Aptiv PLC (APTV) 2015 Q2 法說會逐字稿

Good morning. My name is Calia, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Delphi second-quarter 2015 earnings conference call.

(Operator Instructions)

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

Thank you, Calia, and thanks for joining Delphi's second-quarter earnings call. To follow on with today's presentation, our slides can be found at Delphi.com under the investor section of the website. Please see slide 2 for our disclosure on forward-looking statements, which we'll be making on today's call, and only reflect Delphi's current view of future financial performance which may be materially different from our actual performance. In addition, today's call will include a discussion of a transaction that is governed by the UK Takeover Code. As such, Delphi is limited as to the information that it can disclose on that transaction. Thanks for your understanding.

Joining us today will be Kevin Clark, Delphi's CEO and President; Jeff Owens, our Chief Technology Officer; and Mark Murphy, our CFO. As seen on slide 3, Kevin will provide an operations update as well as an overview of the quarter, and then Mark will cover the financial results and 2015 outlook in more detail. He will then pass it back to Kevin and Jeff who will cover some of our recent portfolio changes. With that, I'd like to turn it over to Kevin.

Thank you, Jessica. Good morning, everyone. Thanks for joining us. Before Mark gets into our financial results, I'd like to provide some context around our record second quarter. Beginning with the macro environment on slide 5, vehicle production in North America remains solid and in line with our prior outlook. Europe is trending higher since our last earnings call. As widely reported, China market growth has slowed, and is reflected in our current outlook for vehicle production growth. However, we remain bullish regarding the China market and expect to continue to outpace growth in this market by 8 to 10 points with our high-technology portfolio of GDI, active safety, and infotainment products that are aligned with the trend for increased vehicle content. Lastly, the South American market continues to weaken.

Taking a step back, solid growth in North America and an improving outlook for Europe is expected to offset a portion of the softening market in China and continued weakness in South America. Other macro factors, principally lower raw material prices, are helping to counter a portion of the negative translation effect of the stronger dollar.

Moving to our second quarter highlights on slide 6. We delivered very strong financial results. Revenue growth was more than 4 points over market, operating income totaled a record $526 million, and operating margins expanded 80 basis points to 13.6%, reflecting EBITDA margins of 17%. During the quarter, we completed several portfolio actions including the sale of our Thermal business, strategic investments in Tula Technology and Quanergy Systems, and agreements to acquire Ottomatika and sell our Reception Systems product line. In addition to these actions, we just announced an agreement to acquire HellermanTyton. We will touch on each of these portfolio moves in greater detail a little later.

Now with the second quarter complete, we are confident in our full-year outlook. 7% revenue growth, roughly 6 points over market, operating margins reaching 13%, and free cash flow of roughly $1.1 billion, providing us with tremendous flexibility to increase shareholder value.

Slide 7 covers new business bookings, which came in at $5 billion during the quarter bringing our year-to-date total to $15 billion. That's $4 billion more than last year, putting us solidly on a path to exceed our prior-year bookings amount. Major bookings include Conquest wins with Volvo in Asia for electrical architecture, Fiat Chrysler in North America for infotainment, Great Wall in China for GDI, and a BMW award in Europe for active safety. The right side of the chart reflects the geographic mix of our year-to-date bookings. A few larger awards in North America skewed the regional mix, but we expect future bookings will continue to reflect a more balanced regional distribution of revenues.

Now in addition to winning new business, customers continue to recognize Delphi for our technology and execution. Slide 8 includes a list of customers that Delphi recently received awards from. Notably, earlier this month, we received the VW Group award in the category of global champion for our new generation infotainment system. With this system, Delphi and VW are among the first to bring both CarPlay and Android Auto to mass market vehicles. These awards are validation that Delphi is delivering leading-edge technology solutions with flawless operational execution.

I'd now like to turn the call over to Mark for a more detailed look at our second-quarter financial results. And then Jeff Owens and I will talk about the strategic investments we've announced which will help drive our future results. Mark?

Thanks, Kevin, and good morning, everyone. Consistent with prior calls, today's review of our actual and forecasted financials exclude restructuring and special items. The reconciliation between GAAP non-GAAP is included in the back of this presentation in the press release. As Kevin mentioned, the sale of the wholly-owned portion of our Thermal business closed in the quarter for which we received $660 million in proceeds and booked an after-tax gain of $285 million in discontinued operations. With the Thermal business reclassified for all periods presented and reflected as discontinued operations, my review will address the continuing operations of Delphi.

Slide 10 provides a snapshot of our second-quarter financial performance. Reported revenue totaled $3.9 billion, up 4% on an adjusted basis which is 4 points over market. Second-quarter operating income increased to $526 million, the highest ever reported by Delphi. Operating margins expanded 80 basis points year over year to a record 13.6%. Earnings per share were $1.34, up approximately 11% excluding the effects of currency and commodities. Adjusting for year-over-year tax differences, EPS growth would have been approximately 16%. During the quarter, we returned $385 million to shareholders through dividends and share repurchases.

Slide 11 provides greater detail on revenue. Revenue of $3.9 billion reflects $378 million of year-over-year currency and commodity headwinds partially offset by strong underlying growth. In Europe, adjusted revenue increased 4% or 3 points over market. Growth in Europe was driven by strong powertrain volume growth and new program launches in electrical architecture. With program launches across all segments, we project Europe growth to accelerate in the second half. North America adjusted revenue increased roughly 5% or 2 points over market primarily driven by our powertrain and electrical architecture businesses. Growth in China was 8% or 8 points over market and driven by gas direct injection, infotainment, and active safety launches. South America performed better than market but was still down on continued underlying market weakness.

Slide 12 walks the year-over-year change in operating income to a record $526 million, up 11% excluding currency and commodity effects. Operating margins expanded 80 basis points year over year to 13.6% primarily due to volume leverage and continued productivity gains.

Slide 13 covers our segments. On an adjusted basis, electrical architecture's revenue increased 4% or 4 points over market with growth in North America, Europe, and Asia. Powertrain, gas, and diesel program launches drove growth up 7% or 7 points over market but especially strong growth in North America and China. Electronics and safety revenue increased 2%. With product launches in active safety and infotainment, we expect electronics and safety growth to accelerate in the second half.

On operating margins, electrical architecture expanded margins 70 basis points to a record 14.3% on continued growth and operating excellence. Powertrain margins increased 120 basis points on strong growth and operating performance. Electronics and safety expanded margins 70 basis points due principally to operating performance.

Turning to slide 14, operating income growth and share repurchases largely offset year-over-year tax effects. EPS growth was approximately 16% excluding currency and commodity and tax differences.

Turning to our outlook, slide 15 provides our full-year guidance assumption. We expect global vehicle production growth of 1% to 2% reflecting continued solid growth in North America, stronger Europe volumes, and slower China growth. In China, we are forecasting growth of 4% for the year with growth rates returning to approximately 6% in the fourth quarter. Our guidance maintains $1.10 euro rate.

Our third-quarter and full-year guidance is on slide 16. We are reducing our full-year revenue outlook $100 million. On $100 million lower revenues in China due to changes in customer production schedules and approximately $50 million primarily associated with the divestment of our Reception Systems business, which is largely offset by higher Europe volumes.

For the year, we expect revenues of $15.2 million to $15.6 billion, a 7% adjusted growth rate, and 6 points over market. OI is projected to be in the range of $1.98 billion to $2.03 billion. Our EPS estimate is $5.30 to $5.40 with a projected tax rate of 16%. For the third quarter, we expect revenues of $3.7 billion to $3.9 billion and 9% adjusted growth rate or 5 points over market. We expect OI to be in the range of $460 million to $480 million and EPS of $1.25 to $1.35.

In summary, it was a strong first half of the year with record operating results in the face of significant currency headwinds. In the second half, we project growth to accelerate across all segments and consolidated year-over-year margin expansion to continue. At this time, I'll turn it back over to Kevin to talk about our recent investments.

Thanks, Mark. Now I'd like to shift the discussion to our portfolio actions, each of which is in line with our capital allocation strategy as outlined on slide 18. We intend to maintain our investment-grade ratings through the cycle. We are going to do this while deploying capital to fund investments and acquisitions and share repurchases, all of which will drive shareholder value. Our focus continues to be on investments and acquisitions that strengthen our competitive position, have strong management teams and solid operating systems, and have strong financial metrics. So I will now turn it over to Jeff to briefly talk about a few of our recent investments.

Thanks, Kevin. Slide 19 shows our history of delivering value enhancing transactions. In addition to the HellermannTyton transaction Kevin will speak to in a minute, most recently we've completed investments in two technology companies, divested of our Reception Systems business, closed on the Thermal divestiture, and acquired Ottomatika, the advanced automated driving software company we announced an investment in last year. In an effort to continuously expand Delphi's technology capabilities, we've made strategic investments in the three companies noted on slide 20.

Tula Technology is a provider of engine control algorithms and software for cylinder deactivation. By combining Delphi and Tula's engine control system software, we can increase fuel efficiency and cut emissions without sacrificing driveability or performance. Cylinder deactivation has been used by automakers for some time to meet ever increasing regulatory demands for increasing fuel economy. It's always been accomplished by shutting down a bank of cylinders, a six-cylinder running on three cylinders, for example. Tula's dynamic Skip Fire software allows the engine to run on however many cylinders you need at the time. Six cylinders can run on five or three or two, whatever, and it's invisible to the consumer and increases fuel efficiency by up to 15%.

In addition to Tula, Delphi has entered into a strategic partnership with Quanergy Systems, strengthening its ADAS and automated driving applications. Quanergy and Delphi will collaborate to bring a range of low-cost, high-performance solid state LiDAR products to the automotive market that will provide an affordable and high-volume vehicle perception solution to Level 3 and 4 automated applications. The prospect of a lower cost ADAS solution could bring wider-spread adoption of the life-saving active safety technology.

Delphi has also completed the acquisition of Ottomatika, a spin-off of Carnegie Mellon University and the leading provider of decision network software for automated vehicles. Previously, Delphi had completed a strategic investment in Ottomatika, and the parties had entered into a joint development agreement. By combining Ottomatika's automated driving software with Delphi's active safety systems, the two companies delivered a technology platform for Delphi's automated driving test vehicles that enables the vehicle to make human-like decisions. This work resulted in several successful automated driving demonstrations including the longest automated cross-country drive in North America earlier this year. The acquisition will enable Delphi to create an advanced driver assisted systems engineering center of excellence in Pittsburgh and further cooperate with Carnegie Mellon University in developing next-generation automated solutions in sensor fusion for intelligent driving.

Ottomatika and Quanergy both complement and enhance Delphi's technology capabilities and allow us to further accelerate work on automated driving as we take our software development to the next level. And Tula's proprietary engine control software could be a game changer, enabling Delphi's cylinder deactivation technology, which is already providing significant fuel savings, to be even more efficient and clean. You can expect us to continue to seek technology-rich investment opportunities such as these that enhance our existing portfolio.

Moving to slide 21, the electrical architecture segment is particularly important because as vehicle complexity increases, electrical architectures grow in content. For example, for now through 2020, we expect that wiring and cable will increase by almost 70% in length, up to two and a half miles. The connectors will grow by more than 25%. Cable management systems will grow, along with the growth of both cable and connectors. Digital data will increase significantly, up to 1.5 gigabit per second. And voltage will increase from 12 volts today up to 600 volts. This complexity growth leads [Zilliant] to rely on electrical architecture experts such as Delphi for its system optimization solutions. With consumers now demanding more connectivity in their vehicles, electrical architecture is the foundation for that vehicle content growth. For Delphi, it's the perfect storm of more content driving greater revenue growth. And now, I'd like to turn it back to Kevin to talk about a transaction that fits perfectly in this space.

Thanks, Jeff. Let's move to slide 22. As Jeff said, the acquisition of HellermannTyton positions us to benefit from the increased demand for electrical architecture solutions. As one of HellermannTyton's largest customers, we know the company very well. HellermannTyton is a leading global manufacturer of highly engineered cable management solution. They have a very strong management team with a track record of delivering strong revenue and earnings growth. The transaction is valued at $1.85 billion reflecting a multiple of 2015 EBITDA plus run rate synergies, which is below Delphi's current EBITDA multiple. The transaction will be funded with the $660 million of proceeds from the Thermal sale that Mark referenced earlier, as well as debt. The transaction is expected to close in the fourth quarter and will be accretive to revenue growth and to margins. We currently estimate the transaction to be $0.15 accretive to 2016 earnings per share. On a full synergy adjusted run rate basis, the transaction is actually roughly $0.26 accretive to 2016 EPS.

Slide 23 provides an overview of HellermannTyton. 2015 sales are expected to increase over 10% to EUR679 million. EBITDA margins have historically been just under 20%. Roughly half of HellermannTyton's revenues are from automotive, a segment which has been growing at a compound rate of 17% since 2010. The balance of the company's revenues are generated in the electrical and datacom markets. As you can see, HellermannTyton has a relatively balanced mix of regional revenues, the result of its very strong worldwide brand.

As you can see on slide 24, HellermannTyton checks the box on each of the acquisition guidelines we've consistently articulated. The transaction meets our core strategic objectives and operating guidelines, and enhances our financial metrics which translates into increased shareholder value. Slide 25 outlines the key areas of synergies. The bulk of our $50 million of synergy savings will be generated through sourcing and supply chain savings, and the elimination of some public company costs. We also expect to generate revenue synergies over the longer term by leveraging the combined product portfolio in the automotive and industrial markets.

As summarized on slide 26, we believe the acquisition of HellermannTyton will create significant shareholder value. The transaction further strengthens Delphi's leadership position in the electrical architecture market. It accelerates our revenue and earnings growth, generates significant operating synergies, and is accretive to earnings per share. We have a track record of increasing shareholder value through smart M&A. As an example, the MVL acquisition that we completed a little over two years ago, significantly strengthened our position in the connector market. In addition, the transaction ultimately generated synergies which were $30 million over our original plan. We currently have EBITDA margins in that business that are 200 basis points higher than our acquisition model. We are confident that we will execute on this transaction just as well.

Wrapping up on slide 27. We had a record quarter marked by solid operating performance, which we translated into strong revenue and earnings growth, giving us a high level of confidence in our revenue and earnings outlook for the balance of the year. In addition, we made significant progress realigning our product portfolio allowing us to increase our focus on our high-growth and high-margin technologies in the safe, green, and connected market segments. With that, I'll turn it back to the operator to open the line for questions.

(Operator Instructions)

Rod Lache of Deutsche Bank.

Good morning, everybody. Congratulations on the quarter and the acquisitions.

Thank you.

Couple questions. One, I was hoping you might give us a little bit more color on what you're seeing in China relative to a couple things. Any changes in customer business mix? Maybe remind us how your backlog is coming and how much of the backlog is coming in from China and whether there is any changes there. What would be sensitivity be at this point for every 1% change in China production?

Sure. Sure. I have all the questions.

China market is -- beginning with the first portion of your question in terms of overall outlook, we started to see weakness, significant weakness in the China market actually beginning in late June. That's when we saw a reduction in overall production schedule, which quite frankly has continued into July. Our outlook for the China market for Q3 is, I think, up 3% on a year-over-year basis. July production is going to be weak. We saw pulling schedules in early July. It appears to have stabilized somewhat as we look at August and September.

We are beginning to see some OEs actually add schedules for the fourth quarter. It's probably a little too early at this point in time to reflect those in our overall numbers, but it appears as though we're starting to see an uplift in the fourth quarter. When you look at mix of our revenues, a little over 70% of our revenues are with the multinationals. A little under 30% are with the locals.

Clearly over the last, let's call it couple quarters, the locals have been picking up some market share related to SUVs. Our general view is that will stabilize over the next -- beginning next year. As we look at China over the 2016 and beyond, we think it's a market that returns to, I will call it, 6% year-over-year vehicle production growth.

We -- this year as well as into the outer years we expect to continue to grow at 8 plus points over market, Rod, just given our mix of customers as well as given where we sit from a product portfolio standpoint and the growth and content whether it's with the multinationals or with the locals. When you look at bookings, over the last couple of years, China has accounted for between 22% and 25% of our total new business bookings. If I were to calibrate each 1% reduction in vehicle production for China, that translates to about $30 million of revenue, and roughly $7 million or $8 million of operating cost.

Okay, great, thanks.

And there are two other things. One is obviously you are expecting some acceleration in the organic growth in the back half to get to the 7%. Could you give us some color on which divisions will be driving that? And lastly, congratulations on these active safety awards.

Could you maybe talk a little bit about how things are progressing there? What kind of content per vehicle are you seeing? Are any of these expanding into increased autonomy at this point, or are they primarily forward crash avoidance kind of systems?

I'll start with the latter question and then Jeff can talk about technology and where it's headed in some of our customer discussions, and then Mark can come back to where we're going to see revenue growth in the back half of the year. When you look at active safety, and we think active safety to autonomous driving, that's a very broad spectrum that as we've discussed before, is all highly dependent upon the technologies that deliver active safety near term.

On our Q1 earnings call, we talked about active safety revenues growing roughly 50% on a year-over-year basis. Our outlook now is active safety, as we look at Q2, Q3, Q4, is going to be growing north of 60% for Delphi. So we are seeing tremendous increased take rate, as well as tremendous demand for active safety solutions from our customers. Maybe I'll turn it over to Jeff to talk about some of the technology in our customer discussion, and then we can go to Mark on the revenue.

Brad, this is Jeff, and certainly the business continues to grow a great deal in the forward component of active safety, the radar and the vision systems, but also now we are seeing a significant growth in the medium- and short-range radar products, as well. And in terms of higher levels of automation, you're going to continue to see chunks of the use cases go to automated, so as we have a few vehicles on the road today, you are going to have more vehicles that have the capability of driving that highway speed with hands off the wheel, if you will, lane vectoring to keep you in the lane and then collision imminent technology to prevent a collision going forward. So there will be periods of the drive that -- or the use case that will be automated, but still, it's mostly the collision avoidance aspect of technology that's being implemented right now.

Mark, you want to talk about -- .

Yes, so Rod, you are correct. We go from basically mid-single-digit growth in the first half, 4 points over market to high-single digits in the second half, about 7 points over market. On a segment basis, we are seeing strong sequential growth in all segments, especially E&S. E&S will go from basically flat with market in the first half up to over 6% over market in the second half. And then on EEA and powertrain, both those will grow from mid- to high-single digits sequentially.

On a regional basis, North America growth will maintain its strength through the back half of the year sustaining about 3% over market. And then in Asia-Pacific, that remains about 10% over market through the second half. And then in Europe, we are going to see with the launch of some diesel programs, infotainment business, active safety business, and also some wiring business, this wire harness business is coming online. See very strong growth sequentially versus the second half from a little bit over market in the first half to high-single digits in the second half over market.

Great, thank you.

John Murphy of Bank of America Merrill Lynch.

Good morning, John.

Good morning.

If we look at slide 23, one of the big things in this HellermannTyton acquisition is business outside of the automotive industry. And I think one thing that we've always looked at and I think you have looked at, is the potential for your connector business outside of the auto industry. So I am just wondering as you think about this, you're talking about cost synergies here but really trying to understand what the revenue synergies might be. I know you alluded to these but I would imagine Majdi wants to push these pretty hard on the connector side. Just curious what the opportunity is there.

Listen, we think the opportunity is really big. Today, our connector business does roughly $300 million out of the total $2.5 billion plus outside of automotive OE in Tier 1. And we think the capabilities of HellermannTyton and the strength of their sales organization really provides tremendous opportunity to sell more connectors through that network into that market. On the flipside, given the strength that we have in the automotive space and with our Tier 1 partners, in the electrical architecture is we think there is more that we can do in terms of partnering to sell their products into customers where we have really strong relationships.

Okay and then also -- .

We underscore, John, we think it's really big and we think given the margin structure of this business or the combined business, the profit impact is significant.

Okay, and then also as we think about these acquisitions, obviously there is a tremendous amount of technology here, the geographic diversity is not too far off what you have right now. What is the customer set in the automaker base? Is there any expansion into maybe the Koreans and the Japanese that might help as far as customer diversification?

They have a very strong position in the Japanese market, both from an industrial market standpoint, as well as from an OE standpoint. 10% of their total revenues are in Japan. That's significantly greater than what we have today. We think that is a real opportunity for Delphi. And there are other examples.

Lastly, maybe if we think about everything that is going on in the world and there is great concerns about slowdown in China and whether North America is peaking and what ultimately will happen in Europe, could you just remind us as we think about your cost structure, what variability you have in your cost structure and what kind of ability you have to react to potential downturns, even though we are not expecting them, but potential downturns in markets to mitigate any downside risk that may occur in the years to come?

Listen, I'll comment and then Mark should follow-up.

Less than 75% of our cost structure is variable. Over 25% of our hourly work force is contract. So we have a tremendous amount of flexibility to flux in the event we need to respond to lower volume or other matters. Mark underscored the point when you look at it this year on a year-over-year basis, when you take into account changes in, for example, things like for exchange, as well as a continued weak South America market in China, we are delivering tremendous margin expansion. Absolutely tremendous margin expansion and flow-through when you adjust for FX is, I think, north of 30%. So we have a business model where we are very focused on maintaining flexibility so to the extent there is any sort of hiccups in the macro-economy, we can deal with them.

Mark?

I would just add, John, that at the same time we're accelerating our growth to above market, we're also experiencing a year where we are delivering record productivity internally. It's that capability to drive productivity that's going to become especially helpful in the event of any sort of slowdown. So we can react very quickly.

Great, thank you very much, and congratulations on the progress.

Itay Michaeli of Citi.

Thanks. Good morning, everyone, and congratulations. Maybe for Mark, you alluded to some of the revenue guidance changes from China, Europe being good news, and then the divestiture. Do you also have that for the operating income impact to your guidance?

Taking a step back, here's how I would calibrate and Mark can chime in. China is worth about $100 million of revenue when you look at decremental margins of about $30 million in OI. The Reception Systems business, we you lose $50 million of revenue in the back half of the year, and roughly $20 million of OI. Now the filter on that is high because it's a business that quite frankly was shrinking and we weren't allocating; we were spending engineering dollars.

And then Europe is worth roughly a $50 million pickup in the back half of the year at 15% OI flow-through, which is about 30%. So net-net, you lose about $100 million in revenue and $25 million of OI. In addition to that, we have the flexible cost structure that Mark and I just talked about, but given the demand we are seeing for active safety, given the transactions, Quanergy and Ottomatika, that we talked about, we're really focused on we are going to be ramping up investments in engineering in and around the active safety and automated driving space to continue to drive increased revenue growth and to execute on a number of the opportunities, the increased set of opportunities that we see out there today.

Great, and maybe on active safety, just two follow-up questions. First, can you talk a bit more about where Quanergy is in terms of the development process, how far potentially from production awards and then sort of where the pipeline there is? And also, did you mention that you had an active safety win with BMW and if so, can you talk a little bit more about that in terms of that rate cam, or is that some other kind of functionality?

Itay, it's Jeff. So if you think about Quanergy and solid-state LiDAR, it's still very much in the development phase. I would expect that we're going see development contracts with multiple OEs as we work together with them to make this -- bring this into automotive grade capability, but it's still going to be development contracts, not production contracts for a period of time.

The real value that we see in this investment for us is to get on a glide slope where you can bring this down to put a LiDAR on the four corners of the vehicle and keep it under $1,000, maybe even get down in the $500 to $600 range for four different systems, and at that, now you're going to see application with the automated driving strategies for the OEs around the world. But it still has to be proven; it still has to work with their individual architectures and so therefore, it's going to be development contracts only here for a couple of years.

Terrific, and then you were given the BMW award for active safety, Jeff. Is that -- ?

The BMW award is for medium- and short-range radar. Again, one of the components that gets enabled by the five-star rating of the euro endcap and a product segment that we think is going to greatly accelerate in the United States as soon as the United States passes that sticker law or puts active safety into five star, as well. It's a 76-gigahertz-based radar product. It's a variant of our forward-looking radar expertise, if you will, but in the medium- and short-range implementation.

Great, very helpful, Jeff. And then just a quick housekeeping. Is there a share count assumption for the second half of the year, or at least for the full-year guidance?

Yes, Itay, we are assuming in the second half we continue on the buyback pace that we have in the first.

Perfect. That's very helpful. Thanks so much, everyone, and congratulations again.

Ravi Shanker of Morgan Stanley.

Thanks. Good morning, everyone.

Good morning, Ravi.

I'm wondering [snagging] Ottomatika will had very good impression of the team there. Can you give us a little more color on how Ottomatika will work within Delphi, because I think you had some existing relationships with other OEMs and maybe some non-traditional OEMs, as well? So can you talk about whether that will be run as an independent entity or whether that will be blended within Delphi?

Yes, Ravi. It's Jeff. We intend to keep this group separate and located in Pittsburgh, adjacent to the Carnegie Mellon University for a couple reasons. One, so to keep them separate so they keep doing the great things that they're doing, and two, to access the tremendous amount of intellectual capital coming out of Carnegie Mellon. We would expect that the relationships they currently have with OEs will continue and we'll continue to nurture those and the reason for it is because they've got market-leading algorithms here.

They really have more experience argue the best in the world at being able to think about automated driving scenarios at vehicle level and now we will help bring that into automotive grade. We'll combine our efforts together, but we do intend to keep them as a separate group.

Right, and I was also pretty interested to see that you have relationships now with both Ottomatika and Quanergy, one being sell-through algorithms and one being hardware. It really shows, or maybe I am missing this, are you going with a holistic approach to autonomous driving where you are not just a systems integrator but you are providing both the hardware and the software?

And so you can get to a point where you can make maybe your own standalone autonomous driving system that can be put into any OEM's car? How are you thinking about that approach?

Yes, that's a big question.

We certainly want to have the portfolio where we can operate at the vehicle level and operate at the component level. That's going to include hardware and a lot of software, no doubt. But even Quanergy, even though the big development this is going to be a solid-state LiDAR as opposed to a mechanically scan, even there you're going to have some significant software and algorithm work to be able to work behind that solid-state optical system to be able to do scenario analysis and discrimination, optic discrimination, just like you do with radar, just like you do with vision.

I don't know that we'll ever have just a hardware world anymore. There's always going to be a software component behind it, but fortunately Quanergy is quite good at both and with our capabilities, we will be able to augment that into automotive grade.

And Ravi, it's important. We probably should say, in addition to the investments that we've made to date, we are really focused on pursuing other opportunities, whether investments or acquisitions in vehicle data acquisition and management systems, short-range radar solutions that enhance our existing portfolio, configurable touch screens, connected vehicle services and telematics, data security solutions, things like that. So there are technologies out there that are not specifically in automated driving or active safety that we are evaluating as well.

Understood and just related to that, can you give us more color on this FCA infotainment win? It sounds like a really big program, and I think you mentioned that the last quarter. But can you talk about the systems that you have, what sizes, what range, what kind of products? And also, are you now the sole-source infotainment supplier to FCA?

We are not the sole-source infotainment supplier. We have a very significant portion of their business. This is a follow-on award to award that we actually received a couple years ago. Actually, the specific definition or requirements around the program, Ravi, I don't have them at my fingertips. I can certainly provide you with that information if you would like it.

Great, thank you.

David Leiker of Baird.

Good morning, everyone.

Good morning, David.

Just a follow-up on a couple of items from Ravi here. If we look at active safety and automated drive, and you seem to be going down the road in some fashion here of vertical integration, and I was going to ask where else would you go with that? You had mentioned touch screens, telematics, but anywhere else on the basic components within that system?

Yes, I think -- David, this is Jeff. Multi-domain controllers will be a big part of this architecture that operates at a system level and certainly cybersecurity. The ability to make sure that the information is secure in and out of the vehicle and on the vehicle for mission-critical implementation. Those will be two key areas off the top of my mind that we will be highly interested in.

And then a question for Mark on the -- I guess, the slide 12. You showed currency and commodities as a net number. Could you give us the gross numbers for that?

Give us one second to get to the slide. David, it's -- give me one second here. It's primarily a -- it's almost all a currency number. There is a small single-digit that is a commodity headwind actually in the quarter.

And then one last item here on HellermannTyton, the non-automotive piece of that business, is that something you intend to keep? Is it something you build? Is that something you might look to divest?

No, it's definitely something we keep. It's a great business. They have a great market position. As I mentioned, we do $300 million of connector business outside of our automotive OE Tier 1 business. It's a space where we would like to do more.

It's clearly a different business and a different business model. It's short cycle but it's a very attractive business and they have an excellent position in that market and we'd like to leverage that.

Great, thank you very much.

Brian Johnson of Barclays.

Yes, I have two questions, one shorter term, one mid term. The short-term one is, what's driving the margin within powertrain just in 2Q and for the remainder of the year? Are there product lines within that that are particularly more profitable that you are seeing a mix shift towards? Is it just general combination of cost reduction and margin?

And related to that, how your OEMs thinking about the impact of lower oil prices and what kind of powertrain equipment, the timing of really powertrain upgrades as opposed to whether they need them or not for 2020.

Mark, do want to talk about what's driving margin expansion?

Brian, it's primarily a volume driven effect, but there is also strong productivity as well. I'd say roughly two-thirds of volume-related effect.

Okay, and then commercial or just broadly?

Brian, as you recall, we have done a lot of rotation of our Western European footprint over the last couple of years, including in that business. Just to qualitatively underscore Mark's point, the reality is we are getting the benefit of growth under that lower cost structure. I think when you look at it from a product mix standpoint, there wouldn't really be a product mix benefit, diesel versus gas or variable valve train. It is really performance and cost structure.

Your question about what we're hearing from the OEMs and they are focused on reduced CO2 emissions and fuel efficiency, and Jeff and I were over in Europe a week ago in meetings; clearly the focus remains on meeting standards. I know there is dialogue among some of the OEs with respect to a desire to push that back in conversations at least at the US level, request to push back.

We will tell you in Europe, we see no -- we see very little possibility that the European regulators and governments would reduce CO2 emissions in the timetable for improvement. And based on our discussions and what we are hearing in Washington, we think it's highly unlikely that the government here backs off the current standards and the timing related to those current standards. That's what we're being told now.

Okay. And mid-term question is, rather than drilling into the three things you bought, I want to kind of talk about cybersecurity, what you're hearing for customers, and then what you have right now and what you may be thinking of having to provide solutions around cybersecurity.

Brian, it's Jeff. So certainly, it's a hot topic. There is no doubt about it, and cybersecurity will continue to be a topic probably for the rest of our careers.

Just by the nature for the technology goes on vehicles, the amount of software and the pipes continue to get bigger and bigger. Right now, there's really not a systemic issue in the industry, and we are all working to make sure that it stays that way. So you know, we use authentication techniques today, encryption, gateways, firewalls, that's part of architectures. That's part of our individual product designs, but at the same time, we're looking to make the designs even more robust at the component level or at the system level.

The OEs are looking at the vehicle level with cybersecurity software nuggets, or kernels for example, that we would embed in the individual products or on the serial data bus. Stay tuned for that. I think we are going to see more of that happening over the next couple of years just to make the architectures more robust than they are today.

And like I said, particularly as the pipes get bigger, making sure that information coming in and out of the pipes. 4G LTE for example, that's secure both ways, secure coming in and secure going out. And that technology is available to do that. It's a matter of making sure that it's implemented properly.

Is that something you would either, A, develop internally, B, partner with a small software company to do or potentially join the list of things like you purchased over the last few weeks in the future?

I think all three of those will be our plan of attack, Brian.

Okay, thanks.

David Lim of Wells Fargo Securities.

Good morning.

Good morning, David.

Just wanted to follow-up on that BMW active safety. Is that for forward collision or AEB? Can you give us a little bit more color on that if you would?

Yes. It's medium- and short-range radar. So it's for a like a stop and go or a low-speed collision imminent breaking, and also including pedestrian kinds of interactions. Does that make sense?

Yes, so this is going to be a radar over a vision-based system. Is that correct?

It's going to be radar used in conjunction with a vision-based system.

Okay, got you. And then I had a question on the China infotainment and active safety. Just wondering if you could provide a little bit more color on what are you exactly providing and if you could disclose who you are providing to on the China infotainment and active safety front.

Listen, David, as you can imagine, our customers without the prior approval are somewhat -- are very sensitive to sharing that sort of information. So we can't provide the customer names.

Sure.

We can tell you they're relatively mid-level to higher-level infotainment systems. On the active safety side, mid-level active safety.

Can you provide -- is it a global OEM or is it more of an indigenous Chinese OEM? Is that a level of detail that you can provide?

Yes, it's both.

Both. Okay. Got you. And then I wanted to piggyback on Brian Johnson's question on cybersecurity. Obviously, there was that article in Wired but, Jeff, I was wondering can you talk about the evolution of the CAN bus system? Is there something that is more robust that's being designed, or is that going to be adequate enough to provide a level of safety that OEMs are looking for?

Yes, that's -- we could talk quite a while on that. The evolution of the CAN bus has been with -- always with a cybersecurity factor in mind, probably not near and far with the kind of attacks that are possible today. But it all depends on how you interact with the CAN bus. The data -- the CAN bus in and of itself isn't necessarily an issue. It's what gets on the CAN bus and what gets off, and you can control that at the component level or at the systems level.

So a lot of different approaches here to take it at the CAN bus, to take it at the component, to take it at the system, and then to look for overlays like AUTOSAR or Jasper, for example, or the functional safety, the 26262 requirements that are becoming indigenous for safety critical products in the cars around the world. So a lot of different approaches here. Fairly well coordinated, but the industry is still going to be working to make progress in this space.

Great, and one last question I had on HellermannTyton. Is the industrial portion of the margins on the industrial side, is that better than the automotive margin? Thank you.

They're relatively consistent and in line.

Great, thank you so much.

Joe Spak of RBC Capital Markets.

Thanks. Good morning, everyone.

One more follow-up on HellermannTyton. I didn't really hear anything about their footprint or cost structure. The margin seemed pretty healthy. I was wondering if there is any opportunity there. And then I guess somewhat related if there is -- what the CapEx profile for that business looks like, if it's similar to Delphi.

I think ultimately -- I'll start with a CapEx profile, I think ultimately it ends up similar to the profile of Delphi. If you look at the last few years, they've been investing significantly in capacity and capabilities in the automotive space. So to put it in perspective, if you go back to 2010, roughly 38%, 39% of revenues were in automotive, and today it's north of 50%.

To grow at that pace, they had to invest in capacity. So for the last couple of years, CapEx has been higher, actually higher than what Delphi's typical average is, but we believe that will come down. And as you look at footprint, they have 12 facilities across the globe in 10 countries in major markets. Those facilities are highly automated. It's a highly engineered product. A high level of material science, it's highly automated. And their manufacturing facilities operate extremely well.

So really, this is really about how do we leverage our sourcing capabilities, combine procurement purchasing, how do we pursue opportunities where we are buying from outside parties and we can replace that with HellermannTyton product, and then over the medium-term, how do we drive more revenue growth in the margin structure that they have. And we think those are real meaningful. Now, the $50 million in synergies that we talk about, those are harder cost savings related to sourcing initiatives, as well as supply chain initiatives. But we think there is upside ultimately on the revenue side.

Okay, and then maybe just on the other minority investments, if there is anything you can tell us. Is there any options to buy embedded in those agreements or right of first refusal? And is this -- should we look at this as almost a built-in pipeline for you if these investments develop enough?

Yes, I would say each is somewhat different. I would say ultimately, it presents an opportunity to potentially buy, but near-term they're structured in a way where how do we both optimize our existing capabilities so that we can develop technologies that we commercialize and sell into the automotive industry.

Okay, thanks, congratulations.

Thank you.

Dan Galves of Credit Suisse.

Good morning, thanks.

Could you give us an update on -- did you have a pro forma leverage number after these transactions? Could you remind us of what your corporate targets are for that, and maybe give us an update on what the M&A pipeline looks like going forward?

Yes. I think the transaction is based on how we are financing, roughly half a turn of leverage on a full debt to EBITDA, net debt to EBITDA basis. I think it brings our debt to EBITDA leverage up to about -- a little under 1.5 times. The M&A pipeline remains very, very strong. There are several opportunities out there. There are a lot in and around software and technology that just talked about that we are evaluating and looking at. There are others that sit within the powertrain electronics and safety as well as electrical architecture that are consistent with the businesses and product lines that we are in.

Okay, got it.

We feel as though -- I should finish, given the cash flow generation of the business, given the leverage that will be pro forma for this transaction, we have ample capacity to do more transactions.

And to also continue the buyback at the current level?

Listen, I think that's what our expectation is now. That would be adjusted up or down depending upon what sort of M&A activity transpires.

Great, and just one on the technology side. Can you give us a sense of how the Ottomatika software works. Does it work in conjunction with what Mobileye provides to the Tier 1s in terms of vision-based systems, and can you just give us a sense of how they work in tandem? Or what the differences are?

This is Jeff.

So the way to think about the Mobileye software is it becomes the central controlling software for the vehicle control. So it will take inputs from the radar and our algorithms, for example. It will take input from the vision system we provide and the mobile i.out algorithms. It will take input from medium- and short-range radars. It will take input from a driver state monitor, vehicle to vehicle information, when that's available, those kinds of things.

It puts all that together and it will project decision paths for the vehicle. Based on what it sees and how the vehicle is operating, it is constantly calculating forward paths. Given any number of things that can happen, as we all know in our day-to-day drives, it's already precalculated as a plan of action and will have the vehicle move out on that path. So it's evaluating, it's route planning, and then it will instigate the action when that particular circumstance occurs. So it synthesizes all of the information from all of the sensors on the vehicle, and that's why it's kind of a master computer, if you will, for the advanced driver assistance system.

Very helpful, thank you.

Emmanuel Rosner of CLSA.

Hi. Good morning, everybody.

Just first one quick follow-up on China. So I think you were very clear that you expect to keep outperforming the market quite meaningfully. When you just look at what has been happening over the past few months, obviously production schedules have come down a bit. Are you still seeing some even minor shifts in terms of content decision? Are you seeing like automakers that would say, for example, hey, we wanted to put in a GDI in the next platform but now that the market is moving down market and there's pricing pressure on the vehicles, maybe we don't need that right now?

Nothing material at this point in time, Emmanuel. Not really.

Okay. That's good to hear.

And then just one additional question on the HellermannTyton. I'm not familiar with their product portfolio, so can you maybe just contrast what they offer in terms of how that corresponds with your product offering?

Listen, we do manufacture product today that is consistent with the HellermannTyton product portfolio. We manufacture internally roughly $40 million, $50 million of product today that is consistent with what they do. As I mentioned, we sell north of $300 million of that sort of product that we source internally from them as well as from others. Their product tends to be rather than connectors, really highly engineered cable management solutions. So fixing end product like that that helps manage the flow of cable through the car.

Okay. And so you were saying you are one of the big customers there? Any sense how much you are buying from them so far?

Yes. We purchased close $50 million a year from them in product.

Okay, understood. Thank you very much.

We're among their top five customers and have been for a very long time. In fact, their CEO is one of 14 members that sit on our supplier counsel that we meet with on a regular basis and talk about where our business is going and how do we do things strategically with our supply base where we optimize the supply chain and cost solutions and at the same time, make decisions that benefit them as well.

That's great to hear. Thank you.

Colin Langan of UBS.

Great. Thanks for taking my question. You mentioned that the multiple that you're paying for HellermannTyton is -- can you actually give the EBITDA multiple with synergies that you're calculating? Is it something in the low 9 times range? I wasn't sure how that compares to -- .

We apologize, and Jessica mentioned this at the front end, just given UK Takeover laws, we can't. I think I can help you somewhat reverse engineer into that. We talked about $50 million of run rate synergies and a multiple that is below Delphi's current trading multiple, a little bit lower current 2015 EBITDA multiple. I think if you use that $50 million back in and you look at transaction value, you should be able to come up with a gross and a net. I apologize for having to be less than clear on it, but that's the legal requirements.

But that's based on consensus for 2015? When you're doing that math.

Yes. I think that's reasonable. It's a good assumption.

How does this -- can you remind us how this compares to the MVL acquisition in terms of what you paid for that business?

We bought MVL, we reached agreement in early 2012, we closed late 2012. We paid 7.5 times for that. We got roughly two turns of -- when we purchased the business, roughly two turns of synergies. When I compare and contrast the two businesses, MVL was growing mid-single digits and had EBITDA margins in the mid-teens. This is a business that in the aggregate has been growing consistently north of 10% on an FX adjusted basis, and as I said in my opening comments, has EBITDA margins that are roughly 20%.

So although MVL is a great business and we did a lot with it, two very different businesses at two very different stages, different growth profiles, different margin structures, and very different competitive positions within the markets they operate. HellermannTyton is number one in a number of the major markets that they operate, including places like Germany, like Japan. So they have a very strong competitive position, and they have a brand that is -- goes back to the 1930s and is very well recognized and have an absolutely superb management team that executes extremely well.

Is there any way to provide any color on the other people looking at the asset? Was it mostly autos or is this more of a tech-type asset?

Listen, I can't tell you whether others have been looking at it. This is a business, as I said, we know the company well and the management team well and we've had dialogues. Dialogues periodically with them.

This is my last question. Any color, I think you said $50 million is the headwind from Reception. Is that a Q4 or is that a second half? What is the annualized hit from the Reception?

Annualized is about $100 million.

Okay, all right. So it's the second half. Okay. So it's already done. Thank you very much.

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

That concludes Delphi's second-quarter 2015 earnings conference call. Thank you for joining. You may now disconnect.