Aptiv PLC (APTV) 2014 Q2 法說會逐字稿

Good morning. My name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the Delphi second-quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn our call over to Jessica Holscott, Delphi's Vice President of Investor Relations. Jessica, you may begin your conference.

Thank you, Ryan. And thanks for joining Delphi's second-quarter earnings call. To follow along with today's presentation, our slides can be found at Delphi.com under the Investors section of the website. Please see slide 2 for a disclosure on our forward-looking statements, which we will be making on today's call, and only will reflect Delphi's current view of future financial performance, which may be materially different from our actual performance.

Joining us today will be Rodney O'Neal, Delphi's CEO and President; as well as Kevin Clark, our CFO. As seen on slide 3, Rod will begin with an overview of the quarter, followed by Kevin, who will review our financial results in greater detail, discuss our 2014 outlook, and then we'll open up the line for Q&A.

With that, I'd like to turn it over to Rod.

Thanks, Jessica. Good morning, everyone. Thank you for joining us today. Our continued strong operating performance resulted in record financial results. And as we have in the past, Delphi will continue to deliver on the strategic imperatives that drive shareholder value.

Let's move to slide 5. And before I get into the slides, just let me start with our perspective on the current macro environment. Overall, our view is that this year's global vehicle production will increase roughly 3% to just under 91 million units. I expect the US economy to remain relatively strong, which should translate into approximately 5% growth here in North American vehicle production.

Europe has continued to stabilize, and we expect roughly a 2% growth for the region. And we remain very bullish in the China market, which we expect to expand in the high-digit growth rates. The macro environment in South America, while it just continues to deteriorate, we expect vehicle production to decline roughly 15%. And, as a result, we are implementing further restructuring actions to reduce our footprint in this region.

Now let's just move on with the second-quarter highlights. As I said, we had a great quarter. Revenue was up 5%; OI was up 7%; earnings per share up 15%. We returned almost $300 million to shareholders; $220 million in stock repurchases, as well as dividends of $76 million. And we remain confident in Delphi and our outlook for 2014.

Let's go to slide 6. Now this slide is a validation of our ability to execute flawlessly, as we continue to receive accolades from our customers. So if you look at the chart, you can see a few examples of the awards that we've received this year from a very diverse group of customers. It's also important to note the number of awards from our fastest-growing region, China. China continues to be a very important part of our growth strategy, so recognition from our customers there is key. These awards underscore our technology and operational leadership in all areas of our product portfolio.

Let's go to slide 7. So we translate the success we have serving our customers into strong financial results and increased shareholder returns. In addition, as I've stated before, we further enhanced shareholder value through a very balanced and disciplined capital allocation plan. Into 2016, Delphi would generate roughly $8 billion of operating cash flow. We continue to invest in the business, execute with opportunistic share buybacks, increase the dividend aligned with earnings growth, and execute accretive transactions.

Slide 8. Our Q2 bookings were in line with the customer cadence for new business opportunities. We remain confident that we will achieve our target of approximately $26 billion for this year. Our second-quarter booking highlights include electrical architecture awards of over $3 billion; a powertrain award with Great Wall Motors for a diesel common rail in China; almost $1 billion of Electronics and Safety awards with a nice balance between infotainment and active safety; and thermal awards totaling approximately $500 million with several different customers, including BMW.

Slide 9. Our priorities for this year remain unchanged. And we are focused on one thing and one thing only, and that is increasing shareholder value. We do this through disciplined revenue growth, further optimizing our operating footprint, and aggressively rationalizing our cost structure, the introduction of advanced technologies that provide solutions to our customers' challenges -- all of which will translate into expanded marketing and increased earnings. And we continue to drive increased shareholder value by deploying capital in a very disciplined manner.

With that, I'll turn the call over to Kevin to go through the numbers.

Thanks, Rod. Good morning, everyone. I will begin by covering our second-quarter results, and then provide third-quarter and updated full-year guidance. Consistent with our prior earnings call, today's review of our actual and forecasted results will exclude all restructuring and other nonrecurring costs. The reconciliation between GAAP and non-GAAP numbers are included at the back of both this presentation and the press release for your reference.

So let me begin on slide 11 with a snapshot of our second-quarter financial performance, which Rod briefly touched on. Revenue was in line with our expectations, primarily driven by strong growth in China and North America, partially offset by significant weakness in South America. Reported revenue totaled almost $4.5 billion -- that's an increase of 5%. Adjusting for the effects of FX and commodity prices, revenues increased roughly 3.5%. That's about 2 points over Delphi's weighted markets.

Operating income increased to $547 million, and operating margins expanded 20 basis points to a record 15.3%, which translates into 15.5% EBITDA margins. Net income increased over 11% to $432 million, reflecting earnings growth and a lower quarterly tax rate. Earnings per share increased 15% to $1.42. And lastly, operating cash flow totaled $627 million. I'll cover each of these items further in my presentation, so let's move to slide 12, and I'll review second-quarter revenue in greater detail.

As I mentioned, reported revenue was in line with our expectations, increasing 5% to almost $4.5 billion. Price-downs of 1.4% and lower copper pricing pass-throughs totaled $73 million, representing almost a 2 point headwind to year-over-year growth. These headwinds were largely offset by FX, which added $79 million to revenues. And lastly, volume totaled $205 million, adding 5 points of growth.

From a regional perspective, European revenues were as forecasted during our last earnings call, largely unchanged from the prior year. The result of solid growth in our Electronics and Safety, and Thermal segments, partially offset by lower revenues in our Electrical Architecture and Powertrain segments, where lower automotive aftermarket revenue more than offset revenue growth with our OEM customers. North American revenues increased over 7%, primarily driven by very strong growth in our Electrical Architecture segment.

Revenues in Asia continue to be very strong, increasing 13%, driven by 15% revenue growth in China. And revenues in South America declined almost 24%. That's a little more than our original expectations, reflecting lower revenues across each of our segments as a result of the weakening macro environment. We'll discuss this region in more detail when we review our third-quarter and full-year outlook.

Slide 13 reconciles the year-over-year change in operating income, which increased $34 million or almost 7% to $547 million. The increase was the result of solid operating performance, flow-through on revenue growth, and benefits from FX, partially offset by price-downs, increased depreciation and amortization expense, and increased investments in information systems and engineering. As I already mentioned, operating margins increased 20 basis points to 12.3%, and EBITDA margins expanded 30 basis points to 15.5%.

Slide 14 includes our segment results. Electrical Architecture's adjusted revenue totaled almost $2.2 billion -- that's up just under 6% from the prior period -- driven by continued strong growth in North America and Asia, partially offset by lower revenues in Europe and South America. Segment operating income increased 12% to $298 million, representing 13.8% operating margins -- that's up 80 basis points from the prior year -- primarily as the result of flow-through on revenue growth and continued very strong operating performance.

Revenue in our Powertrain segment totaled just under $1.2 billion, roughly flat year-over-year, the result of solid revenue growth with our OEM customers, principally in Europe and North America, offset by lower sales of aftermarket products, driven by continued market weakness in Europe. Segment operating income declined slightly to $142 million, and operating margins totaled 11.9%, the result of increased investment in information systems and engineering, as well as depreciation and amortization expense, partially offset by solid operating performance.

In our Electronics and Safety segment, revenue totaled $743 million, representing nearly a 3% increase over the prior period, driven by very strong growth in Asia-Pacific, partially offset by lower revenues in South America, and the effect of the continued rationalization of our reception systems and mechatronics product portfolio, which represented roughly a 3 point headwind to this segment's growth rate. Segment operating income totaled $89 million, and operating margins decreased to 11.8%, the result of flow-through on sales growth, offset by increased engineering spend.

Thermal revenues increased 5.1% to $392 million, driven by solid growth in Europe, Asia and North America, partially offset by lower revenues in South America. Operating income totaled $18 million, and operating margins increased to 4.5%. That's up 130 basis points over the prior year, representing the third straight quarter of sequential margin improvement. We expect to exit the year with operating margins approaching 5% in this segment.

Turning to slide 15. Earnings per share increased 15% to $1.42, driven by increased earnings, a lower share count, and a 3 point reduction in the effective tax rate to 14%.

Moving to the balance sheet and capital deployment on slide 16. We continue to maintain a strong balance sheet. Debt totaled $2.5 billion, and cash decreased about $200 million from the beginning of the year to just under $1.2 billion, reflecting the normal seasonal investment in working capital and the timing of CapEx spend, and over $500 million of share repurchases and dividends. As a result, net debt increased to $1.3 billion, representing a net debt to EBITDA ratio of 0.5 times.

As Rod mentioned, we remain committed to executing a very balanced and disciplined capital allocation plan. The M&A environment has improved, and we continue to pursue value-accretive transactions. We've come close to executing transactions a couple of times this year. However, we remain very disciplined. And to the extent we cannot execute on a transaction that meets our strategic and financial criteria during the balance of the year, we will accelerate our pace of share repurchases from the second-quarter level.

Slide 17 details some of the assumptions underlying our updated 2014 guidance. As Rod has already discussed, we are forecasting global vehicle production of just under 91 million units. That represents a 3% increase in global production. Looking at our forecast by region, in North America, our guidance assumes a 5% increase in production. We are forecasting European production to increase roughly 2%. That reflects improvement in the Western European market, partially offset by a decline in vehicle production in Eastern Europe.

In China, we're expecting production growth of 9%. In South America, we are forecasting a 15% decline in production, due to continued deterioration of the macro environment, which is reflected in our third-quarter customer build schedules. In light of the continued weakness in the market, we've implemented restructuring initiatives in this region to further reduce our cost structure. For the third quarter, we are forecasting global vehicle production of a little less than 22 million units. That's up roughly 4% over last year or just over 3% on a Delphi-weighted market basis.

Turning to slide 18 to discuss our 2014 full-year guidance. We expect revenues to be in the range of $17.2 billion to $17.6 billion, reflecting 6% growth, roughly 2 to 3 points over the underlying market. Based on our year-to-date results and the economic uncertainty in South America, we currently do not expect our revenues to exceed the midpoint of our guidance range.

On a segment basis, we expect revenue growth in our Electrical Architecture segment to slow during the back half, reflecting the timing of the roll-off and roll-on of new vehicle programs. In contrast, revenue growth in our Powertrain segment is expected to continue to accelerate, driven by the ramp-up of new gas and diesel programs, partially offset by continued softness in the automotive aftermarket, primarily in Europe. Electronics and Safety revenue growth is also expected to accelerate, principally in the fourth quarter, driven by the continued strong growth of active safety products, which we foresee -- which we forecast to increase roughly 30% year-over-year, partially offset by the continued headwinds related to the rationalization of our reception systems and mechatronics portfolio that I mentioned a little earlier.

Lastly, we expect Thermal revenues to continue to grow 6% in the back-half of the year. We've increased our outlook for operating income to a range of $2 billion to $2.05 billion, which includes $600 million of depreciation and amortization expense, reflecting 11.6% operating margins and 15.1% EBITDA margins. We've increased our EPS guidance to a range of $4.95 to $5.10, reflecting the strength of our year-to-date earnings, a 17% effective tax rate, and a share count of 304 million. Cash flow before financing is expected to total roughly [$1.1 million], with CapEx still expected to be $800 million.

Turning to the third quarter, we expect revenues to be in the range of $4.2 billion to $4.3 billion, reflecting a 6% increase year-over-year. Operating income will be in the range of $450 million to $480 million, representing margins of 10.7% to 11.2%. EPS will be in the range of $1.10 to $1.18, assuming 303 million shares outstanding and an effective tax rate of roughly 18%.

So with that, we'd like to open the call to questions.

(Operator Instructions) Rod Lache, Deutsche Bank.

A couple questions. First, just on the outlook, as you're looking out to the back-half. If the Powertrain and the Electronics and Safety businesses accelerate in the back-half, what -- could you just talk to us about what that means for incremental margins? My recollection is that those -- the incrementals on those businesses are a little bit above the Company average.

Yes. Why don't I -- I'll start with it, Rod. Yes. When you look at the Powertrain business, especially relative to the mix of Delphi's overall business, the incremental margins generally are stronger. You'll see stronger flow-through on revenue in Q3, especially strong flow-through on Q4 -- or in Q4. A bit of that is going to be offset by continued investments in IT and engineering, but you will see stronger net flow-through on the back-half of the year.

Okay. Because it doesn't -- at least preliminarily, it didn't look to me like you guys were anticipating better incrementals in the back-half. Could you just talk a little bit about -- and I think you've said before, like $100 million to $120 million of savings from restructuring, and $90 million of higher R&D and IT spending. So, what's the sort of the cadence of that as you are working through those efforts this year?

Yes. I think partly -- what you partly have to keep in mind as you look at -- and maybe an easier way to talk about it is margin rates, operating margin rates, in the back-half of the year, principally Q3 and Q4, and the year-over-year change. As you know, in the third quarter, you have summer shutdowns in North America as well as in Europe. You slow down production and then ramp production back up. So naturally, you don't operate as efficiently as you do during your other quarters. So there's just costs associated with that ramp-down in volume and the ramp-up in volume.

I think as it relates to margin rates, you'll see sequentially a decline in margin rates in Q3 versus Q2, which is kind of the logical trend in our business. Then you'll see some very strong flow-through in operating margins in Q4. A part of that is volume-related; a part of that relates to restructuring and synergy benefits, as you talked about it; and a part of it, again, relates specifically to the mix of business.

Okay. And just lastly, could you just remind us -- the aftermarket business in Europe has been a pretty big drag. Size that business for us and how significant has that been? And any additional color on the types of things that you're looking for when you are assessing acquisitions. What businesses would you be targeting?

Sure. Well, starting with your last questions, in terms of M&A focus, it hasn't changed. It's really in and around Electrical Architecture, Powertrain, and Electronics and Safety. We have looked at and are looking at opportunities across each one of these segments.

As it relates to our aftermarket business, it's roughly a $1 billion business. About half of that revenue sits in Europe. A significant portion of those revenues relate to powertrain products, roughly 70% of revenues are powertrain products that we manufacture or we source and sell. And it has been, given the market conditions in Europe, it has been a business that we've seen, year-over-year, reduction in revenue over the last 12 months. We expect that trend to change beginning in the -- beginning in Q4 of this year, as we ramp up some new programs.

Thank you.

Brian Johnson, Barclays.

Yes, a couple questions. In terms -- can you just remind us of the rough impact of South America in terms of revenues mix by segment? And therefore, kind of when we think about the segment growth where South America has had a disproportionate effect?

Yes. Well, South America in total is about 5%, 6% of our -- of total Delphi revenues. We were down across each and every one of our segments in South America -- I'm trying to grab the numbers right now, Brian. But for Q2, our Powertrain segment was down a couple points. Our Thermal segment was down roughly 25%, 30% in revenues. E&S was down north of 30%, and then our EA segment was down roughly in line with the market, about 25%. Our biggest player when you look at revenues for South America -- roughly $200 million of revenues during the quarter, about half of that sits in our Electrical Architecture segment.

Okay. And kind of a second sort of related headwind question. You talked in EMS about the roll-off of mechatronics and other things. I guess two questions. One, when is that roll-off through? Is it something that continues through second-half and 2015? And second, are there other roll-offs to come in other segments that we should be aware of when doing growth walks?

Yes. It's a trend that we would expect to continue through the first-half of next year at roughly the same sort of rate that we've talked about this year, which is about a 3 point headwind. It's factored into our -- the revenue outlook, quite frankly, we've given to -- regarding E&S in the past. But we thought it important to give you added visibility to it. Within the E&S division, there are no other product lines that are of that size or have that impact. And really there, with respect to the rest of our segments, there aren't -- there are no product lines that have that sort of a headwind impact for trend.

Okay. And final question, a bit more strategic. Press reports confirmed by the parties that TRW and ZF are talking. It would appear to be outside of electric steering where there is overlap, largely a diversifying acquisition for ZF. In fact, some press reports said their key goal was to bulk up, become bigger, and therefore better able to resist price-downs from other -- from OEM customers. Just wondering how you -- does that change any way your M&A logic? What's your position on diversifying acquisitions versus deepening or further focusing the Delphi portfolio?

I think we've been pretty clear since we went public with our story about how we would approach acquisitions. And I think our strategy of bolt-ons is the right one, and not trying to get bigger for the sake of bigness. I think when you look at our price-downs at 1.4% this quarter, we've been in the 1.5% range. Almost since we began communicating that 1.5% to 2%, it's some of the lowest in the industry.

And the way we plan on protecting our position is not through size but through products that have deep and wide moats from a pricing perspective. And so I don't view our acquisitions as a defensive strategy, but ought to be an offensive strategy in terms of augmenting our product portfolio. So, I guess net-net, our bolt-on description of how we review acquisitions in the space. So, Kevin outlined powertrain, safety, electronics, software, those kinds of areas. It's still the main driver.

Yes, Brian. I think to the extent there is diversification, it would be in those product areas -- you know, Powertrain, Electrical Architecture and E&S -- in those product areas where we have strong technical capabilities. And it's expanding our product portfolio, or it's taking our existing product portfolio and moving it into markets that are relatively close to the automotive and commercial vehicle market.

Okay, thanks.

John Murphy, Bank of America Merrill Lynch.

Just a follow-up on M&A. Kevin, you alluded to being involved in a bunch of potential transactions this year. I'm just curious, if we think about the size of those transactions, I mean, are you looking at sort of MVL type of acquisitions as bolt-ons or as $1 billion revenue companies? Or are they much smaller than that?

Yes, it's a good question, John. It really ranges. I mean, from as small as a couple-hundred-million to as large as $1 billion or a little bit more.

But that $1 billion range is where you kind of would limit bolt-ons. I mean, as you get above that, it becomes a little bit more transformational -- I mean, not completely transformational, but that would be --?

Well, yes, I think it depends, quite frankly, on what's the businesses, what their product lines are, and the level of integration is. I would say to the extent we get -- approach a transaction that's above $1 billion or a bit over $1 billion, obviously, it's something we take a step back at and further scrutinize.

And you would be willing to take on a decent amount of leverage to do a larger deal if it made sense?

Well, I think we would be willing to increase our leverage as long as there was a path back down to deleverage, so that we could maintain our investment grade rating.

Okay. Then just a second question. If we think about South America, and you guys have alluded to restructuring down there, obviously, it's a small part of your overall business. I mean, how much restructuring are you going to be doing? What does it really entail? Does it really just entail downsizing? And really, ultimately, what is sort of the necessity for you to be in South America?

Well, I'll comment on the -- why don't I comment on the size of the restructuring, Rod --

Yes.

-- and you can comment on the strategy? You know, with respect to incremental restructuring initiatives in this quarter, the charge would be roughly $34 million. The bulk of that will relate to initiatives in South America, principally Brazil. It's primarily headcount reduction. Our plan is to take a fairly significant reduction in overall headcount in that region, in light of the weak volume environment to date and what we are forecasting to be a weak market on a go-forward basis.

And the reason we're there, obviously, is because of many of our global customers, particularly with some of their global platforms, we have to service in that region. So that's why we're there. And it has been, it will continue to be an important market. But as we all have seen over the years, it does tend to come and go; it's a very big piece. And so, we've just -- we can't exit, but we can minimize our presence. And that's where we are, particularly until these governments kind of do some things to make their fiscal policies up at more -- more conducive for capital influx. So that's why we're there.

Okay. And then just lastly, if you look at the margins in the quarter, I mean, they were the best that we've seen in any quarter within the last four or five years. And there's always this question of, do you reach for some asymptotic limit on the high-end on margins, and you just keep going higher and higher? Do you think, at this point, you are sort of inflaming any attention from your customers? Or is there the potential for continued margin expansion, particularly as the mix of your business improves to higher-margin product?

Well, thanks for -- first of all, for recognizing the margin expansion. And I think all we're doing is proving out what we said we would do, which was, we felt our peak margins -- although that wouldn't be where we would say that would be our end destination -- we thought we could get to, you know, the 16% range. And I believe we said we'd get there by 2016.

And so, all you're seeing is the movement in the direction that we said we'd do. The team is doing an excellent job of executing on the plan that we've laid out. And so, I still think there is room for expansion, particularly as I go through and visit the various regions and parts of our Company. As good as we are, there's plenty of improvement for us to do better as a result, so we're not maxed out in terms of being able to bring more cost out of this machine. So -- and, so I feel good about that.

In terms of our customers looking at our margins, to be quite frank, in my dialogue with the customers, they are pretty complementary in the way we run our business. And they are not as focused on our margins as they are on our market costs. So they don't even -- we have a very competitive product portfolio. And so I would -- I don't see the pressures of being any more because we make money. I mean, after the crisis, I think there is an appreciation of a supplier that can create, given this return. So, we don't see any more pressures than we ever have in terms of the commercial line of scrimmage.

That's great news. Thank you very much.

Yes.

Itay Michaeli, Citigroup.

Just on the Electrical Architecture, another strong margin quarter. I think you're north of 16% now in the year. Maybe talk a little bit about that with the drivers there. Maybe how much of it was a favorable regional mix with Asia being strong? Then how should we think about 2016? I mean, as potential upside to your previous target of 16% margin in 2016?

Listen, Itay, it's coming. The Electrical Architecture business continues to -- as Rod's comments earlier, execute extremely well. We are getting the benefit of flow-through on volumes. They are operating extremely well. We are getting the benefits of improved mix, partly as a result of the MVL acquisition and the impacts of selling more connectors; certainly delivering on the MVL synergies. So it's a basic story of a combination of delivering on the revenue growth and the operating execution.

You know, I think as we look at our longer-term margins in that business, it's like we've got to revisit where the longer-term targeted margins are. I think we're there; we'll update people on that next year.

As it relates to margins by -- you know, you talked about the mix of revenue growth and profitability -- again, when you look at Delphi and you look at revenue mix by region, the profitability of our margins are actually fairly tight around the corporate average. Given the weakness in South America this last quarter, margins there certainly have deteriorated. But at a more normalized basis, they tend to group around the corporate average. And that's true with the Electrical Architecture segment. So it really is a regional mix.

Great. That's very helpful. And then just secondly on slide 13, just on the net performance versus price-down. I think this is maybe the third quarter in a row where that relationship has been slightly negative. With the restructuring you're doing, do you expect that to normalize in the next several quarters or even couple of years towards a sort of even? Or do you think you can kind of grow to your margin targets with that kind of remaining slightly negative?

Yes, you're going to see -- you'll continue to see improvement, especially in the back-half of the year. You've got to -- you have to remember, we talked about spending incremental dollars on information systems and engineering growth-related investment. On a year-over-year basis, that chart includes about $10 million of that. And if you recall, last year, we talked about some one-time items in E&S and our Powertrain segment that totaled roughly $10 million. I think if you normalize for those two items, you get much closer to closing that gap between price-downs and performance.

Great. And then just one last quick housekeeping. Any sense of what the backlog contribution was in the first-half of the year? I think the $800 million or so full-year?

You know, I haven't looked at it. It would be weighted towards the back-half of the year, quite frankly, just given timing of launch schedules. Roughly -- you look at it roughly, 65% or 70% of our launches happen in Q3/Q4 versus the front-half of the year.

Perfect. Great. Thanks so much, everyone.

Ryan Brinkman, JPMorgan.

Thanks for taking my question. Regarding the Thermal business, it looks like the improving revenue trend that emerged in 4Q has continued, and EBIT margins were actually up there, I think, 130 basis points after declining year-over-year for something like eight of the last nine quarters. So can you talk about what is driving this improvement trend and how you expect it to progress? And then maybe separate to that, if you can sort of remind us of your latest thoughts relative to core versus noncore for Thermal, and if that is impacted at all by the improving performance?

Yes. I think what you're seeing in the Thermal improvement is what we said would occur. One, the top line would improve because the team had achieved a considerable amount of diverse bookings in the past, and now that that's starting to roll on. And so what you're seeing is the top line expanding as a result of the business rolling on.

And then, you get the multiplying effect of improved operational performance. And so the team is doing an excellent job of removing cost, executing on the launches. And synergistically with the top line moving and the costs coming out, you see things moving north. So, we expect that pace to continue its northward trend. And as you recall, our objective is to be double-digit EBITDA margins in that business.

So, if I can add to that, Ryan. As I said in my prepared comments, we'd expect to exit the year with operating margins at or around roughly 5%; EBITDA margins of roughly 8.5%. So, we expect to continue to see some improved performance in that business, partly driven by volume growth, partly driven by just solid execution.

Okay. Great. Thanks. And then just on the new business bookings, can you kind of talk about the fact that they are not higher year-over-year? Is this maybe just a function -- I mean, is it a function of maybe being more selective relative to the margin profile of the business you're willing to take on? Or are you not really changing anything there, and it's just due to some sort of normal lumpiness or variability in the face of bookings?

I think it's all of the things you talk about. And so -- and it's just a cadence, the normal cadence of what we're seeing. But we are -- there is elective, because it's very important to be that in this business. And so, it's all of the above, but primarily, it's just the cadence of the programs of how they are rolling out this year.

Okay. That's fair. And then just last question then on organic growth versus industry. Obviously, you're outperforming in North America and Asia, in line with South America. Europe was a bit below again. In the past, you've pointed to some explanatory factors there, such as the greater portion of commercial vehicle aftermarket exposure. Sometimes you've talked about change in mix of diesel versus gas.

Can you just kind of share how those factors fared during the quarter and how they might fare going forward? And then, if possible, too, I mean, can you just kind of cut to the chase, sort of say what your organic growth is for the OE light vehicle business in Europe -- which is, what, maybe like 70% or so, I think, of your revenue there? -- how that trended maybe versus the industry was up 2% or so for IHS?

Yes. I -- make sure I get all the questions there. So I -- listen, I think when you talk about headwind in Europe for the quarter, really a couple -- the primary aspect for us as a business was the automotive aftermarket weak market. Our revenues were not strong in that market. We talk about -- that's a segment that -- or a division that has roughly $500 million of its $1 billion of revenues in Europe, so we were affected by that slower market.

You exclude automotive aftermarket, we grew roughly at vehicle production in Europe. So, OEM growth was at production; slightly stronger than that in our Powertrain, our E&S and Thermal businesses; a bit below that in our Electrical Architecture business, when you look at customer mix.

Great. That's very helpful to know. Thank you.

Ravi Shanker, Morgan Stanley.

Just a couple of questions on E&S again. So, the year-on-year step-down in margins, and even the revenue growth, a little bit below what you were expecting, was that entirely attributable to the mechatronics business? And can you give us a little more color there on why that transition is happening and what the margins of the business are like?

You're asking was the growth for our -- or the year-over-year growth in our E&S business was exactly in line with what our expectations were as we headed into the quarter.

Okay.

I would say it was a bit stronger in all regions with offset in the -- in South America. So, netting to coming in line. The headwind as it relates to reception systems and mechatronics was as forecasted, as expected. You know, so I would say no surprises at the end of the day there, Ravi.

Okay. And why is the mechatronics transition happening? Is that you giving up that business because you think it's not necessarily value-added? Or is there something happening on the customer side?

Well, as a reminder, one of the things that we said we were doing with that business and its portfolio was rotating away from the traditional more hardware and more software or beginning more sensing those areas. And so it's really part of the portfolio realignment to increase margins, and above all, drive return on invested capital. And remember, I think I use the adjectives that we felt that the return on invested capital in that business would be breathtaking. And I think it's proven to be true. And so that's really, that's -- all we're doing, Ravi, is continuing that journey. And we're just doing what we said we're going to do.

That's a good point, Rod. So if we were to look at the E&S business, is it possible to quantify what percentage of revenues today comes purely from software? And what the margin on that portion of the business might be?

A lot of the software is embedded into the product. In terms of like a -- the pure play, that's just starting. Do we have the pure --? No, we don't really do it that way. Yes. It's embedded in a lot of our products, but I guess we can come back to you on it, Ravi. What do you think? Do you want to come back to it?

Yes.

A lot of it's embedded in our product, but instead of us producing some of the hardware now, we just buy it and we create the value through the software and make it work. And so that's what you're seeing a lot in that portfolio in this business. We'll come back to you in terms of what the software number is. Okay?

Sure. Sure. And I just had a couple of quick follow-ups. Kevin, just to clarify what you said earlier in the call, when you have the new launches in the Powertrain business come in, in the second half of this year, especially in the fourth quarter, you don't expect those new launches to be margin dilutive, right?

No, we don't. We don't.

Okay. And then just lastly on the tax rate, you obviously had an important development a couple of months ago. Your press release kind of made it sound like you weren't sweating what was happening with the IRS. Can you just give us an update here and what kind of catalysts we should -- or waypoints we should look out for?

Well, yes, listen. We feel as though we have a very good position. We feel very strongly about the nature and the structure of the transaction. We expect the appeals process to start at some point in time in 2015, hopefully early in 2015. It will take one to maybe two years; hopefully, it's shorter versus longer. In terms of how we are managing our business and our capital allocation strategy, that process has no impact on it. So, we'll continue operating as we operate today.

Does that answer (multiple speakers) --

(multiple speakers) Okay. Thank you.

Did that answer your second question?

Yes, yes. That's very helpful. Thank you so much.

Patrick Archambault, Goldman Sachs.

You know, I guess just there's been a lot kind of discussed on the margin trajectory. But you know, I guess tying things together sort of in a first-half/second-half view, it does look like your -- kind of the incrementals that you have are accelerating in the second-half, implied by your guidance. That seems to dovetail with what's kind of been talked about here. But I just wanted to make sure we have kind of the right puts and takes.

It sounds like you do have some of this restructuring that will help both ongoing and then some of the new stuff from South America. You have the new launches in Powertrain and then potentially some mix tailwinds as well, if I'm not forgetting anything. So I just wanted to make sure I was thinking about that correctly as we think about modeling in the back-half.

Yes. I think if you talk about flow-through, okay? -- flow-through, incremental eye on incremental sales dollars, second-half versus first-half, you will see incremental flow-through. Most of that from a timing standpoint will be in Q4 versus in Q3, because Q3, just the natural summer shutdowns in North America and Europe affect operating productivity and performance. But when you look at back-half versus first-half, that certainly is the case; most of it will be weighted to Q4.

Then kind of that catalog of items there that I just cited are pretty much the right ones to be thinking about?

They're the right ones to be thinking about.

Terrific. And then last one from me is just -- your commentary on M&A, it sounds like, from what you said, that you had a few things that got close and that kind of fell apart at the altar. What -- why is that? Has it just been the dispute on valuation? Have things become more difficult to close, given the run in some of these shares? Or were there other issues at hand? And I guess how are you feeling about closing on your targeted levels of acquisitions now relative to maybe a quarter ago?

You know, once we got close on, in reality, it ultimately didn't end up being about value, but ended up being about potential contingent liabilities that could come with the business -- which, I guess, at the end of the day, gets factored into value, with a view on risk of those liabilities versus the view that another buyer would potentially take.

Got it. And then just how do you assess your ability to close some of these acquisitions now -- I mean, that doesn't sound like a fundamental thing. That sounds actually quite stock or company-specific. (multiple speakers)

Yes, yes. (multiple speakers)

So how are you assessing the environment now?

It's no different. Again, we're very reactive. We're looking at a lot of opportunities. We have strategic and financial threshold metrics that we hold out there and use to evaluate opportunities. They need to meet those parameters. I think, given where we are at this point in time of the year, is probably unlikely that we'd close a transaction this year. I think it's very possible we could announce something.

Okay, great. That's very helpful color, guys. Thank you very much.

Thanks, Patrick.

Joe Spak, RBC Capital Markets.

Hi, Joe.

Joe's line may have dropped. Joe, if you could just re-queue by pressing star-1? All right, Joe Spak, your line is again open.

Hi, can you hear me. (multiple speakers) All right. Sorry about that. And so just two points of clarification. One, on the confidence in the Powertrain business not being margin dilutive, is that a function of that some of that business has already started up and it's just continuing to ramp a little bit more? Or is it really that this is some higher-margin business or potentially mix-related that that's not margin dilutive? Because if it is sort of new business, I would've thought that the incrementals were a little bit lower as that business starts up.

Yes. We've talked about this in the past. In reality, we are always launching programs. We launch over 1000 programs a year. They tend to be back-half-weighted, but you could argue we are in perpetual launch. You're right in terms of getting business ramped up, it tends to not be as profitable as business you've been running on for a period of time. But just given the puts and takes in our business, it's not -- they're not programs that we would call out as margin dilutive. They are programs, quite frankly, that we did start launching late in Q2. And we're continuing to see ramp up in volumes, so there's partial benefit from that.

But all of the launch -- what you call inefficiencies, are in the numbers that Kevin outlined. So, it's (multiple speakers) --.

Okay. Thanks. That's helpful. And then just on Thermal, good to see some traction there. And it sounds like a strong exit rate for the year. I guess just two questions related to that. Should we -- is there -- it seems like, historically, there was a little bit of lumpiness in there. So is it -- should we see sequential improvement from here to the fourth quarter? And then as we think about 2015, is that exit rate a solid base to think about that business?

Yes, I think just given, again, the summer shutdown pattern in North America and Europe, I'd expect margins in the Thermal business to be flat to slightly down Q3 versus Q2, and then up significantly in Q4.

Okay. (multiple speakers) And then in terms of --?

(multiple speakers) As you head into 2015, it's a business that will continue to have solid revenue growth, and as a result, solid margin expansion on flow-through of volume as well as operating execution.

Okay, great. Thanks a lot, guys.

David Lim, Wells Fargo.

Just wanted to ask a quick question about commercial vehicles both on and offroad. Just wondering, how did CV affect the quarter? And where do you see it going? And just to remind us, is CV revenue heavily weighted to powertrain?

Yes. Yes. CV revenue is heavily weighted towards powertrain or heavy-duty diesel business.

And (multiple speakers) -- yes, go ahead, sorry.

Your question was -- is, what was the impact on the quarter?

Yes. And going forward, your thoughts there.

Sure. Well, the CV market, the market in and of itself and production schedules, where it ended up relative to where we expected it to be as we entered the quarter, the market was weaker principally in Europe. Asia was a bit weak as well as South America. We saw high-single-digit growth in our heavy-duty diesel business, even in light of that. So we see a continued ramp-up of revenue in that product category.

We expect it to continue during the balance of the year. A part of it is the launch of the new programs that we've touched on, part of what's driving growth within our powertrain product portfolio. But for the full-year, we'd expect the CV market to be not quite as strong as we expected it to be three or four months ago. It's growing but not growing at the rate we originally estimated or the industry originally estimated.

And any preliminary views on 2015 related to the commercial vehicles?

Not at this point in time.

Thank you very much.

Take care.

Emmanuel Rosner, CLSA.

I wanted to ask you a question about your outlook for the ability to keep outgrowing the market growth. Obviously, this quarter, we saw maybe a couple of points of performance versus your geographically-adjusted global production. Seems like you're guiding to about sort of like the same maybe 2, 3 points for, for this coming quarter. Yet at the same time when you look at sort of like the $800 million backlog, that would have been probably more like maybe 5 points [above] performance.

But more importantly, looking mid-term, we could -- the backlog numbers we're given would probably translate into 6, 7 points. So I'm just curious, are we going to start seeing an inflection point later in the year, so let's say maybe fourth quarter this year, where things are going to start picking up meaningfully in terms of your ability to outgrow the market?

Yes. I think what you'll see in Q3, principally in Q4, is growth relative to market increasing in comparison to where we were in the first half of this year. So, you'll see a continued acceleration in that growth relative to market.

And that's principally a function of the timing of the launches of new business?

Timing of new programs, customer mix. Yes, it's a few items. But principally timing of new programs.

Okay. And then one final one from me. On M&A, you've obviously given a lot of good color. One of your earlier prepared remarks was saying that the environment has improved. Can you maybe tell us sort of like in what way? Is it just in terms of number of opportunities you are being presented with? Or do you generally feel like there's something else out there that's getting better?

No, we would say it's opportunities. There are more opportunities that are being presented. Sellers are more willing -- or potential sellers are more willing to have discussions about separating themselves from assets.

Understood. Thank you.

Our last question comes from the line of Colin Langan from UBS. Your line is open.

Oh, great. Thank you for taking my question. Yes. Any color on the pace of repurchases? You mentioned you think it's likely you may -- you probably won't close a deal but you may announce something. I mean, that does give a lot of time and cash flow. Should we think repurchase should pick up in the second half then, if you're not going to be closing on a deal?

Yes. I think, Collin, it's a good question. It will. We bought $220 million in Q2. I'd expect, without closing on a transaction, for that pace to increase slightly. Maybe we run at a rate of about $250 million a quarter, assuming we're not going to close on a transaction this year or early next year.

Okay. And then looking at the powertrain margins were down year-over-year, I'm not sure if I missed this in your comments, but was that partly reflecting the commercial and legal settlement last year? Was that the segment where that was a help last year?

Yes. There's a little. That was about $5 million. So there's a little bit of that. And then the other piece is just net-net flat sales.

Okay. And just lastly just to kind of -- your organic growth is only 3% this quarter. It isn't too far from global production. Can you just remind us what are the reasons why you have this -- you're not outperforming the way you would normally? And what are the main factors? And really, more importantly, when those maybe subside going forward?

Well, I think organic growth is 3.5%; our weighted markets was about 1.6%. So we grew above markets. I guess if you want to look at global vehicle production and assume we're on -- our mix matches global vehicle production, you could have a different view. But that will vary each and every quarter.

The big headwind to growth rate, quite frankly, this year has been the aftermarket business for us. That's been a significant headwind. South America clearly has been a market that's been challenged and our revenue has been challenged there. But, in our view, is relative to revenue growth, we are in line with exactly where we told people we'd to be at this point of the year, and you'll see us continue to accelerate in the back-half of the year.

Okay. All right. Thank you very much.

We have no further questions on the line. I would like to turn our call back over to Jessica Holscott.

Great. Thank you for participating in today's call. As always, we'll be available for any additional questions you may have after the call today. Thank you.

And that concludes Delphi's second-quarter 2014 earnings conference call. Thank you for joining. You may now disconnect.