Aptiv PLC

Good day and welcome to the Aptiv Q2 2026 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Betsy Frank, Vice President, Investor Relations. Please go ahead.

Thank you, Shelly. Good morning and thank you for joining Aptiv's second quarter 2026 earnings conference call. The press release and 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 reflect the continuing operations of Aptiv as of June 30th, reflecting the treatment of our EDS segment as a discontinued operation for the second quarter 2025. The reconciliations between GAAP and non-GAAP measures are included at the back of the slide presentation and the earnings press release. Unless stated otherwise, all references to growth rates are on a pro forma adjusted 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 are Kevin Clark, Chair and Chief Executive Officer, and Varun Laroyia, Executive Vice President and Chief Financial Officer. With that, I'll turn the call over to Kevin.

Thank you, Betsy, and thanks everyone for joining us this morning. Starting on slide three, during the second quarter, we generated 2% revenue growth and 10 basis points of EBITDA margin expansion. And we continue to demonstrate progress diversifying our business. Evidence by double digit non-auto revenue growth in the quarter and new business awards in attractive high growth markets that present expansion opportunities for Aptiv. And while we're increasingly optimistic about the long term opportunities presented in these areas, in the near term, we continue to contend with challenges in our traditional automotive market, which are leading us to lower our 2026 guidance, including prolonged sales weakness in the domestic China market, which is causing local OEMs to reduce second half production on vehicle platforms for the domestic market and also leading to a further reduction in schedules from luxury European OEMs for vehicles exported to the China market. Varun is going to walk you through how these dynamics and other factors are impacting our guidance for the remainder of the year and what specifically has changed since we last spoke to you. and I'll spend a bit more time discussing the actions we're taking, including how we're working to evolve our business mix in and outside of the automotive market to mitigate the challenges we're experiencing today. And now that the separation of EDS is complete, we'll continue to evaluate additional opportunities to maximize value for shareholders over the long term. Now let's begin by reviewing our second quarter progress against our strategic priorities. During the second quarter, we continued the momentum we'd established, leveraging our product portfolio and operating capabilities across diverse end markets, including product innovations, where we secured our first Gen 8 radar award, an important component of our ADAS platform. Penetration into new end markets, where the products we've developed for automotive have applications in other markets, reflected in the award from Robust AI, which I'll talk more about later. and expansion of our software partnership ecosystem with leading edge AI players, including most recently with NVIDIA. This list represents a small portion of the 5 billion of new business awards during the second quarter, bringing our year-to-date total to 10 billion, putting us on track for our $20 billion full-year target. We also continue to increase the resiliency of our business model by leveraging our digital twin and N-tier tracking capabilities to provide our automotive and adjacent market customers with a step change in supply chain visibility. And reaching long-term supply agreements is part of our supply chain resiliency efforts. These are both great examples of the actions we've taken to enhance the robustness of our operating model, better enabling us to keep our customers connected in this dynamic environment. And it is one of the reasons we were recently recognized as supplier of the year by Ford in the supply chain category. On capital allocation, we repurchased $250 million of our shares in the second quarter, bringing our year-to-date total to $325 million, with an intention to repurchase a similar amount in the second half of the year and bring the full year total to over $600 million. And over the next few years, we're committed to returning approximately half of our free cash flow to shareholders through share repurchases, while simultaneously pursuing smaller Both on M&A transactions to diversify the business and better position us for the long term. Turning to review our business segments through the lens of the automotive and non-automotive end markets we serve. Starting with the automotive market highlights during the quarter, we made some meaningful progress expanding our business with leading OEMs in Asia Pacific and driving growth in new business bookings across next generation technology areas. including our full stack gen six ADAS system and in-cabin solutions like driver and cabin monitoring. Notable program launches in the quarter included within the intelligent system segment a full tech stack ADAS award across additional vehicle lines of a large European OEM demonstrating the flexibility and scalability of our solutions and continued strength of our technology partnership. And the launch of our next generation digital cockpit for a luxury European OEM incorporating software-enabled functionality via over-the-air updates and lifecycle management capabilities. And within the engineered component segment, the integration of our high-voltage interconnects on a European OEM's next-gen high-powered 800-volt architecture program. We also continue to innovate across our product portfolio, evidenced by the introduction of our advanced occupancy classification system which is the industry's first occupant detection system that utilizes AI ML-based computer vision software and is powered entirely by an in-cabin camera, streamlining vehicle systems architecture as well as lowering cost. We also secured several important new business awards in the quarter. Within intelligence systems, these included Gen 8 Radar Award by Volvo Cars for its next-gen software-defined vehicle platform. where we will enable robust perception across increasingly complex environments and driving scenarios, as well as an award from a large North American OEM's next generation software defined vehicle architecture, a critical milestone in the transition to more centralized vehicle architectures. And within engineered components, these include high voltage bus bars across the North America and China markets for battery pack and charging applications, Demonstrating continued penetration of both existing and new OEM customers on their next generation EV platforms and the continued expansion of our business with the leading China local OEMs across our key product lines, including high speed cable assemblies and high voltage inlets across platforms for both the domestic and the overseas markets. Moving to slide six to discuss our progress in non-automotive markets. which reflects the applicability of our technologies across a diverse set of end markets and the strong operating execution by our team. Starting with program launches during the quarter in engineered components, we launched a new program providing high performance interconnects for a utility scale energy storage provider that leverages the same technology we're already delivering in automotive and in intelligent systems we launched our integrated cockpit controller for one of the industry leading commercial vehicle OEMs. In terms of product development in the second quarter, this included expanding our high performance interconnect product lines for complex aerospace and defense platforms where space efficient high density solutions are critical for customers. And collaborating on an optimized power solutions for 800 volt DC architectures with a leading developer of power electronics for next-generation infrastructures, including data centers, a market where we experience strong commercial momentum and see very meaningful growth opportunities over the next few years that will further accelerate with the transition to 800-volt architectures. And lastly, achieving a key software milestone and cybersecurity rating for our enterprise Linux operating system, which will expand our potential opportunities in the government and the defense market. A few notable business awards in the second quarter included robust AI selection of our intelligent perception solutions and compute, including AI and ML-based sensor fusion powered by our innovative pulse sensor for its Gen 3 Carter Cobot, which I'll talk more about on the next slide. And in engineered components, an award for our high performance cable management and protection solutions for large scale solar energy and battery storage projects in the U.S. market. Lastly, we continue to expand our commercial presence in non-auto markets through our partnership ecosystem, first with NVIDIA, where we extended our partnership to provide Aptis production-grade software to edge AI customers using NVIDIA Compute. Second with Kindrel, which is an important extension of our enterprise partner ecosystem, where Kindrel will deploy our Wind River software as part of its mission-critical solutions portfolio. Together, they enable customers to more easily deploy and operate mission-critical systems while accelerating adoption through joint go-to-market initiatives and integrated offerings. Turning to slide seven, I want to spend a few minutes providing an overview of our progress capturing opportunities in new end markets, which we're confident will meaningfully diversify our non-automotive revenue mix over the next few years. The robotics and drone markets are higher growth, higher margin sectors, where opportunity is materialized much faster than we previously anticipated, driven by the same demands for autonomous solutions that have been transforming automotive over the past decade. Since initially outlining our addressable market opportunity and growth targets for non-automotive markets, we've achieved the following. In robotics, we secured partnerships with three leading robotics manufacturers and one of those partnerships has advanced to a meaningful commercial agreement and we expect to be making additional commercial announcements during the balance of the year. In drones, in July we secured our first commercial award from a leading drone manufacturer with total lifetime revenues of over $500 million over a five year program. This award will be included in our third quarter bookings numbers. We're actively engaged in discussions with several drone manufacturers that we expect to translate into commercial agreements during the balance of the year. The content per device opportunity in the robotics and drone markets are significant and our initial awards represent a large portion of that total content opportunity. And both of these markets present time to market advantages versus our experience in automotive. In summary, we're increasingly confident in the broad relevance of our product portfolio across multiple end markets, which will significantly change our business mix. We have a high degree of confidence in achieving annual revenues from the robotics and drone markets of about $300 million over the next few years. We believe we're also uniquely positioned to benefit from growth opportunities in the space, energy storage, and data center markets. which we'll talk more about in the future. I'll now turn the call over to Varun to go through our financial results and guidance in more detail.

Thanks Kevin and good morning everyone. Starting on slide eight with our second quarter financial results. We delivered revenues of 3.3 billion which grew at an adjusted rate of 2% and were just shy of the midpoint of our guidance. Looking at revenue growth by region, North America grew 10%, driven by strength across both segments. In Europe, revenue was down 8%, primarily reflecting volume pressures with select luxury OEMs, predominantly in intelligent systems. And in Asia Pacific, revenue increased 6%, including 5% growth in China, driven by improved mix with local OEMs, partially offset by a slowdown in production for the domestic market. Adjusted EBITDA totaled $613 million and adjusted EBITDA margin increased 10 basis points. This came in ahead of our guidance due to the timing of recoveries and operating performance. FX and commodities amounted to a 30 basis point headwind to margin in line with our expectations. Earnings per share was $1.63, an increase of 12 cents from the new active pro forma results in Q2 2025, reflecting higher operating income, the benefit of share repurchases and interest other income partially offset by higher tax expense. Free cash flow for the quarter was an outflow of $33 million and included approximately $70 million in cash separation costs associated with the Versagen spinoff which we highlighted last quarter. Moving to slide nine and starting with highlights on the consolidated business. We generated strong results in strategically important non-automotive revenues with 12% growth while absorbing some customer mix headwinds in our automotive business in the second quarter where revenues declined 1%. Adjusted EBITDA margin increased 10 basis points, driven by flow-through on revenue growth, strong performance across material and manufacturing, and a benefit in timing of certain recoveries, more than offsetting the impact of stranded costs following the vestige and spin, which we are aggressively working to eliminate. Turning to intelligent systems, revenue of $1.5 billion was flat versus the prior year. which reflects strength in the non-auto which was driven by software and services. And this was offset by automotive revenues which were impacted by weakness with certain European OEMs and a lower production at a North American OEM impacted by a supplier fire. Intelligent systems adjusted EBITDA margin declined 120 basis points primarily driven by investments in non-auto markets and the impact of stranded costs. Moving to engineered components, revenue of $1.8 billion grew 3% versus the prior year, driven by double-digit growth in non-auto markets and, more specifically, in diversified industrials and aerospace and defense, while automotive revenues were essentially flat. Adjusted EBITDA margin increased 100 basis points and reflects flow-through on volume growth, favorable timing of the previously mentioned recoveries, and performance initiatives partially offset by stranded costs. Turning to our full year 2026 financial guidance on slide 10. As a reminder, historical new active performer financials are on the investor relations website under the quarterly financial section. And those correspond to our guidance that treats Q1 as new active performer. Starting with the full year, We now expect revenue in the range of 12.6 billion to 12.8 billion, which implies adjusted growth of 2% at the midpoint. I'll discuss the changes here in detail on the next slide. We expect adjusted EBITDA in the range of 2.31 billion to 2.37 billion and an EBITDA margin of 18.4% at the midpoint, reflecting the impact of lower revenue growth which is partially offset by performance. We now expect adjusted earnings per share in the range of $5.60 to $5.80 with a midpoint of $5.70 reflecting lower operating earnings partially offset by a slightly lower effective tax rate and a lower share count. This also includes The projected impact of an additional $300 million in share repurchases through the remainder of the year, as Kevin mentioned. Lastly, free cash flow is expected to be in the range of $625 million to $725 million, reflecting the reduction in EBITDA. As a reminder, this includes the one-time cash separation costs associated with the Vestigen spinoff, which have already been largely incurred year-to-date. and the continued investments in supply chain resiliency for semiconductors. For the third quarter specifically, we expect adjusted revenue growth of 1% at the midpoint, adjusted EBITDA and EBITDA margin of $560 million and 17.7% at the midpoint and earnings per share of $1.30 at the midpoint. Turning back to our full year guidance to discuss the key changes to revenue in further detail. We are reducing full year revenue guidance at the midpoint by 300 million, which reflects the following. First, approximately $150 million related to changes in customer production schedules. These schedule revisions are primarily related to weakness in the domestic China market with both local China OEMs and European OEMs that export to China. Second, $100 million related to delays in program launches and ramps. Specifically, delayed ramp in production volumes on certain programs in China and the launch with the European OEM where the launch is delayed by the OEM and we did not benefit from the expansion to additional car lines as we originally anticipated. And finally, approximately $50 million related to the timing of enterprise sales in software and services. While these items have impacted both business segments, the intelligent systems business is disproportionately impacted by the above factors. Now translating this to the implied ramp in year-over-year revenue growth from the first half to the second half that we outlined last quarter. As a result of what I just described, The following have changed. First, the 150 basis points improvement in growth from lapping of previously identified headwinds, specifically the lower production with a major North American customer due to a supplier fire and program cancellations with local China OEMs is unchanged. Second, launches and ramps are now expected to contribute 200 basis points to revenue growth in the second half of the year. This is lower by 100 basis points than initially anticipated, reflecting the programs I previously described. And beyond that, the outlook for vehicle production in the second half has turned from a tailwind to a headwind. This is further amplified by our customer and program mix due to the schedule changes I outlined earlier, which are cumulatively Now a 150 basis point headwind to revenue growth in the second half. I want to wrap up with some closing comments on these revisions. First, the China domestic market, which has and continues to be a more volatile region, has clearly deteriorated relative to when we last updated you. And second, we were not conservative enough in certain assumptions, particularly around launches and ramps. We have incorporated an additional element of conservatism in the second half of this year. I'll close by noting that we continue to see long-term opportunity across a diverse set of end markets and across regions where we are delivering solid progress, as evidenced by our revenues, bookings, and commercial awards. With that, I will turn the call back to Kevin for his closing remarks. Thanks, Varun. I'll wrap up on slide 12.

In summary, we remain confident in the significant long-term opportunity resulting from secular trends that are demanding solutions that can sense, think, act, and optimize, and the customer needs they introduce for high-performance and cost-optimized solutions. However, we also acknowledge the more near-term challenges to our business driven by ongoing volatility in the domestic China market and the related impact on our broader automotive customer mix. To be clear, our customer mix in China has improved and dramatically moved towards the local OEMs. However, this improvement has not been enough to offset the rapid shift of local OEMs business toward export platforms, as well as the reduction of European vehicle exports into the China market. Holistically, we continue to focus on improving the revenue mix of our business, both inside and outside of automotive. We also remain laser focused on execution, delivering margin expansion, earnings growth, and strong free cash flow generation across a variety of different macro backdrops. And we're keenly aware that these efforts need to translate into increased shareholder value. Based on the significant value opportunity we see in our stock, combined with the strength of our cash flow generation and balance sheet, we intend to remain active buyers of our shares utilizing approximately 50% of our expected free cash flow on a more regular basis over the next few years to repurchase our shares. And in 2026, our repurchases will be materially above this level. We're also committed to continually evaluating our business portfolio in light of changes in the macro environment to maximize shareholder value. We're confident that we'll continue to deliver value for our customers drive profitable growth and create sustainable long-term value for our shareholders. Operator, let's now open the line for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit your question to one initial with one follow-up so that we may take as many questions as possible. Again, you can press store one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll now go to your first question. It will come from the line of Etai McCalley with TD Cowan.

Great. Thank you. Good morning, everyone. I know it's a little bit early to talk about 2027, but I'm just curious kind of how some of the changes you're seeing in the second half of the year kind of inform you in terms of just the prior 47% growth framework into 2027 and beyond and kind of how we should think about that just given some of these changes here in the second half.

Yeah, sure. Thank you, Etai. Listen, our long-term view of what the business is capable of remains intact. Clearly, drivers of growth are constantly changing, especially in an environment that is dynamic as this environment is. When you look at the automotive sector, IHS has brought down the growth outlook for future vehicle production. Clearly, material cost inflation is increasing in light of various macro economic factors. However, having said that, within the automotive sector, for the second straight year, we're running with very strong bookings across both of our businesses with the leading automotive OEMs inside and outside of China. on the non-auto side opportunities are materializing much faster than we had initially expected and that's across both of our business segments and we've had a tremendous amount of success leveraging our automotive portfolio into these these new markets so that's an area that we're We're very optimistic, but the environment certainly is dynamic. I won't get specifically into 2027 at this point in time. As we move later into the year, that's something that we'll certainly provide incremental information about and updates on.

Great, that's helpful, Kevin. And as a quick follow-up, good to hear a bit more conservatism in the second half guidance. I think the Q4 revenue guide still implies a pretty healthy uptick versus Q3. Maybe you could talk about some of the drivers and puts and takes and degree of visibility kind of into that Q4 ramp.

Thank you.

Itai, hi, good morning. It's Varun Laroy out here. Listen, yes, in terms of when you think about the year-over-year second half and also Q4 in particular, essentially it's a couple of points right the first is the year-over-year uptick in the production with the North America customer which had a fire at their supplier a year ago so that unwinds you know from a comp perspective the second is growth in our software and services business As I mentioned, the 50 million reduction in software enterprise bookings is from a timing perspective. So we expect Q3 to be softer, but again, return to high single double digit levels in the fourth quarter and then just growth in our engineered components business.

That's very helpful. Thank you.

Your next question will come from the line of Mark Delaney with Goldman Sachs.

Good morning. Thank you very much for taking the questions. Kevin, you mentioned that even though Aptiv has been making good progress with its bookings for the Chinese domestic OEMs, not enough of those were on the export vehicles. Maybe you could talk a bit more on that. I mean, I would have thought Aptiv was very well positioned for exports given the global nature of Aptiv and your strength in other regions. So maybe talk a little bit more on what's happening and what Aptiv is going to do on that front going forward.

Yeah, so Mark, that's a great question and a very fair one. So we are very well positioned. I would say over the last couple of years, the real focus was on how do we get a stronger mix with the leading local OEMs. When you take a look at our revenues today in China on export platforms, it's about 10% of total Total revenues, so the mix is more heavily weighted for the domestic platforms. As you look at our bookings over the last two years, that percentage has significantly increased. So the benefit of our product portfolio and our capabilities outside of the China market are certainly coming into play. But right now, our revenues don't match the bookings mix over the last two years. and that's something we're working on and that's something quite frankly we've been making progress on over the last year or so.

Okay, thank you. I also wanted to ask about the non-automotive opportunities and I see the solid growth the last couple quarters there. You mentioned specific progress in drones and robotics. I think you said that business could approach 300 million of revenue in the next few years. What does that mean in terms of profitability? I know non-auto can be higher margin, but maybe there's also a number of investments you're making. So if you could speak a bit more on what you're seeing there and how to think about the profit implications.

Yeah, so from a run rate standpoint, margin profile, as you can imagine, is much higher than when it's in automotive. We're investing in non-automotive capabilities today from a product and go-to-market standpoint that we talked about. There's minimal capital investment because we're using existing facilities, existing machinery and equipment. So from a capital standpoint, that's less of an upfront cost and initial drag. But both markets are much higher margin profiles than what we experience in the automotive industry.

Thank you.

Next question will come from the line of Emmanuel Rosner with Wolf Research.

Great. Thank you so much. One quick question on the change in guidance. It seems like, so I understand, you know, some of the revenue drivers, but it seems that the EBITDA line, maybe the implied incremental would be pretty high, like around maybe 40%, which seems maybe a little bit above the normal. Can you maybe just talk about the change in the EBITDA guidance?

Emmanuel, it's Varun Laroyia out here. Listen, the specific one really is the software timing item that I mentioned. So that really is to do with product mix. So that's the one which kind of leads to, you know, the second half, the $50 million reduction that I'm talking about. That really is what impacts that.

Okay, so those... This is a very, very high decremental, and so therefore, on average, the total is around that 40%.

Yeah, I think typically the mix would be the decremental would be less than that. I think just given the size of the software revenue reduction was roughly $50 million in the VAT path. the flow through on that tends to be higher. Therefore, the overall decremental in that particular period is higher.

Understood. And then I understand the the software revenue changes, you know, timing. Can you maybe just give a little bit more color around, you know, what's going on on the ground and just sort of like how to think about growth in software on a go-forward basis?

Yes, so growth in software. So we've been growing kind of low double digits over the last, high single low double digits over the last several quarters in the software business. Our software business is kind of twofold when you break it down, embedded solutions, which I would say tend to be less lumpy and then enterprise solutions that go into markets like telco and industrial markets which tend to be larger in terms of their overall size Emmanuel and at times they can shift for various reasons and when they shift it has a more pronounced impact on a particular quarter's growth rate.

Okay, but on a go-forward basis, what sort of growth rate would you expect?

Yeah, I think our growth rate will continue in the double-digit sort of growth rate with a target to getting to that mid-teen sort of growth rate. We've been a bit below that over the last few quarters.

Got it. Thank you.

Next question will come from the line of Joe Speck with UBS.

Thanks. Good morning, everyone. Look, I appreciate sort of the coming clean on not being conservative enough. And you know, you think you've built in more percussion going forward. But, you know, we've been here before. So maybe you could just sort of walk through, you know, how, what you're doing to sort of changing your plan, your planning process for some of this uncertainty, because, you know, like, I know, it's and many more. So, you know, how are you thinking about, you know, one, planning the business and two, sort of communicating that on a go-forward basis, like what's changing from here?

Yeah. Yeah, I think, no, Joe, that's a fair question. So I think as it relates to as China becomes a bigger part of of our overall revenue base is the China local OEMs become a bigger part of our overall mix as you know as well as I do China OEMs have a number of different nameplates or a higher mix of nameplates relative to the western OEMs just a more significant haircut from an overall conservatism standpoint. I think that is the major change in terms of our process, in terms of how we operate internally and how we forecast externally. So today we've had a process where we've discounted those schedules, obviously have not discounted them enough. I would say the China domestic market is significantly weaker at this point in time than what it's been over a number of years with domestic retail sales down 20%. I think most people in our industry would have expected that the China government would have stepped in to provide some element of support as it relates to the industry. it hasn't yet. And assuming that they would provide some support obviously near term was a mistake. So I think it's just an overlay of significantly more conservatism.

Okay.

Thanks for that, Kevin. And then maybe just some quick hitters on some of the non-auto things. One, like how quick can sort of The drone business come into sales. I noticed you said you're collaborating on 800 VDC. Can you just describe that a little more? Is that something you're licensing and building, or are you creating your own solution? And then the optical M&A, is that a tech buy and something you need to commercialize, or is there a book of business there?

Yeah, so there's a couple layers to that. So as it relates to whether it's drone robotics, or Energy Storage, depending on the customer. The path to market is much faster. On the robotics and drone awards this year, we'll have revenues in 2027. So I would expect typically roughly six months path to revenue. on the energy storage slash data center side. Most of our product portfolio is in and around power side. Transition to 800 volt given our existing portfolio in 800 volt presents incremental opportunities. We're working with several players. We'll be talking about more commercial awards. I'm sure over the next couple months today in that space we have under $50 million in revenues. We expect that to grow at a very rapid rate, Joe, over the next three years. And again, most of that is in and around power, both to the RAC and now with some capabilities in the RAC. and the M&A acquisition is just building out our portfolio as it relates to products that we can take, quite frankly, across multiple markets.

Thanks, Kevin.

Your next question will come from the line of Colin Langan with Wells Fargo.

Oh, great. Thanks for taking my questions. We've talked a lot about China being weak, and I'm not sure if I'm looking at slide eight wrong, but you actually look like you outperformed in China. According to that slide, you were up five and the market down three, and it was pretty weak in Europe. So is that really the bigger issue? Because I think you mentioned also in comments about European exports to China weakening. Is that the bigger factor that's causing a headwind here? And is that Possibly why, you know, we've seen other suppliers haven't cut guidances. Do you have like higher exposure to some of those players and that's having a bigger impact?

No. So there's a couple aspects. So we talked about traction in commercial awards in China with a local OEM. So we have made significant progress. And that is what's reflected in our overall year over year growth. Having said that, that year-over-year growth was not as strong as we had initially forecasted and included in our guidance. So, yep, we showed strong growth, strong outgrowth, but not where we expected it to be. As it relates to the impact of China, the domestic market, the decline in the domestic market, the reduction in schedules impacted the local OEMs. impacting both our EC business as well as our IS business. Our IS business was disproportionately impacted by the number two player in the China market who we were launching several active safety programs with. From a European standpoint, It really is principally the export of vehicles into the China market from two luxury European OEMs that we saw a significant reduction in their schedules depending on the OEM late June or July. I think they're the OEMs that have been the most public about their challenges in the China market. So you can identify who those are. So that's where the biggest impact, quite frankly, is.

Got it. And just to follow up on earlier questions, the margins seem to kind of, the quarterly cadence is a little odd. It's like there's a pretty negative decremental sequentially and then a big incremental into Q4. Is this all recovery driven? Is there some cost headwinds in Q3?

So there are three things. So here's how I would look at it. One is just volume flow through Q2 to Q3. The incremental impact of a piece of that being software, so higher margins, going from Q3 to Q4.

bounce back in software, higher margin, volume pickup, just underlying volume and flow through on that volume.

And third, as you know, engineering credits, recoveries, things like that tend to be stronger in the fourth quarter than they are in other quarters. So that's the walk. there is an element of Q3 margin that's impacted by Varun mentioned in his comments timing on recovery so normally that would have shown up in Q3 so Q3 is a little bit let's call it artificially lower than what we would have expected that has some general impact but my My comments about the walk as it relates to volume software recoveries, that's the biggest piece.

Got it. All right. Thanks for taking my questions.

Your next question will come from the line of James Piccarello with BNP Paribas.

Hi, everyone. Kevin, can you share some thoughts behind the portfolio changes you had indicated at the tail end of your prepared remarks?

Listen, I don't have any specific comments I would make at this point in time. Clearly, we're operating in a very dynamic market, right? And that's across regions and across technologies. and as we always do we're evaluating that mix of products that portfolio and and how we optimize and drive shareholder value so I would just I would just leave it at that yeah understood and then just can you share segment level color on the updated guide here for the full year what's

embedded for each segment's non-auto growth in the outlook? Thanks.

Yeah, I think non-auto growth for both for the full year are relatively strong. Third quarter in the intelligence system segment, it'll be weaker given that software adjustment that I talked about. But we see a strong bounce back in the fourth quarter. Non-automotive revenue growth across both of the businesses has been very strong and in line with our 8% to 10% sort of framework that we've provided previously.

And just like revenue core growth and in margins by segment or just directionally would be great. Thank you.

Yeah, go ahead. Yeah, just to be sure, are you asking that for the full year or?

Yeah, yeah, full year.

Yeah, listen, in terms of both businesses, based on the latest updates that we've mentioned, as I mentioned, the revision in guidance is largely impacting the intelligence systems business, right? And we kind of gave you the puts and takes associated with that. So from an intelligent systems perspective, we would expect the business at this point of time to be approximately flat on a year over year basis on a revenue basis with engineered components growing in the low to mid single digits. So that's point number one. And then with regards to margins, margins, essentially what we've kind of talked about previously, you know, solid margins coming through both businesses. with EBITDA margins in intelligent systems, call it at the mid-teens level, and then with regards to on a full year basis, and then on our engineered components business in the call it low 20s, so call it about roughly about 22 points of margin for the full year.

Thank you.

Your next question will come from the line of Tom Narayan with RBC.

Hi, good morning, Kevin, Varun, and Betsy. Just one more question on this three-bucket exchange, if that's okay. So it looks like, yeah, look, the scheduled change, you have, I think, the European OEMs, the Chinese market, the delayed programs, and the timing one coming back in Q4. The timing one's fairly obvious. But just curious on the other two. I guess, do you have any level of confidence that those other two buckets, you clearly gave those buckets distinctly for a reason, potentially coming back in 2027, is this what's reliant on the Chinese government coming back with stimulus or are some of those like you know you're getting back and then have a follow up?

And Tom, your talk, you're speaking to all Are you speaking to rebuckets or are you speaking to the reduction in H2 customer schedules?

Just the timing one we already know. It's going back in Q4. But then you had two other items, right? Scheduled changing and delayed program. So just curious of those two buckets potential coming back in 27. Yeah.

So there's two aspects. to the China local market. Aspect one is domestic China market with domestic local OEMs and how that plays out during 2027. It's at least for us difficult to envision another year where the China local market is down 20% and production schedules are therefore adjusted to that point. So it's difficult to envision that, but those are some of the things that we're working through. There's a second piece as it relates to within that. So the bulk of that 150 that Varun talked about is China local OEMs. And then there's a part that is effectively European exports into China. I think it's possible that those European exports into China, we don't see a bounce back during 2027 in light of the competitiveness of the China market. As it relates to the program delays and launch ramps, listen, the local China OEMs, I'm confident that you'll continue to see their launches ramp at a lower There's one program from BYD that we're confident will be launched, just was shifted, and that's an export vehicle program. And then there is the program that Varun talked about that was a delayed launch from a European OEM. that had initially the view was it was going to be rolled across multiple programs. That program is launching as we speak. So that will be a tailwind from a revenue standpoint as we head into 2027.

That's very helpful. It doesn't sound as bad as then the non-automotive question I have.

You mentioned this is coming in ahead of expectations. and I know we you discussed this at the investor day and these are all very different verticals but just curious what you're seeing on the competitive side here that you're able to win so much here I would have thought that there'd be incumbents in these verticals um or is this simply just lack of competitors and like kind of a rising tide lifts all boats just how have you guys been so successful in capturing these new new business wins here yeah so I I think um

So I put them into two buckets. I would put the drone and robotics buckets where we're playing. And our principal focus on the drone and robotics here is in and around autonomy. So robotics, it tends to be AMRs, although We have commercial opportunities with a few of the humanoid players. Our view on significant volume is likely to more come from players like AMRs. It tends to be more of a nascent industry. I know there's a lot of talk about the size and growth, but it's a bit more nascent. And it's not only our technology where we bring opportunity, but it's also our capability as it relates to systems, systems engineering, Bill of Material supply chain in manufacturing that is differentiated from the typical players in a nascent industry. On the drone side, that's even more so the case. There's significant demand for reasons that you're aware of. There is a requirement of a non-China supply chain. a number of different technologies. That's something that we have visibility to and we can provide. Our perception systems and compute and ability to take bill of material costs out is unique relative to what their current supply base, which isn't very mature and isn't quite as organized as what we're accustomed to. So I would say it's a mix of bringing our technical capabilities, but there's an equal part of what we do day in and day out from an automotive standpoint so that there aren't really the traditional competitors, if I could say. It's an area that we're moving very fast in. We've invested in capabilities, as Varun talked about. We're going to continue to invest and actually ramp up our investment in this area because the potential opportunity near term is significant. And as I said, the margin profile pricing here is more value-based than cost-based. So the nature of those two markets are very good. I should now go to, if I can, just to the energy storage slash data center. Listen, our sweet spot is power. That's what it is. We've put a team very focused on those two specific markets based on our backgrounds in power distribution. We are working with players who are well known in the automotive space for energy storage, including a now Texas-based global OEM, as well as the leading China OEM. as it relates to leveraging our automotive relationship. And then we're working with several players that I alluded to who support those markets today for incremental opportunities. And today, again, our revenues are relatively small, but the size of the commercial pursuits and bookings we're confident will ramp up revenues certainly much faster than what we experienced in the automotive market.

Thanks a lot.

Your next question will come from the line of Rajat Gupta with JP Morgan.

Great. Thanks for taking the question. I just wanted to start with one clarification on, you know, the first quarter restatement. You know, if I look at the press release and take the six-month EBITDA number, it implies a lower 1Q than what was provided in the OneQ deck and like those financials on the website. I just want to make sure like if that is just an accounting nuance that we need to be aware of. Hey, Rajat.

Yeah. Rajat, it's Varun out here. Listen, that's all CODO associated with the vestigen spin. So what you need to look at is the Q1 pro forma on our investor relations portal.

Understood. So that's the right number. Okay, got it. And just to follow up, you know, just in the bookings mix, you know, within the Intelligent Systems, you know, year-to-date bookings or just the second quarter bookings, are you able to share in more detail in terms of, you know, how much is like full stack, you know, ADAS including software versus modular? and I'm curious like if that makes this change at all, you know, over the last few months, you know, as a lot of manufacturers, you know, try to build more internal capability. Thanks.

Yeah, our, the trend that we're seeing in, and I want to make sure, I think you're talking about the intelligence systems and tech stack. is more of a separation of software and hardware and, quite frankly, more software opportunities. And I referenced the full tech stack award from a Gen 6 ADAS standpoint. We're seeing or experience a significant portion of our bookings in 2026 will be ADAS, GEN6, ADAS Solutions, the bulk of which will include our hardware and our software. So we're seeing more momentum there. We're seeing more OEMs come to us as they work on their path to software-defined vehicles, asking us to do some of that software development in and around areas like middleware and other portions of their software tech stack. We often get asked that question about insourcing from an OEM standpoint, and it varies a bit by OEM, but we would tell you Our experience has been the overall trend. We've not seen that. And in fact, we've seen several OEMs who have attempted to do broad-based software that has decided to go down a different path and be more reliant on suppliers.

Got it. Got it. That's helpful. Thanks for that, Goddard, and good luck.

And that was our last question. This will now conclude today's question and answer session. I will now turn the call back over to Mr. Kevin Clark for any additional or closing remarks.

Thank you everyone for joining us today. Have a great day.

This call is now complete and thank you so much for joining.