Aptiv PLC (APTV) — Q2 2023 Earnings Call Transcript

Thank you, Elaine. Good morning, and thank you for joining Aptiv's Second Quarter 2023 Earnings Conference Call. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at aptiv.com. Today's review of our financials excludes amortization, restructuring, and other special items and will address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for our second quarter financials, as well as our full year 2023 outlook, are included at the back of the slide presentation and the earnings press release. During today's call, we will be providing certain forward-looking information that reflects Aptiv's current view of future financial performance and may be materially different for reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Kevin Clark, Aptiv's Chairman and CEO; and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business, and Joe will cover the financial results in more detail before we open the call to Q&A. With that, I'd like to turn the call over to Kevin Clark.

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% to $5.2 billion, a new record for quarterly revenue, representing 10 points of growth over underlying vehicle production, driven by strong demand across our portfolio as well as across all geographic regions. Revenues in our active safety and high-voltage electrification product line increased almost 50%, underscoring the strength of our safe, green, and connected product portfolio. EBITDA and operating income totaled a record $695 million and $530 million, respectively, reflecting solid flows 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 $6.1 billion, further validating our industry-leading portfolio, the strength of our customer relationships, and our ability to execute flawlessly in a dynamic environment. Turning to Slide 4. Our first-half performance was substantially in line with our expectations. New business bookings totaled over $20 billion, driven by customer awards for our SBA compute and software, high-voltage electrification, user experience, and active safety solutions. Record revenue, representing 20% growth, 8 points over underlying vehicle production, was 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 Intercable 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. 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 disruption 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. 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 $6.1 billion, bringing our year-to-date total to over $20 billion. Advanced Safety and User Experience bookings totaled $1.7 billion, driven by $1 billion in user experience bookings, including awards for Aptiv's integrated cockpit controller and driver state sensing solutions. Signal and Power Solutions bookings reached $4.4 billion, including $1.4 billion 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 $4.2 billion in high-voltage business awards, and we remain highly confident in achieving our full-year earnings target of $32 billion, 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 second-quarter highlights. ASUX achieved record revenue of $1.5 billion, 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+ ADAS 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 were awarded over $400 million of active safety bookings, including program extension awards with a North American customer. As I mentioned, we're also awarded roughly $1 billion 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, the need for more advanced compute, software development, and integration capabilities are required. Our ability to provide a full suite of flexible platform solutions that are cost-effective while providing our customers with choice differentiates us from our competitors. 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. Moving to Slide 7. Wind River delivers edge-to-cloud software solutions for mission-critical applications, enabling software to find systems that require the highest levels of safety, security, and performance. The Wind River team has done a great job increasing the partner ecosystem while also winning new business, particularly in the aerospace and defense, telecom, and automotive markets, including a new program award for an A&D customer GMV to provide its edge software and with a 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 Wind River 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. This solution will be enabled by Wind River's Helix virtualization platform, which will allow end users to utilize a diverse set of runtime environments, 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 Verizon'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 teaching in September. We're excited to tell you more about the Active 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&PS second-quarter revenues increased 21%, 6 points over vehicle production, the result of strong revenue growth in China as we lapped the COVID disruptions during the second quarter 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 $1.4 billion 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, High Voltage Electrical Center award, a global European truck manufacturer, further increasing our penetration of the commercial vehicle market as it begins to transition to battery electric vehicle platforms. Moving to Slide 9. As I mentioned earlier, we're on our way to exceeding last year's record of $4.2 billion 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 Intercable Automotive solutions expands our portfolio to include high-voltage bus bars, solid-state electrical centers, and battery cell interconnect solutions, further widening our competitive moat. 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. With approximately $1 billion in bookings, year-to-date Intercable has already exceeded its 2022 full-year bookings amount. Their pipeline for 2023 new business awards is now more than $2 billion, validation of the strength of their best-in-class high-voltage electrification technologies. Already a market leader with European customers, Intercable recently launched production from one of Aptiv's 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 in 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 they 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. In July, Aptiv was recognized by Volkswagen with the 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 and our teams have been working closely over the last three 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 turn the call over to Joe to go through the numbers in more detail.

Thanks, Kevin, and good morning, everyone. Starting on Slide 11. As Kevin highlighted, Aptiv reported another quarter of strong financial results, reflecting robust execution across both segments and continued improvement in operating performance. Revenues were up 25% to $5.2 billion or 10% above underlying vehicle production, excluding the impact of acquisitions. With outgrowth driven in part by strength in our ASUX 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 million and $530 million, respectively, reflecting flow-through on increased volumes of approximately 30%, continued progress on our ongoing performance initiatives, including a $70 million improvement in supply chain disruption costs from last year, and margin headwinds of 90 basis points from FX and commodities primarily due to the stronger Mexican peso and weaker Chinese RMB. Earnings per share in the quarter were $1.25, an increase of $1.03 from the prior year, driven by higher operating income, which more than offset the negative FX and commodity impact. Operating cash was $535 million, which was $440 million above the same period last year, primarily driven by higher earnings and reduced working capital investment during the quarter. Capital expenditures were $222 million. Looking at revenues in more detail on Slide 12. The revenue in the second quarter was a record $5.2 billion, representing adjusted growth of 25%. Growth was broad-based across regions and segments, and our recent acquisitions added $176 million of revenue in the quarter. 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 with 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% or 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. Advanced Safety User Experience revenues rose 39% in the quarter were 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 million, up $168 million 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. Market outperformance was driven by strength in several key product lines, including high-voltage and commercial vehicle. Segment operating income totaled $392 million, up 61% 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 to lower disruption costs, which more than offset the impact of higher labor costs in the quarter. Turning to Slide 14 and our updated 2023 macro outlook. We've 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. We expect China to be essentially flat on a year-over-year basis, in line with our prior guidance. 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 $19.95 billion to $20.25 billion. EBITDA and operating income are expected to be approximately $2.8 billion and $2.1 billion at the midpoint, 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. Adjusted earnings per share of $4.75 at the midpoint, up almost 40% from the prior year, driven by higher earnings, partially offset by higher tax and interest expense. Operating cash flow of approximately $2 billion, an increase of approximately $100 million over the prior guidance. Slide 16 walks prior guidance to our current outlook. Starting with revenue, sales volume increases by $700 million, reflecting higher European and North American customer schedules. Net price, commodities, and foreign exchange contributed positively to revenue driven by the rate changes I previously discussed. Adjusted operating income is up $125 million over prior guide as flow-through on sales growth and higher operating performance is 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 peso for weaker RMB, have been significant this year, representing a $100 million headwind to the original guide. However, assuming rates for the balance of the year remain relatively consistent with the rates used in our updated guidance, including a stronger euro that partially offset a peso and RMB impact, we believe the majority of the negative impact has been reflected in the 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. 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 noted concerns not materialize.

Thanks, Joe. 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. 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 performance and deliver sustainable value creation for our shareholders. Operator, let's now open the line for questions.

Good morning, guys. Thanks for all the information this morning. Just a simple question first on ASUX. It seems like you suddenly just kind of got into escape velocity here. And I'm just curious if that's kind of a fair statement, particularly with these margins at 9%, they're weighed down by some other factors. So, I mean, on a normalized basis, they're actually reapproaching 10%. In the ramp-up of some of these growth segments, I mean, is this where we should be thinking sort of the travel rate for margins? Or is there something else going on in the quarter other than just this kind of escape velocity being reached?

Yes. John, 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 and enhance alternatives or choices. And with the slowdown in some of the consumer electronics markets, it has certainly freed up incremental supply. 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, and that's reflected in our numbers to date. And then we would expect that to continue into the back half of the year as we reduce disruption costs, enhance operating efficiency, and continue in 2024 and beyond.

Okay. And then just one follow-up on Intercable using that sort of as a test case for some of these acquisitions that you're making. I mean, it sounds like you can't sell this or explain it well enough at how the expansion opportunity is in front of you for Intercable. I'm just curious in the current base of customers, and the $1 billion that's been won year-to-date or booked 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.

Yes. I'll make sure I understand the question. I think today, the bulk of their revenues are related to European unbalanced programs. But as we talked about previously, one of the reasons that we acquired Intercable was, in addition to their technical capabilities and their broad portfolio, a view that we could easily provide them with entry into the North American 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. We'll be delivering product to a North American OEM starting this quarter, and we see significant opportunities with the other North American OEMs. Similarly, with China, although they have manufacturing capabilities in China, just given our knowledge of the market and our experience there, we believe that we are a great leverage point for them to sell their product into that market as well. As I mentioned, their funnel for bookings opportunities is well over $2 billion. So, the opportunities are really significant with Intercable. They have a great portfolio and an even stronger management team, so we're really excited about the acquisition.

Great. Thank you very much.

Great. Thanks, and good morning, everyone. Just two questions for me. Just first, I was hoping you could just walk through how you think about the H2 versus H1 margin bridge embedded in your guidance? And then just secondly, I didn't notice restructuring expenses kind of moved up in Q2. I think you raised your outlook there. Maybe just hopefully you could elaborate on where you're seeing these restructuring opportunities and how much more of the lever that could be going forward for margin expansion?

Yes. Let me start by addressing that, and then I'll discuss the transition from H1 to H2. We have mentioned this previously, not specifically in the context of restructured dollars, but in efforts like shifting engineering to lower-cost countries; those activities are clearly evident. As we outlined at Investor Day, especially concerning engineering, this aligns with our established margin guidance through 2025. Therefore, you can view this as us taking the necessary steps over time to stay on track with that commitment rather than seeking something additional. Regarding the transition from H1 to H2, I won't provide extensive details, but there are a few points to note. We expect a slight increase in volume, just under $100 million, which will translate to about 30% on volume. Additionally, foreign exchange will improve, with an expected benefit of around $30 million. We don’t anticipate the current rates to bring as many transaction impacts compared to the first half as we have adjusted downward. Also, there will be performance initiatives and inflation recovery that will exceed $100 million. This is the main area of focus. Part of that will come from reduced disruption costs, while the other part will continue to stem from the performance initiatives we've discussed, which will further enhance as we progress through the second half of the year.

Perfect. I appreciate all that detail. Thank you.

Good morning, everybody. Had 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 $1.7 billion. I think you called it performance. It was elimination of COVID costs; part of it was some supplier costs. Can you just update us on where that bucket stands now? And what proportion of that $1.7 billion you think we will actually see in 2023?

Yes, Rod, it's Joe. Let me start. So remember that bucket was a '22 to '25 bridge, right? So, the biggest individual item in that $1.7 billion is about over $300 million, call it, $330 million to $350 million of supply chain disruption costs. We expected a lot of that to come out this year. We had $130 million in the original guide. It's improved now, maybe around $160 million coming out this year. The balance will come out next year. The remaining is just sort of what I'll call those annual material and manufacturing improvements for the three years, '23, '24, '25. I would say you could sort of take those across each of the years. They're a little back-end loaded. They grow into '24 and '25. 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 over the past quarter, right, $70 million improvement in supply chain disruption costs alone. So, I might say we're tracking in line with those expectations.

Thank you for that. Now, shifting topics. Recently, several western companies have come to the realization that the electric vehicle designs they were developing were too costly. We've already seen Volkswagen connect with Xiaoping to utilize their platform, and it appears there are additional discussions happening in the industry regarding the adoption of Chinese platforms. From Aptiv's viewpoint, I am curious how this impacts you. You did mention on the call that you've been collaborating with Volkswagen on future architecture. Are you open to this approach, or would there be certain implications for you if this trend continues?

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 electrification overall has been, I'd say, a bit on the conservative side relative to kind of industry perspective. 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 cost, and sensitivity to the cost of new technologies. So that's one. Two, 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 solution that is much lower cost than a traditional approach to battery electric vehicle architecture. We've had examples, and we've talked about this in the past, where existing customers with existing both platforms have come to us, asked us to evaluate opportunities to optimize. Using our design capabilities and our portfolio of solutions, we've been able to reduce weight and mass by 25% to 30% and overall systems cost by 20% or more. So, given our historical capabilities, given our strength from a product portfolio standpoint and our knowledge of vehicle architecture, we bring a lot to bear. I'd say the third 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 and those platforms that we operate on. We operate on those that we have a high level of confidence that they'll be global. They're designed specifically for battery electric vehicle platforms; therefore, we'll get volume. From a contracting standpoint, we contract very carefully to ensure that to the extent we see volume reductions, there are changes in pricing. So just given our past experience, as we've seen battery electric vehicles developed and introduced into the markets over the past 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 we manage risk, while at the same time, how we develop a portfolio capability that provides our customers with lower-cost solutions because we believe that over time, you're going to continue to see significant penetration of electrification in our industry.

Great. That’s helpful. Thank you.

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. So maybe Joe, we can focus in on Europe. Just some quick numbers on the 4% to 6% production, which is lower than the forecasters, I think we have something like 15%, 16% in the first half, so it implies down in the second half, obviously inflation prices and cost of living, et cetera. But curious if you're seeing anything specific. You obviously have a lot of insight there or is there's just a bit of conservatism built in for the next couple of months as schedules firm up?

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 been through July. Certainly, as I said in my prepared remarks, to the extent there is more production in the back half of the year, I think we'd certainly benefit from it, remaining a little cautious just given all the potential sort of macro ups and downs. The environment is not perfect; it's still a challenging environment. It's, as Kevin said, it's much better. But yes, a little bit of caution and but more in the fourth quarter than in the third. In the third, we're fairly locked in at this point on customer schedules.

That's very helpful. To follow up on Mark's comments regarding ASUX and its margin progression, it appears to be gaining momentum. The increase from 8% to 9% for the full year suggests that the latter half may approximate 10%. Typically, due to certain pricing concerns, we could consider this as a base, aiming for a target margin of between 13% and 13.5% for 2025. Considering the $190 million you mentioned in recovery, a significant portion is expected to come from ASUX, assuming low single-digit volume growth next year. This would allow us to find a midpoint, projecting 2024 somewhere between half of that 10% and the 13.5%. Is there any reason that might lead to a longer timeline for achieving a 13% or higher margin in 2025?

Yes, I won't discuss 2024 since it's still early in the year for that. We are confident in our projections for 2025 regarding both total active and the segments. I anticipate steady ongoing growth in key product lines and continued improvements. The team has effectively managed inflation recoveries. While there may be uneven quarters leading up to 2025, I expect a consistent positive trend. We still need to determine where 2024 will land, but as we observe the developments in the business, including increased software content, we remain confident in our 2025 goals.

Very helpful. Thank you.

Thanks, everyone. Kevin, I thought your response to Rob's question was very well articulated, especially regarding the adjustment of conservative EV targets based on your experience. If I could follow up on that, in a scenario where your 2025 and long-term EV forecasts are significantly influenced by Tesla and Chinese manufacturers—say they capture more than 5% of the EV market—would that be unfavorable for you? I’m curious about how you would address such a high level of market concentration since there might be situations where it’s a winner-takes-most dynamic in these global markets. I have a follow-up question as well. Thank you.

Yes. I’m not going to discuss specific customers. However, when looking at our revenue mix by region, it’s fairly balanced among North America, Europe, and China, with significant growth opportunities in China on a relative basis. We are very focused on that area from a booking and funnel standpoint. Regarding your comment about a winner-takes-all scenario, our customers in China's high-voltage or BEV segment are increasingly targeting not just the domestic market but also exports to other regions, which I think you’re referring to. Customers in China tend to prefer purchasing a complete system solution from us rather than individual component parts, which generally yields higher margins. Therefore, I’m uncertain whether this is a net advantage or simply neutral for us.

Okay, Kevin. And either Kevin or Joe, on Motional, can you give us the latest update on the capital need there in terms of cash consumption? And then what have you got left in the tank before we need to put more in the kitty? Thanks.

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, and continue to make progress on the technical and commercial side of things. As we've said previously, probably not the most receptive capital market at this point. Obviously, our partner, Hyundai, and ourselves are looking at it. I had to call it today, I'd say the partners fund another year of operations. I haven't made that decision yet, but that would be the most likely outcome. I think if we had to call it today, they're going through about $500 million to $550 million of cash per year. So, it would be a split of that.

Thanks, Joe, thanks, Kevin.

Hi, good morning, and thank you for taking the question. First, I wanted to ask about commodities. You mentioned it was a headwind in the quarter. Could you provide us with more detail on what the challenges in the quarter were related to? More broadly, what are you seeing in semiconductors? It seems like the environment is improving and becoming more stable. Is there a possibility of relief from the cost pressures you've experienced in recent years in the semiconductor sector?

So, two distinct questions there. Let me take commodities. For us, commodities are still mainly copper; nothing's changed over the last couple of years there. We copper, and we're indexed to copper with our customers for the vast majority, 80% of our copper buy, those prices get adjusted either quarterly or, in some cases, semi-annually; we have one large customer where we actually do it monthly. So, all we're dealing with there is really the lag. How much copper do 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. Copper tends to be more of a margin rate impact in margin dollars. As it relates to semiconductors, we've obviously passed along the price increases that we have received to date. We've been sort of direct; if a chip goes up, we pass that cost along to our customers. 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, I don't see any indications of chip prices coming down. I think if you look at least at some of the chip firms that have a large automotive presence, I think they've been echoing the same sentiment, at least the potential to hold or maybe even go up in some of their public comments. We remain vigilant. We expect to pass additional price increases through to our customers but don't see any downside on those prices at this point.

Okay. Thank you. And then just a related question. If we zoom out and look at the last few years, obviously, the results have been dragged by all the material inflation headwinds, largely semiconductors. And I assume that when you're booking your bookings, that pricing is based on the commodity or input cost outlook at that time, and obviously, it's progressed to be a bit tougher since then. So, what steps are you taking to ensure that as your backlog rolls on, as that becomes revenue and launches, 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 by an input cost outlook from a prior time?

So, Dan, we've talked about this a couple of times before. So, the renegotiation on price with customers 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 to put capital on the ground, right, you've sort of got a two-year to three-year window before program start, there are various touch points with customers around the economics of the program. Customers need that; we want that; suppliers want that. Historically, those tended to have been around volumes, right? If a program looks like it's going to be significantly higher in volume, the OEM wants to have a discussion; if it's going to be lower in volume, the supplier wants to have a discussion. Bond costs are historically part of those. So, as we approach the point of starting production or putting capital to work to start production, we have mechanisms in place and the team does a good job at it to go back to customers on the overall economics of the program and bond costs are going to be obviously now 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.

Dan, I'd like to make an additional comment. Joe provided an excellent overview of our contracting and operational strategies with customers. Over the past couple of years, we've prioritized keeping our employees safe and ensuring strong supply chain connectivity for our customers. As Joe mentioned, while we are passing on price increases to customers, we've also been focused on enhancing our business model. From a supply chain perspective, whether it involves semiconductor chips, resin, or other materials we use in manufacturing, we have concentrated on redesigning products to eliminate unnecessary components and reduce costs. We aim to collaborate more effectively with our suppliers and improve our operations to lower expenses for our customers as well. Additionally, in light of inflation affecting labor costs, we're continuously evaluating where we conduct our operations and striving to boost productivity in our existing facilities to reduce our operating costs organically. Overall, we are taking a dual approach to manage and counteract inflation while improving operational efficiency.

Thank you, that was very helpful.

Good morning. Thank you for taking my question. You mentioned that Aptiv has been a little bit more conservative on its EV volume projections given the cost of those platforms. I'm hoping you can clarify whether there has 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 slower EV growth, but perhaps some or all of that is being offset by upside that other OEMs may be realizing?

No. Listen, our assumptions have always been lower than what I think some of the industry forecasts have. So, I'd say from a baseline standpoint, our 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 side. 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. I would say the industry is probably coming closer to where our initial perspectives were as related to bet penetration. Having said that, although we're more conservative, revenue growth in the second 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.

Yes, Mark, it's Joe. I mean, we had talked about at Investor Day high-voltage being at least a 30% grower per year for '23, '24, '25, and that view has not changed at all. So, I think that's reflective of where we were on our estimates relative to the broader forecasting community.

That's very helpful context. Thank you. And 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 Wind River has seen with auto OEMs, and perhaps there's been a recent uptick to some of these challenges that the industry is facing that Wind River can help to address? Thanks.

Yes. I'm not sure there's an uptick. I think the industry still wrestles with software integration. I think there are still major challenges. Wind River has announced a number of program wins with OEMs; I think today we’re actively engaged with, I don't know, 10 OEMs to 12 OEMs as it relates to their underlying software architecture and some of the needs that Wind River can provide; a lot of momentum there. As I mentioned in my prepared comments, I would expect by the end of the year to have some additional amounts to make. So, those challenges present an opportunity for Wind River. And then when you think about the middleware, real-time operating system as it relates to Aptiv, whether it be in user experience or ADAS or other areas, certainly opportunities for Aptiv as well.

Thank you.

Hi, thank you for taking the question. Joe, maybe can you help us understand ASUX 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? Or are there 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 ASUX business.

On the engineering credit, this is a typical annual occurrence for ASUX. Last year, it amounted to around $40 million in credits during the latter half of the year. While I’m not suggesting it will be that same figure this year, a reasonable range would be between $20 million and $40 million. Regarding ASUX, there were indeed a couple of launches in Q1 that were slower than anticipated due to supply issues from other suppliers. However, those programs resumed in March and have been meeting their schedules since then, particularly in North America. ASUX's growth in North America exceeded the market by over 20% in the second quarter, and programs are back on track. Additionally, on the SPS side, we have some programs concluding and a busy launch schedule for the second half of the year. Therefore, as we approach the year's end, North America's growth will align more closely with the overall business, although there may still be some fluctuations in the figures from time to time.

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.

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

Got it, thank you.

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