Aptiv PLC (APTV) 2016 Q2 法說會逐字稿

Good morning. My name is Kayla and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi Q2 2016 earnings conference call.

(Operator Instructions)

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

Thank you. Good morning, Kayla, and thank you for joining us today on second-quarter 2016 earnings conference call. To follow along with today's presentation, our slides can be found at delphi.com, under the Investors section of the website. Consistent with prior calls, today's review of our actual and forecasted financials excludes restructuring and other special items and will address the continuing operations of Delphi.

The reconciliation between GAAP and non-GAAP measures is included in the back of today's presentation and the press release. Please see Slide 2 for a disclosure on our forward-looking statements, which reflect Delphi's current view of our future financial performance, which may be materially different from our actual performance.

Joining us today will be Kevin Clark, Delphi's President and CEO; and Joe Massaro, CFO and Senior Vice President. As seen on Slide 3, Kevin will provide an operations update as well as an overview of the quarter and then Joe will cover the financial results and the 2016 outlook in more detail. With that, I would like to now turn the call over to Kevin Clark.

Thank you, Elena. Good morning, everyone. Thanks for joining us. Before Joe gets into our financial results, I would like to provide some context around the second-quarter as well as our outlook for the full year.

Beginning with the second quarter highlights on Slide 5, I would summarize we had a solid quarter, delivering accelerated revenue and earnings growth. Revenues increased 7% driven by strong double-digit growth in our Electronics & Safety segment, which had over 40% growth in Active Safety revenues and high single-digit growth Electrical Architecture.

Powertrain revenues, however, were weaker than expected, principally due to lower heavy-duty and light-duty vehicle volume. We also experienced increased demand in volatility -- excuse me, with certain key local customers across our segments, impacting our growth in the China market, which we currently believe will continue into the second half of the year.

Operating income increased to $577 million and margin expanded to 13.7%, driven by both volume growth and continued cost structure optimization. These increases were partially offset by our continued investment in engineering and information systems to fund growth initiatives as well as some recent manufacturing inefficiencies in our Electrical Architecture segment that we are working through. Joe is going to provide more color on these in a few minutes.

Earnings per share increased 19% to $1.59 a share and despite some macro headwinds, we are raising the midpoint of our full-year EPS outlook $0.05 to between $5.95 and $6.05 per share. As Joe will discuss in detail later, we are reflecting the changing macro environment and updated customer schedules in our revised outlook for sales and operating income in the back half of the year.

We remain disciplined in our allocation of capital, investing in both organic and inorganic growth. And at the same time, we returned $144 million of cash to shareholders during the quarter, bringing the year-to-date total to roughly $600 million.

We also posted strong second quarter bookings of $6.5 billion for a total of $13 billion year to date, reflecting awards from both our traditional OEMs as well as newer non-traditional customers. In summary, we continue to leverage our business model and remain very focused on execution.

Slide 6 highlights a few of the assumptions impacting our current outlook. Starting with the positives on the left. Regulatory trends and consumer demands continue to influence fuel economy; CO2 emissions and vehicle safety standards; driving content per vehicle growth.

We continue to experience very strong demand for active safety, infotainment, gas direct injection, variable valve train and power electronic product lines and increased demand for active safety products has translated into increased interest in our automated driving solutions. In several cities such as Singapore, Boston, Columbus and others are investing in automating driving pilots, all in support of the future mobility on demand, presenting us with even more opportunities for future profitable growth.

The right side of the chart reflects our current view on macros, including further currency and commodity headwinds, primarily from the recent devaluation of the Sterling and Chinese RMB; increased weakness in the global commercial vehicle market, driven by double-digit declines in North America, more than offsetting growth in the European and Asian markets.

And slowing global vehicle production in the second half of the year, particularly in China as well as weaker light-duty diesel lines of both Europe and the emerging markets. In summary, although the macro environment appears to be increasingly challenged, we are confident in our updated outlook for the balance of the year.

Continued strong business bookings are reflected on Slide 7, which as I mentioned, totaled approximately $13 billion through the second quarter. We had a number of important customer bookings as well as [several] new platform wins in the quarter, including large complex wins for Electrical Architecture with GM in North America and with Daimler in Europe; powertrain wins including valvetrain programs with both Hyundai and General Motors.

And engine control module [conquest] wins with VW and a GDI win with Changan in China; and a key power electronics win for Electronic & Safety with Beijing in China as well as an active safety win with Audi. On the right side of the chart, you will see a sampling of the customer diversity in our year-to-date bookings, ensuring that we're not dependent on any one customer or any one region or business segment for growth.

Turning to Slide 8. As we have discussed previously, our customers are increasingly seeing the need for further electrification of powertrain to close regulatory gaps on CO2 emissions and fuel economy. 48-volt model hybrids deliver roughly a 70% reduction in CO2 emissions compared to full hybrids, at about 30% of the cost.

Given our strength in Electrical Architecture and power electronics, Delphi has a competitive advantage in the intelligent electrification of the vehicle. The increased interest from customers is further validated by the stronger volume projections from the industry experts who are now forecasting 48-volt model hybrids making up 15% of vehicle production by 2025; that's up from just 10% six months ago.

Now we have been awarded a third customer program since our last update, bringing total 48-volt bookings to roughly $200 million, with the first two programs launching with European OEMs in late 2017. In addition, we are presently engaged in discussions with four additional major OEMs of potential development programs in this exciting space.

On Slide 9 are just a few examples of some of our 2016 major program launches, Electronic & Safety revenues are benefiting from infotainment launches on the VW MQB platform, the Cadillac XT5, and the Chrysler Pacifica; and active safety launches on the Renault Scenic and BMW 5-Series; as well as power electronics launches on a number of these platforms, including the Volvo S90.

Revenue growth in Electrical Architecture segment is partially driven by program launches on the Daimler E-Class, Chrysler Pacifica, and the Volvo S90; and Powertrain revenues are benefiting from the launch of the Ecotec small engine on Chevrolet's Malibu, and Volkswagen 1.4 and 1.6-liter engine platforms.

Turning to Slide 10. Over the last few years, there's been a lot of focus on active safety and the technologies that support it. As you've heard us say previously, active safety technologies are the building blocks that will ultimately support autonomous vehicles, saving thousands of lives each year so that's why active safety is the fastest growing sector in automotive and certainly, for Delphi. Customers want it and regulators see the benefit of it.

During the first half of 2016 we booked $700 million in active safety awards, with wins across each geographic region and we are on track to achieve well over $1 billion in active safety bookings for the fourth straight year in a row.

Now, with almost 80% of the safety benefits of Level 4 Automation, accounting for just 20% of the cost at Level 2 automation, we see the near-term for demand -- near-term demand, rather, for active safety technologies only growing. As a result, we expect our active safety revenues to increase roughly 50% annually over the next few years.

And on Slide 11, as a result of industry-leading portfolio, the active safety and automated driving solutions, we were recently selected by Singapore to develop and implement an end-to-end ecosystem for an urban point-to-point, on-demand autonomous vehicle service. Delphi will provide a fleet of fully autonomous vehicles, leveraging our proven automated driving platform, including advanced sensors, software and electrical distribution.

And we will develop a cloud-based mobility on-demand software suite, opening up new potential autonomous markets for Delphi customers and enabling faster commercialization opportunities. Other pilots are planned for cities in North America and Europe, and we expect to make those announcements later this year. With that, I will hand it over to Joe to cover the financials in more detail. Joe?

Thanks, Kevin, and good morning, everyone. I will start by covering our second-quarter performance and then discuss our outlook for the remainder of 2016. Let's begin on Slide 13 with a snapshot of our second-quarter financial performance. As Kevin mentioned, we delivered solid revenue and earnings growth in the quarter.

Revenue was up 9%, or 7% adjusted for currency commodity acquisitions and divestitures. Our operating margins expanded 10 basis points to 13.7% and earnings per share grew 19%. Operating cash flow increased to $575 million, driven by higher earnings levels and improved working capital performance, partially offset by higher restructuring outflows.

Slide 14 provides greater detail of revenue for the quarter. Starting on the left, we had strong sales growth, including the impact of M&A, driven by HellermannTyton, which contributed approximately $200 million of revenue. The impact from the Japan earthquake was within the range we provided in April. The strengthening US dollar, principally against the Chinese RMB and Pound, and lower copper prices were a drag on revenue in the quarter.

Moving to the right, South America continues to be very weak. Growth in North America and Europe was strong driven primarily by our Electrical Architecture and E&S segments. Our adjusted growth in China slowed in the quarter to approximately 5%, reflecting volatility in schedules at certain customers, including SGM and Great Wall.

While our overall view of full-year China vehicle production growth remains unchanged at approximately 4%, we expect fluctuations in quarterly growth over market rates to continue in the second half of the year.

Turning to operating income, Slide 15 walks the year-over-year change for the second quarter. Overall, our operating results were in line with our expectations. Flow-through from volume growth contributed to margin expansion. HellermannTyton was accretive to earnings and our integration activities and synergy realization continue on pace.

Although we did experience some regional performance challenges in the quarter within North American manufacturing and Electrical Architecture, which I will speak to in a moment, launch costs in E&S moderated in the quarter as expected. Also as Kevin referenced, we see significant opportunities in areas such as active safety, automated driving, infotainment and vehicle electrification, and continue to increase investment in these areas.

As always, we continue our relentless focus on optimizing our cost structure, leveraging best-cost locations, and driving increased efficiencies throughout our organization to fund continued investment in innovation and to help offset the impact of the discrete performance challenges that I just noted.

Slide 16 takes us through performance by segment. Electrical Architecture, consistent with our expectations, grew 8% on an adjusted basis. HellermannTyton growth was 10%. As I mentioned, operating margin flow-through in Electrical Architecture was negatively impacted by manufacturing performance challenges in North America, totaling approximately $20 million.

During the quarter, we experienced lower efficiency and higher labor costs associated with the previously planned consolidation of facilities. We expect some level of inefficiency to continue into the second half and have included an additional $30 million in our full-year guidance.

Powertrain revenues were flat year-over-year and short of our expectations. As solid growth in our gas business, GDI grew 50% in the quarter, was offset by lower commercial vehicle volumes in North America, a decline of light-duty diesel schedules in Europe and lower China volumes.

With respect to light-duty diesel, towards the end of the second quarter, our powertrain segment experienced a decrease in order levels, impacting both the second quarter and the back half of 2016 across multiple customers. We believe the reduced order levels are primarily related to customers managing down overall diesel inventories in Europe and Asia Pacific.

The Powertrain margin decline of approximately 50 basis points was driven by the decline in volumes as well as a foreign exchange transaction impact, primarily associated with the devaluation of the RMB and Pound.

As expected, Electronic & Safety organic growth accelerated to 14%, reflecting revenue from program launches completed in late 2015 and earlier this year. The growth for the quarter includes a drag of approximately 2% for the [power electronics] business. Growth was strong across several product lines, including active safety and infotainment, which grew over 40% and 10% in the quarter, respectively, as well as power electronics, which although currently a small revenue base, grew significantly in the quarter.

E&S margins expanded 10 basis points to 12.4% on strong volume growth and positive net performance, as launch inefficiencies continue to wane. As noted, we continue to increase investment in key technologies that drive growth in the E&S, particularly in active safety, automated driving and infotainment.

Turning to Slide 17. Earnings came in at the high end of our range, despite a slightly higher tax rate of 17.4% versus the 17% forecast. EPS growth was driven by increased operating earnings and a favorable impact of a lower share count. We exceeded the midpoint of our guidance by $0.04 per share, including $0.03 from operations and $0.01 improvement from below-the-line items.

Turning to Slide 18 and the outlook for the remainder of the year. I'd like to walk through changes to our full-year revenue and operating income guidance. Starting with revenue on the left, full-year revenues are expected to be $16.25 billion to $16.45 billion, with operating income between $2.15 billion and $2.2 billion.

The updated revenue guidance reflects a reduction of $450 million from our previous midpoint, including a $200 million reduction in the latest FX translation and commodities, primarily resulting again from the weakening Chinese RMB, British Pound, and lower copper prices. Reduced global vehicle production accounts for the remainder of the decrease of $250 million.

The lower production volumes reflect our views regarding continued weakness in the [CB] market, the estimated impact of Brexit, and lower light-duty diesel volumes. In addition, we have included an estimate of lower volumes in China related to certain OEs primarily impacting the powertrain segment.

As a result, at a segment level, we now expect Electrical Architecture adjusted growth of 6%; powertrain growth of 3%; and E&S growth of 14%. E&S and Electrical Architecture will continue to provide strong growth throughout the year for Delphi. Accordingly, we expect our full-year adjusted growth rate to be approximately 7%, reflecting over -- growth over market of roughly 5%.

The earnings impact of the foreign exchange headwinds and the flow-through on lower volumes, including the lower performance in Electrical Architecture, will be partially offset by continued optimization of our cost structure. In addition to accelerating previously planned restructuring actions, we continue to identify additional opportunities to reduce cost in the second half of the year.

We expect full-year operating margin of 13.3%, a 30 basis-point expansion over last year. We have tightened and raised the midpoint of our full-year EPS guidance to $5.95 to $6.05, reflecting year-over-year growth of 15% at the midpoint.

Moving to the third quarter, we expect to generate revenues of $3.9 billion to $4 billion. The midpoint reflects further organic growth acceleration to 8%, with continued strong growth in Electronic & Safety and Electrical Architecture. We expect operating income in the range of $505 million to $525 million, and third quarter earnings per share of $1.38 to $1.44, up approximately 10% at the midpoint.

Turning to Slide 19, our capital allocation strategy remains unchanged and is an important lever to enhance shareholder value. On the left, we expect cash flow from operations to grow approximately $1.9 billion, in line with earnings and the deployment priorities on the right are consistent with our strategy, maintaining a strong balance sheet and investment grade rating.

We are investing in our business through capital expenditures, supporting new program launches, ongoing cost alignment and footprint rotation to best-cost countries. We are committed to paying out competitive dividends and when we have excess cash, we have a track record of returning it to shareholders via share repurchases, as evidenced by the $435 million of repurchases we have already done this year.

Our full-year guidance assumes repurchases for the year of $600 million. We continue to pursue inorganic growth opportunities that meet our investment criteria and strategic growth objectives, particularly around expansion of our Electrical Architecture platform, active safety and automated driving technologies as well as Infotainment and power electronics. I'll now turn it over to Kevin for some closing remarks before we open it up to questions.

Thanks Joe. Wrapping up on Slide 20. We delivered solid performance in the second quarter despite a few challenges. Our financial performance continues to be driven by the relevant, safe, green and connected technologies that solve some of our customers' biggest challenges.

We're confident in our second-half outlook, which includes 7% organic growth, roughly 60 basis points of margin expansion and mid-teens EPS growth. We continue to optimize our cost structure while investing in technologies that will drive our future growth.

Our year-to-date bookings in commercial developments position us well for continued strong revenue and earnings growth and as Joe just said. We remain disciplined in our allocation to capital, investing in both organic as well as inorganic growth and returning excess cash to shareholders through both share repurchases as well as dividends. Through all this, we remain focused on executing in a more dynamic macro environment during the back half of this year.

With that, we will now turn it over to the operator to open up the line for questions. Thank you.

(Operator Instructions)

Rod Lache, Deutsche Bank.

Good morning, everybody.

Good morning, Rod.

I had a couple questions. One is just about the growth outlook. I think that your prior expectation for Delphi's outperformance versus your weighted average exposures was something like 900 basis points in the back half? And now it's -- looks like around 600 basis points, which is up from the 300 to 400 basis points in the first half. Can you talk a little bit about the bridge a little bit more, the bridge to that number? What, for example, specifically is happening in China?

What are some of these specific drivers of that acceleration, if you can just comment on programs that are launching and how meaningful those would be? And lastly, I know it's a long question but there -- we always get questions about how confident we should be about the growth guidance longer-term.

And you guys have been talking about 8% to 10% as you look out to 2017 and beyond. Is there any reason, just given some of these variances that we're seeing, is there any reason to reassess that longer-term excess growth assumption?

Why don't I, if it's okay, Joe, I'll start at a higher level and you can fill in the blanks with the details. I think, listen, as you look at our adjusted outlook for the back half of the year from a growth standpoint, as Joe referenced, there's really three key components.

One is FX and commodity rates and the translation effect and Joe quantified that was roughly $200 million. Then there's two separate pieces on volume. Piece one is effectively lower outlook or lower forecast from IHS and customers for vehicle production across the back half of the year.

One, and then specific growth relative to market for us principally in our powertrain segment. I think, Rod, if you look at growth over market in our E&S segment, I think if you look at growth over market in our Electrical Architecture segment, quite frankly, the outlook remains unchanged.

Where it has changed somewhat, at least in the near-term, is on the powertrain side and is principally being driven by a couple of things. One, light-duty diesel growth. And again, I will let Joe comment on that. Much lower commercial vehicle growth and then when we look at the mix of customers were on in China and incremental effect related to growth over market there.

As we look at the back half of the year and risk related to revenue, I'd tell you we feel very good about where we stand from a revenue outlook. Very good where we stand and as we head into the back half of the year, we will reassess each of our businesses in each of the markets and take another view of our longer-term outlook for growth.

Having said that, I would tell you if you look at our growth over market for calendar year 2016, even on a revised basis, it's very strong relative to overall vehicle production at 5 points over market. Joe, I will let you add on more specifics.

Sure. So let me just expand a little bit on details. So Kevin mentioned, of the $450 million, $200 million FX in commodities. Again, FX translation effects is about 50/50. Commodities, primarily copper, is another $100 million. Of the $250 million, right now, we see industry volumes of about $100 million coming out.

That's based on updated production information that we have includes some insight into what folks are thinking from a Brexit perspective and impact on Europe. The remaining $150 million, which would be more of a growth over market impact, the diesel, which is both commercial vehicle and light-duty is $100 million of that, $150 million.

And then China, we have adjusted down $50 million. As I mentioned in my script, as Kevin touched on, we have seen customer specific adjustments to schedule. I would almost refer to them as model-specific adjustments, some inventory balancing, we think in the back half of the year.

Certainly -- and primarily in powertrain. Certainly nowhere at the level of schedule called out that we saw last year so this is very different. It's model specific. It's customer specific really concentrated in two or three customers on a couple of platforms. But we do see those (multiple speakers) -- sorry, go ahead.

Yes, can you maybe give us a couple of examples of programs that are meaningful to --? You still are experiencing somewhat of an acceleration and outperformance in the back half. Are there two or three programs that you can cite that could be meaningful and then also at a higher level, powertrain, it sounds like a lot of it's there and the organic growth was zero in the quarter. Obviously, there is some cyclical headwinds there.

There's also other issues, of course, with real-world driving emissions and the costs of complying with the new diesel standards. Are there any changes longer-term that you think are affecting the market dynamic there in terms of either growth or the competitiveness that would affect powertrain?

Joe, why don't you respond to -- why don't you talk about what some the launch volume is driving revenue growth in the back half and then I can comment on powertrain?

Rod, and we tried to address this because we know those questions come up before. If we look at Slide 9 of the deck, particularly the ones on the left-hand side, those are really the platforms that for us in the back half of the year are generating the volume growth. Higher content for us, infotainment, active safety type products, electrical architecture, so we've got the electrical distribution system and those products.

We've got a couple of examples on it. The VW example, we've got the Tiguan up there but that's actually -- that entire platform that we are on that is launching in the back half of the year, the MTB platform. So for us, that's an important one. That's a big one and it's across, actually, all three segments. We have content from all three segments on that vehicle. So that's why it's designed to provide some insight into what we see driving volume in the back half.

And on the powertrain side, Rod, our view, as Joe said today, is it's principally Europe-related, European OE. Based on our discussions with those OEs, it appears to be inventory re-balancing at this point in time. It's something we are watching closely. But one thing I want to underscore and get back to you, as we all know, governments are focused on whether it's the US or Europe, OEs hitting the revised standards.

To the extent there is less light-duty diesel, there needs to be more powertrain electrification. I think over -- although there may be slight dislocations in the near-term over the medium to long-term when you look at where we sit from a power electronic standpoint, we cited these facts before.

The average CPV on a standard internal combustion engine for Delphi is 300 hours; when we look at 48-volt, it is 4 times that CPV. On a hybrid it's 5 times; on a full EV, it's 7 times. And given our product portfolio, we are certainly well-positioned.

I think that overall trend is why we're seeing such a significant ramp-up in growth in power electronics and as Joe said, off a low number, it's a very high growth rate. But when you look at what we're seeing from a bookings standpoint, just to give you a data point, the first half of last year, we booked roughly $400 million on power electronics, vehicle electrification.

In the first half of this year, we are over $1.2 billion. So what we're seeing, stepping back and taking a look at the big picture, is significant ramp-up in demand for powertrain electronics or electrification of the powertrain, which is good for us.

That's helpful. Thank you.

John Murphy, Bank of America.

Good morning, guys.

Good morning, John.

Just to follow up on this powertrain discussion, in the short run, GDI really should be backfilling unless there's something else going on and I understand there can be some disruption for a couple quarters as there is inventory adjustment. Just curious if you are seeing that pick-up as an offset or if there's something else going on here?

And when you look at the restructuring you were doing on -- in powertrain, is that directly expressly addressing this issue or is that sort of a more ongoing Western to Eastern European restructuring?

So GDI -- we are seeing it, John. I mentioned that GDI growth was over 50% in the quarter. Relatively speaking, that's about a $300 million business so there's a little bit of a -- it's growing fast and we're very excited about it. It will fill that hole but there is going to be somewhat of a timing just as diesel comes down. It's obviously a much larger business but we have seen very strong growth in the second quarter and quite honestly, expect full-year growth in GDI to be a little bit over 50%.

So we are seeing that. Restructuring, I would say, we are moving a little bit quicker on restructuring in powertrain. Some of that is opportunistic.

I would say at this point, it's still consistent with the footprint rotation from West to East, particularly in Europe, although as you may recall, that is diesel-focused. Those are diesel facilities that we are consolidating into taking out of Western Europe. There was one last year in France. There's another one this year in Spain and they are going into Romania so it is diesel focused, but still consistent with the overall plan.

Listen, John I think it's important to note, a lot of dialogue right now about light-duty diesel but our outlook for light-duty diesel, FX adjusted, is it's going to grow. It's going to grow 1% year over year versus a prior outlook of roughly 3% year over year.

Okay. That's helpful and then a second question on the growth above market. I think that a lot of people simplistically, ourselves included sometimes, look at the schedules on light vehicles side and plug in your growth above market on top of that but there's two components that I think we might mix -- miss with that and that is mix on the light vehicle side but also the pressure or benefits that you might be getting from the commercial vehicle side.

So is there a better way to express this or think about this more simplistically as a total growth number as opposed to a growth above market as far as your targets that might encompass that? I'm just curious as we think about mix on the light vehicles side and then also the commercial vehicle side, what impact, in general, you think that is having positively or negatively in the business in the near-term (multiple speakers)?

That's a good question; it's something we need to be consistently clear. When we talk about market, we're including commercial vehicle market in our production numbers. And commercial vehicle is, as you know, is roughly 10% of our total revenues principally in the powertrain area.

Our outlook, for instance, on the commercial vehicle side is for the global market to be down roughly 3% on a year-over-year basis with the biggest driver of that load growth or no growth, really being the North America market but it's encompassed in the production numbers that we communicate to you and the growth numbers regarding markets that we communicate.

Okay and then just three really quick maybe housekeeping issues. What is the cash component of the restructuring and what is the payback period that you're expecting? And then also on powertrain, there was a big step-up in D&A to $67 million in the quarter. I think it was like $40 million something in the first quarter. Just curious if something was going on there? And then the exact share repo number you were expecting specifically for the second half of the year.

So let me start with the share repo number. So we've got included in our guidance assumptions for the full year $600 million. So that would be versus the $435 million year to date. So that is obviously increasing share repurchases and Q3 and Q4. If you did that math, we are assuming acceleration off of the Q2 level of about $65 million. If I -- your first question was -- and I'm sorry, I missed the middle one. The first part of your question was cash flow on restructuring?

The restructuring charge that you took in the quarter, how much of that is cash and what is the payback period you're expecting from the restructuring charges?

That cash -- it will be -- that one will pretty much flow through this year. That primarily relates to the closure of Barcelona and powertrain in Spain. Payback on those types of plant moves, they do vary and we're -- tend to see anywhere from 3.5 to 4.5 years.

Again, that may sound long but it's -- those are complicated plants to move. That's one of the reasons why they're still there and they are obviously in Western Europe so there's a little bit more expense. But on powertrain, European powertrain plant moves, that tends to be the range of payback.

The D&A stepped up as $67 million versus, I think it was about $44 million in the first quarter. It just seems like with write-downs, that should be a number that might go down as opposed to going up that much.

That's fair although we have expanded capacity in China and in Eastern Europe which is increasing that D&A number. The other thing just to think about is these plants that are closing in Western Europe have been around for awhile so their relative depreciation burns a lot less than some of the newer facilities. So even though we are taking those off-line and getting out of them, it's got a slightly different appreciation expense profile.

That's very helpful. Thanks so much.

Brian Johnson, Barclays.

Yes I have a longer-term question. Good morning -- tied to the 48-volt and electrification move and then more of a below-the-line question on tax rate. With the longer-term evolution towards partial hybridization, whether it's 48-volt or Prius-style hybrids. You have talked about the 3X to 7X CPV move but questions we're getting are a couple of things.

Basically boils down to what are the margins likely to be in that future world? What is the competitive environment given there are players out there clearly servicing Toyota's needs on the hybrid side? Is it going to be as concentrated and hence, maybe as profitable as the powertrain business has proven to be? And especially since a lot of it is wiring and wiring a fair amount is copper price-through?

Well, when you talk about the entire system, our outlook for this space, margins would be roughly in line with the blended rate between Electrical Architecture and Electronic & Safety. Because what we're focused on selling, Brian, is we've discussed with you in the past is really the full system. Obviously, there is a period of time when you ramp up new programs or products like this where there's more investing than there is earning.

I can tell you we've talked about EVs or vehicle electrification for quite awhile here and as you know, there was a point in time where we were investing far more than we were earning. This year, we're at a point where it's a profitable product line, not quite at the levels that we're at for E&S/EEA today but certainly on a good track to achieve those levels.

I think just one addition to that, Brian, is as volume comes up, we start to see the benefit of material savings and just being able to acquire or procure better. Obviously, as these product lines start out at relatively low levels, we don't see that type of material performance year over year.

Okay, second question is around given the UK referendum results, the sustainability of this 17% tax rate. I know it's early days. I know there are a lots of tax treaties that would need to be renegotiated but could you just help us through the impact, the risk factors in terms of remaining EU members trying to tax operations locally to offset, especially with your move to Eastern Europe that you might have with that and just how you're thinking about that?

Sure. It is something we are paying close attention to. I think it does, to some extent, has obviously settled -- after the -- all the activities at the end of June. To your point, it is going to take a long time so there are a couple of things that we're watching and will be mindful of from a, what I will call a tax structure perspective.

Those are primarily around how the European Union and the UK interact or contract effectively post-Brexit. At this point, we don't see anything that materially changes our tax rate. So from a tax policy perspective, there aren't any single major drivers that if, we were to -- if they were to change now, we would have a material impact of a 17% tax rate.

Obviously, if new treaties and such are struck, new agreements are reached, particularly, if it's punitive to UK-based companies, we would obviously have to evaluate how to either structure around those or look at other alternatives. I would caveat, I think the one thing that' -- our tax structures a little bit unique in Europe because even though we are UK-based, we have a significant presence in Europe so it's not necessarily one of these tax structures that's built on, what I will call, just planning initiatives.

We have large physical presence in the UK. We have large physical presences in Luxembourg and our structure tends to be built around how we do business in Europe, how we do business in the UK versus just one-off planning actions. So that tends to be more substantive and tends to hold up better to tax law changes, i.e., things get grandfathered and such.

So right now, we see no risk. I hope that answers the questions, but again, at this point, we see no risk at this point for the 17%. There is nothing out there that we're looking at saying, we need to go change it now but obviously, something we will continue to watch diligently as we go forward.

And if I can add, you are at present continue to do scenario planning and what-if analysis that we're in front of it versus behind it.

Yes, we are. Did that answer the question, Brian? I know it was a little open-ended?

Yes, about as much as we can know at this point.

Okay, thanks.

Pat Archambault, Goldman Sachs.

Good morning. A couple from me. Just on the third quarter, it was disproportionately lower than what we expected and consensus did and the growth rate is somewhat subdued in terms of operating income. Just wanted to get a sense of why that is in 3Q in particular?

I mean, I take it's some of the factors, just an extension of a few of the items that you highlighted, particularly, some of the operational issues, right? $20 million that becomes $30 million, but maybe just I'll leave it there and just see if you can give us the line items so we can better understand that sequential year-on-year move, if you will?

I think it's a combination of those. So you're right, the E/EA performance, the powertrain revenue, those impact the third quarter a little bit more as you think about the back half of year than the fourth quarter. We've also got -- we continue to launch products in E/EA and E&S and those are more Q4 launches so you've got a little bit of the items that are weighing us down or a little bit heavier in Q3, with some additional growth coming in the fourth quarter, which is what's giving you that look.

In actuality, Patrick, the growth rate accelerates in Q3, actually, in growth over market so it's on a relevant basis. It's a strong growth quarter. Operationally, to the point Joe talked about, there's launch costs as well as in the manufacturing inefficiencies and mix powertrain relative to other business from a margin standpoint.

Got it. And just related to that, the impact of the supply issue in Japan. You said it came in kind of in line with what you expected and was supposed to be made up with for in the back half as -- maybe can we just put some numbers around that and remind us what you guys are thinking there?

So the impact in Q2 was about $40 million to $50 million. We had $50 million at the bottom of our range so we're basically at the bottom end of the range. I think as you think about it in the back half of the year, it's a little bit of a mixed bag.

The way I think about it as we call out revenue of about $100 million from an industry volume perspective in the back half of the year, the Japan impact or the recovery of that is effectively netted in there. And it's case by case.

Some customers, as you clearly saw it come back; others talked about it not coming back but maybe as it related to some of the other inventory adjustments. So less of an impact in Q2 and effectively netted within our industry volume adjustment in the back half of the year.

Got it. And if I can just ask one maybe more theoretical or longer-term question on Slide 11, I found this announcement interesting when you made it. Is there -- you mentioned Columbus, Ohio, I think the Smart City Challenge winner, and Boston, I think the -- is there anybody doing robo-taxi, like Singapore is?

When we've look at it, it seems like most municipalities are just starting with some kind of an automated bus or shuttle system and Singapore seems to be by far the most ambitious but you guys having delved into it a lot more deeply, I wanted to see if that's what you were seeing as well?

Singapore is the most advanced from a plan to get to, use your term robo-taxis, and we've been working with them or planning with them for about the past year. There are several other cities that are talking about it at this point in time, that we're talking with, providing the same sort of service and solution.

But when you look at Singapore in terms of actually executing, we're in a situation now where we have launched a program, we'll have piloted vehicles for two years through the end of 2018 and actually, pilotless vehicles beginning in 2019. And their plan is to have pilotless vehicles, a fleet of pilotless vehicles in the area that we're currently testing beyond 2020, servicing consumers.

So they by far and away are the furthest along but when you look at other US cities, there certainly are examples. London is talking about it. Amsterdam is talking about it. They are looking at it and where we are located in -- outside of Shanghai and [An Ting], so there's a lot of dialogue but Singapore is first.

Got it. All right. Well, extremely interesting. Thanks a lot, guys.

David Leiker, Baird.

Good morning, everyone.

Good morning, David

Kevin, I wanted to touch on two things. One is on the 48-volt launches that you have coming up in the contract and any other bookings that you have. Are these bookings that go into vehicles that are meant to be a small portion of fleet, test-type applications? Or are they broader in scale where an entire vehicle platform may end up being a 48-volt?

Listen, I think it's ultimately entire vehicle platform. It's lower volume today. So as I mentioned to you, we have through the second quarter $200 million of total bookings, including those two programs that are going to launch next year with European OEs but they are launching on vehicles that tend to have a significant amount of volume.

So I wouldn't -- I'd call it beyond a test but it's certainly not high volume in this case. When you go through the economics and the discussions that we're having with -- when you go -- based on the discussions we're having with the other OEs at this point in time, and you talk about the technology, the cost of the technology and the benefit of the technology, we think this is something that is going to gain significant traction, as we go for release (multiple speakers) --

The economics make a lot of sense there. And then on the autonomous driving side, there has been discussion here in the last few weeks of trying to create some industry standards for the sensor suite, the algorithms, the applications accelerate the path, through regulations, through development and ultimately, lowering the cost curve on that. Do you -- what is Delphi's view on that and your ability to participate in something along those lines?

Well, listen, ultimately, if you break the market down into two spaces, if you were to look at the mobility providers, the non-traditional OEs, I think they are less focused on a standard and they are less price-sensitive. For them, it's about the economics of drivers in more vehicles with a slightly different answer. I think for the traditional OEs, having a standard makes significant sense.

It's, to your point, what will drive down costs and ultimately, will drive up penetration. Our view is with some of the recent events and certainly the dialogue out of Washington, that's something you will see more pressure on or greater push towards.

Where do you see Delphi? Are you part of a group that drives that? Do you take the baton and drive that effort to standardization? What is your role?

When you look at the suite of products, we have from hardware to software as well as some of the partnerships that we have. We think we're ideally positioned with support, quite frankly, from others to actually be one of the leaders in the supply base driving that.

Okay, great. Thank you.

Ryan Brinkman, JPMorgan.

Hi good morning. Thanks for taking my question. What is your outlook for -- good morning. What is your outlook for the Chinese government tax incentives on smaller engine vehicles? Do you presume your forecast, if this goes away at the end of the year or that it is extended and if you presume it goes away, does it provide a bump in the fourth quarter on pre-buy?

At this point, we have assumed it as much a 2017 question. We assume it ends, just for lack of any better information. I would tell you there haven't -- we have had some discussions internally about pre-buys; haven't necessarily seen the big push from customers scheduled perspective yet.

It's not too late to flow some of that. So China is going to be, just from a year-over-year comp perspective, a little interesting for everyone, it's just not us, for everyone just Q3, Q4, just given the volatility from last year. And last Q4 was obviously a very strong quarter in China but at this point, assuming it ends at the end of the year and have yet to see any big discernible pull as a result of an ending.

Okay, thanks. And then the last question is just on the M&A environment. You mentioned the prepared remarks that you continue to pursue inorganic growth opportunities that meet your investment criteria. So I'm just curious what that environment looks like? The ability to find attractive companies at attractive prices, presumably the Companies are out there, but relative to attractive prices, how to think about that?

Because the stock market is at an all-time record high and yet the prices in multiple for automotive companies are still down. So what's the more important metric, the valuation of the market overall if you're going to buy a technology-type companies or the valuation of automotive companies?

Well, listen, Ryan, I think each situation is unique. When you look at the high tech companies, you are right. You certainly have seen valuations increase. That is partly why Joe and his team are in addition to focused -- focusing on investment opportunities out of Silicon Valley. Actually, doing more activity outside of Silicon Valley from a prospecting standpoint and we'll probably talk about -- more about that later this year.

From a more traditional acquisition standpoint, listen, we have a fairly simple and straightforward perspective and it's really cash-on-cash returned. We look at those as traditional cash flow investments. They need to generate the right return on invested capital for us to go forward and make those investments, including both purchase price, certainly on the outflow. But when you look at performance of the business, margin expansion opportunities, and synergies.

Great. Thank you.

Colin Langan, UBS.

Great. Thanks for taking my question

Hey Colin.

Just to -- on a follow-up on the Singapore fleet, any color on how these vehicles would work? Are they going to be geographically range-bound? Limited to certain routes? Any speed restriction? Will they work in all weather? Just curious how these will be deployed initially?

Yes, they will be geographically range-bound. There's an area called One-North, which is about 5 square mile space where they will be resident to -- it's residential and commercial. As I mentioned for the first two years of the program beginning now, we actually have a vehicle there now. We will have six vehicles there by the end of next year.

For what it's worth, five of which will be fully electric vehicles. They will be piloted for two years and then they will be pilotless beginning in year three, and they will operate in and around that range.

Got it. And on the 48-volt technology, how is your technology different from your peers? Do you think, particularly on the vehicles that you are launching on, did you need to partner things like battery and e-motor or do OEMs find those components on their own? And overall, do you think this has any impact on the full EV demand? It seems like a pretty viable bridge to fuel economy at a (inaudible) cost?

Yes, I mean, our outlook, when you look at our outlook for the market for HEV EV, by 2025, we are still -- our perspective is it -- they make up high-teens percentage of overall vehicle production, with full electrics representing roughly 2% to 3%. And 48-volt representing roughly 15% of the vehicle production which, six months ago, the IHS outlook was that they were worth 10 points of that growth. When you look the economics, it's a no-brainer, quite frankly.

When you look at what Delphi brings to the party. In addition to systems integration, from a product standpoint, we bring everything with the exception of e-motor, the e-turbo and battery. The solution that we're offering, we are partnering with others to offer those solutions to OEs and it would be our intention longer-term to continue to partner with third parties versus develop internal capabilities in those areas.

Okay. Thank you very much for taking my question.

Joseph Spak, RBC Capital Markets.

Hi. Good morning, everyone.

Good morning, Joe.

I was wondering if you could just help me a little bit more with the fourth-quarter margin year-over-year bridge because, if my math is right, you're pointing to something like, about like 13.9%. And I know on the year-ago period, you dealt with all the inefficiencies in China from the rapid ramp-up.

But it also sounds like you're talking about some continued inefficiencies in the back half so I was just wondering if I am missing anything else big that helps bridge that improvement?

No, I think though, you're thinking about -- you have the right components. So we had inefficiencies, $25 million to $30 million last year in China, as we dealt with the whipsaw around the volume ramp; that's obviously not there. That comes out. We will see a little bit of inefficiency -- this -- the current E/EA inefficiencies in North America. We'll see those wind down over the course of the quarter so think of that as roughly $10 million in the fourth quarter.

Fourth quarter is usually strong for us as well, remember as we have NRE and we have nonrecurring engineering. We get a lot of our reimbursements in the fourth quarter, particularly in the E&S and the Powertrain business so that margin rate is typically stronger in the fourth quarter as a result of that and we continue to see that. And call that $20 million or so, if you want to range-bound it. I think, Joe, having been a little bit longer than Joe, if you go back and look at 2014 versus 2013 fourth quarter so on and so forth, you'll note fourth-quarter margins tend to be our highest and it's for the reasons that Joe just talked about. It's really in line on a more normalized comparison.

Okay, can you just remind me with the $25 million to $30 million in inefficiencies in China last year, is that mostly in powertrain or where did that -- how did that break down?

Mostly in Electrical Architecture.

Electrical Architecture, okay. Okay, and then just quickly on the Singapore deal. I guess I was just -- it seems that this draws heavily on maybe the automatic acquisition. I was wondering if there's a little bit of change in strategy with that asset.

Were you going more after this shared mobility concept versus potentially signing that to OEs? You seem to be on the margin, wanting to do little more of that work in-house and then how -- for this, well, A, is that true? And then B, for this deal, how does an -- the OE or other partners who get involved in this? I guess, why did they come to you as the first point of entry?

They came to us because we provide the full suite of services and they were less focused on what type of vehicle we're actually using. So the vehicle there right now is actually -- it's another Audi FQ -- Q5. The additional five vehicles that we're going to select; it's a choice between two OEs. I don't want to get into that but they will be fully electric.

They are really focused less on the car but how does the overall system work? Not only the vehicle but also how does the vehicle interact from an infrastructure standpoint and how to we put a cloud-based system in that allows the government of Singapore to operate a mobility on-demand service, Okay?

So it goes above and beyond that so they can drop that service in. I would say that's an expansion of what we've previously contemplated. We think there's a lot they will learn. There is a lot we will learn. I think the mobility on-demand, quite frankly, what you're seeing is a space of the market moving much faster to get automated driving than the traditional OEs.

And although all the traditional OEs are very focused on it and as you know, some are further along than others. When you look at the non-traditional players out there in the mobility space, they are moving much more aggressively, much faster and it seems to be a bigger priority and we want to be a part of that. We want to be one of the first movers in that.

So is it fair to assume the automatic asset has shifted a little bit towards providing that type of solution versus trying to position that more to OEs for owned autonomy, if you will?

No, listen, I think -- I don't think the strategy has changed at all. I guess, given the pace of change and the desire to move quickly, the mobility providers, the non-traditional folks out there are looking to ramp it up faster and therefore, are more interested in that part of automatic that we have to offer. The traditional OEs, there's some we're working with or providing automatic to algorithms to. There are others, to your point, that are developing their own.

Okay. Thanks a lot.

David Lim, Wells Fargo Securities.

Hi. Good morning, everyone.

Good morning, David.

Morning. Just a couple quick questions. Are you seeing any kind of risk to North American production in the second half? I know that your latest guidance takes all the latest information into consideration but we're seeing some inventory heaviness in certain segment pockets.

David, we're obviously watching it very closely. There was obviously an announcement last week with Ford and such; at this point, what we see is in the forecast. We haven't had any updates or -- we have not seen any softening at this point beyond the volume estimates that we have provided.

Got you. And then recent news this morning, Samsung and Marelli discussions there. How would that impact your Infotainment business from a competitive standpoint and then secondly, would you guys consider selling off Infotainment, obviously, if there was the right price for it?

Well, let me start with the last and that we -- Joe and I can respond to the first. Listen, our Infotainment business, we consider to be very strategic. Joe talked about the growth rate. It's going to grow close to 20% this year and I think it accelerates in 2017 and beyond. So it's a great space and we think it's a great space where you're going to see convergence between active safety, infotainment, cluster technology.

We are starting to see that today and we think we've got a great position in it. Having said that, we're about how do we maximize return to shareholders, right? And from that perspective, I guess I'd never -- I would never say never but I think it's highly unlikely based on what we view the opportunities to be in that space.

With respect to the story today about Samsung and Magneti-Marelli, listen, we're very familiar with both companies. If that were something to happen, it's not something that we're overly concerned about.

Got you. As always, thanks for the color.

Emmanuel Rosner, CLSA.

Hi. Good morning, everybody.

Good morning, Emmanuel.

Just first a quick point of clarification on China and just the Eastern/Western automakers in the powertrain business. When you look at the full-year outlook by now, I think up until now, you expected to outperform the market quite a bit. What is your outlook for the full-year -- your own full-year China revenue in comparison to the market now?

So we're, right now, looking at full-year China growth of 9%, adjusted growth of 9%. As I mentioned, we have a view of China production growth at about 4% or 5% over market on the full-year. Again, there will be some bouncing around in Q3 and Q4 with those rates obviously, just given what happened last year in the -- and just the comparables year over year, but full-year, when it settles, 9% growth and about 5% over market.

Okay, that's helpful. And I guess just shifting to the ADAS opportunity, obviously, significant content of opportunity over time. At the same time, a lot of these components seem to be becoming significantly cheaper very quickly and obviously, a lot of it has to do with ramping up volume.

What is the environment you're seeing in terms of price progression for active safety content and component? And is that still in terms of getting that to reasonable margin, is that still consistent with it?

Our price outlook hasn't changed. We still think around 2% is the right number for Delphi overall. We're actually -- we were a little lower than that in Q2. You're right. Electronics & Safety tends to be the -- our one segment where price is a little bit higher 2.5%, to 3%.

But again, we're comfortable with our range. Don't see things significantly changing, and as I mentioned one benefit that we do see the margins over time and expect to continue to see, as these newer product lines grow in volume, material savings also is -- becomes more available to us.

So as we buy more, we're able to leverage that spend better. A product line at $100 million, there's only so much leverage you can do. As you get to $0.5 billion and beyond, there's obviously more leverage over supply base.

Emmanuel, if I can add, we're now at a point, we've talked previously -- we talk about active safety, about in investing mode. We're in profit mode now. Not where E&S margins are, but we're clearly making money. I think with respect to price pressure, with specifically as it relates to active safety, it really somewhat depends what sort of active safety solution you are talking about, right?

If it's Level I, where it's just a camera or just a radar, right? It -- that's, as you know, we're in an industry that commoditizes itself very, very quickly and to Joe's point, we're really good at getting cost out when we get volume and leveraging the manufacturing plants as well as getting material savings.

As you get into integrated solution, where you're fusing sensors, that's a much different scenario and there are only a few players that can actually do that, we being one of them. I think in those sorts of scenarios and that's where this space is headed, and those sort of scenarios, the pricing pressure is actually very reasonable. It is there; it's always there but it's much more reasonable.

Great. Thanks for the color.

Brett Hoselton, KeyBanc.

Two quick questions, I just had. One given the lower organic growth expected here in this year, should we just immediately assume that next year and the following year, the organic growth rate is likely to also step down by maybe a comparable amount or is that an unreasonable expectation?

Listen, I mean, we're looking at 2017 now. If we were to start with over our outlook for overall vehicle production, if we were to snap the chalk line including passenger vehicle and commercial vehicle, our outlook is roughly 1% volume growth.

With respect to growth over market, that's something we're still working through. I would think it's roughly in line with what we're seeing this year or more, depending on what we see in terms of acceleration in active safety, infotainment, power electronics, all of the areas that Joe just talked about.

Okay. And then second question is, you're competing against very formidable competitors in the -- whether it be active safety or connectivity or autonomous driving vehicles and so forth. My question is, does the fact that you have an Electrical Architecture business give you an advantage?

Or is it more along the lines of it's a separate business that's just growing as vehicles are electrifying? I guess I'm wondering if there's synergies between that and the other portions of your business that maybe gives you a leg up versus, let's say, a Bosh or somebody along those lines?

Listen, I mean, to your point, they are terrific competitors. They have great technology as do we, but having Electrical Architecture that really enables, right? It's an enabler of everything that we're talking about, whether its active safety, automated driving or vehicle electrification, electrification of the powertrain.

And having the ability to combine that know-how with what we know at E&S, and powertrain and areas, for example, like the SaaS, which we're doing for VW, combining those capabilities is significant. We're looking at similar opportunities from a technology standpoint as it relates to infotainment and clusters. Having that capability and the ability to take out cost and take out complexity based on our experience in that segment is huge.

I think -- Kevin mentioned earlier, I think 48-volt is another great example of that. If you think of -- we have to partner on the motor, the e-turbo and the battery but the rest of the content in that 48-volt vehicle is Delphi content and without the Electrical Architecture business, it would obviously not be possible to put that system together at that level. So that vehicle electrification is clearly going to be one where both the powertrain business and E/EA are able to collaborate benefits.

Thank you very much, gentlemen.

Chris McNally, Evercore.

Good morning. Thanks guys. Just a follow-up on the customer drags within powertrain, similar to some of the questions at the beginning of the call. Is there a way to think about this as a customer-specific diesel production issue or is it really several customers and a representation of a broader, lower diesel sales?

It's more than one customer. It's, we call it, four customers. I do think there is some consistency in what we are seeing across those customers. They are -- and we have talked to each of them and we're obviously engaged but the message back from them has the consistency of exactly what I had said, which is managing diesel inventories, heading into summer shutdowns for the back half of the year.

We're dealing with primarily European production, although there is some export to Asia Pac/India that we're seeing impacted as well. So again, hard to draw any broader conclusions than that. We are certainly not, at this point, where we've had very specific dialogues with the customers but it is more than one. It isn't just one customer.

So if I could augment Joe's comment, listen, on the commercial vehicle side a straight market. It ended up being a very challenging market for anyone in that space. I think as you look at powertrain and you look at light-duty diesel, the reality is every OE has multiple powertrain platforms and there is some mix effect.

So to Joe's point, listen, we're seeing some dots, we're trying to connect the dots. They all may not be perfectly correlated because each OE has different inventory levels, quite frankly, has different mix of vehicles and those all come into play. So at time, at a given point in time, there can be some challenging calculus to give you a real specific answer.

Okay, but so we should -- when we start to isolate the risk, we should think about it as a diesel-specific issue related to some issue of inventory sales rather than a broader powertrain backlog, which I think has been fairly so investors' concerns given powertrains across multiple suppliers have been where we've been having weakness.

So I would say a light-duty diesel-specific issue related to mix, near term, I wouldn't draw any conclusion about light-duty diesel penetration from where we sit now that is any different from than what we have communicated previously. Is that clear?

Yes. Perfect.

So great. Well, listen, we appreciate everybody's time today. Thank you and have a great day.

That concludes the Delphi Q2 2016 earnings conference call. Thank you for joining. You may now disconnect.