-up, if I may. Just want to confirm that out of the $1.8 billion or almost $2 billion of high voltage — sorry, electric portion of the — was the $2 billion — sorry, of the $2 billion number that you quoted.
Kevin Clark: $1.8 billion. So Adam, $1.8 billion, I use round numbers.
Adam Jonas: Thank you. Just want to confirm that. Tesla is the single largest component of that. I want to confirm that and then labor remind us how much of your sales is labor and what rate of inflation you’re seeing in real time. Thanks, guys.
Kevin Clark: Yes. On the customer piece, listen, we can’t talk about — speak about specific customers, so that’s a question we’re not going to respond to. As it relates to labor, I think I would focus on labor within the overall business. Joe?
Joe Massaro: Yes. We’ve talked about it. Adam, we had in the Investor Day, $900 million of dollar increase between evenly split over the three years, that was about 10% to 11% increase and that’s what we’re seeing.
Operator: Thank you. Next we’ll go to Chris McNally from Evercore. Please go ahead.
Chris McNally: Thanks so much, team. Maybe we could just do a little housekeeping. Kevin and Joe, maybe I’m missing something, but the $1.8 billion in high voltage, what’s the number you’re using for 2022? Maybe I — maybe it’s been restated, but I think you had $1.2 billion in some of your old slides. Could you just update those 2022 and 2023?
Kevin Clark: Yes, that’s accurate — yes, that’s accurate $1.2 billion.
Chris McNally: Okay. And so that’s actually — is that an increase? I mean because I think the previous number guided to on Q2 was maybe a 30% increase. So it looks more like a 50% increase for high voltage for this year.
Joe Massaro: Chris, it depends on what you’re doing with Intercable, right? We closed Intercable end of last year. So wasn’t in last year call that just a little north of $200 million of revenue. So just thought if you pro forma for it, yes, it’s growing, yes, and if you didn’t, you got to look at that Intercable, yes.
Chris McNally: That’s exactly. Okay. Thank you, Joe. Intercable was exactly what I was asking for. And the second one, just to follow-up on Adam’s, you forget about talking about the customer, but the $1.8 billion is only high voltage, right? So if there was a large EV player that you mostly did low voltage for, that low voltage revenue, even though it goes to an EV, would not be in the $1.8 billion, is that correct?
Joe Massaro: Yes, that’s right. We talked about that. We really wanted to focus on just the high voltage product line, and that’s when we started providing that guidance a few years back. So that’s just high voltage and the low voltage is what’s going in either vehicle, right? So you don’t really see a big vehicle difference.
Chris McNally: Either vehicle.
Joe Massaro: Yes.
