Aptiv PLC (APTV) — Q2 2025 Earnings Call Transcript

Thank you, Jess. Good morning and thank you for joining Aptiv's Second Quarter 2025 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 are included at the back of the slide presentation and the earnings press release. Unless otherwise stated, all references to growth rates are on a year-over-year basis. 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 Chair and Chief Executive Officer; and Varun Laroyia, Executive Vice President and Chief Financial Officer. Kevin will provide a strategic update on the business, and Varun 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.

Thanks, Betsy. Thanks, everyone, for joining us this morning. Starting on Slide 3. We had a solid quarter, both operationally and financially. Our strong business foundation, coupled with strength in the underlying markets we serve, enabled us to produce record second quarter results. Our unique capabilities from the sensor-to-cloud provide our customers with flexibility and scalability while further strengthening our competitive moat. Our product portfolio is aligned to the accelerating trends of electrification, automation, and digitalization that are happening across multiple industries, and is reflected in our new business bookings. Over the last decade, we've built a resilient business model that has enabled us to operate efficiently even in this dynamic environment. We leverage our global scale while executing in region, for region, close to our customers in the most important geographic markets around the world, and we're constantly working to increase the efficiency of our operations and further optimize our cost structure, which allows us to remain agile, respond quickly to changes, and closely partner with our suppliers and customers to avoid any production disruptions. I'm proud to tell you that as a result of those efforts, we received the Volkswagen Group Award for Resilient Supply Chains during the quarter. The recognition reflects the real-time end-to-end visibility that we have across our global supply network that's enabled by the digital twin we have built over the last 5 years, giving us the ability to react quickly and keep our customers connected. Lastly, with a focus on maximizing shareholder value, the spin-off of electrical distribution systems remains on track, and we look forward to sharing more information on our progress at the upcoming Investor Day in November. Moving to our results. Our second quarter revenue growth of 2% reflects strength across multiple areas of our business and the benefit of stronger-than-expected vehicle production in the North American market. Operating income totaled $628 million, reflecting flow-through on volume growth and strong operating performance, more than offsetting significant headwinds related to foreign exchange and commodity prices. And when combined with the lower share count resulting from our recently completed accelerated share repurchase program, this drove record earnings per share. Lastly, we generated $510 million of operating cash flow, further strengthening our balance sheet and providing us with capital allocation flexibility. Varun will discuss each of these elements in more detail later. Moving to Slide 4 to review our second quarter new business bookings. Our portfolio of advanced technologies and industry-leading supply chain capabilities led to $5.4 billion in new business awards, positioning us for another year of strong bookings. We'll get into more detail on each of our segments shortly, but a few of the highlights include Advanced Safety and User Experience business awards totaled $1.8 billion, driven by active safety bookings of $1.2 billion. Customer awards in our Engineered Components Group reached $2.4 billion, ranging across our full portfolio of interconnect high-speed cable assemblies, busbars, and cable management products across a broad range of customers and end markets. And new business bookings in Electrical Distribution Systems totaled $1.2 billion, and included both low-voltage and high-voltage customer awards across each of our geographic regions. Let's move to the key developments in each of our business segments during the second quarter. Moving to Slide 5 for an update on our Advanced Safety and User Experience segment, where revenues declined low single digits in the quarter, the result of mid-single-digit revenue growth in Aptiv Safety and Wind River, offset by the ongoing roll-off of legacy user experience programs we've referenced previously and a recent slowdown in production schedules on select Zeekr and NIO programs in China. We expect these to remain headwinds for the next few quarters. Looking ahead, we executed multiple strategic program launches across each of our product lines. The highlights include an ADAS system spanning multiple brands for a leading European OEM, enhancing the performance of their current ADAS solution and enabling them to meet the latest regulatory requirements; an in-cabin sensing solution across multiple brands with a leading European OEM, our first in-cabin sensing program with this customer, opening the door to other opportunities; and a user experience solution for one of the flagship platforms of a luxury European OEM. Moving to new business bookings. We continue to see momentum with our flexible and scalable Gen 6 ADAS platform as evidenced by two major awards. First, a leading North American OEM selected Aptiv for their next-gen ADAS solution that runs across a range of vehicles, supporting features with scaling up to hands-free driving. We're also awarded a full system ADAS program with Leapmotor, a Chinese EV OEM for the European market, which includes in our costs from Wind River running on a China local SoC and an AI-powered vision stack from StradVision. These awards demonstrate how our global ADAS expertise, open architected platforms, and global footprint make us a partner of choice for a wide range of OEMs. In user experience, we were awarded a next-generation Digital Cockpit program for a German luxury OEM, which incorporates Wind River Studio for over-the-air updates and lifecycle management, providing enhanced connectivity, performance, and personalization. Wind River also had a range of strategic customer awards across multiple end markets, which include Wind River Studio for Hyundai Mobis to power their software development and deployment and lifecycle management for automotive applications; Wind River cloud platform for a multinational telecom company; an edge platform solution and safety certification for a leading U.S. aerospace and defense prime; and an edge platform for advanced medical imaging systems with a leading healthcare equipment provider. At the same time, we expanded Wind River's edge AI ecosystem by establishing multiple strategic partnerships with AI players, including ZEDEDA, Nota AI, SiMa.ai, and DEEPX, which will help advance the deployment of AI across diverse edge applications and industries. Moving to Slide 6 to review the highlights for our Engineered Components Group, which delivered solid mid-single-digit revenue growth in the quarter. We launched several strategic programs and secured strong new business awards across our portfolio. Notable program launches include a high voltage charging inlet on a luxury European OEM platform, enabling expanded charging access across multiple regions; and low-voltage EU connectors for a leading Chinese OEM's commercial vehicle program, and an up integrated high-voltage electrical center for a large Korean OEM for next-generation electrical and electronic architectures. Moving to new business bookings, these awards underscore our role in advanced signal, power, and data distribution. During the quarter, we received a high-speed cable assembly award to enable next-generation features, including L2++ hands-free driving for local Chinese OEMs, such as BYD, Geely, and CHANGAN. Intercable Automotive's first busbar award was for a new autonomous vehicle program with a leading U.S.-based EV manufacturer, a high-voltage inlet award for a luxury European OEM, and an award for our Rapid Power Reserve, providing highly reliable redundant power for a variety of critical functions for Sirius with Huawei systems. Notable awards outside of the automotive sector include an award in aerospace and defense with a leading manufacturer and operator of small satellites for use in low earth orbit and bookings for mission-critical applications from a leading U.S. defense company. Moving to Slide 7 to review the second quarter highlights for our Electrical Distribution Systems segment, which delivered solid mid-single-digit revenue growth. Beginning with new program launches, we gained incremental high-voltage content on a recent launch of a refreshed vehicle platform from a U.S.-based global EV manufacturer. We also launched a high-voltage battery warning program for a leading Korean OEM that will be used across multiple electric vehicle programs for the Asia-Pacific market. Moving to new business awards, we continue to book programs in both high- and low-voltage architectures. We increased our share of wallet on current vehicle programs with local Chinese OEMs, including Leapmotor's new flagship SUV and a new extended range electric SUV from IM Motors, SAIC's EV brand. In India, we were awarded low-voltage harnesses for a next-gen platform with Tata and a significant low-voltage harness award on a top 10 European battery electric vehicle platform with a luxury European OEM. Turning to Slide 8, I'd like to provide some context on our outlook before Varun takes you through our update in more detail. As intended, we're providing third quarter and updating our full year 2025 financial guidance. Our first half results benefited from stronger than forecasted vehicle production, likely reflecting some pull forward of demand. And we capitalized on this market backdrop with strong manufacturing, engineering, and supply chain performance across each of our segments. Looking at the second half of the year, we remain in a period of uncertainty driven by evolving trade and regulatory policies, and remain cautious that consumer demand could weaken in the back half of the year, which we've reflected in our updated guidance. Our team remains relentlessly focused on navigating the dynamic environment, serving our customers and delivering strong financial results that enhance shareholder value. I'll now turn the call over to Varun to go through our second quarter results and third quarter and full year 2025 guidance in more detail.

Thanks, Kevin, and good morning, everyone. Starting with our second quarter financials on Slide 9. Aptiv delivered record financial results, reflecting strong execution, continued progress on our operational efficiency programs, and the benefit of our ASR completed in the quarter. Revenues were a record $5.2 billion, up 2% on an adjusted basis. I'll talk more about our revenue performance on the next slide. Adjusted EBITDA and operating income both grew 4%, marking record levels on an absolute basis. Operating income margin expanded 10 basis points, primarily driven by the strong performance on our operating and cost structure initiatives, including our continued footprint rotation to best cost locations. These efforts were offset by the impact of foreign exchange and commodities, which were a 120 basis point headwind on margin, largely driven by the Mexican peso, where we lacked a natural operating hedge. Earnings per share was $2.12, an increase of 34%, reflecting the flow-through of higher operating income, benefits of share repurchases, net of higher interest expense, the restructuring of the Motional joint venture, and lower tax expense in the quarter, driven by the timing of certain discrete items. Operating cash flow was $510 million, and capital expenditures were $149 million. Turning to the next slide and looking more closely at second quarter adjusted revenue growth on a regional basis. In North America, despite vehicle production being down year-on-year in the region, revenue grew 3%, driven by growth in both active safety and electrified programs. In Europe, revenue was down 1%, slightly better than vehicle production in the region, driven by growth in commercial vehicles. And in China, revenue declined 1%, which reflects the unfavorable impact of customer mix in the ASUX segment. Moving to our segment performance on Slide 11. And again, I'll refer to revenue growth on an adjusted basis. Starting with ASUX, revenue of approximately $1.5 billion was down 3%, primarily driven by the two factors Kevin mentioned previously. Partially offsetting these was a 6% growth in active safety revenue driven by strong volumes and take rates across major customers in North America and Europe. ASUX adjusted operating income grew 5% with 90 basis points of margin expansion. A 150 basis point headwind from foreign exchange and commodities was more than offset by our ongoing performance and cost savings initiatives and the lapping of a customer receivable issue in the second quarter of last year that was resolved in the third quarter. The associated settlement from a year ago will present a temporary headwind to margin next quarter. For ECG, revenue of $1.7 billion increased 5%, and was driven by growth in Europe and continued traction with local Chinese OEMs, which grew by more than 30%. ECG adjusted operating income declined 4%, while margin contracted by 160 basis points as flow-through from stronger volumes was more than offset by the impact of unfavorable foreign exchange, commodities, and labor inflation. And lastly, for our EDS business, revenue of $2.2 billion increased 5%. This was driven by strong volume growth in North America and Asia Pacific, while commercial vehicle revenue grew by 17%. EDS adjusted operating income grew by 18% with 70 basis points of margin expansion, thanks to strong flow-through on volume growth and execution on footprint optimization, which more than offset a 90 basis point margin headwind related to foreign exchange. Now let's review our balance sheet on the next slide. We generated $510 million of operating cash flow in the second quarter with the change versus the prior year owing to investments in working capital. Our cash flow, as measured on a last 12-month basis, remains very strong at well in excess of $2 billion. We ended the second quarter with over $1.4 billion of cash and approximately $4 billion in total liquidity. As I discussed on our Q1 earnings call, we paid down $175 million on our pan-European factoring facility in early April. Year-to-date, we have paid down approximately $700 million of prepayable debt, well ahead of our original deleveraging schedule. With net leverage at 2x, our balance sheet continues to provide us with flexibility to execute on our strategic initiatives while selectively pursuing growth opportunities. Turning now to our guidance, which we have updated for the full year and have established for the third quarter. Starting with revenue growth expectations on Slide 13. We continue to forecast active weighted global vehicle production to be down 3% for the full year 2025, equating to approximately 92.5 million units. Relative to our original 2025 outlook, this reflects stronger volumes in China, offset by slightly weaker volumes in North America. Based on our vehicle production assumptions, we expect adjusted revenue growth at the midpoint of our guidance to be up 4% in North America, driven by content growth with key customers as well as growth in commercial vehicles, down 1% in Europe, slightly better than vehicle production in the region, and down 2% in China, which largely reflects our revenue mix between the local OEMs and multinational JVs. For the third quarter specifically, we forecast Aptiv weighted global vehicle production to be down 2% and adjusted revenue growth in North America to be up 9%, with strength across all end markets and partially reflective of an easier comparison from a year ago. Europe down 1%, driven largely by lower production in the region, and China down 4%, driven by customer mix across all segments. Moving on to other components of our guidance. Our full year revenue outlook of $20.15 billion at the midpoint continues to reflect a 2% adjusted growth rate with higher midpoint, a function of favorable foreign exchange. We expect low single-digit adjusted growth at each of our three segments. Adjusted EBITDA and operating income are expected to be approximately $3.19 billion and $2.42 billion at the midpoint, up 3% and 2%, respectively, and unchanged from prior guidance. While foreign exchange is a benefit to our top line, primarily owing to the euro, conversely, it is a headwind to our bottom line due to peso-related costs. Higher commodity prices are also a headwind, and these are being offset by stronger performance. Adjusted earnings per share is estimated to be in the range of $7.30 and $7.60, up 19% at the midpoint. This is $0.15 higher than our prior range, reflecting a lower share count following the completion of our ASR program and favorable net interest expense as we have deleveraged ahead of schedule. Lastly, we expect operating cash flow of $2 billion, $100 million lower than our prior guidance, owing to accelerating actions associated with the EDS separation that were originally slated for early 2026 into 2025. On capital expenditures, we expect these to be approximately 4% of revenue. For the third quarter, we expect revenue growth of 3% on an adjusted basis at the midpoint, with operating income margin of 11.6% at the midpoint, and adjusted EPS to be in the range of $1.60 and $1.80. While our full year tax rate remains unchanged at 17.5%, owing to the timing of discrete items, the tax rate in the second half of the year will be higher than the first half. Looking more broadly at the full year, we remain cautious that markets could weaken in the second half, and our guidance reflects this. Combined with revised foreign exchange and commodities assumptions, this bridges the delta in our second half expectations relative to our original guidance provided in February, which we believe is prudent given the ongoing macroeconomic uncertainty. Our current guidance reflects our exposure to tariffs based on trade policy as it currently stands and does not include the impact of tariffs that have not yet been implemented, including the copper tariffs that were announced overnight. As we have previously discussed, our direct exposure to tariffs is minimal in large part because of a high compliance with USMCA and a low level of non-USMCA imports into the U.S. In the limited areas where we have exposure and cannot change sourcing due to the industry's setup, we've been able to pass on the incremental costs. With our resilient business model and relentless focus on optimizing performance, we remain confident in our ability to deliver strong execution regardless of the environment. With that, I'd now like to hand the call back to Kevin for his closing remarks.

Thanks, Varun. I'll wrap up on Slide 15 before we address any questions. We exceeded expectations in the second quarter, delivering record revenue, operating income, and earnings per share, and we remain well positioned to continue our strong operating performance through the balance of the year. Our continued strong execution despite the macro uncertainty is a function of our resilient business model and our proactive efforts around our product portfolio and cost structure. It's been positioned Aptiv to perform in all macro backdrops. We continue to see robust demand for our portfolio of industry-leading products across our full sensor-to-cloud technology stack, which is uniquely positioned to benefit from the continued transition towards a more electrified, automated, and digitalized future across multiple end markets, and we remain vigilant in positioning Aptiv for long-term success through proactive portfolio management with the forthcoming separation of EDS being a great example of our commitment to increasing value to our shareholders. Operator, let's now open the line for questions.

Just first question on the degree of visibility you have at the moment for Q4 production. The guidance I think implies a healthy decline year-over-year, but pretty strong outgrowth on your part. I'm just kind of curious how far visibility do you have right now in terms of the schedules themselves.

Yes. As we mentioned before, we have schedules extending through the end of the year based on our current situation. The schedules are strongest the closer they are to the present time, generally ranging from 2 to 4 weeks out. However, they become less firm beyond that timeframe. At this moment, we haven't observed any significant changes in schedules compared to a month ago. Considering the dynamic market and the strong performance in the second quarter, along with discussions with OEMs, we adopted a relatively conservative outlook for the latter half of the year similar to what we provided in February for the first half of the year. We have some visibility, but given the current dynamics, we believe it is wise to remain somewhat conservative.

That's very helpful. And as a follow-up, the changing U.S. emission standards, some automakers are expressing intent to shift their mix to larger vehicles and take an opportunity. And I'm curious whether that does present any content opportunities for you on that presumably mix shift that may happen next year?

You're talking about movement from EVs to ICE vehicles increasing...

There is a trend towards larger vehicles within internal combustion engines, particularly SUVs, due to emissions considerations.

Yes. So to be transparent, we've already seen some of that this year. We saw some of that in the second quarter. So our outlook for growth in the EV that we originally had at the beginning of the year, we'll certainly end up below our original outlook. That has been more than offset by both production schedules as well as content. So absolute production schedules as well as content certainly on large trucks in North America. So we've, in fact, offset that headwind from a slowdown of EV adoption in North America.

I had a question on the bookings target of $31 billion. You spoke to this award progress in some areas, but also an uncertain macro backdrop, and the bookings target is 2H weighted. So can you help investors better understand the visibility you have into reaching the $31 billion full year target? And any key drivers that you see that would contribute to the increase in bookings in 2H?

Yes. So there is a cadence for bookings. I would say we have a very strong funnel with significant visibility to bookings. I would say we have a high level of confidence that they will achieve the target that we've presented to investors. I would also tell you it's taking a little bit longer to get bookings finalized and documented, just in light of the environment we're in. The reality is our OEM customers across the globe are spending a lot of time kind of managing through the evolving trade and regulatory landscape, in addition to working with suppliers like ourselves on new business awards. So I would say we have a reasonable level of confidence that will be back-end loaded; we saw some amount of protracted periods between RFQs and awards last year, and we had a strong year last year. I think you'll continue to see us have a strong year this year as well.

My other question was in the non-automotive areas. The company has had a goal of diversifying and better addressing some of these other areas, industrial, aerospace, defense. Can you speak a bit more on what you're seeing there and whether or not you were able to grow faster in some of these nonautomotive end markets?

Yes. Growth was strong in the first quarter, but it was somewhat low single digits this quarter. However, for the second half of the year, we anticipate solid double-digit growth based on our visibility. I noted in my prepared comments that from a booking perspective, both the ECG and ASUX businesses are seeing awards in the industrial sector, including aerospace and defense. We expect this particular customer category to be our fastest-growing market by the end of the year. We are making significant progress and gaining traction.

I wanted to start with a question on the implied growth in the second half. And specifically, the implied growth over market. I think in the first half, the growth over market or your organic growth relative to underlying active markets was something like 1 to 2 points. You're guiding to, I believe, for the full year, roughly 5 points. So there is some acceleration in the back half on that outgrowth. Maybe you could just talk about some of the assumptions in the second half growth change.

Yes. First, when considering year-over-year growth, it's important to focus on the fourth quarter of last year and the global vehicle production compared to our current outlook. This context is crucial. The most significant growth acceleration in the latter half of the year is largely driven by the ASUX business, along with notable growth in our EDS business. These two segments are the primary contributors. Overall, ECG's growth rate has remained consistent with year-to-date figures. If we delve into ASUX, a significant factor is the ongoing launch of ADAS programs mainly in North America and Europe, though there will be some challenges from the Chinese OEM programs that may impact growth, but we still anticipate an acceleration. For EDS, we expect strong growth in the third quarter due to year-over-year comparisons, although there may be a slight slowdown in the fourth quarter, particularly given how robust EDS performed in the fourth quarter last year, making that comparison quite challenging.

Great. And there's not one specific launch that you're dependent on or that this is weighted to, correct?

No. We're launching over 2,500 programs this year, Dan. So there are multiple programs being launched throughout the year that will impact the growth acceleration in the second half.

Okay. Great. And then the second question is around capital allocation. And maybe you could just revisit the framework specifically with the EDS spend. Now it sounds like you're pulling that forward. How should we think about capital allocation dynamics in the future post EDS spin and especially on the inorganic side, what types of targets you may be seeking?

Sure. So first, we're not pulling the EDS spin for it. We're still on a path where we'll spin the business at the end of the first quarter of 2026. We're obviously just given the size of that business; there's a lot of time spent by management focusing on moving that, continuing to move that forward. So I want to make sure I correct you on that. As it relates to capital allocation, starting with the EDS spin, that's a business that we're very focused on having manageable leverage out of the gate. So there'll be an element of leverage on that business and the dividend to Aptiv. That cash will be used to pay down some amount of debt. We'll continue to deleverage during the back half of this year and into 2026, certainly at RemainCo, partly as a result of earnings growth, partly as a result of select debt paydown. When we look at priorities from a capital allocation standpoint, we've made the decision for the first couple of quarters that we're going to really sit on cash, evaluate the environment. We'll continue to sit on cash during this quarter. And then priorities are really first M&A opportunities in the engineered components and in the ASUX space, principally in assets that have exposure outside of the automotive market.

Maybe, Kevin, just to start, just a few points of clarification. One, when you're saying second quarter pull forward to demand, I just want to be sure. You're talking about consumer demand of vehicles and you're shipping to that? Or do you think there was actual channel inventory build, like you shipped more than production? And then how will you answer that?

Yes. I think an element of both the schedules we received from our customers and the number of vehicles our customers produced. So I think it's a mix, obviously, those two are aligned. I think, Joe, it's difficult to be precise on how much of that took place. But just based on our dialogue with customers and kind of the timing of changes, I think it's reasonable to assume that there's some element of pull forward of production.

The second clarification regarding the implied guidance for the third and fourth quarters is that it seems revenue will remain flat from the third to the fourth quarter, but margins are expected to increase significantly. Is this primarily due to the typical seasonality observed in engineering recoveries, or are there other factors that contribute to the higher margins in the fourth quarter compared to the third?

Yes. From a year-over-year growth rate, it's really important that you look at the prior quarters, right? And to a certain extent, we were impacted slightly differently by the business, Q3 and Q4 last year. And if you look at overall production, you'll see a few anomalies in Q3 and Q4, right? Q4 vehicle production last year was the highest Q4 it's been and I think you can go back for a very long period of time. And I think on a sequential basis, it was up roughly 10%, give or take a couple of points. So when you look at that fourth quarter growth rate on a year-over-year basis, a portion of our business, especially our EDS business gets impacted. Q3, given our customer mix in Q3, obviously, you'll see strong growth there. So I think it's important to look at it that way. I think as you look at margin, how margin plays out in Q3, Q4, it's really about the continued benefit of the cost actions we've taken last year, and this year and the timing associated with those. And then it's to your point, Joe, it's the timing of engineering credits, which tend to be back-end loaded in our business, principally more of that in the fourth quarter than the third quarter.

Okay. For my second question, regarding the 85% of your daily bookings from local Chinese OEMs, do those come in quicker compared to other bookings? We've heard from some suppliers that the time from winning a contract to launching can be around a year. Can you also explain what is driving this acceleration? Are you refocusing on these customers, introducing new products, or experiencing significant differences in profitability?

Yes, we've been discussing this for a while now. It's not a new focus; it's something we've concentrated on for the past few years and are making progress. Joe, you know our China team, which is based there and has localized our product capabilities, engineering, and manufacturing supply chain to cater to the China market for quite some time. Our product portfolio is strong, and we leverage our global scale. I mentioned in my prepared comments the award we received from Leapmotor for their European vehicles featuring our Gen 6 ADAS solution. We have other awards in our sectors that are related to projects both in China and elsewhere. The major players have awarded us business for exports as well as for programs launching from Europe or South America. More developments are expected in this area, and we will continue to focus on it. Regarding the time frame between award and launch, I would say it's about 6 to 9 months currently, which is quite rapid, covering various components like wire harnesses, interconnects, active safety, and user experience systems. However, it's a dynamic environment. I mentioned the Zeekr and NIO programs, which are significant customers for us, but we are on a couple of vehicle platforms with Zeekr that are struggling in the China market. We noticed a quick decline in production schedules starting from Q2, which will impact us in Q3 and Q4, but we are addressing that. On the positive side, we continue to secure a lot of business, and we're confident that we can make up for that volume as we move into Q4 and next year.

I would like to hear more about the trajectory of AS and UX revenues, which decreased by 3% in the quarter. You mentioned some decline in legacy UX programs and some unfavorable mix in China. Can you explain the growth outlook for this business? I believe you have launches planned for the second half. How should we view the forward growth trajectory for ASUX?

It's a great question. Our business is positioned well as content per vehicle is increasing. We are facing a challenge from the legacy user experience program, which we have discussed previously. When you examine our overall growth rate, whether quarter-to-quarter or year-over-year, this program contributes to a reduction of about 200 to 300 basis points. We will begin lapping it in the first quarter of next year as it winds down by the end of this fourth quarter. This has certainly impacted our growth rate over the past year. Regarding active safety, we expect it to grow approximately 6% this year, which falls into mid-single digits. However, this growth is somewhat hindered by the China programs I mentioned earlier, some of which are actually ADAS programs. Moving towards 2026, we are optimistic about maintaining a mid-single-digit growth rate in the ASUX business, driven by new program launches and the conclusion of the user experience challenges we face.

Yes, that's very helpful. And then second topic for me, I wanted to ask you about the ECG margins; they decreased in the quarter versus last year, even though organic revenues were actually up a very good lift. Maybe some FX and commodities in there. But I guess more generally, where do you think ECG margins can go?

Yes. Listen, this quarter was all FX and commodity prices. So that was the headwind. We're facing significant headwinds principally as it relates to the peso. We're hedged down to 19%. And I'll let Varun talk about it. But that's been a significant headwind for that business for the margin profile of our EDS business, and then, to some extent, lesser extent, our ASUX business. Varun, I should let you answer this.

Yes. No, I think, Kevin, you pretty much answered that. Emmanuel, if you think of the points that Kevin just mentioned right on and as you think of the second half of the year, we do see the kind of seasonal uptick in margins in the ECG business also. So outside of the FX piece that we pulled out kind of Mexican peso, we do see ECG margins recovering in the second half of the year.

In terms of ECG margin opportunities, we anticipate ending the year with approximately 22% EBITDA margins, a notable increase from under 20% in 2022. This reflects a significant improvement as we grow, particularly in the industrial sectors where our margin rates are considerably higher than in automotive. It’s worth noting that the industrial sector is expanding faster than our traditional automotive sector, which will contribute to further margin growth.

So I appreciate the good conservatism. I think we all know there's a lot that needs to happen, particularly around the Mexico trade deal, which seems next. So Kevin, that's my sort of my first high-level question. You guys are always pretty connected in D.C. And if we step back, what do you think the industry is asking for at this point? Is it sort of 15% like all the other countries? Or is there a case of USMCA compliant vehicles could get something better? Just curious, super high level, what you think the industry is asking for or really, in your opinion, should be asking for, for good policy going forward?

Yes, I generally avoid discussing political policy, but I can share our perspective. The USMCA will certainly remain in effect, though some elements may be adjusted. The administration is concentrated on bringing high-paying jobs back to the U.S., and our OEM customers in North America support this effort and are collaborating to achieve it. This will be the main objective. Regarding your question, I can't definitively say whether vehicles manufactured in Mexico with U.S. content will be subject to a lower tariff regime, as I'm not certain about that. However, it's important to note that, as Varun mentioned in his remarks, 95% of our products are produced in Mexico, and 99% of those products comply with USMCA. The recent announcement about copper tariffs will not affect wire harnesses, so that won't be a concern for us. Evaluating potential challenges based on current information suggests these will be relatively minor and manageable. Therefore, regardless of whether vehicles are made in Mexico or the U.S., we believe we're well positioned for the future.

No, that's great. I appreciate the sensitivity, Kevin. I find it interesting because we're now hearing public discussions from players like VW on their call, talking about almost OEM-specific deals for reshoring. Moreover, GM, a major customer, is already making announcements in that direction. It's going to be an exciting August and September regarding that. We'll keep an eye on it. As for your guidance, is it fair to say that the minus 6% reflects an industry-wide expectation of a rough Q4 due to tariff-related pricing? Can I rephrase that to say your minus 6% suggests no new deals? In that case, OEMs will have to increase prices, resulting in a decrease in SAR and production. Does that represent a conservative view where we anticipate needing price increases and a negative SAR? If there are better outcomes, could that lead to an upside surprise?

Yes. I believe there are two factors to consider. First, it's comparing this year's Q4 to last year's in terms of vehicle production. Second, we assume that consumer demand may be weaker due to vehicle pricing or other challenges consumers are facing, which impacts OEMs and their production. Looking back at the situation, when we provided guidance in February, we anticipated being more immediately affected by tariffs, expecting they would be implemented sooner than they have been. It seems there may have been an acceleration in production from our North American customers. As a result, we now share the same concerns about the second half of this year that we expressed in February. If vehicle production turns out to be stronger than expected, we will benefit similarly to how we did in the first and second quarters. However, given the current circumstances, we believe it is wise to proceed with a more cautious outlook. We should anticipate an impact on vehicle production in the latter half of the year due to adjustments in trade policies and tariffs.

Looking at the quarter, your performance in China was about 10% below the market. It was slightly better in the first quarter. When do you expect that to normalize? You mentioned some new opportunities with very short lead times. Will that help close the gap significantly in the second half, and how should we anticipate this playing out next year?

Yes, it depends. Colin, we have made significant progress over the last two years, and we will continue to do so. Our goal was to align our mix with industrial production in China by the end of this year, and we are on track to achieve that. The vehicle programs I mentioned regarding Zeekr and NIO have had a negative impact and have set us back. We will continue to focus on areas where we can add the most value and drive profitability. China is a very dynamic and critically important market for Aptiv, and we are committed to not only growing revenue but also ensuring margin expansion and a good return on investment in this market. We are confident that we can achieve this. We have a streamlined cost structure and are actively working to reduce costs by changing our engineering activities, leveraging global platforms, and cutting sourcing costs related to our supply chain. The team is doing an excellent job. However, it's crucial for us to engage with the right customers on the right platforms to minimize risks, especially in light of recent customer volume reductions affecting us. We are making progress in that regard. Our primary focus remains on growing earnings, both in China and across Aptiv as a whole.

Got it. That makes sense. You mentioned that the guidance doesn't include the copper tariffs, which I understand. However, can you clarify how this impacts your contracts, particularly since I believe many of them have pass-through provisions? Is there a risk to the figures or from a dollar perspective, or is this more about margin dilution?

No, this is derivative, and while it is non-232, it is manageable. Based on our analysis, we don't have all the specifics, but Varun and I can confidently tell you that this is something we can manage from a supply chain perspective. If we can't offset all of it, we are in discussions with our customers about it, and we will be able to push it through. Varun, you should...

No, I think that's right, Kevin.

I know you guys have talked a lot about China. Just one more. So on that order book, the 85% to domestic, just curious if we could get a little more detail on that. I know one of the big catalysts was potentially the fact that these domestic OEMs have to expand or want to expand outside of China, particularly Europe, and that benefits you guys. Just curious as to commentary in that regard. Is that a big factor that was driving the domestics that you're winning? Or is it just kind of across the board?

No, Tom, it's a great question. It's widespread. We've been winning significant business, for example, with BYD in our ECG business over the last couple of years and in our EDS business over the last 12 months, along with opportunities in ASUX that we are currently working on. Our focus is on strategic programs in China, vehicle programs, as well as an additional emphasis on where those OEMs are taking vehicles offshore, whether through export or production in Europe. There are a few that we are dedicating a lot of time to regarding their European or South American supply chains as they move production out and work to ramp up. So we are engaged with those specific vehicle programs and making progress. I would say it’s a bit of a two-pronged approach, but we believe we can provide the most value, or incremental value, for those that need support outside the China market.

Got it. My follow-up is a high-level question. In your prepared comments, there were a lot of significant wins. I'm curious if these wins on the ADAS side have specific characteristics that make them stand out. I lost track of my original question, but I would appreciate it if you could comment on where these wins are occurring.

Yes. Our ADAS awards are located in North America, Europe, and China. Due to the cost pressures faced by our OEM customers, particularly from tariffs and other factors, there is an increased focus on full system solutions that can help reduce expenses. We mentioned the award from Leapmotor for their European vehicles, which includes locally sourced China-based SoCs and our reference vision solution for a Gen 6 ADAS platform, making it very cost-effective. Similarly, with a North American OEM, we have a different vision solution that enhances our existing Gen 6 ADAS, providing additional features, capabilities, and scalability while placing greater emphasis on balancing performance with cost.

I think I remember what I was going to ask, sorry. Yes, so this is something we've been hearing from many OEMs; it seems that the larger OEMs have a tendency to in-source for ADAS, whereas the smaller ones tend to prefer outsourcing. I'm curious if you're noticing the same trend, where larger OEMs may be interested in selecting parts of your ADAS portfolio instead of the entire suite, or if that's not the case and they're successfully engaging with the whole lineup, even the larger ones.

Yes, we would tell you now, we're seeing from OEMs less desire to do things internally. Now there may be some things that with particular OEMs where it might be a feature or some features within an ADAS stack. But that, we're going to do it all ourselves. And listen, you're familiar with the OEMs that have tried doing that, have spent money doing it; they've not been overly successful. We would say that trend is reversed course. We would say, though, all of our OEMs are looking for open architected solutions where they have flexibility that, that's important, that they're scalable so that they can put higher-performing, high-cost systems on a more luxurious vehicle and lower-cost systems on entry vehicles. And to the extent you can do that with a single platform, it's less engineering cost for them. So all of them are looking for that sort of approach to things. So in a strange way, all the cost pressure going on in the industry is actually helpful to our business model. But again, we're willing to provide the full system solution or part of the solution, depending upon what the customer is looking for.

Thank you, operator. And thanks, everybody, for spending time with us this morning. We really appreciate your questions. Have a great rest of the day. Thanks.