Aptiv PLC (APTV) — Q1 2017 Earnings Call Transcript

Thank you. Good morning, Kim, and thank you for everyone for joining Delphi's First Quarter 2017 Earnings Conference Call. To follow along with today's presentation, our slides can be found at delphi.com under the Investors section of the website. And consistent with prior calls, today's review of our actual and forecasted financials exclude restructuring and other special items and will address the continuing operations of Delphi. The reconciliations between GAAP and non-GAAP measures are included in the back of the presentation and the press release. I also want to mention that during the first quarter, we adopted a recent accounting pronouncement that changes the presentation of net pension and postretirement benefit costs but has no impact on overall net earnings. This has been reflected in our Q1 2016 and Q1 2017 financial results as well as our financial guidance for the remainder of 2017. Additional details of the prior period impacts are included in the appendix of today's presentation. We have also presented our Q1 2016 financials on a pro forma basis excluding the results of our Mechatronics divestiture, which we sold at the end of last year, and provided a reconciliation in the appendix of our presentation as well. Please see Slide 2 for a disclosure on forward-looking statements, which reflect Delphi's current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-K. Joining us today will be Kevin Clark, Delphi's President and CEO; and Joe Massaro, CFO and Senior Vice President. As seen on Slide 3, Kevin will provide a strategic update on the business including an overview of today's portfolio announcement, and then Joe will cover the financial results and our outlook for 2017 in more detail. With that, I would like to turn the call over to Kevin Clark.

Thanks, Elena. Good morning, everybody. Thanks for joining us. Before Joe gets into our financial results, I'll provide highlights around the first quarter and then spend some time discussing this morning's announcement of our plans for a tax-free spin-off of our Powertrain segment into a new independent company. Starting with the first quarter. Our results reflect a great start to the year with a positive trend we saw in the fourth quarter continuing including strong growth in revenue, operating margin and earnings per share and new business awards driven by the strength of our technology portfolio. Based on our results, we remain confident in our 2017 outlook. Staying on Slide 5. The spin transaction we announced today reflects the company's continued evolution and positioning to strengthen our capabilities to solve our customers' biggest challenges and drive increased value for our shareholders. The convergence of the technologies underpinning the safe, green and connected megatrends is driving the need for an exponential increase in computing power and faster signal distribution to deliver increased vehicle safety and connectivity. At the same time, more stringent regulatory requirements targeting reduced CO2 emissions and improved fuel efficiency are requiring increasingly complex powertrain technologies. As the pace of change accelerates and the needs of our customers continue to evolve, we feel now is the right time to establish two strong strategically, well-positioned companies, each with a great portfolio of relevant technologies, a global footprint, a lean and flexible cost structure and the financial flexibility to pursue organic and inorganic growth opportunities, all of which translate into a compelling growth outlook. Turning now to Slide 6. Since our IPO in 2011, we've been executing our strategy to strengthen our business and expand our capabilities through organic investments, acquisitions and minority investments in key technologies, all aligned to the safe, green and connected megatrends. We optimized our portfolio with actions that better positioned us to leverage the industry secular growth trends. And as a result, we've built an industry-leading portfolio of high-value technologies that include strong foundations in smart vehicle architecture solutions such as centralized computing; power and signal distribution; high-value connection systems and cable management; sensing and computing domain expertise, which enhances our active safety, autonomous driving, connected car and data analytics capabilities; and powertrain technologies such as Gas Direct Injection, power electronics, and variable valve train. During the same period, it's become clear that our customers' needs are rapidly changing. The technologies underpinning vehicle electrification, autonomous driving, and vehicle connectivity are converging as these systems all require smart vehicle architecture, which leverage the capabilities of our Electrical Architecture and Electronics and Safety businesses. Advanced engine management solutions are requiring a more focused strategy to introduce new propulsion technologies, including electrification to meet the increasingly stringent regulatory landscape. Moving to Slide 7. Upon completion of the spin transaction, our Electrical Architecture and Electronics and Safety businesses will combine to be a global technology leader with unparalleled strength in smart vehicle architecture, centralized computing platforms as well as fully integrated systems for advanced safety, autonomous driving, infotainment and user experience as well as vehicle connectivity and data management. This business will include 145,000 employees, more than 15,000 engineers, have annual revenues of $12 billion and operating margins of almost 14% and over $19 billion of new business awards in 2016. Our Powertrain business will also be a global technology leader, focused on optimizing vehicle propulsion systems by enhancing environmental efficiency and vehicle performance through advanced fuel injection and valve train technologies as well as power electronics. This business will be a supplier to both original equipment manufacturers and aftermarket customers. It will have over 20,000 employees with more than 5,000 engineers and revenues of approximately $4.5 billion, industry-leading operating margins of 11.5%, and new business bookings of almost $7 billion in 2016. Now Liam Butterworth, currently President of the Powertrain segment, will be the company's President and CEO. The company will be chaired by Tim Manganello, the former Chairman and CEO of BorgWarner and current Delphi board member. Both Tim and Liam are talented, well-respected powertrain leaders with proven track records, making them ideally suited to lead the new company into the future. In summary, the outcome will be two independent and well-resourced companies with the flexibility to invest and grow even faster and more profitably than they are today. Turning to Slide 8. You can see our vision for Electrical Architecture and Electronics and Safety businesses, which is to enable smart mobility architectures. We're seeing a paradigm shift in the vehicle's computing power, its connectivity, and the ecosystem that supports it. The technologies in these two businesses are uniquely positioned to deliver end-to-end smart mobility solutions, integrating smart vehicle architecture with mobility computing platforms, serving as the only provider of both the brain and the nervous system of the vehicle. As a stand-alone company, this business will focus its resources and investment to accelerate the commercialization of advanced technologies and systems for active safety, for autonomous driving, data services and infotainment while providing the high-speed sensing and networking architecture that is required throughout the vehicle. No other company will be better positioned to advance integrated high-speed sensing and networking and software-enabled vehicle features for their customers. Slide 9 captures our vision for the Powertrain business, which, simply put, is to enable advanced vehicle propulsion through engine management, software and electrification solutions. Our comprehensive portfolio for optimizing vehicle propulsion enables regulatory compliance while at the same time enhancing the performance of the vehicle. In addition to helping our customers meet the increasingly stringent regulatory standards, our technologies unlock the power needed to support the ever-increasing electrical content being added to the vehicle. As a stand-alone powertrain company, the business will have increased flexibility to further enhance its portfolio of advanced technologies and leverage its systems integration capabilities to solve the propulsion challenges of the future, which will accelerate the growth in powertrain electronics, advanced gasoline systems, and powertrain products. Turning to Slide 10. As I mentioned, the two companies will benefit from well-balanced portfolios, each with sizable addressable markets, which provide the opportunity for long-term, sustainable growth as we continue to partner closely with our customers to meet their evolving needs. So in summary, we believe today's announcement is great for all stakeholders, creating two well-positioned companies for the long term, each with very strong management teams with long-standing customer relationships and proven track records, leading portfolios of advanced technologies that solve their customers' biggest challenges and strong operating discipline, delivering more revenue growth, more margin expansion, earnings and cash flow generation, all of which will drive long-term shareholder value. So with that, I will hand the call over to Joe to take us through the first quarter results, our outlook for 2017 and key transaction details. Joe?

Thanks, Kevin, and good morning, everyone. Beginning on Slide 12. Delphi had another quarter of strong new business bookings across the portfolio totaling $6 billion, following record-breaking levels in the fourth quarter. As you can see from the chart on the left, key growth technologies including active safety, electrification, infotainment user experience, and advanced gas systems have represented an increasing portion of our bookings since 2011 and that trend continued into the first quarter, putting us on track to exceed last year's record of almost $26 billion of bookings. Our core businesses, representing established product lines that form the foundation for many of our new technologies, continue to see new bookings growth as well. On the right side of the chart, we highlight several key wins including a major power electronics win from Geely and Volvo for production in both Asia and Europe, a global active safety win with a large North American OE, a significant Electrical Architecture conquest win with SGM in China; and an infotainment user experience conquest win with a large OEM in Europe. In summary, another great quarter of business wins. Slide 13 provides a summary of our first quarter financial performance. As Kevin said, we are very pleased with our solid start to the year. Organic revenue growth in the quarter was 9%, led by strong growth in every region and business. Our EBITDA margins expanded 20 basis points on a pro forma basis to 16.5% and operating margins expanded 20 basis points to 12.5%. As Elena mentioned, the adoption of a new pension accounting standard resulted in a $7 million reclass of certain pension costs from operating expense to other expense with no impact to net earnings. Earnings per share grew 23%, primarily due to strong volume flow-through, partially offset by foreign exchange and commodity headwinds, and benefited from a slightly lower-than-expected tax rate. We generated an operating cash flow of $290 million, well above prior year levels, and we returned $270 million of cash to shareholders in the quarter, including approximately $200 million of share repurchases, on track for our $600 million share repurchase target for the year. Turning to Slide 14. Let's look at revenue in the quarter in greater detail, beginning with the walk on the left. On a pro forma basis, excluding Mechatronics, price-downs of 1.8% and foreign exchange and commodity headwinds of $82 million were in line with expectations. Adjusted sales growth of 9%, well above 4% global vehicle production for the quarter, was driven by stronger growth in Europe and Asia including higher take rates on active safety and new infotainment launches in E&S, and strength in our Powertrain business driven by strong growth in gas and commercial vehicle volumes in North America and China. Also, South America was up over 15% in the quarter, albeit off a relatively low base. Turning to operating income, Slide 15 walks the year-over-year change in the quarter. Operating income was $537 million, up 10%, and operating margins were 12.5%, up 20 basis points, adjusting for the sale of Mechatronics. Price, foreign exchange, and commodity headwinds all partially offset strong flow-through in volume growth. We experienced a net $26 million performance headwind in the quarter related to two separate commercial settlements, which I will cover in a moment, partially offsetting positive performance gains. Overall, another quarter of strong year-over-year performance, having lapped certain operational challenges we had last year. Turning to the segments on Slide 16, let's start with Electrical Architecture on the left. Sales grew 4% in the first quarter driven by double-digit growth in HellermannTyton and solid growth in the power and signal distribution businesses. E/EA margins expanded 50 basis points due to improved performance, partially offset by the expected unfavorable timing of copper escalations in the quarter. Powertrain delivered 8% organic growth with double-digit gains in power electronics, Gas Direct Injection, and variable valve train. Powertrain margins expanded 250 basis points due to strong sales flow-through and a $17 million favorable commercial settlement related to a previously disclosed program cancellation in 2016. As we have discussed, our guidance includes a continued decline in light-duty diesel revenues in Europe. However, our balanced portfolio of leading gas and commercial vehicle solutions is driving continued strong growth, giving us confidence in our outlook for mid-single-digit organic growth in Powertrain in 2017 and beyond. Moving to Electronics and Safety. Adjusted revenue grew 27% in the quarter, driven by new infotainment launches and strong active safety take rates. E&S margins were 5.9%, negatively impacted by a commercial settlement of a warranty matter, which had a $43 million impact in the quarter. Without this settlement, E&S margins would have been 11.1%. Regarding our investments for growth. Our outlook continues to reflect a spending ramp in automated driving and software and service investments expected to be made over the course of the year. Slide 17 walks our EPS year-over-year, which grew 23% versus Q1 2016, driven by organic sales growth, a lower year-over-year tax rate, interest expense, and a lower share count. EPS was $0.14 higher versus the midpoint of our guidance, of which $0.12 was attributable to stronger volume and operating performance and $0.02 was the result of a more favorable tax rate. Turning to Slide 18. We've provided our guidance for the second quarter and outlook for the year. Our guidance for the second quarter reflects $4.2 billion of revenue at the midpoint, up 5% organic or 6 points above market, driven by double-digit growth in E&S, mid-single-digit growth in Powertrain, and low single-digit growth in E/EA, all in line with our prior expectations. Margins are expected to be up 10 to 30 basis points, reflecting continued improvement in operating performance, partially offset by our planned E&S investments. Earnings are expected to be in the range of $1.62 to $1.68 per share, up 9% at the midpoint. Despite a strong start to the year, we are maintaining the forecast for revenues to be up mid-single-digit organic in the range of $16.5 billion to $16.9 billion. While there are puts and takes by market, we continue to plan for flat global vehicle production and monitor the cautionary market trends. However, if volume is stronger than expected, we're in a good position to capitalize on stronger flow-through. For the full year, we are reflecting the reclassification of pension costs from cost of sales and SG&A to other expense, effectively moving those costs below the line so no impact to earnings per share. Operating income is expected to be $2.26 billion with margins up approximately 30 basis points year-over-year at the midpoint. And earnings and cash flow are in line with prior guidance. Turning to Slide 19. Kevin talked about our portfolio transformation at the onset of today's call, and now I'd like to take a minute to reflect on Delphi's performance over that same time period. Aligning our portfolio to the safe, green, and connected megatrends has allowed us to grow at an average rate of over 5% per year organically since 2010. And operating income margins will have expanded 500 basis points to 13.5%, evidence that our relentless focus on managing our costs has allowed us to further increase our operating leverage. More income yields more cash as cash flow from operations has more than doubled over that time period, driven by strong earnings growth, lower taxes, and effective capital management. Increased cash flow has translated into more opportunities to drive shareholder value through disciplined and accretive deployment. We've returned roughly $5 billion to shareholders since the IPO through dividends and share repurchases, and during that time, we spent over $2 billion on M&A, supplementing our portfolio with higher-growth, higher-margin businesses. We will continue to have a disciplined and balanced approach to capital allocation, focused first on investing in our businesses organically through growth investments and engineering and CapEx and inorganically through accretive M&A. As a result, we have generated industry-leading returns for our shareholders with total shareholder returns of over 300% since our IPO, more than double the S&P return over that same period, validating that we know how to grow, execute, and outperform in any environment. With that in mind, let's turn to Slide 20 where I'll walk you through the spin transaction timing and expectations in more detail. The transaction will be structured as a pro-rata tax-free distribution to our shareholders, which we expect to complete by March of 2018. Once completed, the two companies will be stand-alone, public entities with individual management teams focused on accelerating disciplined revenue growth while continuing Delphi's track record of expanding margins, increasing cash flows, and accretive capital deployment. Over the coming months, we will be providing additional financial and transaction details including the SpinCo Form 10, which we expect to file with the SEC in June. In addition, we are planning to present the strategic and financial outlooks for both companies at our annual investor conference in the fall. As Kevin discussed at the onset of today's call, we're excited about the incremental value that can be created by these two companies going forward. I'd like now to hand the call back to Kevin for his closing remarks.

Thanks, Joe. Let me summarize on Slide 21 before turning it over for Q&A. Delphi delivered another strong quarter with solid revenue and earnings growth, which was a continuation of the positive trend we saw across the company over the course of 2016. Our great start gives us confidence in our outlook for the full year, as Joe said: mid-single-digit organic revenue growth, 30 basis points of margin expansion, and double-digit earnings growth. We remain committed to staying ahead of evolving market dynamics and trends to ensure that our business is always positioned to deliver significant value to our customers and outsized returns to our shareholders. We believe the strategic rationale for the spin-off of our Powertrain segment reinforces that commitment. By creating two well-positioned companies aligned to evolving industry trends, each with increased flexibility to pursue distinct strategies that will better position them to solve our customers' biggest challenges, accelerate revenue and earnings growth, and increase shareholder value.

Thank you, Kevin. We'll now take our first question.

Congratulations on this move. I think it's going to be very well received. I had a couple of questions on the spin. First, can you just give us a sense of how you're thinking about the capital structure of the new co versus the RemainCo? And if we were to think about how overhead costs would be allocated, so we obviously see what you guys reported on a segment basis for EBIT and EBITDA, if we were to adjust that for what the company would look like on a stand-alone basis.

Sure. Joe, do you want to take this one?

We're still in the early stages of managing the capital structure, and that process will pick up speed after the announcement. We anticipate that RemainCo will keep its investment-grade rating. SpinCo will provide a dividend to RemainCo for some deleveraging, and we will determine the specific amounts and structures over the next couple of months. Regarding overhead costs, we currently allocate them to our segments, which means some of Delphi's overhead and public company costs are already included in the Powertrain figures. At this point, we don't foresee significant additional costs, although there will be some added expenses. However, we do not expect these to materially impact Powertrain as a stand-alone entity. These same costs will be stranded for RemainCo. Based on our initial assessment, we believe the stranded costs will be slightly higher than what we had with Thermal. If you recall, we had about $60 million in stranded costs with Thermal, and we expect the Powertrain stranded costs to exceed that but remain below $100 million. We plan to address these costs in the first 18 to 24 months after the spin, similar to our approach following the sale of Thermal.

Rod, if I can add to Joe's comments. Just philosophically, listen, our view on this transaction is that the best time to do something like this is when businesses are doing well and you’re coming off a position of strength. Our philosophy, as it relates to capital allocation and the use of cash, I think, obviously, it’s driven value for our shareholders, and that’s something, a philosophy, that we certainly would maintain at RemainCo and certainly would expect some mix of that to remain with this spun Powertrain business.

Can you discuss the anticipated growth rate for the Powertrain business, specifically your assumptions regarding light-vehicle diesel? Additionally, there seems to be considerable dialogue around consolidation in both areas, with articles mentioning the Delphi Powertrain business and developments in electronics and software. What is your view on how each of these businesses relates to industry consolidation?

Sure, Rod. It's Joe. I'll take the light-duty diesel question and Kevin can follow up on your second part. So our view right now, and this has been very consistent over really the last year plus, we have light-duty diesel revenues, which, for us, is primarily passenger car and light commercial vehicle in Europe. We have those revenues decreasing 3% per year over the next couple of years through our forecast period of 2019, effectively following down light-duty diesel penetration in that car park. At this point, there continues to be discussion and I would say a lot of differing views on that. But we think we're consistent with where our customers are at; we're consistent with what we're seeing in schedules, and certainly with some of the forecasting agencies, their projections of between now and 2019, 2020, light-duty diesel penetration to go from the high 40s to the low 40 percentage. So that is unchanged at this point and we think that's the right place to be.

Yes. And then to augment that, Rod, listen, when you break it down by segment at a high level, our outlook for revenue growth is mid-single digits for Powertrain. As Joe's talked about before, there is very strong growth in the Gas Direct Injection, very strong growth in heavy-duty and medium-duty commercial vehicle, and very strong growth in power electronics offsetting that light-duty diesel headwind. As it relates to Electronics and Safety, there is very strong double-digit growth. Electrical Architecture sees low to mid-single-digit growth just given its market position. But we think with the separation of these two companies and the increased focus on developing advanced technologies, those are growth rates and profit margins that should actually improve. As it relates to consolidation within the industry, listen, consolidation has been something that's been talked about a long time in this industry, both at an OE and supplier level. Our rationale for the CSLP partnership with both Mobileye and Intel was really about how do you leverage the capabilities across the industry, whether it’s through formal consolidation or informal partnerships. And we are in areas of technology that are going to require more focused investment, increased investment; and I think there are multiple ways to fund that, whether it be through physical consolidation, acquisitions and mergers, etc., for less formal or more formal strategic partnerships like we have. Hopefully that answers your question.

I want to follow up on that with some more questions around the Powertrain vision. If you take an OEM who wants to, say, do 48-volt and then evolve into a plug-in hybrid, before we've heard about how the different business units within current Delphi worked together on that, can you give us a sense of, A, how bundled or separate those decisions really are; and then B, how that's addressed in this new two-company structure?

Sure. Sure, I'll start, Brian. Listen, from a bundling product standpoint, they're completely separate from a technology and product standpoint. Go-to-market, where it makes sense from a customer standpoint, that's where we partner. We're doing a lot of that now in China and we'd expect by the end of the year to have a few joint programs, one of which is unannounced. Post-spin, we'd expect, as long as we continue to drive value for each separate, independent business, that’s cooperation that we would continue to have.

So the components that would go into, say, a plug-in hybrid system apart from the electrical architecture, things like inverters, converters, maybe at some point motors, control algorithms, those would be part of Powertrain, not RemainCo?

Yes, let me be clear. So all that product portfolio that, about a year ago, we moved out of Electronics and Safety into Powertrain because that's where the decision was being made from a purchase and engineering standpoint. So inverters, converters, all the products that you just mentioned, that will sit within the Powertrain business.

Okay. So I guess that means that Powertrain isn't just a runoff internal combustion engine company; it can participate in the shift in powertrains?

No, no. Let me make it really clear. We have a great Powertrain business that's very well positioned, that has a great product portfolio including power electronics. And this is about how do we position it to increase flexibility, to accelerate investment, to increase growth, increase profitability and to be in a better position to serve our customers.

And have you had any feedback this morning from some of your OEMs?

Yes, we've spoken to all of our major OEMs and the feedback is all positive.

Congratulations on this. This is a great move. As we look at the business, are there any structural issues that you would take, that you would look at, either further divestitures or potential places where you're looking to add on to the two businesses?

Yes, listen, I wouldn't say we have structural issues or gaps. I think both businesses will look at opportunities to further enhance their product portfolio, whether that be through organic investment or acquisitions.

Okay. And then one on the quarter here. Good bookings number here again. Can you give a little discussion about what the bidding activity is? And how robust is that? And are you seeing any new players that you're bumping into as you're bidding on new contracts?

Yes. Listen, the activity is roughly in line with what we had last year. I think the funnel's actually a little bit larger. We'd expect our bookings this year to exceed what we booked last year, which was $26 billion. With respect to new entrants or new players bidding on business, I'm not seeing anything noteworthy. Joe, do you have anything?

No, nothing from a new entrant perspective. David, I would say that bookings are very lumpy, right? If you looked at '15 and '16, bookings were probably a little more heavily weighted to the beginning of the year. In '17, they're normal flow, a little more weighted to the back end of the year. That would be the only thing I'd point out.

So Joe, I think on Powertrain you mentioned an expectation of continued mid-single-digit top line growth beyond 2017. Hoping we could talk a little bit about, just perspective-wise and I know it's early days as you kind of go through the numbers, but margin in the next couple of years and whether you anticipated any potential increase in R&D or anything else kind of post the spin for the Powertrain business.

Well, certainly, as a stand-alone business, it will be able to make capital deployment investment decisions based on the direction of the technology. That business has worked very hard. Liam and his team have put in significant effort to improve the margin structure. Similar to what Delphi has achieved, the expectation would be continued margin expansion while investing in new technologies. I don't expect that to change. Additionally, they've done an excellent job with their footprint rotation and making smart investments. We will provide more details after the Q2 release and leading up to Investor Day, but I don’t foresee any major changes from that perspective.

Yes. Listen, I would say, thematically, Liam and his team are great operators who have executed really well from a cost structure standpoint, so we'll experience very solid operating margin expansion this year. In the out years, even with increased investments, I think Liam as well as, you're all familiar with Tim Manganello, they are very focused on revenue growth and profit improvement. So thematically, you would see no change.

That's very helpful. And just a quick follow-up on the quarter. On the sales growth flow-through, I think it was quite a bit stronger than the past several quarters. Just wondering how we should think about that the rest of the year? What drove the strength in the quarter? And what are some of the puts and takes to think about as we model that going forward?

Yes, I believe it's quite similar to our conversation in the fourth quarter where we observed strong flow-through. We have been predicting a flat market and will continue to do so. If there is an increase in volume, we will see stronger flow. As planned, we approach capital deployment and investment expense management with a flat volume mindset. When we experience concentrated higher volume, particularly in China during Q4 and Q1, and in Europe as well, we tend to see stronger flow. I would emphasize that our margin guidance for the full year is where we intend to be. We're still forecasting a flat market, and with potential upsides in various markets, we should experience a bit stronger flow.

Great. If I could just quickly follow up on that, Joe. Is the strong flow-through on the base business? Or is it also on new backlog, new launches coming through or maybe both?

It's probably on both. We're getting the volume from new launches. Take rates in E&S, very strong in both China and Europe, particularly in active safety and infotainment. But the base business is, particularly in the Electrical Architecture space, is seeing some performance gains after some of the challenges they had last year.

Also, great move. Timing couldn't be better. So I might have missed this earlier on the call, but would you care to comment on those reports that you held recent talks with Continental in combining your respective Powertrain operations?

Listen, we don't comment on market rumors.

Okay, that's fine. I mean, Kevin, I respect your stance. However, if you're not going to deny the rumors outright, your customers and investors might assume that they're true, but that's not the main point. The real question is whether there’s any merit in having discussions with a company like Conti about achieving cost savings and exploring growth opportunities for Powertrain.

Listen, Adam, I'd answer it this way: we have a great Powertrain business that's very well positioned, that has some tremendous opportunity out there that we believe, by setting up as a separate public company, they're better positioned to pursue. And as a result, they'll be a better supplier to their customers and all that will translate to better value for shareholders. Having said that, you saw the roadmap slide that I walked through. We're about driving shareholder value and making sure we do it in a way that benefits our customers. So that's how I'd respond.

I appreciate that. Just one follow-up. You mentioned that the separation can actually provide a revenue synergy for both companies, allowing them to pursue growth and margin expansion opportunities more effectively on their own than together. However, I assume there could also be some dissynergies that might offset the synergies. Could you highlight some of the obvious areas where working together could generate business, any cost-sharing benefits, or other significant factors that could be considered in the overall netting process?

Yes, that's a great question. In the short term, there are definitely some dissynergies, though I don't believe they are significant. Joe mentioned the corporate or overhead costs, which will see some temporary duplication. However, there are advantages in scale, particularly in areas like sourcing. We also stand to gain from leveraging technology across our Electronics and Safety divisions, as well as our Powertrain business, improving ease of use. That said, considering the rapid evolution of the industry, the increasing complexity of technology, and the convergence of what we traditionally viewed as Electrical Architecture with developments in autonomous driving, infotainment, and user experience, I believe that maintaining a sharp focus will accelerate technology development, ultimately leading to greater revenue and margin benefits. Keeping both businesses separate provides more flexibility for the management teams, allowing them to make decisions with fewer trade-offs to consider.

Congrats again on the strategic decision. So just a slight alteration to some of the questions that have already been asked. So the power electronics, which will remain in Powertrain, I think it's like 60% of your content per vehicle in EV. So I guess that means you really still have a heavy, if not a positive, transition from internal combustion engine to EVs within Powertrain. I guess my question is, does it make sense at some point to get into some of the more hard components, electric motors, drive modules? Or do you think that there's not an advantage to bundling everything that would be relevant to EV?

Yes, there is always a benefit in terms of efficiency and cost to having a system. However, most of our customers in the Powertrain area prefer to purchase components individually. This is an important consideration. We will continue to assess other areas within our product portfolio related to EVs or powertrain electronics, where we will determine whether we want to enter the business ourselves or collaborate with existing players in the market. This will involve a trade-off in terms of capital allocation.

Okay. I mean, is the way to interpret that, it doesn't have to be actual capital market mergers; you could maybe have collaborations instead.

Yes, I think some of the products that you mentioned, our view today is that it's likely some of those become commodity-like and that you're better off buying versus making, and there is a universe out there of very capable suppliers that are happy to partner with a company like Delphi to provide that product in a system.

Yes, Chris, motors are a good example of that. We have a couple of partnerships in place now in the Powertrain business, including a motor provider in China that's a big part of our product offering there. So there are opportunities in the marketplace to do that without deploying capital.

Perfect. And if I may, just one real quick follow-up on E&S where you had this big warranty. We've now had sort of two quarters in a row where you had warranty expenses that you haven't called out in your non-GAAP items and they've been pretty big. Quite frankly, the two quarters would look spectacular if you didn't have these expenses. How do we think about quantifying them going forward? I mean, should we think about them truly as one-time? Or is this the type of thing that could come up on a more regular basis?

Well, listen, the two items that you're referring to, the fourth and first quarter, related to, let's call it, older technologies that are out there. I'll start, and Joe should get into more detail. When you look at warranties, the reality is there's a big chunk of warranty that is lumpy at the end of the day. It's a lumpy expense. And I think based on that, I think our conclusion was we're better off keeping them in the numbers and highlighting them for you. And Joe, I should...

Yes. No, Chris, Kevin nailed it. It is lumpy. It's obviously hard to forecast. The way I think about it and the reason we haven't called it out or referred to it as nonrecurring, if you look at the past five or six years since we've been public, we average about $100 million of warranty expense in a year. Now there is one year where just the timing it hit $140 million and the next year it's $60 million. But that tends to be the way to think about it. It's not a trend. This is not something we see increasing over time. That range of somewhere right around $100 million per year on a six-year base is where we think about it. But in a given quarter, it's just going to stick out a bit. It's going to be lumpy, and again, that’s the reason we haven't backed it out and wouldn't advise to.

Kevin and Joe, with this spin-off, can you give us an idea of how the backlog would look between RemainCo and the SpinCo, if you would?

Yes, well, we've talked about it. If we go to the deck, I think from a bookings perspective, if you want to use '16 as a proxy of our $26 billion in bookings round numbers, about $19 billion sits in RemainCo, $7 billion sits in Powertrain. And that ratio is generally consistent.

Got you. And then can you give us some color on how China is sort of unfolding as you see it? I mean, I guess there are some discussions that maybe Q2 or Q3, there might be a little bit of a chop. But I was wondering, what's your guys' take on it?

Yes, from our perspective, we're seeing that. We've had China in our full year guidance. It's just 1% growth. Clearly, Q4 was strong, Q1 was stronger than that. We do start to see it catch up to itself, though, obviously, as the year goes on, particularly lapping in Q3 and Q4. We see China market growth actually turning negative in Q4, down 1%, to finish at sort of that 1% for the year, but clearly tailing off from here. But that's been in our guidance from the beginning; it's how we're running the business, and it's what we're seeing on the ground for the most part.

Congrats on the quarter and spin. I understand you think the Powertrain business and internal combustion efficiency boost in general is secularly aligned. I heard you say today that you thought maybe Powertrain could grow something like 6% versus the industry, which is forecast by IHS to grow more like 2%. But is part of the logic behind the spin just the idea that they do exist in the market, these debates about the leverage of the Powertrain business, the secular trends within the industry, whereas there really are no debates about the alignment of the E/EA and E&S businesses and so this transaction would allow the multiple of the RemainCo to fully reflect the potential of the fastest growing parts of the business including autonomous driving, which now rises materially as a percent of total revenue?

Yes, Ryan, listen, I think, again, I want to go back, we strongly believe that there’s significant growth above vehicle production that sits within the powertrain space where we operate. We are very confident of that. We have no doubt. Our view of the concern about the demise of the internal combustion engine, our view is, in 2025, 95% of powertrains are going to be ICE, right, with some electrification, with some amount of EVs, and there's tremendous opportunity for growth and profitability serving all those various categories. We think as regulations get increasingly more stringent, especially in Europe and China, the reality is the acceleration of technology serving those spaces would increase and technology development is going to have to be more rapid. Having said that, and it gets to the capital allocation question, there is a view among investors about the value of a Powertrain dollar of earnings versus some of the other businesses we're in. And we believe that having these separate, having more flexibility to decide where investment is made, possibly having a slightly different makeup of shareholders, results in incremental value at the end of the day for the existing Delphi shareholder base.

Okay, great. And then just, lastly, for me, we can see clearly the relative margin of the three current businesses, but could you also talk about how would you rate, on a relative basis, the three businesses' current returns on invested capital and cash generation?

Yes, I mean, today, when you look at cash generation and return on capital per dollar of revenue, the two highest are in our Electrical Architecture and our Electronic and Safety business, right? E&S is principally software related. We're working to make that or create more of a software model within that E&S business. Electrical Architecture is, I think you all know, a portion of that business is very high-margin, high-growth connectors and engineered components. The other component is Electrical Architecture, which isn't quite as high margin but has very little capital expense related to it and therefore is a big cash generator.

I surprisingly still have some questions on the spin. I mean, I would imagine you can't comment on specific rumors, but you ran a full process of potentially thinking about a sale or spin here and just came up with the best economic outcome for shareholders, right?

Well, we evaluated all alternatives, right, and came up with the conclusion that, to your point, this was the right path to go down to drive value for shareholders and to position the business to best serve our customers.

Okay. And then if we think about the RemainCo, and you keep calling it the RemainCo and not Delphi, which I find interesting, is there the potential to change the name and rebrand the core RemainCo company something else? And do you think, by doing this, you might get access to capital at a much lower cost because we're seeing some of these new auto tech companies get almost free capital? I mean, would you potentially consider raising capital at lower costs to grow the business in that RemainCo?

Well, listen, with respect to names, we actually really like the Delphi name. But having said that, we're going through a whole process now to determine where it best fits and evaluating are there other naming alternatives, whether it sits with the Powertrain business or the RemainCo business.

Okay. And then potential for capital at lower cost on this new branded company?

If the capital is available, I would support the idea. Regarding raising additional capital, Joe would need to conduct a cost of capital analysis and consider the options for its deployment. Joe, do you...

Yes, John, I mean, we're not certainly at that point yet. I think, as I mentioned, we expect the RemainCo to maintain its investment-grade rating. And much beyond that, we really haven't looked into it.

Okay. And then, just lastly, the earnings in the first quarter were particularly strong yet you kept the full year guidance largely the same. Is there anything out there that is kind of bugging you or concerning you that would lead you not to raise the guidance? Or is this just steady as you go and relative conservatism?

Yes, I believe it's important to maintain a steady approach. It's still early in the year, and we are forecasting a flat market. This has helped us in terms of capital deployment and cost management, allowing us to operate more strongly if there is an increase in volume. However, we remain cautious and it's quite early in the year. We are comfortable with our flat forecast. We are monitoring inventory levels, which appear to be rising due to some shutdowns and model transitions. Additionally, we are paying attention to the ongoing passenger car and SUV mix, especially in North America. Overall, we are keeping a close watch, but everything is currently in line with our original expectations.

If I can revisit a previous question, I feel I neglected to address the cash flow profile of our business, particularly the Powertrain sector. This area, while being more capital-intensive due to the nature of the product and the manufacturing process, actually demonstrates strong cash generation capabilities. Although the return on capital is somewhat lower compared to our E&S and E/EA segments, we still see solid returns on invested capital and remain focused on this aspect.

Maybe just to follow up there on this flat production, just given where we are with inventories in North America and effectively China as well. The sales environment, it's a little bit slower than what I think most folks were thinking about, and inventories that continue to pile up. I think we've seen some announced production shutdowns for the summer so far and maybe we need a little bit more. I mean, is flat really still the right way to be looking at this right now?

Well, listen, let’s dissect your question a little bit. In terms of the guidance that we give to Wall Street, the evaluation, the puts and takes, whether it be North America, China, South America, Western Europe, Eastern Europe, yes, we think it's the right way to look at it. With respect to how we operate our business and how we're always positioned, listen, you've heard Joe say this before; we're always aggressively attacking our cost structure to make it more variable, to make it more flexible, to put it in a better position to the extent there is any softening in vehicle production, that is something that we can absorb.

Yes. No, David, we often answer the revenue or the market question with a cost question first. I mean, we've been very focused on really from late last year on a flat market and what are the implications of that from a cost perspective, and we continue to maintain that discipline internally. We'll obviously even be more focused on it now just given the spin-off. But we tend to focus on, first and foremost, on where that cost structure needs to be to maintain our margin expansion and EPS growth commitments. And what we're now viewing is a flat market. Certainly, to the extent that things change, those market concerns materialize, we'd go to what we do very well, which is managing that cost structure.

Okay, understood. That's helpful. If I think about, from a European standpoint, light-duty diesel, we saw the declines in the sales in the first quarter. Have the production schedules from your OEM partners changed to reflect that? And I ask the question because what they were producing in the first quarter wasn't necessarily reflective of what they're selling. So as a result, is there a catch-up, a little bit more of an air pocket for diesel production in the second quarter to get those inventories in line? Or are we not thinking about that the right way?

Well, listen, when you think about production schedules, we get production schedules that are 30 to 60 days out with some adjustment at the front end. So I would tell you at least as it relates to the first few months of the second quarter, those would reflect their outlook, their current situation related to inventory and their outlook for sales.

Yes, and we have Europe forecasted as a down quarter on a year-over-year basis anyway, so we're not saying anything beyond that.

Okay. And then, I guess, just lastly for me on the Powertrain business. As we think about the competitive dynamic going forward, can you remind us what the current annual price-downs within that business is today on your product lines and then, again, how competitive you think the go-forward is going to be from an incremental CapEx and R&D perspective that needs to be spent within the business to pivot it further into a 48-volt all the way through better electric vehicles?

Sure, we'll talk about that. It's a business that price-downs average between 1.5% to 2%. So from a pricing standpoint, it's well positioned. From a portfolio standpoint, this business is very focused on serving those areas, where there’s only a, quite frankly, a handful of suppliers that serve that market. And the business works really hard to have technologies that are better than the technologies of its competitors. From an engineering standpoint, our Powertrain business spends about 10% of sales. So there's an engineering-intensive aspect of that business. Today, that encompasses a lot of the power electronics that we're selling today and under development right now. Liam and team will kind of evaluate, just as they do now, the trade-offs between more investment and where they can offset it in their cost structure to maintain and continue to expand margins, and we'll talk about that more at the Investor Day in the fall.

Two questions and just I guess a riff off of the two previously asked questions. First is on the cap structure. Typically, on a dividend spin situation like this, we would think that the leverage on the SpinCo would be high. Now the business, as you just referenced, Kevin, has terrific returns, but it has a high operating leverage and capital requirement. And so how should we think about that capital structure for that business given where we are in the cycle relative to sort of normal course behavior?

Yes, well, listen, and Joe can give more specifics. Again, this business will have a capital structure that positions it and allows it to continue to invest and grow the business. So I start with that. That’s how it's going to be positioned. I guess, we could debate a little bit about what is high, but in this industry and all of us familiar with the industry, I think we'd be at a fairly tight band on what we consider high. Joe, why don't you...

Yes. No, Matt, like I said, we're obviously still working through that. Some of that needed to come sort of post-announcement just given who all gets involved with that type of planning. But it will be higher than RemainCos. But at this point, we haven't set an exact level. But to Kevin's point, our expectation and our goal is that this business is positioned with a capital structure that allows it to operate effectively, allows it to invest and that, I think, from an equity perspective, it fits well within its overall weighted average cost of capital.

Okay. For the second question, I want to clarify something. In regards to the Powertrain business, it will have access to all necessary products and IT that will enable it to compete effectively in a world with electrified drivetrains, whether that involves hybrid or electric vehicles. Is this the right way to think about it, or should I consider it differently?

That is correct, yes. We moved our power electronics business, which includes inverters and converters, into Powertrain over a year ago, and that business rightfully belongs in Powertrain and will be part of the spin.

This is Kevin Clark. Thank you, everybody, for your time. We appreciate you listening in on our conference call. Have a great day.