Aptiv PLC (APTV) — Q2 2017 Earnings Call Transcript

Thank you. Good morning, Kayla, and thank you to everyone for joining Delphi's Second 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. 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 reconciliation between GAAP and non-GAAP measures is included at the back of today's presentation and the press release. Please see Slide 2 for a disclosure on forward-looking statements, which reflects Delphi's current view of future financial performance, which may be materially different from our actual performance for reasons cited 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, and then Joe will cover the financial results and our outlook for 2017 in more detail. With that, I'd like to hand the call over to Kevin Clark.

Thanks, Elena, and good morning, everyone. Thanks for joining us. I'm going to begin by providing some highlights from the second quarter and then spend some time discussing our portfolio of advanced technologies. Joe will then take you through our detailed financial results for the quarter and outlook for the third quarter and full year and as well as provide an update on the status of the spin-off of our Powertrain segment into a new independent company. So let's begin with the highlights on Slide 5. Our second quarter financial results reflect continued momentum of the positive trends we've experienced over the last few quarters, including mid-single-digit revenue growth translating into strong growth over market; solid margin expansion, while continuing to invest in strategic growth initiatives, demonstrating the benefits of our industry-leading cost structure; and strong new business wins, driven by a portfolio of key technologies. Based on our year-to-date operating results, we're raising our guidance for the full year. Joe will walk you through the details in a few minutes. Additionally, we're pleased with the progress we've made on the spin transaction, which we expect to take place by the end of the first quarter of 2018. Turning now to Slide 6. The transformation of the automotive industry continues to dominate the news, with increased focus on safety, connectivity, electrification, and automation, all of which are at the heart of our strategy. Customers are increasingly looking to Delphi to solve their toughest challenges. And as you can see from the headlines on this slide, our technologies are front and center. Volvo's recent announcement to conclude electrification on all their vehicles beginning in 2019 is another great example of the industry's accelerating shift to electrification. The unveiling of the new Audi A8 last month, the first semi-automated vehicle, is moving into production with Level 3 functionality through Audi's Traffic Jam Pilot feature. Delphi's Z-Fast multidomain controller for the Audi A8 is the most powerful, centralized computing platform in production today, enabling A8 drivers to give up vehicle control at speeds of up to 60 kilometers per hour. ADAS, infotainment, and autonomous driving features are requiring more software, more signal distribution, and more compute power. And Delphi is uniquely positioned as the only provider of both the brain and the nervous system of the vehicle with software and systems integration capabilities, which are critical to seamlessly delivering these advanced automotive-grade solutions. As highlighted on Slide 7, our portfolio of advanced technologies is, in fact, driving revenue growth today. Beginning with RemainCo on the left, active safety remains on pace for over 50% growth in 2017 and is expected to continue at that pace into 2018 driven by the combination of increased penetration with existing customers, conquest wins with new customers, and further penetration in less mature markets. Infotainment and user experience is expected to grow 15% to 20% in both 2017 and 2018, benefiting from the market shift to medium- and high-end infotainment systems, which is our sweet spot as well as an acceleration in the adoption of advanced cockpit controllers to enable improved graphics performance, greater computational power, and support for multiple displays. An industry-leading portfolio of high-margin engineered components positions us to grow faster than both the market and our competitors. And high-voltage electrification is on pace to grow 45% in 2017 and actually accelerate in 2018, reflecting the growth in high-voltage electrical architecture that is necessary to support the increased demand for powertrain electrification. Turning to the right side of the slide, in the Powertrain business. Our power electronics product line has revenues totaling $150 million today and is currently growing at a compound rate of 25% and will meaningfully accelerate in 2018, driven by the roughly $4 billion of new business bookings. GDi and variable valve train have each grown to roughly $350 million in revenues and continue to track at a solid mid-teens growth rate. And heavy-duty and medium-duty diesel revenues are currently increasing at a rate of over 20%, driven by improving conditions in the commercial vehicle market and the work that our powertrain team has done to further penetrate strong global customers. So in summary, our portfolio of advanced technologies, which represents over 35% of our current revenues, are growing mid-teens, which continues to 2018 and beyond. As you can see on Slide 8, we've broken out new business bookings for both RemainCo and the Powertrain business and further highlighted some of our key growth technologies. For RemainCo, the active safety, infotainment and user experience and high-voltage electronics bookings are accelerating, increasing at just under a 30% growth rate since 2011, totaling $25 billion of lifetime revenues and representing more than 25% of total bookings. Active safety bookings have increased at a compound rate of 50% since 2011, and the $2 billion of year-to-date bookings have already surpassed 2016 total active safety bookings of $1.4 billion. Infotainment and user experience bookings have increased over 40% in the last year and have increased at a mid-teens compound rate since 2011, reflecting the benefits of new technologies and share gains with both new and existing customers. And high-voltage electrification bookings and our Electrical Architecture business have grown at a 60% compound rate since 2011 and now total almost $4 billion. RemainCo also continues to benefit from strong bookings in this base business, which includes wire harnesses, connectors, cable management, and electronic controls, growing at a compound rate of 5% since 2011 and now totaling $78 billion. For our Powertrain business, key growth technologies, including GDi, variable valve train, and power electronics have grown at over a 20% growth rate since 2011, totaling almost $13 billion and representing 30% of total bookings. GDi bookings now total $5.5 billion and have grown at a compound rate of 50% since 2011. Bookings for power electronics have increased off of an initial low base and now total almost $4 billion. New business bookings in our Powertrain business have also benefited from $14 billion of cumulative awards from commercial vehicle customers, partially offsetting the slowdown in light-duty diesel bookings. Delphi had another great quarter of bookings in the second quarter of this year, bringing our year-to-date total to $14 billion and putting us on a path to finish the year above 2016's record of $26 billion. Slide 9 highlights some of the vehicle electrification and active safety bookings from the quarter. The growth in vehicle electrification creates more opportunities for both RemainCo and the Powertrain business. This is illustrated by a significant high-voltage award with FAW-VW in China for our Electrical Architecture business. Additionally, we secured a major power electronics contract with Volvo Geely in our Powertrain business for a new combined inverter DC/DC converter, which is expected to generate over $1 billion in lifetime revenues, bringing the total for this project with this customer to nearly $2 billion year-to-date. We have also received an active safety award from a prominent global customer, with lifetime revenues exceeding $1 billion. Each of these bookings underscores our success in introducing new advanced technologies to the market. Now Slide 10 further underscores that increased powertrain electrification provides increased content opportunities when compared to low-voltage content for Electrical Architecture or the base internal combustion engine content for powertrain. By 2025, we believe that over 30% of all vehicles produced will include some form of electrification, with roughly half of those utilizing 48-volt technologies. And as we've discussed, both the Powertrain business and RemainCo are well positioned to benefit from the trend of electrification, providing strong growth opportunities in years ahead. Today, we have roughly $400 million of electrification revenues, which have grown at a compound rate of over 50% per year but again off of a fairly low initial base. Approximately $300 million of these revenues are high-voltage electrical distribution and connection systems offered through our Electrical Architecture segment with the balance from the Powertrain electronics products that are part of our Powertrain segment. We've booked over $7 billion in vehicle electrification programs over the last 6 years, which we expect will translate into revenue growth in the range of 40% per year over the next few years. Now turning to Slide 11. Our new business awards with Volvo Geely serve as further validation of our vehicle electrification strategy for the China market, the largest electrification market in the world. China is forecasted to lead the global trend in powertrain electrification, representing over 50% of unit production in 2025, reflecting a 40-fold increase over today's levels. We remain optimistic about the China market as a result of the underlying macro trends, which include increased government focus on emissions regulations, which are increasing demand for China's new energy vehicles; increased consumer demand for active safety and infotainment and user experience technologies; and accelerated penetration of higher-contented SUVs and luxury vehicles. As a result of the underlying macro trends and our related business strategy, we've had double-digit revenue growth year-to-date, roughly 8 points above market in China, led by roughly 80% growth in GDi, over 60% growth in active safety revenues, and over 20% growth in connectors and cable management revenues. A record $5 billion of year-to-date bookings in the region reflects a more balanced blend of local Chinese customers, representing 2/3 of the bookings in the region. And as a result, our key growth technologies in China are forecasted to grow over 50% per year for the foreseeable future. Another example of the work we're doing in this region includes our recent automated ride-and-drive event from the Shanghai Auto Show. The event was very well received as customers and other key stakeholders came away excited about the social and environmental benefits of advanced driver assistance systems. Moving to Slide 12. We're focused on the safe, green and connected operations of the vehicle as we move toward a more connected and automated mobility environment, validating our technology in standing up new mobility solutions that are going to be critical to providing solutions to our customers and unlocking value for our shareholders. As a result, we're selectively expanding our automated driving pilot programs, which are terrific opportunities to commercialize our autonomous technologies, including automated mobility on-demand and data analytics solutions. Now we've previously discussed our automated mobility on-demand taxi service in Singapore's one-north business park. During the quarter, we also announced our Transdev partnership in France, where we will have several vehicles in operation in 2018. Now as a reminder, Transdev is a leading mobility service provider, operating over 43,000 vehicles in multiple municipalities globally. Our partnership with Transdev will combine their universal routing engine and remote control command software with Delphi's centralized sensing localization and planning automated driving platform, which we're developing in partnership with Mobileye and Intel. We believe this partnership will help accelerate the development of a robust automated vehicle solution and provide a clear path to commercialization. We're also pleased to announce that we have reached agreement on a smart city pilot in the city of Boston. Leveraging our activities in Singapore and France, we're collaborating with Transdev in Boston to develop a commercially viable service, with similar Level 5 operations, fleet management, and mobility cloud services. We're also partnering with AT&T in Boston to provide vehicle to infrastructure solutions that demonstrate the value of vehicle data analytics for efficient city operations and equitable access to mobility. As part of the combined efforts with Transdev and AT&T, we'll be establishing a local software development presence in Boston, which will provide us with further access to top engineering talent in critical fields such as data analytics, machine learning, and artificial intelligence. These pilots collectively underscore the broader momentum in our autonomous driving in smart city collaborations. We look forward to further highlighting our strategy and technology roadmaps during our Investor Day on September 27 in Boston. Joe will take you through the details of that event later, and I look forward to seeing many of you there.

Thanks, Kevin. Good morning, everyone. Slide 14 provides a summary of our second quarter financial performance. Organic revenue growth of 5% was led by strong growth in E&S and Powertrain despite the declining market this quarter. Our EBITDA margins expanded 20 basis points on a pro forma basis to 17.7%, and operating margins also expanded 20 basis points to 13.6%. Earnings per share grew 13%, primarily due to year-over-year operating income growth and a lower tax rate. We generated operating cash flow of approximately $600 million, an increase of 8% from prior year levels. And we returned $173 million of cash to shareholders, including $95 million of share repurchases. Turning to Slide 15. Let's look at revenue in the quarter in greater detail. Beginning with a walk on the left. On a pro forma basis, excluding Mechatronics, price downs of 1.9% and FX and commodity headwinds of $47 million came in better than expected. Adjusted sales growth of 5%, well above the 1.5% decline in global vehicle production for the quarter, was driven by Europe and Asia, including strong active safety growth and new infotainment launches in E&S, accelerating gas and commercial vehicle volumes in North America and China in our Powertrain business. South America was up over 15% in the quarter, albeit off a relatively low base. And North America revenue was flat, reflecting a 3% market decline. Growth in Electrical Architecture was negatively impacted by tough year-over-year comparisons, including the impacts of lower FCA volumes from the previously discussed program cancellations as well as production ramp-downs and certain new model transitions. Turning to operating income growth. Slide 16 walks the year-over-year change in the quarter. Operating income was $587 million, and operating margins were 13.6%, up 20 basis points adjusting for the sale of Mechatronics. Strong volume flow-through and positive net performance was partially offset by FX and commodity headwinds. Overall, another quarter of strong year-over-year performance, having lapped certain operational challenges we had last year. Turning to the segments on Slide 17. Let's start with Electrical Architecture on the left. Sales were flat in the quarter as mid-single-digit growth in our connector and cable management product lines and 44% growth in high-voltage electrification was offset by the previously mentioned program cancellations and OEM production cuts. Electrical Architecture margins declined 50 basis points as a result of flat sales, combined with launch costs in the quarter associated with planned second half launches. Moving to Electronics and Safety. Adjusted revenue grew 19% in the quarter, driven by new infotainment launches and higher penetration of active safety products. As Kevin referenced, our strong win rates and bookings in active safety continue to give us confidence in the outlook for 50-plus percent active safety growth this year and next. E&S margins were 11.2%, down 10 basis points versus the prior year, as strong volume flow-through was offset by increased investments in automated driving, which accounted for approximately 100 basis points of margin in the quarter. We remain on track with our original automated driving spending plan for the year of $50 million to $60 million and expect the costs to ramp in the second half of 2017. Powertrain delivered 7% organic growth, with strong double-digit gains in power electronics, Gas Direct Injection and commercial vehicles. Powertrain margins expanded 200 basis points due to strong volume flow-through and benefits from prior period restructuring actions. Our full year Powertrain outlook continues to contemplate a mid-single-digit decline in light-duty diesel revenues, which is being more than offset by strong double-digit growth in GDi, commercial vehicles, and power electronics, giving us confidence in our outlook for mid-single-digit organic growth overall. In summary, all of our businesses delivered above-market growth and performed at or better than expectations despite a more challenging macro environment. Slide 18 walks our EPS year-over-year, which grew 13% versus Q2 2016, driven by organic sales growth, a lower year-over-year tax rate, lower interest expense from last year's debt refinancing and a lower share count. As a result, EPS was $0.06 higher versus the midpoint of our guidance range. Slide 19 provides an update on key macros reflected in our updated full year outlook. Relative to our prior guidance, we are seeing faster growth in active safety, infotainment, and GDi as recent launches with new customers have been strong, and we expect this activity to continue through 2017 and into next year. FX and commodities are also driving higher reported revenues, particularly the strengthening euro, which we initially planned at $1.05. Our second half estimate now assumes the euro at $1.08, reflecting levels similar to what we saw in the first half. Moving to the right side. We remain mindful of certain cautionary indicators, which we believe could put pressure on production in the second half. We have reflected these in our latest outlook for the year, which now includes a 2% decline in North American production from 2016 levels versus our initial estimate of flat. As a result, our view of global vehicle production is that it will now be down slightly for the year, representing a decrease of approximately 1% from our prior expectations. As we have consistently demonstrated, we are relentlessly focused on improving our cost structure and can quickly flex in response to varying market conditions. For example, we've proactively targeted $20 million in annual cost savings to help mitigate the impact of lower volumes in North America and we'll begin taking actions in the second half of 2017. Turning to Slide 20. We've provided our guidance for the third quarter and updated outlook for the year. The third quarter outlook reflects $4.05 billion of revenue at the midpoint, up approximately 3% organic or 3.5 points above market, driven by double-digit growth in E&S and mid-single-digit growth in Powertrain, offsetting weaker North American production, which is primarily impacting Electrical Architecture. Margins are expected to be up approximately 30 basis points, reflecting continued volume growth and operating performance, partially offset by the previously mentioned ramp in automated driving investments in E&S. Earnings are expected to be in the range of $1.52 to $1.58 per share, up 8% at the midpoint. Revenues for the year are now expected in the range of $16.85 billion to $17.05 billion, $250 million higher at the midpoint. Adjusted operating income is now expected to be $2.27 billion at the midpoint, with margins up approximately 20 to 30 basis points year-over-year. Earnings per share are now expected in the range of $6.55 to $6.75, a $0.10 increase at the midpoint, driven by higher operating income and the benefit of a slightly lower tax rate. Cash flow guidance now reflects July payment to settle the unsecured creditors litigation of $310 million, and it's expected to be $1.85 billion net of that payment. In summary, we are confident in our raised outlook for the year, reflecting strong sales growth and operational performance versus the original guidance we set earlier this year. Turning to Slide 21 for a brief update on the status of the Powertrain spin transaction. As we discussed last quarter, the outcome of the separation will be 2 independent and well-positioned companies. Since the announcement in early May, we have filed our draft Form 10 and completed our initial assessments of capital structure planning. We are pleased with the progress made to date, and the team remains on track to complete the spin-off by March 2018 as planned. In the meantime, both teams are executing well and are excited to share their visions for the future at the upcoming investor conference on September 27 in Boston. There, we will provide a more in-depth review of both RemainCo and SpinCo as well as informative discussions around our technology roadmaps and long-term planning frameworks. And as always, we will be featuring some of our latest innovations.

Thanks, Joe. Let me summarize on Slide 22 before opening the call to Q&A. We delivered another solid quarter, driven by continued strong demand for industry-leading technologies and solid operating execution. This positive momentum gives us confidence in our increased guidance for the full year, which reflects the strength of our first half financial results. We continue to work tirelessly on increasing the efficiency and the flexibility of our cost structure and have been focused on positioning our business for the future as we work towards completing the spin-off of the Powertrain business. We're encouraged by the overwhelmingly positive feedback from customers, partners, and employees that we have received since announcing the spin-off transaction, which reinforces the industrial logic and the significant growth opportunities on the horizon for both companies. Each company will benefit from strong foundations of industry-leading advanced technologies, favorably aligned to evolving industry trends, each with increased flexibility to pursue strategies that will better position them to solve their customers' biggest challenges, resulting in accelerated revenue and earnings growth and increase shareholder value. We look forward to sharing more with you on that front at our upcoming Investor Day on September 27. So with that, I'm sure there's some question. Let's open up the line, operator, to Q&A please.

Kayla, we will now take our first question.

I just had a couple of questions. One is if you could just clarify the outlook for the second half in the Electrical Architecture business. Is that headwind still going to continue through the end of the year from some of the canceled contracts? And also on the Electronics and Safety business, obviously, phenomenal growth, but there are some costs that you're incurring in R&D and, presumably, other places. If you can just give us a sense of what the underlying conversion is or what some of those headwinds are.

Sure. Go ahead, Joe.

Yes, Rod, so yes, I think, listen, when we talk about Electrical Architecture, there's a couple of things. We obviously have been discussing some pass car cancellations in last year as we set guidance that primarily impacted that business. We're continuing to see softness in pass car in North America, some in the first half. We expect a little more in the second half. And then we're going through fairly significant truck SUV launches at the moment that will really come in, in '18. So we sort of got the costs in a lot of them, the wind-down of the older model to deal with this year and the expected ramp coming next year. So with respect to revenue, would expect that business to, primarily because of North America and the items I just discussed, have similar to slightly down revenue for the balance of the year. We will see margin expansion for the year, though, in that business. They've done a nice job with performance, so we're still expecting that business to be up about 30 basis points of margin on a year-over-year basis. So this quarter, a little flat just given the timing of some of the production cuts versus some of the launch costs. But on a full year basis, still expect margins to expand 30 basis points.

And do you want to talk about investment in automated driving in E&S?

Sure. So we're still on track for the $50 million to $60 million for the year. We see that ramping in the back half of the year. So about 60% of it will be spent in the back half. That's what you see coming out in the E&S margin. And in Q2, that was worth, as I mentioned, about 100 basis points of margin expansion in the E&S business.

Great. And just lastly, on the Powertrain business, any initial thoughts on expected capital structure for the SpinCo? And do you think you can sustain that kind of mid-single-digit growth rate even with maybe some stronger headwinds from diesel going forward?

Let’s start with the growth rate. We anticipate a mid-single-digit growth of between 4% and 6% for this business over the next few years. The gas technology and power electronics sectors are on a strong upward trajectory, supported by commercial vehicles this year. However, light-duty diesel remains down about 3%. Based on our observations, this aligns well with our guidance, and we do not expect this trend to change.

Yes, I’d like to add to that. Regarding growth, we've discussed light-duty diesel, which is certainly a challenge for us. We have nearly $1 billion in light-duty diesel business, with about $600 million of that specifically in Europe. We anticipate a decline there. While Joe mentioned the light-duty diesel growth rate, it's expected to decrease by low to mid-single digits over the next couple of years in Europe, leading to an approximate $300 million headwind in that segment. However, we believe that some of our light-duty diesel business may still grow outside of Europe, particularly in light commercial vehicles. Additionally, we've seen robust growth in heavy-duty diesel, medium-duty diesel, and Powertrain electrification, which more than compensates for the challenges in light-duty diesel. Regarding Powertrain and our capital structure, Joe can elaborate further. Our capital allocation strategy is among the best in the industry, and we believe it has served us well. We expect the Powertrain business to maintain a similar strategy moving forward.

Yes, Rod, over the course of the quarter, we have firmed up discussions with rating agencies and such. So it's consistent, I think, with our initial thoughts that this would be a high-quality sub-investment grade sort of, call it, BB-type company from across the board from the agencies, very much aligned with expectations. And we'd expect RemainCo post-spin to hold these ratings.

Okay, so consistent leverage on both sides? Or is there...

Yes, it's going to be about a left pocket, right pocket. I would think both businesses are right around 2x leverage, and we're basically shifting the debt burden to Powertrain in line with the EBITDA move.

Thank you for the detailed insights on the segment's positives and challenges for the second half. To summarize, the lower end of the organic growth guidance seems to be mainly tied to the reduced overall industry volume. Is that correct? It sounds like the rest was largely anticipated.

Yes, I believe that's the correct assumption, Joe, and it primarily pertains to North America. There are two main factors at play. Firstly, we're navigating a significant transition with our truck SUVs, which we've indicated will be uneven from quarter to quarter. We are currently utilizing both the old and new platforms, leading to some fluctuations in our quarterly results. However, I am confident that we will ultimately be in a strong position with the new platform. Additionally, we have another major truck launch planned for 2018 in our Electrical Architecture business. We are actively preparing for this. Currently, we are observing a slowdown in the North American passenger car segment, as highlighted by several business operating executives last week. We transitioned from the typical levels of summer shutdowns observed in Q2 to experiencing an increase in shutdowns, as we have been informed. This information is publicly available regarding their discussions. This accurately reflects our revenue guidance.

Okay, perfect. I found the disclosure on the bookings growth by RemainCo and SpinCo quite interesting. It appears that what you're defining as growth in key technologies constitutes a larger percentage in Powertrain compared to RemainCo. Looking ahead for both companies, will there be more of a catch-up for RemainCo? Is that partly because you've been accounting for that since 2011, while some of the electrification and active safety initiatives are more recent?

Yes, Joe, I think it underscores, quite frankly, the strength of that Powertrain business. And it gets back to the question that Rod asked with respect to capital structure, right, that at the end of the day, what's important for us is that we position this business to pursue the opportunities that are in front of it to appropriately service customers and to invest. And there's some terrific opportunities on the side of GDi and variable valve train and power electronics and others that are really going to drive growth there. As it relates to RemainCo, similarly, RemainCo is the larger base number in absolute terms. So you got to a bit careful of percentages. But when you look at the growth opportunities in active safety, 50% plus, when you look at infotainment growth in the area of 15% to 20%, when you look at high-voltage electrification on the Electrical Architecture side extremely strong. And then engineered components growth, you have very, very solid growth businesses within each business' portfolio.

Okay. And then Joe, one quick housekeeping. I think in the quarter, there was a $17 million reserve for unsecured creditors. I think that was a positive in the first quarter and then a reversal this quarter. Was that just timing or something different?

I think it's the other way around, Joe. We had originally accrued a higher number just based on our estimates. And then the settlement of $310 million was a little better than that. So you see the $17 million coming back in the second quarter.

Yes, no, that's what I meant. Sorry if I said it backwards, yes.

Kevin, if you could, Audi A8, we've been talking about that for a while and the Z-Fast controller on that and Delphi's involvement with it. I don't know that there's been a discussion of everything that you're doing on that vehicle and, in particular, everything that the Z-Fast controller is responsible for. Could you flesh that out a little bit?

Yes, I can walk through that. So listen, I've had a long-term relationship with Audi, as you know. We've been working on the Z-Fast controller with them over the last couple of years. As you know, it just launched and will continue to launch over the next year or so. And when you look at it, there's both what we call a Z-Fast light as well as a Z-Fast high-end configuration. So the light basically reflecting Level 2, the higher end reflecting Level 3. Content on it includes drivers seat sensor module. It includes camera and visioning technology. It includes a controller itself. It includes radar technology, ultrasonic sensing as well as some of our connections in Electrical Architecture systems. So it's a very robust, very robust product.

Okay, great. And then on a different note. As you're going across the two businesses, I know there's a lot of talk in the industry of disruptors coming into the space, particularly from a Tier 1 perspective. Can you talk if you're seeing any changes in that competitive landscape, if there's anybody new coming in there, anybody dropping off?

I'm familiar with that argument. Many of the companies that are supposedly entering the industry and shaking things up are actually partners we work with. It’s recognized by both technology firms outside and within the industry that there’s a significant complexity involved in performance and quality, particularly in how vehicles need to be designed to meet consumer demands such as autonomous driving, active safety, infotainment, and increased displays. All these features require advanced signal distribution and higher computing power, areas where many new entrants typically lack expertise. In fact, I would say that our discussions with customers show we are encountering fewer competitors in this space. If a company does not have a strong foothold in critical areas like active safety today, the extra advantage gained from being involved in Electrical Architecture puts us in a very unique position. This field is inherently complex and challenging to enter because it pertains to the vehicle's foundational design. We will discuss this more in-depth, especially at the Investor Day in September.

Could you share how Delphi's North America revenue is split between the cars and light trucks segment in the second half of the year? Additionally, how do you anticipate North America production will compare to Delphi's North America revenue for the second half?

In North America, Holdco is approximately 65% SUV truck compared to passenger cars. We've put significant effort into structuring the business this way over the past few years, and it remains strong. The bookings are actually somewhat stronger than that when looking at the truck programs we are introducing. As we consider the North American market for the year, we anticipate a decline of 2 points. I would describe Delphi's revenue growth as 2.5 points above the market, which is about 0.5 points better than that.

Great, that's helpful. Then as a follow-up and maybe for Kevin on Slide 12. When you think about Delphi's role in future automated mobility on-demand, how should we think about the different opportunities you have, both the vehicle, of course, and Level 4? But also, should we think about potential services revenue, fleet management? And kind of how should we size that up in terms of the long-term opportunity for Delphi?

The data opportunity in this industry is significant, and we have only just begun to explore it. We believe that mobility on-demand, particularly through fleets and mobility providers, presents us with opportunities both within the vehicle and in external applications. Currently, we are assessing these possibilities, which is why we are conducting smart city pilots with a select group of partners. We will share more details about our plans as they become more concrete.

Yes, I have two questions, one regarding accounting and the other more strategic in nature. The incremental growth in powertrain is very strong at 30%. First, you mentioned restructuring savings; when do we anticipate seeing those? Second, regarding powertrain, how significant was the commercial diesel volume, and did that contribute positively to the incrementals?

Joe, do you want to...

Brian, regarding the restructuring we've discussed, we expect the business to improve significantly in 2017, exceeding 100 basis points for the year. This is primarily where we will see the benefits from the restructuring. In the following year, we anticipate a return to our normal margin expansion, around 20 to 40 basis points. This year marks a significant change. Commercial vehicle revenues increased approximately 20% in the quarter, driven largely by strong performance in North America. This strength not only comes from North America but also reflects the quality of our customer base, as we serve major global players and platforms within our Powertrain business.

The second question is more strategic, focusing on the opportunities for RemainCo. While not specifically about Tesla, it's worth noting that their approach to data architecture, electrical architecture, over-the-air updates, and data harvesting seems to surpass that of most legacy companies. They are discussing goals aimed at reducing wiring complexity in vehicles while enhancing functionality. Can you provide insights into a few elements in this area? Specifically, over time, what is the content opportunity for Delphi given the increase in data and more centralized controllers? Is it realistic to anticipate fewer kilometers of wiring? Additionally, considering the significant need to re-architect the data in the electrical architecture of vehicles, where do legacy companies currently stand on this, and has it become a greater priority for them?

Yes, Brian, that's a great question. Tesla is an important customer of Delphi and our primary wire harness provider. We are familiar with their strategy. Regarding their current conversation about wiring in vehicles, they are trying to reduce the amount of wire in the car for simplification and cost efficiency from a manufacturing perspective. However, the need for more flex circuits and other cables to optimize that actually increases content in the near term. In terms of industry-wide architecture discussions, we are starting to engage more with European luxury original equipment manufacturers. There is a growing realization that everything integrated into the vehicle needs a different architecture to optimize signal distribution, increasing compute power and software becomes a more significant component of the overall value proposition needed to advance the technology and capabilities. This focus began with Audi a couple of years ago and the Z-Fast controller, and we are actively working on this with several OEMs today.

And in terms of timing when those would show up in bookings and eventually in program launches?

I believe Z-Fast will have more releases in 2019 and beyond. However, meaningful changes to the car's architecture will take over five years. During this time, we will see increased adoption of Level 3 and eventually Level 4 and Level 5 autonomous driving. Additionally, there will be more displays and content integrated into the infotainment system and cockpit.

My question is around the acceleration of organic and outgrowth from this sort of current 5% level to something better in 2018, 2020, as your key growth drivers become larger portions of the portfolio. And I think you've been pretty explicit with the 7 secular drivers from some of the analyst days. And I really just wanted to drill down into Electrical Architecture specifically. And kind of my question is, can we get back to this 4% to 5% type organic growth, which it seems to be the drag on the overall top line? We talked about the truck changeover. But in a 0% production environment, and I guess, we're still in the early stages of the EV ramp, is that possible? Or do we have to wait for sort of electrification to be further along to hit sort of that mid-single-digit for that division?

No, we won't wait that long. Even in 2018, you'll notice an increase in growth as we transition from trucks to SUVs and as passenger cars stabilize. This business will experience growth above the market average. This growth comes partly from our scale and our focus on higher-content vehicles like the Audi Q7 and GM truck SUVs. We’ll be introducing another major North American truck platform next year. So, growth will return in 2018. This situation involves the truck transition, which we anticipated and accounted for, alongside the decline in passenger cars in North America.

Yes, to clarify, the revenue growth in the second half of the year is significantly influenced by two specific factors related to North America and specifically to passenger cars and truck turnover. These changes are associated with a transition to a new platform, and they are short-term in nature. For 2018, we anticipate the business will return to its historical growth trajectory, which is typically around two points above the market. The E/EA revenue growth from the latter half of this year is quite specific. Regarding overall accelerated growth compared to the market, we will emphasize at Investor Day that we have strong bookings and are in a solid position. Our guidance moving forward remains a commitment to approximately five points of growth above the market, as we do not control some decisions made by Original Equipment Manufacturers regarding production schedules. We aim to avoid scenarios where we have to explain weaker-than-expected organic growth, and instead, we prefer to highlight instances where our performance exceeds our initial forecasts.

Kevin, no, that's really clear. I really appreciate it. I mean, should we at least think about, though, if the EA is growing, like you said, maybe in a normal environment, which starts next year after the changeover is 2 points above market, we do get a nice material step-up, though, as we hit the end of the decade when full EV and plug-in start to take off because of the acceleration and the content per vehicle pickup that you talked about.

Yes. I think if you look at our bookings and growth in bookings on key technologies, you look at revenue growth rates on key technologies, both within what will be RemainCo as well as Powertrain, again, I think it's fair to surmise and look at it and say that the profile of both businesses are higher growth. However, having said that, again, we don't control vehicle production schedules by OEs. And we want to limit the situation or the risk of ever having to explain to you folks why growth wasn't what we communicated.

First question, following up on Tesla. Besides the wiring harness, where you mentioned you're the primary supplier, could you confirm what else you do for the Model 3 that you might have disclosed or would like to disclose now?

Yes, it's principally Electrical Architecture.

Okay. Can you confirm that Elon's comment of taking the wiring length, and I know that's not the only to way to judge the value of the system, but let's say the kilometer down by roughly 50% from Model S to Model 3?

Yes. I think they're working to reduce the amount of length, I can confirm that. I'm not going to give specifics as to exactly how much.

All right. But you also supplied the Model S wiring as well, correct?

No, we don't.

I was wondering if, in a situation where we reduce wiring length, are you able to fully compensate for the value of the Electrical Architecture with the connectors? Or is it somewhat reverting back?

Yes. Listen, yes, I think, at the end of the day, from an architecture standpoint, we don't just provide wire, right? So I think at the end of the day, when you talk about what's going into a vehicle from a complexity standpoint, when you talk about everything that they're putting in from a technology standpoint, the reality is that requires more complex architecture, which is a mix of not only length of wire but type of wire, whether it's carbon fiber or copper as well as number of connection points. So as you look at content growth for Delphi on those vehicles over a period of time, that specific OE, content growth has actually increased from a broad architecture standpoint.

Kevin, just a couple of follow-ups, Foxconn. Do you have a relationship with that company right now on the automotive side?

No, no.

Is there any interest, and can you confirm if there have been discussions? Do we have a relationship?

We could potentially have a relationship, but I have nothing to confirm at this time. We do not have a relationship currently, and I'm not sure what your question is referencing.

Foxconn intends to manufacture cars, according to the Chairman. They want to produce vehicles. Regarding your last question, there are 145,000 employees at RemainCo. I was wondering what the total number would be if we included the nonconsolidated, mainly Chinese operations. I believe the 145,000 refers only to the consolidated employees, but I’m not sure of the broader figure.

Yes. No, that's total, Adam. And it's Joe. This for a lot of years. I mean, we're at this point, either own or majority control all the operations in China and have fully consolidated them. So that's the all-in number.

Just what spins into the Powertrain business comprise exactly what was in that division prior to the announcement of the spin or some product groups that sat in one division or another going to transfer between them prior to the spin? I asked just in part because I wasn't aware as the takeaway from Slide 10 seems to imply that the spin match will have at least more incremental, you clarified, leveraged electrification than the E/EA business. Maybe that was always the case, and I just underappreciated it.

No, Ryan. It's fine. We may have caused some confusion. The power electronics business, which focuses on powertrain-specific electrification, historically belonged to our E&S business. A little over a year ago, we moved that into our Powertrain business because our customers had more discussions with powertrain experts regarding power electronics. Given this shift in customer interaction, we felt it was more appropriate for it to be part of the Powertrain business and segment. Within Powertrain, we have the traditional product line, including gas fuel injection, diesel fuel injection, power electronics, and the aftermarket business, which mainly relates to powertrain products.

Got it, that's helpful. And in power electronics, to be clear, that has relevance not just for electrification of internal combustion engines but for pure electric vehicles, too?

Yes.

Yes, that's correct. It's the full product line. So your inverters, converters, those types of battery packs, those types of products.

Great. And then just finally, in light of all of this leverage we've been talking about to electrification of internal combustion engines of the spin and also to pure electric vehicles and then also combined with obviously the diesel headwinds, et cetera, on the light-duty side, what are the latest talks in terms of the SpinCo's kind of normalized organic growth relative to light vehicle production?

I mentioned earlier that we are very confident in the mid-single digit growth range. This projection takes into account the decline in light-duty diesel being balanced out by the increase in heavy-duty diesel, as well as growth in power electronics and gas technologies. To break it down, if you consider the approximately $950 million in revenue from light-duty diesel in Powertrain, around $550 million of that comes from passenger cars. This figure is relatively small when you put it into perspective. The remainder of light-duty diesel revenue comes from commercial vehicles, which are not facing the same political and social pressures as light-duty passenger cars. Therefore, if we anticipate that the $550 million will be halved over the forecast period, we are able to limit that revenue loss, and it becomes a fairly simple calculation.

Just quickly, you talked about the SUV transition for you guys. Is the new vehicle that you guys on or the replacement vehicle, is that of higher content?

It's a little bit more. Roughly the same, a little bit more.

And we expect it to grow over its life, too. They typically do. They'll add more content as the vehicle matures.

Got you. And then on the power electronics, I think, in Q1, you guys mentioned $600 million of wins. Is there a number you guys could offer for Q2? I know you guys gave a lot of numbers, but I just want to be sure what your power electronics wins were in Q2.

Yes, Q2 was strong as well. It was over $1 billion in power electronics bookings.

Got you. Regarding the long-term outlook on electrification, there has been considerable attention on solid-state battery technology and its applications in commercial vehicles. If a significant breakthrough occurs in the next few years, what impact do you think it would have on your Powertrain business? Or do you believe such advancements may not materialize as quickly as anticipated?

Yes. Listen, are you talking about Powertrain electrification? Is the question related?

Yes. What we are hearing is that Toyota has made a breakthrough with solid-state batteries that can significantly extend range and reduce weight. If this breakthrough is genuine, would we expect to see a quicker transition to electrification for both light and commercial vehicles? Additionally, what would be the impact on SpinCo?

Yes. Electrification is beneficial for both businesses incrementally. Both businesses gain advantages, whether it involves full electric vehicles, mild hybrids, or plug-in hybrids. This trend presents a positive outlook for both. The potential for increased content per vehicle far exceeds our current average content per vehicle, regardless of whether it has an internal combustion engine or relates to low-voltage electrical architecture in a standard car. As vehicle electrification increases, it positively impacts both sectors. There is an opportunity for acceleration, but one must consider infrastructure and other factors that may limit the extent of this acceleration. Regarding commercial vehicles, we see an opportunity for electrification, particularly in light commercial vehicles and possibly last-mile solutions for heavy-duty Class 8 commercial vehicles. However, given the current market dynamics, heavy-duty diesel is likely to remain dominant for a considerable time.

I think I caught that you mentioned your ADAS bookings being strong year-to-date at about $2 billion. Is that what I heard?

Yes.

Yes.

So that's pretty nice growth and acceleration over the past couple of years of about $1 billion, I think, you mentioned last year in total. Are you seeing an acceleration in the market for RFPs? Is your win rate higher or lower within that market? And then what level of ADAS are we seeing being quoted or requested the most from the OEM standpoint?

Yes, the level of activity has definitely increased. Our win rate on the programs we're bidding on is nearly 100%. This uptick in activity is largely driven by the democratization of active safety and greater penetration in established markets, along with faster adoption in emerging markets like China. We anticipate active safety to grow over 50% this year and continue at that pace next year. The levels we're seeing typically range from Level 1 to Level 2 plus, with some programs like Z-Fast offering Level 3 capabilities, although those are quite rare and mainly involve luxury German OEMs.

Understood. Within your response, you mentioned of the programs you're bidding on, can you widen that out a little bit? How much larger is the market relative to what you're bidding on today? And what's bifurcating what you are going after from what you are going after?

David, I'm not sure I can give you an exact number. It's obviously a big market. It's growing roughly mid-teens. Every OE is focused on it. And if you can imagine at a 50% growth rate in revenues and roughly the same from a bookings standpoint, we're getting all the business that we can pursue at this point in time when you look at allocation of resources.

Understood. And just the last one for me. Infotainment wins, you've had a lot. Over the past couple of years, you start to come in 15% to 20%. Is this all display audio product? Is it some embedded navigation? And what are you seeing, at least, from a bidding activity from the OEMs going forward?

Yes, it's a mix. We are seeing increased activity, particularly in areas where we have integrated cockpit controllers and have established the architecture. As Joe mentioned, these typically fall into the mid- to high-end category. It's about the compute power, graphics capability, and scalability. Therefore, we are concentrating our efforts on forming strategic relationships within the medium to high-end infotainment sector, where content is expected to expand and we will see more displays in vehicles.

Got it. Has there been any fundamental change in your win rates what you're seeing there, following the acquisition by one of the larger competitors last year by Samsung?

We have a solid win rate, and our bookings levels have been extremely strong this year. While opportunities are a bit more concentrated in the latter half of the year compared to previous years, we have significant prospects that put us in a great position.

Yes, the $1.2 billion win in Q4 that we announced for the German luxury OE was a conquest win on a very high-end system. We believe that our product offering and our expertise in centralized computing are contributing to our success in the infotainment space.