Aptiv Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 12 speakers on the call.

Operator

Welcome to the Aptiv Q2 2023 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jane Wu, Vice President of Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Thank you, Elaine. Good morning, and thank you for joining Aptiv's 2nd quarter 2023 Earnings Conference Call. The press release and related tables along with a slide presentation can be found on the Investor Relations portion of our website at active.com. Today's review of our financials exclude amortization, restructuring and other special items and will address the continuing operations of Aptiv. The reconciliations between GAAP and non GAAP measures for our 2nd quarter financials As well as our full year 2023 outlook are included at the back of the slide presentation and the earnings press release.

Speaker 1

During today's call, we will be providing certain forward looking information that reflects Aptiv's current view of future financial performance and may be materially different for reasons that we cite in our Form 10 ks and other SEC filings. Joining us today will be Kevin Clark, Aptiv's Chairman and CEO and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business and Joe will cover the financial results in more detail before we open the call to Q and A. With that, I'd like to turn the call over to Kevin Clark.

Speaker 2

Thank you, Jane, and thanks everyone for joining us this morning. Beginning on slide 3, We delivered a record quarter demonstrating outperformance in an improving supply chain environment. Touching on a few of the highlights, Revenue increased 25 percent to $5,200,000,000 a new record for quarterly revenue, representing 10 points of growth over underlying vehicle production, Product lines increased almost 50%, underscoring the strength of our safe, green and connected product portfolio. EBITDA and operating income totaled a record $695,000,000 $530,000,000 respectively, reflecting solid flow through on volume growth and fewer supply chain disruptions, partially offset by unfavorable foreign exchange rates, Commodity prices and ongoing material and labor inflation. New business bookings totaled $6,100,000,000 Further validating our industry leading portfolio, the strength of our customer relationships and our ability to execute flawlessly in a dynamic environment.

Speaker 2

Turning to slide 4. Our first half performance was substantially in line with our expectations. New business bookings totaled over $20,000,000,000 driven by customer awards for our SVA Compute and Software, High Voltage Electrification, User Experience and Active Safety Solutions record revenue representing 20% growth, 8 points over underlying vehicle production, In line with our long term framework, record EBITDA and operating income as well as significant year over year margin expansion, The result of strong volume growth and increased operating efficiencies, partially offset by the headwinds I mentioned on the prior slide. And we're ahead of plan for both Wind River and Inter Cable Automotive Solutions with both companies experiencing an uptick in commercial engagements And customer awards. Although supply chain issues persist, we experienced a sequential improvement in the supply of semiconductors resulting in more stable vehicle production schedules.

Speaker 2

From a macro and industry perspective, global vehicle production has been strong With the North American and European markets being the most resilient. Given the current industry backdrop, we're updating our outlook for the full year. We now expect global vehicle production to increase 3% to 4%, principally driven by stronger vehicle production in North America and Europe. Our updated outlook does not take into account any labor disruptions in North America, although we do recognize that this is a real risk. Joe will provide a more granular update on our revised outlook when we review the financials.

Speaker 2

Regardless of the market backdrop, We remain laser focused on enhancing our portfolio of safe, green and connected solutions, executing on our commercial strategy and optimizing our business model, which will continue to position us to benefit from the secular tailwinds. Moving to slide 5, As I already mentioned, new business bookings during the quarter were $6,100,000,000 bringing our year to date total to over $20,000,000,000 Advanced Safety and User Experience bookings totaled $1,700,000,000 driven by $1,000,000,000 in user experience bookings, including awards for Aptiv's integrated cockpit controller and driver state sensing solutions. Signal and Power Solutions bookings reached $4,400,000,000 Including $1,400,000,000 in bookings for our high voltage electrification solutions, comprised of awards across our high voltage product portfolio With both traditional and new battery electric vehicle manufacturers. Given the strength of our commercial pipeline, we have clear line of sight to exceed last year's $4,200,000,000 in high voltage business awards and remain highly confident in achieving our full year bookings target of 32,000,000,000 Further validating the strength of our portfolio of advanced technologies and our ability to deliver exceptional value for our customers. Turning to slide 6 to review our Advanced Safety and User Experience segment's 2nd quarter highlights.

Speaker 2

ASU X achieved record revenue of $1,500,000,000 increasing 24 points above underlying vehicle production. Active Safety revenues increased 49% with strength across North America, Europe and China as the launch of our Level 2 and Level 2 +8aaS Solutions continue to ramp. User Experience revenues increased 33%, driven by volume growth across key programs in both Europe and North America. And lastly, smart vehicle compute and software revenue grew 30%, reflecting Wind River's commercial success in both the automotive and non automotive markets, which I'll cover in more detail on the next slide. In terms of new business bookings, we're awarded over $400,000,000 of active safety bookings, including program extension awards with a North American customer.

Speaker 2

As I mentioned, we're also awarded roughly 1,000,000,000 of user experience bookings, including a significant program extension with the VW Group. This particular award is for an integrated cockpit controller first launched on the Porsche Taycan and now being rolled out across numerous other vehicle platforms. As vehicle life cycles get shorter, the ability to cost effectively extend our solutions across both luxury and mass market vehicle platforms Reinforces Aptiv's value as a strategic partner. And as demand increases for more advanced active safety and user experience solutions, Flexible platform solutions that are cost effective while providing our customers with choice differentiates us from our competitors. And as a result, we've experienced an increase in the number of strategic customer engagements and are confident that additional business awards will follow later this year.

Speaker 2

Moving to slide 7. Wind River delivers edge to cloud software solutions for mission critical applications, Enabling software defined systems that require the highest levels of safety, security and performance. The Wind River team has done a great job increasing the partnership ecosystem, while also winning new business, particularly in the Aerospace and Defense, Telecom and Automotive Markets, including a new program award for an A and D customer GMV to provide its Edge software And with the global European truck manufacturer to provide its Linux edge software and services for their next generation communication gateway, providing a nice entree into the commercial vehicle market. The WinRiver team continues to be actively engaged with several automotive customers on enabling the software defined vehicle of the future. In addition, they've announced several new partnerships to expand their ecosystem, Including with Samsung to develop a fully integrated software and hardware solution for the automotive industry.

Speaker 2

This solution will be enabled by Wind River's including the VxWorks RTOS, Linux and Android. Last month, the team also announced a strategic collaboration with Horizon Robotics To provide Wind River's complete edge to cloud portfolio for Horizon's automated driving compute solutions for the China market. These partnerships in automotive along with Wind River's continued commercial success in its traditional markets allow Aptiv to capitalize on the Transition to a more software defined future. Together with Wind River, Aptiv is well positioned to provide cloud native software solutions That help customers reduce complexity, while enabling flexibility, lower total system cost, faster speed to market and new business models. In order to provide you with a deeper look at our software strategy and the value that we can deliver to customers, we'll be hosting a software teach in in September.

Speaker 2

We're excited to tell you more about the Aptiv Wind River opportunity and we'll provide more details as we get closer to the date. Turning to the Signal and Power Solutions segment on slide 8. S and PS 2nd quarter revenues increased 21%, 6 points over vehicle production, the result of strong revenue growth in China as we lap the COVID disruptions during the Q2 last year, A 48% increase in high voltage revenues, reflecting strong growth across all regions and product lines and a 32% increase in commercial vehicle revenues. The $1,400,000,000 in high voltage bookings that I mentioned previously included another strong quarter from intercable automotive, which I'll touch on in more detail on the next slide. Multiple awards with the Hyundai Motor Group, including for both power distribution And Battery Pack Electrical Architecture and a High Voltage Electrical Center Award from a global European truck manufacturer, Further increasing our penetration of the commercial vehicle market as it begins to transition to battery electric vehicle platforms.

Speaker 2

Moving to Slide 9. As I mentioned earlier, we're well on our way to exceeding last year's record of $4,200,000,000 of high voltage bookings. We continue to enhance the breadth of our high voltage product portfolio as we introduce new offerings in power electronics and battery management systems. The addition of Inter Cable Automotive Solutions expands our portfolio to include high voltage bus bars, solid state electrical centers And battery cell interconnect solutions, further widening our competitive mode. We expect intercable revenues to increase roughly 30% Per year over the next several years, strengthening our position as the only full system provider of high voltage solutions.

Speaker 2

With approximately $1,000,000,000 in bookings year to date, Inter Table has already exceeded its 2022 full year bookings amount And their pipeline for 2023 new business awards is now more than $2,000,000,000 validation of the strength of their best in class high voltage electrification technologies. Already a market leader with European customers, Inter Cable recently launched production from 1 of Aptus facilities in North America with customer deliveries scheduled to begin this quarter. In addition to what Interconnect brings, we continue to experience significant commercial interest And our growing portfolio of power electronics and battery management system solutions for both battery producers and high volume battery electric vehicle manufacturers. With our unique portfolio of high voltage solutions and full system capabilities, we're perfectly positioned to be the partner of choice for customers around the world As a transition to an optimized electrified vehicle architecture. Moving to slide 10, Before I turn the call over to Joe to walk through the financials, I wanted to take a minute to recognize an important achievement by the Aptiv team.

Speaker 2

In July, Aptiv was recognized by Volkswagen with a prestigious VW Group award, one of just a handful of suppliers. Aptiv was chosen for more than 40,000 suppliers for the top spot in the category of Global Performance Champion, Recognition for our product innovation and ability to keep Volkswagen connected during these challenging times. The VW and Aptiv strategies are fully aligned Our teams have been working closely over the last 3 years to design and develop the vehicle architecture that will enable the software defined vehicle of the future. The Aptiv team is extremely proud of this award and looks forward to continuing to innovate and further strengthen our long standing and strategic partnership with the VW Group. With that, I'll now turn the call over to Joe to go through the numbers in more detail.

Speaker 3

Thanks, Kevin, and good morning, everyone. Starting on Slide 11. As Kevin highlighted, Aptiv reported another quarter of strong financial results, reflecting robust execution across both segments And continued improvement in operating performance. Revenues were up 25% to $5,200,000,000 Or 10% above underlying vehicle production, excluding the impact of acquisitions, without growth driven in part by strength in our ASU X segment, particularly in Active Safety as well as continued traction in our high voltage and commercial vehicle product lines. Adjusted EBITDA and operating income were $695,000,000 $530,000,000 respectively, Reflecting flow through on increased volumes of approximately 30%, continued progress on our ongoing performance initiatives, including a $70,000,000 improvement in primarily due to the stronger Mexican peso and weaker Chinese RMB.

Speaker 3

Earnings per share in the quarter were 1 $0.25 An increase of $1.03 from the prior year, driven by higher operating income, which more than offset the negative FX and commodity impacts. Operating cash was $535,000,000 which was $440,000,000 above the same period last year, primarily driven by higher earnings and reduced working capital investment during the quarter. Capital expenditures were $222,000,000 Looking at revenues in more detail on Slide 12. Revenue in the 2nd quarter was a record $5,200,000,000 Representing adjusted growth of 25%. Growth was broad based across regions and segments and our recent acquisitions added 170 $1,000,000 of revenue in the quarter.

Speaker 3

Net price and commodities were positive, more than offsetting the FX impact on revenue. From a regional perspective, North American revenues were up 19%, 4% above market, reflecting program timing at several customers Increased launch activity expected in the second half of the year. In Europe, revenues increased by 28%, 14% above market, supported by growth in active safety and user experience. In China, revenues grew 41% We're 20% over market, reflecting the strength of our underlying product portfolio, particularly in active safety and high voltage. Moving to the segments on the next slide.

Speaker 3

Advanced Safety and user experience revenues rose 39% in the quarter We're 24 points over vehicle production. The outperformance was driven by strength in several product lines, including Active Safety, Where revenues were up 49%. Segment adjusted operating income was $138,000,000 Up $168,000,000 when compared to the same period last year, despite a 90 basis points headwind from FX. With strong flow through on incremental volumes of approximately 30%, as well as net price and operating performance that offset Higher material and higher labor costs. Signal and Power revenues were up 21%, 6 points above market.

Speaker 3

Market outperformance was driven by strength in several key product lines, including high voltage and commercial vehicle. Segment operating income totaled 39 $2,000,000 up 61 percent from the prior year despite an FX and commodity headwind of 90 basis points, Driven by strong flow through on incremental volumes offsetting the net price and commodities impact as well as improvements in operating performance, Turning to Slide 14 and our updated 2023 macro outlook. We have increased our outlook for adjusted growth to 11% to 13% for the full year, a meaningful increase from our original range of 7% to 9%, and we continue to expect to outgrow the market by 9%. The change in outlook primarily reflects increases in customer production schedules in North America and Europe, resulting in vehicle production growth of approximately 4% and 5% at the midpoint respectively. Please note that our production outlook does not assume any significant North American labor disruptions.

Speaker 3

We expect China to be essentially flat on a year over year basis, In line with our prior guide, although we continue to see strong EV penetration, particularly with our Chinese OEM customers. In addition to changes in vehicle production volumes, we have also reflected current foreign exchange and commodity rates into the updated guide. The next slide summarizes our updated 2023 outlook. We now expect revenue in the range of $19,950,000,000 to $20,250,000,000 EBITDA and operating income are expected to be approximately $2,800,000,000 $2,100,000,000 at the midpoints respectively. This reflects year over year operating income flow through of 21%, In line with our historical range of 18% to 22%, despite significant FX and commodity headwinds.

Speaker 3

Adjusted earnings per share of $4.75 at the midpoint, up almost 40% from prior year, driven by higher earnings, partially offset by higher tax and interest expense. Operating cash flow of approximately $2,000,000,000 An increase of approximately $100,000,000 over the prior guidance. Slide 16 walks prior guidance to our current outlook. Starting with revenue, sales volume increases by $700,000,000 reflecting higher European and North American customer schedules. Net price, commodities and foreign exchange contribute positively to revenue driven by the rate changes I previously discussed.

Speaker 3

Adjusted operating income is up $125,000,000 over prior guide as flow through on sales growth and higher operating performance It's partially offset by the negative impact of foreign exchange and the timing of copper price adjustments to our customers. Net pricing, which includes the impact of customer price downs, price recoveries and material inflation remains in line with our original guidance. As previously discussed, the impact of foreign exchange movements, particularly the stronger pace of weaker RMB have been significant this year, representing $100,000,000 headwinds to the original guidance. However, assuming rates for the balance of the year remain relatively consistent with First half results. In summary, we are pleased with Aptiv's year to date performance, including the continued growth of our key product lines, Strong bookings and continued margin expansion.

Speaker 3

Our performance initiatives, including efforts to significantly reduce and ultimately eliminate disruption costs And to offset significant labor inflation, are on track and will continue to build throughout the year. Although we remain cautious about potential negative macroeconomic conditions over the next few quarters and the potential for labor disruptions in North America, We remain confident in our ability to meaningfully outgrow vehicle production. We also believe we are well positioned to take advantage of stronger market conditions should the noted concerns not materialize. With that, I'd like to hand the call back to Kevin for

Speaker 2

closing remarks. Thanks, Jill. I'll wrap up on slide 17 before Opening the line for questions. 2023 is off to a good start with record first half revenues, EBITDA and operating income and strong margin expansion. We maintained our momentum on new business awards for optimized full system solutions that deliver increased performance at lower cost to our customers.

Speaker 2

Our outlook for industry volumes has increased and easing supply constraints have led to fewer production disruptions and improved operating efficiencies. And we continue to focus on optimizing our cost structure to further enhance our operational resiliency. Our culture of innovation and commitment to keeping our customers connected is Clearly translating into strong commercial momentum, which gives us confidence in our ability to execute our strategy, maintain our track record of outperformance and deliver sustainable value creation for our shareholders. Operator, let's now open the line for questions.

Operator

Thank We will take our first question from John Murphy from Bank of America. Please go ahead.

Speaker 4

Good morning, guys. Thanks for all the detail this morning. Just a simple question first on ASICs. It seems like you suddenly just kind of gotten to escape velocity here. And I'm just curious if that's kind of A fair statement, particularly with these margins at 9%.

Speaker 4

They're way down by some other factors. So I mean, on a normalized basis, they actually were approaching 10%. In this ramp up of some of these growth segments, I mean, is this where we should be thinking as far as the travel rate For margins, there was something else going on in the quarter other than just this kind of escape velocity being reached?

Speaker 2

Yes. John, it's I'll start and Joe certainly should add to it. Clearly, the environment For semiconductors and supply chain associated with semiconductors has improved. I think as an industry with the semiconductor Manufacturers, we've been working over the last couple of years to enhance visibility, to enhance alternatives or choices. And with the slowdown in some of the consumer electronics markets, it certainly freed up Incremental supply.

Speaker 2

As a result, it's made our supply chain much more efficient, Which results in lower costs from a manufacturing standpoint as well as from a freight and other standpoint. That's reflected in our numbers to date. And then we would expect that to continue into the Obviously, into the back half of the year, we have lower disruption costs, More operating efficiency. We're able to operate more efficiently and then continue into 2024 and beyond.

Speaker 4

Okay. And then just one follow-up on Inter Cable, using that sort of as a test case for some of these acquisitions You're making I mean it sounds like you can't sell this or explain it well enough as to how So the expansion opportunity is in front of you for Inter Cable. I'm just curious in the current base of customers and the $1,000,000,000 that's been won Year to date or book year to date, are we still looking at a European centric Revenue base as far as the customers and there's just extreme opportunity in other regions and with other automakers outside of the European Automakers, I'm just trying to understand where this is ultimately going to go.

Speaker 2

Yes, I'll make sure I understand the question. I think Today, the bulk of their revenues are related to European bev programs. But as we talked about Previously, one of the reasons that we acquired Inter Cable is In addition to their technical capabilities and their broad portfolio, a view that we could easily provide them with entrees The North America market, which we've done to date. As I mentioned in our prepared comments, we're already producing products In one of Aptiv's existing manufacturing facilities in Mexico, Ben will be delivering product to a North American OEM starting this quarter and we see significant opportunities with the other North American OEMs. And then similarly with China, although they have manufacturing capabilities in China, just given our knowledge of the market and our experience there, we feel as though that we We're a great leverage point for them to sell their product into that market as well.

Speaker 2

So as I mentioned, Their funnel for bookings opportunities is well over $2,000,000,000 So the opportunities are really significant with Inter Cable. They have a great portfolio. They have even stronger management team. So we're really excited about the acquisition.

Speaker 4

Great. Thank you very much.

Operator

We will take our next question from Itay Micheli from Citi. Please go ahead.

Speaker 5

Great. Thanks. Good morning, everybody. Just two questions for me. Just first, Joe, I was hoping we could just walk through the How do you think about the H2 versus H1 margin bridge embedded in your guidance?

Speaker 5

And then just secondly, I did notice expenses kind of moved up in Q2. I think you raised your outlook there. Maybe just hopefully if you could elaborate on where you're I've seen these restructuring opportunities and how much more of a lever that could be going forward for margin expansion.

Speaker 3

Yes, let me start with that one and then go to H1, H2, Itay. I would say that that is we've talked about that not necessarily in the context of the Structure dollars, but things like pivoting engineering to best cost countries, those types of activities, it's obviously what you're seeing. And as we laid out at Investor Day, particularly with engineering, that's really part of the established margin guidance into 25, right. So I would think of that as us taking the necessary actions over time to continue to move towards That commitment versus something incremental. From a bridge perspective, From an H1 to H2, not going to get into a lot of detail, but you're going to see a couple of things.

Speaker 3

There's a slight volume uptick, A little less than $100,000,000 that sort of flows it, call it 30% on volume. FX will be better. We had about be better by about $30,000,000 We don't expect that these current rates to have as much Transaction hits as we did in the first half as we adjusted down. And then you've got what I'll call performance initiatives As well as some inflation recovery, that's going to be over $100,000,000 That's really the big bucket. Some of that's coming out of disruption costs.

Speaker 3

The other, as I noted, It's going to be a continued march on these performance initiatives that we've talked about and they'll continue to improve over the back half of the year.

Speaker 5

Terrific. I appreciate all that detail. Thank you.

Operator

We will now move to Rod Lache from Wolfe Research. Please go ahead.

Speaker 6

Good morning, everybody. I wanted to just ask you kind of a couple of big picture things. One is, in the margin bridge that You presented from 2022 to 2025 at your Investor Day. You had a bucket of $1,700,000,000 It was I think you called it performance. It was elimination of COVID costs, part of it was some supplier costs.

Speaker 6

Can you just update us on where that bucket Stands now and what proportion of that $1,700,000,000 you think we will actually see in 2023?

Speaker 3

Yes, Rod, it's Joe. Let me start. So remember that bucket, a big that was a $22,000,000 to $25,000,000 bridge, right? So you had Right. The biggest individual item in that $1,700,000,000 is about over $300,000,000 call $330,000,000 to $350,000,000 of supply chain disruption costs.

Speaker 3

We expected a lot of that to come out this year. We had $130,000,000 in the original guide. It's improved now, maybe around 100 1,000,000 coming out this year. The balance will come out next year. The remaining is just sort of what I'll call sort of those annual material and manufacturing Improvements for the 3 years, 'twenty three, 'twenty four, 'twenty five.

Speaker 3

I would say you could sort of take those Across each of the years, they're a little back end loaded. They grow into 2024 and 2025, but for the most part, we're on track. It's really what you're seeing sort of come through In the Performance Bridges, as we've talked, just even over the past this past quarter, right, dollars 70,000,000 improvement in supply chain disruption costs alone. So, I'd say we're tracking in line with those expectations.

Speaker 6

Okay. Thanks for that. And just Switching gears, a few Western companies seem to have lately realized that the EV platforms that they were working on We're just too expensive and we've already seen Volkswagen reach out to Xiaoping to use their platform and Seemingly, there's a few other discussions in the industry about using Chinese platforms. I'm just wondering, from Aptiv's How that affects you? You did mention again on the call that you've been working with Volkswagen on the So would you be agnostic to that?

Speaker 6

Or is there some are there some implications for you If that is something that continues.

Speaker 2

Yes. Rod, maybe I'll start with it. Listen, I think As we've talked about in the past, our overall outlook for penetration of battery electric vehicles and So that has been our underlying perspective and a significant amount of that perspective is shaped on Costs and an understanding of our OEM customers and sensitivity to costs and sensitivity To the cost of new technologies, so that's 1. 2, just given the breadth of our product portfolio, given our Full system approach to high voltage electrification in this particular case. We have an opportunity to present our customers with a And we've had examples and we've talked about this in the past where existing customers with existing bev platforms have Oleo solutions, we've been able to reduce weight and mass by 25% to 30% and overall systems cost By 20% or more.

Speaker 2

So given our historical capabilities or given our strength And from a product portfolio standpoint and our knowledge of vehicle architecture, we bring a lot to bear. I'd say the 3rd piece, As we've talked about this transition to battery electric vehicles, which in reality has been underway for a long period of time. We've seen elements of fits and starts during that period, and we've been impacted by those fits and starts. We've been very selective as it relates to Those customers, those platforms that we operate on and we operate on those that we have a high level of confidence. They'll be global.

Speaker 2

They're Designed specifically for battery electric vehicle platforms, therefore, we'll get volume. And then from a contracting stand We contract very carefully to the extent we see volume reductions, there are changes in pricing. So just given our past experience again as we've seen battery electric vehicles developed and In the attempt to introduce them into the markets for the last several years, we've learned a lot of lessons and we've established a really, I would say, a fairly conservative approach in terms of how do we manage risk, but at the same time, how do we develop a portfolio capability that provides our customers with lower cost solutions, We are big believers that over a period of time, you're going to continue to see significant penetration of electrification in our industry.

Speaker 3

Great. That's helpful. Thank you.

Operator

We will take our next question from Chris McNally from Evercore. Please go ahead.

Speaker 7

Thanks so much team. Maybe I could start on the top line and macro. I know it gets kind of confusing talking about North America with the upcoming UAW issue. So maybe, Joel, we could focus in on Europe. Just some quick numbers on the 4% to 6% Production, which is lower than the forecasters.

Speaker 7

I think we have something like 15%, 16% in the first half, so it implied down In the second half, obviously inflation crisis and cost of living, etcetera. But curious if you're Seeing anything specific, you obviously have a lot of insights there, or if there's just a bit of conservatism built in for the next Couple of months as schedules firm up.

Speaker 3

Yes. Chris, it's a good place to start. I would say, Q3, we're on production schedules, right? So we're sort of locked in at this point with our customers and we've obviously Have been through July. Certainly, and as I said in my prepared remarks, certainly to the extent there is more production in the back half I think we'd certainly benefit from it.

Speaker 3

Remaining a little cautious just given All the potential sort of macro ups and downs, it's still the environment is not perfect. It's Still a challenging environment. As Kevin said, it's much better. But yes, a little bit of caution and but more in the Q4 than in the 3rd. And 3rd, we're fairly locked in at On our customer schedules.

Speaker 7

Okay. That's really helpful. And if I could just follow-up some numbers to Merv's comments On ASU X where the margin progression does seem like it's starting to take off. I think from your 8% to 9% full year, it sort of implies the back Roughly 10%. So we usually I think because of some of the price issues, we can sort of use it as like a base.

Speaker 7

And you have a 13.5% 13% to 13.5% target for 25%. Given that I think that $190,000,000 you just laid out in recovery, a lot of that will come in ASU X. Is it assuming that we have Okay. Up small, low single digit volumes next year that we can kind of split the difference and start to think about 24% being somewhere in between the halfway point of that 10% and let's call it 13.5% or is there anything That takes longer, why it would be more of a back end loaded 13% plus margin in 2025?

Speaker 3

Yes. Listen, we remain I'm not going to get into 24, it's a little too early in the year to do this. I think we remain confident in the 25 numbers For both total Aptiv as well as the segments, I would think it will be a steady march Of continued volume growth in the key product lines, continued improvement, the price the team has done a good job on our inflation recoveries. The environment, you can still have lumpy quarters between then and 2025, but feel like it's going to be a pretty steady March. Exactly where 2024 falls out, it's obviously something we've got to work out.

Speaker 3

But as we look at what's rolling on in that business, increased software content, those types of things, Still remain confident in that 2025 range.

Speaker 7

Very helpful. Thank you.

Operator

We will take our next question from Adam Jonas from Morgan Stanley. Please go ahead.

Speaker 8

Thanks everybody. Kevin, I thought your answer to Rod's question. Your answer to Rod's question on the yes.

Speaker 5

There's a bit of

Speaker 8

an echo. On the pulling back on the more conservative EV targets, given your experiences, it was really well done. I guess if I follow-up on that, if there was a scenario where your 2025 and then longer term EV assumptions were really dominated By Tesla and the Chinese, like I'm thinking 75% plus share of the The EV market being those 2 regimes, would that be mix adverse for you or Yes. I just kind of leave that open ended, but just kind of think curious how you would approach that level of concentration because there may be some scenarios where there's a winner take most On these global platforms? And then I have a follow-up.

Speaker 8

Thanks.

Speaker 2

Yes. Not going to talk about specific Customers, Adam, I would say when you look at our revenue mix by region, we're pretty balanced Between North America, Europe and China, growth opportunities in China, I'd say on a relative basis Are more significant. So from a funnel standpoint, any bookings opportunity standpoint, that is an area that We're very focused on your comment on winner take all. Our China high voltage or bev customers are very focused Not only on the China market, but increasingly regarding exports into other markets, which I think is a part of what you're Alluding to our China customers from a system standpoint tend to be more inclined to buy a full system solution for us From us, so that tends to be a higher margin solution relative to selling component Parts, so I'm not sure if that's a net benefit for us or just a net neutral.

Speaker 8

Okay, Kevin. Thanks for that. And either Kevin or Joe on motional, can you give us a latest update on the capital need there in terms of Cash consumption and then what you got left in the tank before we you need to put more in the kitty. Thanks.

Speaker 3

Yes. Yes. No, Adam, no changes on that front since the last couple of quarters. They have cash through or at least into Q2 of next year, We continue to make progress on the technical and commercial side of things. And as we've said previously, Probably not the most receptive capital markets at this point.

Speaker 3

Obviously, our partner, Hyundai and ourselves are looking at it. If we had to call it today, I'd say the partners fund another year of operations. Haven't made that decision yet, but that would be the most likely outcome, I think, if we had to call it today. And They're going through about $500,000,000 $550,000,000 of cash per year. So it would be a split of that.

Speaker 8

Thanks, Gerald. Thanks, Kevin.

Speaker 3

Yes. Thank you.

Operator

We will take our next Question from Dan Levy from Barclays. Please go ahead.

Speaker 9

Hi, good morning. Thank you for taking the questions. First, wanted to just ask on commodities. It was you noted it was a headwind in the quarter. Maybe you could just provide us, Joe, with a bit more color on what the drag in the quarter was related to?

Speaker 9

And more broadly, what are you seeing in semis? Is there it sounds like the environment is getting better, it's more stable. Is there any path to relief on the cost pressures that you saw in recent years in semiconductors?

Speaker 3

So two distinct questions there. Let me take commodities. For us commodities is still mainly copper. Sort of nothing's changed over the last couple of years of that. We copper we're indexed to copper with our For the vast majority, 80% of our copper buy, those prices get adjusted either quarterly or In some cases, semiannually, we have one customer, a large customer, we actually do monthly.

Speaker 3

So all we're dealing with there is really the lag, How much copper we have in at a certain price before we can pass it along or before we can, in this case, increase the prices. So you wind up with That lag every once in a while and copper tends to be more of a margin rate impact than margin dollars. As it relates to semi, we've obviously passed along the price increases that we have received to date. We've been sort of direct. A chip goes up, we pass that cost along to our customers.

Speaker 3

We will continue to do that as if and when we see additional inflation coming in the year. I would tell you at this point, And don't see any indications of chip prices coming down. And I think if you look at least in some of the Ship folks that are have a large automotive presence, I think they've been sort of echoing that, at least The potential to hold or maybe even go up in some of their public comments. So we remain vigilant. We would expect to pass additional price increases through to our customers, but certainly don't see any downside on those prices at this point.

Speaker 9

Okay. Thank you. And then just a related question. If we zoom out and look at the last few years, obviously, the results I've been dragged by all of the material inflation headwinds, largely semiconductors. And I assume that when you're booking your bookings that that pricing is based on commodity or Input costs outlook at that time, obviously, it's progressed to be a bit tougher since then.

Speaker 9

So what steps are you taking to ensure that As your backlog rolls on, as that becomes revenue and launches that you're going to get the appropriate pricing to ensure that The margins are in line with what you'd like them to be as opposed to being dragged maybe by an input cost outlook From a prior time.

Speaker 3

So Dan, and we've talked about this a couple of times before. So the renegotiation on price with covered in process products, right, products that were being manufactured and things that were near launch, Call it within sort of 12 months plus to launch. For programs that are longer further out from a start date perspective, We have the opportunity and we've done this even before semiconductors prices have gone up. Typically before we really start Put capital in the ground, right? You got a sort of a 2 to 3 year window before program start.

Speaker 3

There are various touch points with customers around the economics of the program. Customers want that. We want that. Suppliers want that. Those tended historically to have been around volumes, Right.

Speaker 3

If a program looks like it's going to be significantly higher in volume, the OE wants to have a discussion. If it's going to be lower in volume, the supplier wants to have a discussion. Bomb costs are historically part of those. So as we get up to the point of starting production or putting capital to start production. We have a mechanism in place and the team does a good job with it to go back to customers on the overall economics of the program And volume costs are going to obviously now are included in that have always been, but are now sort of at the top of the list, particularly with semiconductors of things that get discussed And sorted out to get the program back to the original economic deal that was struck.

Speaker 2

Dan, if I could add one comment. I think Joe did a great job explaining how we contract and how we operate with our customers. At the same time, right, the last couple of years there's been a lot of 1, keeping our employees safe and then more recently, obviously, just supply chain connectivity, right, keeping our customers Connected and as Joe articulated passing on price increases to customers. At the same time, we've been very focused On how do we continue to enhance our business model. So from a supply chain standpoint, whether it's semiconductor Semiconductor chips or its resin or other inputs to what we manufacture, we've been very focused on how do we redesign product And take out content, lower cost.

Speaker 2

How do we operate with our supply base more efficiently and more effectively to lower cost? How do we operate with our customers from a supply chain standpoint as well to increase efficiency And take out costs. And then at the same time, when you look at inflation in and around areas like labor, How do we continue to rotate where we do things? How do we increase our product how do we move manufacturing, engineering, other, As well as how do we improve the productivity within the existing 4 walls, so that we Again, on an organic basis, we're driving down our cost of operating. So it's really a 2 pronged approach in terms of pushing Incremental inflation onto our customers, while at the same time trying to operate more efficiently, whether or not we're getting We're experiencing material inflation and other items.

Speaker 9

Thank you. That's helpful.

Operator

We will take our next question from Mark Delaney from Goldman Sachs. Please go ahead.

Speaker 10

Good morning. Thank you very much for taking my question. You mentioned that Aptiv has been a little bit more conservative on its EV volume projections given the cost of Platforms, I'm hoping you can clarify, has there been a change at all in Aptiv's own outlook for EV volumes this year? Because some OEMs have certainly talked recently about seeing some EV growth, but perhaps some or all of that is being offset by upside that other OEMs may be realizing?

Speaker 2

No. Listen, our assumptions have always been lower than what I think some of the industry Our forecast has. So I'd say from a baseline standpoint, overall view on bev penetration, high Voltage penetration has been lower and has been for an extended period of time. As we evaluate business cases For specific platforms or customers, our assumptions on volume tend to be on the more conservative And as I mentioned, as it relates to contracting and pricing, we have some levers that we include to provide us with Some risk mitigation. So nothing has changed in terms of our overall outlook.

Speaker 2

I would say the industry is probably coming closer to Where our initial perspectives were as it related to best penetration. Having said that, although we're more conservative, Revenue growth in 2nd quarter on high voltage solutions is close to 50%. So and we're still expecting very significant growth For the balance of the year and into the out years.

Speaker 3

Yes, Mark, it's Joe. I mean, we had talked about Investor Day, high voltage being at least 30 And that view has not changed at all. So I think that's That was reflective of sort of where we were on our estimates relative to the broader sort of forecasting community.

Speaker 10

That's very helpful context. Thank you. My other question was just around software and Wind River and some OEMs have continued to struggle with The understandable large challenge of software integration. You mentioned momentum with Wind River and I'm curious if you could elaborate a bit more on the types of engagements

Speaker 2

Yes. I'm not sure there's an uptick. I think the industry still wrestles with software. I think there are still major challenges. Wind River has announced a number of program wins with OEMs.

Speaker 2

I'd say today we're Actively engaged with, I don't know, 10 to 12 OEMs as it relates to their underlying kind of software architecture And some of the needs that Wind River can provide. So a lot of momentum there. As I mentioned in my prepared comments, we'd expect by the end of the year to have some Additional announcements to make. So those challenges present an opportunity for Wind River. And then when you think about Above the middleware, the real time operating system as it relates to Aptiv, whether it be in user

Operator

.:]

Speaker 7

Thank you.

Operator

We will be taking our final question from Tom Narayan from RBC. Please go ahead.

Speaker 11

Hi. Thanks for taking the question, guys. Joe, maybe can you help us understand AF UX timing in 2023? I remember from Q1, I think there were some orders that may have been pushed out. Did those really come in, in Q2?

Speaker 11

Or There are kind of more to come there on H2. And I know there were I think there were some engineering credits that you expected later in the year. Just trying to understand How we should think about the ASU X Business?

Speaker 3

Yes. On the engineering credit, that's a Very normal flow that happens every year on ASU X. Last year, by way of example, it was about $40,000,000 of credits in the back half of the year. Not saying it will be that amount this year, but that's order of magnitude, call it somewhere sort of $20,000,000 to $40,000,000 is sort of a Good range to use on that. As it relates to you're right, as it relates to Q1, ASU X had a couple of Launches that launch, but we're ramping slower than expected due to supply availability at from other suppliers.

Speaker 3

As we talked about at the time, those programs really came back online in March, and have been hitting schedules Sense and that was in North America. I think ASU X North America's growth over market was north of 20% in the second quarter. Those are back. What you saw now in North America, I referenced, we've got, which is again nothing to do with So we're getting back to sort of normal ebbs and flows of the business. We've got some on the SPS side, we've got some programs winding down.

Speaker 3

We've got a heavier launch calendar in the back half of the year. So I think as you get to the end of the year, North America growth over market will look like the rest of the business, but you always get a little bit of lumpiness from time to time in some of those numbers.

Speaker 11

I don't know if you guys can answer this, but on the whole UAW situation, and this might be a question really for the OEMs, But have you guys noticed OEMs kind of building inventory ahead of it? Or maybe put another way, looking back at what happened in 2019 for you guys. Is there anything you've learned from that experience that could help you prepare in the event something happens? Thanks.

Speaker 2

Yes. Listen, I think we direct you to our OEM customers. So we don't have UAW workforce in North America. So from a direct employee standpoint, that's not something where we have exposure. I think we We would say having gone through it in 2019, there's some small operational lessons learned as it relates to kind of Supply chain management, inventory management, things like that.

Speaker 2

But I think it's a question more appropriate for our OEM customers.

Speaker 3

Got it. Thank you.

Operator

That concludes today's question and answer session. Kevin Clark, at this time, I will turn the conference back to you for any additional or closing remarks.

Speaker 2

Great. Thank you very much. We appreciate everyone joining us this morning. Have a great day. Take care.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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Aptiv Q2 2023
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