Aptiv Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Jane Wu, Vice President, Investor Relations and Corporate Development
• Kevin P. Clark, Chairman and Chief Executive Officer
• Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations

Analysts

• John Murphy, Bank of America Co.
• Itay Michaeli, Smith Barney Citigroup
• Rod Lache, Wolfe Research
• Chris McNally, Evercore ISI
• Adam Jonas, Morgan Stanley
• Dan Levy, Barclays PLC
• Mark Delaney, The Goldman Sachs Group, Inc.
• Tom Narayan, RBC Capital Markets

Presentation

[Operator]

Good day, and 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.

[Jane Wu, Vice President, Investor Relations and Corporate Development at Aptiv]

Thank you, Aline. 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 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 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.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

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 lines 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 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 $6.1 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 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 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 are 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.

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 bookings 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 a 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 were 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 to launch on the Porsche Taycan and now being rolled out across numerous other vehicle platforms.

As vehicle lifecycles 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 is 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. 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.

Moving to Slide 7. Wind River delivers edge-to-cloud software solutions for mission-critical application, 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&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 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. 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&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 of 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 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.

Moving to Slide 9. As I mentioned earlier, we're well 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 and power electronics in battery management systems. And the addition of Intercable Automotive Solutions expands our portfolio to include high voltage busbars, solid-state electrical centers, and battery cell interconnect solutions, further widening our competitive moat.

We expect the 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. And 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 delivery 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 from 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 now turn the call over to Joe to go through the numbers in more detail.

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

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 out-growth 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 investments during the quarter. Capital expenditures were $222 million.

Looking at revenues in more detail on Slide 12. 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 and User Experience revenues rose 39% in the quarter or 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 including 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 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.

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 $19.95 billion to $20.25 billion. EBITDA and operating income are expected to be approximately $2.8 billion and $2.1 billion 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. 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 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 contribute positively to revenue, driven by the rate changes that 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 and 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 offsets the negative 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 the noted concerns not materialize.

With that, I'd like to hand the call back to Kevin for closing remarks.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

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 delivered 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 outperformance, and deliver sustainable value creation for our shareholders.

Operator, let's now open the line for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] We will take our first question from John Murphy from Bank of America. Please go ahead.

[John Murphy, Analyst at Bank of America]

Good morning, guys. Thanks for all the [Speech Overlap] 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 are weighed down by some other factors. So I mean, on a normalized basis, they actually were approaching 10%. In these ramp up of some of these growth segments, I mean, is this where we are -- we should be thinking as far as 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?

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

Yeah. 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, to enhance alternatives or choices. And with the slowdown in some of the consumer electronics, markets have certainly freed up incremental supply. As a result, it's made our supply chain much more efficient, which results in lower cost 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 as we have lower -- sorry, it sounds like we had a little feedback. As we have lower disruption costs, more operating efficiency, we're able to operate more efficiently. And then continue into 2024 and beyond.

[John Murphy, Analyst at Bank of America]

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 as to 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 it'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. Just trying to understand where this is ultimately going to go.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

Yeah, 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 Intercable is, in addition to their technical capabilities and their broad portfolio, a view that we could easily provide them with entrees into 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. And we'll 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 that we -- we're a great leverage point for them to sell their product into that market as well. So as I mentioned there, their funnel for bookings opportunities is well over $2 billion. So the opportunities are really significant with Intercable. They have a great portfolio. They have an even stronger management team. So we're really excited about the acquisition.

[John Murphy, Analyst at Bank of America]

Great. Thank you very much.

[Operator]

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

[Itay Michaeli, Analyst at Smith Barney Citigroup]

Great. Thanks. Good morning, everybody. Just two questions from me. Just firstly, Joe, I was hoping you could just walk through the -- how you think about that H2 versus H1 margin bridge embedded in your guidance.

And then just secondly, I did 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 the lever that could be going forward for margin expansion.

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Yeah, 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 restructure dollars, but things like pivoting engineering to best-cost countries, those types of activities. That'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 2025, 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, I can't get into a lot of detail, but you're going to see a couple of things. There is a slight volume uptick, a little less than $100 million that sort of flows at call it 30% on volume. FX will be better. We had about -- be better by about $30 million. 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 million, that's really the big bucket. Some of that's coming out of disruption costs. The other, as I noted, is going to be -- it continued the -- 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.

[Itay Michaeli, Analyst at Smith Barney Citigroup]

Perfect. I appreciate all that detail. Thank you.

[Operator]

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

[Rod Lache, Analyst at Wolfe Research]

Good morning, everybody. I wanted to just ask you kind of 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. It was, I think, you called it performance. It was the 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?

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Yeah, Rod. It's Joe. Let me start. So -- remember that bucket, a big -- that was a '22 to '25 bridge, right. So you had -- 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 sort of 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, sort of 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 even over the past -- this task order, right, $70 million improvement in supply chain disruption costs alone. So I'd say we're tracking in line with those expectations.

[Rod Lache, Analyst at Wolfe Research]

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 were just too expensive. And we've already seen Volkswagen reach out to Xiaopeng 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 perspective, how you -- how that affects you. You did mention again on the call that you've been working with Volkswagen on the architecture of the future. So would you be agnostic to that or is there some -- are there some implications for you is -- if that is something that continues?

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

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 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. And we've had examples and we've talked about this in the past, where existing customers with existing BEV platforms have come to us, asked us to evaluate opportunities to optimize. And 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 or given our strength in -- 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 and 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. So be global, they're designed specifically for battery electric vehicle platforms. Therefore, we'll get volume. And then from a contracting standpoint, 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 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, because we are big believers that over a period of time, you're going to continue to see significant penetration of electrification in our industry.

[Rod Lache, Analyst at Wolfe Research]

Great. That's helpful. Thank you.

[Operator]

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

[Chris McNally, Analyst at Evercore ISI]

Thanks so much, team. Maybe I could start on the topline and macro. I know it gets kind of confusing talking about North America with the upcoming UAW issues. So maybe, Joe, we can focus in on Europe. Just some quick numbers on the 4% to 6% of production, which is lower than the forecasters. I think we had something like 15%, 16% in the first-half. So that implied down in the second-half. Obviously inflation crisis and cost of living, etc. But just curious if you are seeing anything specific. You obviously have a lot of insight there. Or if it's just a bit of conservatism built-in for the next couple of months as schedules firm up here.

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Yeah, Chris. It's a good place to start. I would say, Q3, we are on production schedules, right. So we've -- 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 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, it's still -- the environment is not perfect. It's still a challenging environment. As Kevin said, it's much better. But yeah, a little bit of caution. And but more in the fourth quarter than in the third. In third we're fairly locked in at this point of customer schedules.

[Chris McNally, Analyst at Evercore ISI]

Okay. That's really helpful. And if I could just follow-up, some numbers to Murph's comments on ASUX 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-half, roughly 10%. We usually, I think because of some of the price issues, we can sort of use that as like a base. And you have a 13.5% -- 13.0% to 13.5% target for '25. Given that I think about $190 million, you just laid out in recovery, a lot of that will come in ASUX. 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 '25?

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Yeah, listen, we remain -- I'm not going to get into '24. It's a little too early in the year to do that. 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 inflation recoveries. The environment, you can still have lumpy quarters between that in 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. 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.

[Chris McNally, Analyst at Evercore ISI]

Very helpful. Thank you.

[Operator]

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

[Adam Jonas, Analyst at Morgan Stanley]

Thanks, everybody. Kevin, I thought your answer to Rod's question [Technical Issues] there's a bit of an echo. On the pulling back or 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 EV market being those two regimes, would that be mix adverse for you? Or -- yeah, I'll 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. Thanks.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

Yeah. I'm not going to talk about specific customers. And 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 and a bookings opportunities 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.

[Adam Jonas, Analyst at Morgan Stanley]

Okay, Kevin. Thanks for that. 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 you got left in the tank before we need to put more in the kitty? Thanks.

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Yeah. No -- Adam, no changes on that front since last the couple of quarters. They have cash through -- or at least into Q2 of next year, 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. 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 million to $550 million of cash per year. So it would be a split of that.

[Adam Jonas, Analyst at Morgan Stanley]

Thanks, Joe. Thanks, Kevin.

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Yeah.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

Thank you.

[Operator]

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

[Dan Levy, Analyst at Barclays]

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

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

So two distinct questions there. Let me take commodities. For us, commodities is still mainly copper. Sort of, nothing has changed over the last couple of years on that. We -- copper -- 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, when we have one customer or a large customer, we actually do monthly. 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 line 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. We will continue to do that as if and when we see additional inflation coming in a year. I would tell you at this point [Technical Issues] and don't see any indications of chip prices coming down. And I think, if you looked at least in some of the chip 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.

[Dan Levy, Analyst at Barclays]

Okay. Thank you. And then just a related question. If we just zoom out and look at the last few years, obviously, the results have been dragged by all of 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. 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, 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?

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

So, Dan, and 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 in the ground, right, you got a sort of a two-year to three-year window for program start. There are various touchpoints 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. 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. BOM costs are historically part of those.

So as we get -- I have -- up to the point of starting production or putting capital to work 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 BOM 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.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

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 focus on one, 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 it's 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, 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 cost.

And then at the same time, when you look at inflation in 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 four walls, so that we, again, on an organic basis, we're driving down our cost of operating. So it's really a two-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 in other items.

[Dan Levy, Analyst at Barclays]

Thank you. That's helpful.

[Operator]

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

[Mark Delaney, Analyst at The Goldman Sachs Group]

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 those 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 slower EV growth, but perhaps some or all of that is being offset by upside that other OEMs maybe realizing.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

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, overall view on BEV penetration and high voltage penetration has been lower and has been for a extended period of time. As we evaluate business cases for specific platforms or our customers, our assumptions on volume tend to be on the more conservative side. 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. I would say the industry is probably coming closer to where our initial perspectives were as it related to BEV penetration. Having said that, although we're more conservative, revenue growth in second quarter in 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.

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Mark, it's Joe. I mean, we had talked about at Investor Day, high voltage being at least 30% grower per year for '23, '24, '25. 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.

[Mark Delaney, Analyst at The Goldman Sachs Group]

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 is seen with auto OEMs and perhaps, there has been a recent uptick related to some of these challenges that the industry is facing that Wind River can help to address. Thanks.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

Yeah. I'm not sure there is an uptick. I think the industry still wrestles with software and there are still major challenges. Wind River's announced a number of program wins with OEMs. 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, would 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 to the real-time operating system as it relates to Aptiv, whether it be in User Experience or AS or other areas, certainly opportunities for the Aptiv as well.

[Mark Delaney, Analyst at The Goldman Sachs Group]

Thank you.

[Operator]

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

[Tom Narayan, Analyst at RBC Capital Markets]

Thanks for taking the question, guys. 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.

[Joseph R. Massaro, Chief Financial Officer and Senior Vice President, Business Operations at Aptiv]

Yeah, on the engineering credits, that's a very normal flow that happens every year on ASUX. Last year, by way of example, it was about $40 million of credits in the back half of the year. I'm not saying it will be that amount this year. But that's order of magnitude, call it somewhere, sort of $20 million to $40 million is sort of a good range to use on that.

As it relates to -- you are right, as it relates to Q1, ASUX had a couple of launches that launched but were ramping slower than expected due to supply availability from other suppliers. As we talked about at the time, those programs really came back online in March, and have been hitting schedules since. And that was in North America. I think ASUX North America's growth over market was north of 20% in the second quarter. So those are back.

What you saw now in North America, I referenced, we've got, which is again nothing to do with supply chain sort of 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. 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.

[Tom Narayan, Analyst at RBC Capital Markets]

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 learnt from that experience that could help you prepare in the event something happens? Thanks.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

Yeah. Listen, I think we direct you to our OEM customers. So we don't have a UAW workforce in North America. So from a direct employee standpoint, that's not something where we have exposure. I think, 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. But I think it's a question more appropriate for our OEM customers.

[Tom Narayan, Analyst at RBC Capital Markets]

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.

[Kevin P. Clark, Chairman and Chief Executive Officer at Aptiv]

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

[Operator]

[Operator Closing Remarks]