Aptiv PLC (APTV) 2016 Q3 法說會逐字稿

Good morning. My name is Kayla and I will be your conference facilitator today. At this time like to welcome everyone to Delphi Q3 2016 earnings conference call.

(Operator Instructions)

I will turn the call over to Elena Rosman, Delphi's Vice President of Investor Relations. Elena, you may begin.

Thank you, Kayla. Good morning. Thank you for joining Delphi's third-quarter 2016 earnings conference call. To follow along with today's presentation our slides can be found at www.delphi.com under the investor section of our 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 the presentation and the press release. We ask you look at slide 2 for a disclosure on our forward-looking statements, which reflect Delphi's current view of future financial performance which may be materially differ 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 cover Company highlights for the quarter and then Joe will get into the financial results and the outlook for the remainder of the year in more detail. With that, I will turn the call over to Kevin Clark.

Thanks, Elena, and good morning everyone. Thanks for joining us. Before Joe gets into our financial results, let me provide some context on the third quarter. Beginning with the highlights on slide 5, we had a solid quarter delivering strong revenue and earnings growth.

Revenue increased 10%, driven by double-digit growth in both our Electronics and Safety and Electrical Architecture segments and mid single digit growth in our Powertrain business. Operating income increased to $531 million and operating margins expanded to 13%, driven by flow-through on volume growth and continued cost structure optimization, partially offset by strategic investments.

Earnings per share increased 17% to $1.50 and we generated strong cash flow, a portion of which we used to return $175 million of cash to shareholders, bringing the year-to-date total per share repurchases and dividends to roughly $770 million. As Joe will cover later, we also took actions during the quarter to strengthen our capital structure and divest our Mechatronics business, continuing the rotation of our product portfolio into high-growth sectors.

Lastly, we delivered another strong bookings quarter, bringing our year-to-date total to $18 billion. The leadership team remains focused on executing flawlessly and delivering on our commitments. Turning to slide 6. The automotive industry's transformation has been the theme of each of this year's major auto shows with the highly-seen megatrends of safe, green, and connected, which are at the heart of our strategy.

The theme of the recent commercial vehicle shown in Hanover was around new mobility. I met with a number of customers who were looking to Delphi to help solve some of their toughest challenges resulting from these megatrends. In addition to the usual discussions regarding new powertrain technologies and their impact on increased fuel efficiency and reduced CO2 emissions, much of the dialogue was around vehicle connectivity, active safety, automated driving, as a means of increasing driver productivity, enhancing vehicle safety and improving fuel economy.

Each of which translates into real cost savings for fleet handlers. In turning to slide 7, at the Paris auto show vehicle electrification was front and center as customers look to close regulatory gaps on CO2 emissions and improve fuel economy. Industry experts and even some our customers are now forecasting 25% to 30% of vehicles to be electrified by 2025.

And given our strength in powertrain technology, electrical architecture and power electronics, Delphi has unique competitive solutions in the intelligent electrification of passenger vehicles that cost-effectively help our customers meet increasingly stringent regulatory standards. These solutions are shown in greater detail on slide 8. We are well-positioned, regardless of the trend in vehicle electrification and our content per vehicle grows with increased electrification.

From 2 to 4 times the content of a gas internal combustion engine on a 48-volt vehicle, depending on whether we are doing components, or a full system integration, all the way up to 7 to 8 times the content on a full electric car. The trend towards increased electrification is very good for Delphi. Slide 9 highlights our $18 billion booking year-to-date which includes large conquest wins for Electrical Architecture in Asia and additional content wins in North America.

Awards for gas fuel injection systems with OEMs in both North America and Europe and major infotainment wins, including a program for a large European OEM and an active safety win with Changan in China. On the right side of the chart are the cumulative bookings for some of our faster growing technologies, underpinning the safe, green, and connected megatrends.

Let's turn to slide 10 for another example. The road to increased vehicle connectivity and automation requires faster speeds for data processing and more high-speed computing power. High-speed vehicle computers such as the multi-domain controller we launched with Audi in 2017, and the integrated cockpit controller we launched with Volvo in 2018, make decisions 34,000 times faster than humans.

Through the fusion of sensors and the integration of advanced software algorithms, these technologies reduce architectural complexity while increasing computer processing power and enabling vehicle connectivity. This serves as a nice bridge to slide 11, which provides an overview of our recently announced partnership with Mobileye.

We've experienced significant interest from customers in the US, Europe, Korea, China, and Japan for our central sensing localization and planning automated driving platform. When you combine Mobileye's Vision and Road Experience Management systems with Delphi's sensor suite, automated driving software from Automatica, and our multi-domain controller, no other entity comes close to matching the quality or the capability of this automated driving system.

Our collaboration is off to a fast start and making significant headway. In fact, you are going to be able to see and ride in the first demonstration vehicle, along with several other important technologies at the Consumer Electronics Show in January. Finally, on slide 12, I'm proud to say Delphi has received two nominations for the Automotive News PACE Awards, one of the industry recognition forums for innovation.

Delphi is being recognized for its gesture recognition technology, which recently launched on the all-new BMW 7 series, and for our 360 degree short-range radar for e-dash systems that provides superior radar performance while enabling many new sensing capabilities. They recently launched on a new Hyundai vehicle with several other OEs launching next year.

This is really a great testament to the capability and dedication of our team, which has received over 60 nominations and won 18 PACE Awards over the past two decades. So with that, I'm going to hand the call over to Joe.

Thanks, Kevin. Good morning everyone. I'll review our third-quarter financial performance before discussing our guidance for the remainder of the year. Beginning on slide 14, the summary of our third-quarter financial performance, we're very pleased with the third-quarter results as Kevin mentioned. Adjusted revenue grew double digits up 10%.

Our EBITDA margins expanded 60 basis points to 17.2% and operating margins expanded 10 basis points to 13%. Earnings per share grew 17% driven by solid sales growth. And in the quarter we generated operating cash flow of $415 million and purchased 1.5 million shares totaling approximately $100 million.

With our 7874 issue behind us, our low tax rate 17% for the quarter continues to allow us to deploy capital more effectively. Slide 15 provides greater detail on revenue in the quarter. Sales growth outpaced expectations with strong performance around the world, particularly in Europe and China.

Beginning with a [walk] on the left, sales volume more than offset price, foreign exchange, and commodity headwinds. FX headwinds were largely driven by the weakening British pound and Chinese RMB, as we had previously guided. And the HellermannTyton acquisition contributed approximately $200 million of revenue up 10% year over-year, partially offset by the Reception Systems divestiture.

Moving to the right, with the exception of South America, all regions benefited from strong growth. Again in particular China was up 27% for the quarter benefiting in part from a weak Q3 2015, while Europe benefited from strong growth in Electrical Architecture and DNS, driven by robust new program modules.

Turning to operating income, slide 16 walks the year-over-year change for the third quarter. Overall operating margins were in line at 13%. Strong sales growth, combined with accretive M&A and net performance contributed a margin expansion in the quarter partially offset by price and FX headwinds. Net performance was favorable despite higher levels of engineering spend and primarily related to our automated driving initiatives [in the US] and the operational inefficiency of Electrical Architecture we highlighted last quarter.

On slide 17 you can see a breakdown of performance by segment. Electrical Architecture had adjusted growth of 11%, with new launches benefiting Europe and higher volumes in China. Margins expanded 30 basis points year over year on higher volumes. As previously discussed, we continue to experience operational inefficiencies in the business which negatively impacted our performance in the quarter by approximately $15 million, in line with our previous expectations.

Powertrain also delivered above market adjusted growth of 4% with strong double-digit gains in gas direct injection and variable valve train, more than offsetting mid-to high single-digit declines in commercial and light-duty diesel volumes. Powertrain margins expanded 30 basis points on strong manufacturing performance, partially offset by the FX impact of the weakening GBP and Chinese RMB, primarily related to the FX transaction impact in our Powertrain UK and China operations.

Electronics and Safety adjusted growth accelerated to a record 17% in the quarter. New program launches, particularly in active safety and infotainment, continue to drive double-digit growth. As Kevin mentioned we are investing alongside this growth to position the company for acceleration in automated driving opportunities. With higher engineering investments in the quarter negatively impacting E&S margins by approximately 40 basis points.

It's important to note the segment numbers for both 2015 and 2016 reflect the realignment of our power electronics business from E&S to Powertrain. This move better aligns our propulsion technologies with the changing needs of our customers. The impact was relatively small with breakeven sales of approximately $30 million in the quarter.

Turning to slide 18, EPS was 17% versus the prior-year, representing our third-quarter of double digit EPS growth this year. We exceeded the midpoint of our guidance range by $0.09, driven primarily by the flow-through of higher-than-expected sales and below the line items contributed approximately $0.03, including the results from our non-consolidated joint ventures.

Turning to slide 19, the third quarter also proved to be active on the capital structure front. We completed the refinancing of our 2023 senior notes that resulted in a less expensive, longer tenor capital structure. As you can see, by using new long-term debt denominated in both US dollars and euros, including $300 million of 30-year senior notes at 4.4%, we were able to extend the time to maturity by almost three years and optimized the cost of funds, decreasing our interest expense by approximately $20 million annually.

And we are generating more key free cash flow, driven by higher operating earnings and lower cash taxes, providing more cash for key investments and capital redeployment. Our capital allocation strategy remains unchanged. As Kevin mentioned, we signed a definitive agreement to divest our Mechatronics business.

With an annual sales of approximately $250 million, we expect the transaction to close in the fourth quarter. We continue to be very active in the market for acquisitions and investments, focused on companies with leading technology, strong management teams and operating capabilities that give us the confidence in our ability to integrate and drive synergies.

We are committed to paying a competitive dividend and returning excess capital to shareholders. As you can see from our recent track record, since 2014 we have returned over $3.5 billion in the form of share repurchases and dividends. For the full-year we are on pace to complete $600 million of buybacks consistent with our prior outlook.

Turning to slide 20 and starting with the outlook for the fourth quarter on the left. Revenue is expected to be $4.1 billion at midpoint, reflecting approximately 4% adjusted growth on flat vehicle production, lapping a tough comparable from Q4 2015. Margins however, are expected to expand 60 basis points year over year with strong net performance helped in part by the lapping of the inefficiencies we experienced last year in China.

Earnings were expected to be in the range of $1.55 to $1.65, reflecting year-over-year growth of 15% at midpoint. Moving to the right of the slide, you can see our updated full year outlook. We are reflecting the strength of the third quarter performance in our updated full-year guidance for sales and earnings.

We now expect sales of approximately $16.45 billion at midpoint, up approximately 7%, and EPS in the range of $6.00 to $6.10 per share, up 16% over last year. Before I hand it back to Kevin for some closing remarks -- given the time of year, we begin to get questions on next year and I thought it would be helpful to spend a minute on our initial considerations for 2017.

As we sit here today we believe global vehicle production for next year will be flat to 2016 levels. However, with our strong portfolio of relevant technologies, we would expect Delphi to grow mid-single digit organic, driven by our faster growing product lines: Active Safety, Infotainment, GDI, and Vehicle Electrification, all of which are expected to grow strong double digits in 2017.

As always, our team remains focused on optimizing our cost structure and driving increased efficiencies throughout the organization. This relentless focus will allow us to continue to expand operating margins and invest in key technologies, including our CSLC automated driving partnership with Mobileye. Delphi experienced significant FX and commodity headwinds in 2016, if spot rates held where they are today, we would only expect a $150 million headwind to revenue in 2017.

Lastly, as we noted, the divestiture of Mechatronics is expected to close late in the fourth quarter and will be accretive to our 2017 adjusted growth rate. Although the sale will be a headwind to reported revenue and operating income. As we reflect on the future, we have a more competitive technology portfolio, a more flexible business model, and a less expensive capital structure that will drive revenue, earnings, and cash flow growth through the cycle.

With that, I'll now turn it over to Kevin for some closing remarks before we open up for questions.

Thanks, Joe. Now wrapping up our formal comments on slide 21. As we said, we delivered strong performance in the third quarter with double-digit sales and earnings growth. We remain confident in our 2016 outlook, which includes 7% organic growth, mid-teens EPS growth, and $1.1 billion of free cash flow.

And as Joe mentioned, we continue to aggressively optimize our cost structure to increase our flexibility, continue to expand margins and fund smart investments in technology that will enhance our competitive position and drive further profitable growth. We remain focused on executing the balance of this year and throughout 2017.

We are confident in our industry-leading cost structure, operating discipline, and safe, green, and connected technology portfolio will continue to yield margin expansion and earnings growth. And our ability to convert more income to cash and effectively deploy capital, provides additional leverage to drive shareholder value in the years to come. With that, we will now open up the line for questions.

(Operator Instructions)

Rod Lache, Deutsche

Good morning. I wanted to ask a couple of things.

First, on the portfolio repositioning, could you talk about what the proceeds are and what the EBITDA was on that Mechatronics business? Are you thinking about any other changes to the portfolio? Specifically, vis-a-vis Powertrain? And given what we're seeing with diesel declines and growth in electrification, how are you thinking about positioning of that division?

I can start with a bit of background as it relates to the divestitures. Those of you on the phone, most of you know we've been talking about our Mechatronics business as non-core and slow growth, and quite frankly a headwind to growth over the last couple of years. As we work to reposition the portfolio and reposition E&S specifically as less mechanical, a little less electrical, and much more software orientation, this was a logical step in continuing to rotate that overall portfolio. In terms of what we do with the business, we've been actually working on that for, let's call it the last year or so. I will let Joe touch on the numbers.

Rod, we won't be disclosing proceeds and deal specifics until the transaction closes. We expect it to close in December of this coming year. As I mentioned in my prepared remarks, think of revenue as approximately $250 million. I would think of EBIT around the $70 million number. And remember, we had a similar situation with Reception Systems, and those businesses are more profitable relative in the portfolio because we no longer -- the last couple of years we haven't been investing in engineering and pursuit.

Any thoughts on the powertrain and some of the trends you are observing there on diesel?

Why don't I start it again, Joe, you can make any comments.

Powertrain is an important part of our overall portfolio. Clearly, there is a headwind as it relates to light-duty diesel penetration in the market. Offsetting that is significant growth in gas direct injection and variable valve train technologies. To put it in perspective, GDI for us this year will grow close to 50%, variable valve train close to 40%. We're working very hard to close the gap in terms of revenue headwind on light-duty diesel with replacement technologies on the gas side of the engine.

In addition to that, the rationale for our movement of the power electronics out of E&S into Powertrain is, given the trend in light-duty diesel, we are seeing more of that customer interaction, quite frankly, take place within the powertrain functions of our customers than where it's been historically, as they work to improve fuel economy and reduce CO2 emissions. That was the rationale for why we've moved that product line there, and that's another product line where we're seeing close to 100% growth this year in revenue, albeit off of a very small number.

It's Joe.

One last thing I meant to finish on Mechatronics. I would also note that, as we look for -- that business is Western European-based. In addition to the sales proceeds, we were facing a fairly significant shutdown cost, call it late 2018 and 2019, as we deemphasized growth in that business. So we will also be out from under that as well as we move forward.

It's not surprising; I think you guys have talked about this? One other thing I wanted to ask, and I will let other people ask questions, could you talk about broadly the outlook for R&D spending as we think about 2017 and beyond? I know you are targeting 18% or 19% EBITDAs and mid-14% EBIT towards the end of the decade, like 50 basis points of expansion per year. Some of your peers are pointing to increasing pressures from R&D and you guys have highlighted quite a bit of spending on active safety and autonomous driving. So can you size up what kind of headwind you're looking at? And how we should be putting that into context for margins?

I think -- I mentioned the 2017, some of the initial planning considerations. And it is still early days from a planning perspective. We're going through investments now. Clearly, we will spend more on automated driving and increase that. As we are setting up our targets internally, we are focused on, call it 30 to 40 basis points of margin expansion next year. And that would be inclusive of any investment in automated driving.

Great, thank you.

John Murphy, Bank of America

Good morning, guys.

Maybe if I can follow up on some of the margin direction you were going in? Quite simplistically, if you can, what kind of sales growth do you need to maintain margins? And what kind of sales growth do you need to expand margins? I'm trying to think about all else equal here, because there could be some big swings in global volume, and I'm just trying to understand. We tend to oversimplify and think about incremental and decrimentals, but curious what you're thinking about what kind of sales growth you need to maintain margins?

John, let me take a first shot at it.

Our business model really remains unchanged. We have built a plan, and work to execute where we have performance initiatives that offset price and economics. I think we've talked about, in the past, is a 10% reduction in vehicle production would translate into about 150 basis points of margin degradation. On the upside, flow-through of [leeched out] or volume flow-through is $0.18 to $0.20 of operating income. That model really doesn't change, and I think we have exhibited times in the past, where whether it was in a specific region or it's in a particular quarter, where we have the ability to flex our cost structure. Its one of the benefits of 90% of our hourly workers being low-cost countries and 75% of our manufacturing facilities in low-cost countries, and high-level temp labor, where we have the ability to flex. At the end of the day, I'm not sure I have a specific number.

Joe, I will defer to you.

Yes, at this point in the planning process, I revert back to what I just mentioned. In a flat market, with appropriate levels of investment to support automated driving, we are targeting a 30 to 40 basis points of expansion, and I would calibrate off of that.

Okay, that is incredibly helpful.

A second question: if you look at slide 9, on the backlog bookings, do you think you are going to have a large fourth quarter where we could see this ramp up to an equal level to what we saw in 2015? And also, as we think about these new business bookings, what is the margin and return profile on these new bookings? Is it higher than corp average during the course of the life cycle of those contracts?

Yes, so with respect to the threshold for profitability, again, nothing has changed. They're at or above our current profit margins, so over the life of the program you'd see improved profitability. With respect to bookings, $18 billion year to date, last year we did $26 billion. We booked another $2 billion in the month of October. I think we have a steady line of sight for $26 billion for full year. Given timing from a customer standpoint, it's possible that we fall $1 billion short, that we're in the $25 billion to $26 billion range. That would be quarter to quarter. We have a clear line of sight, directionally, toward that number.

Got you.

And then one housekeeping, on slide 8, it looks like you see some pretty good expansion as we move to full electrification of the vehicle. The baseline there, I would imagine is about $400 to $500 of potential content on an ICE engine? Is that correct, what that X would be, roughly?

Yes, on a gas ICE engine, John, its closer to $300; diesel would be $500. But we're using gas as a starting point here.

Got you. Thank you very much.

Brian Johnson, Barclays

Good morning.

I have a question around diesel mix, following up on that; and then I'll ask one on Active Safety. You talked just $500 diesel and $250 gas per engine content. As you look at your customer base and think about a consumer going into a showroom in Europe and maybe having some prejudice against diesel, given your customers' offerings in the showroom, do they have the GDI engines out on the market now, that the consumer can leave with a GDI? Or do you still have a base of customers with, you're doing the diesel, but the gas engines are naturally aspirated so there's more of a risk there?

Listen, our customer base currently has GDI engines out in the market and serve as replacement for light-duty diesel and it's passed cars to the extent that, that's what a consumer is looking for. Does that answer your question?

Yes. And so when you talk about building more GDI, is that with different OEMs? Or across a greater rate of lineup of those OEMs?

It's penetration of existing as well as growth with new OEMs. Both. It's really both.

Okay. Second question is more around Active Safety, and since we last chatted on calls, NHTSA has come out with some quote, guidelines, unquote, for testing active safety systems and voluntary compliance. We've seen, actually, a startup, according to TechCrunch with [Jarrods] [8 S] aftermarket product due to NHTSA concerns? Can you comment on how you see that evolving? And then, to what extent is it, are you having these discussions, and in your partnership with Mobileye, the idea of regulatory compliance that we can walk you through almost FAA / FDA style? That compliance process; and to what extent is it that a competitive advantage in E&S?

We, Delphi, whether it's within E&S or our other businesses, have for long time -- we're customers of the regulatory authority. At least as it relates to shaking regulations. Regulation within automated driving and active safety is good. It forces standardization. Once you have standardization, suppliers and automotive OEs can work on technology as well as commercializing the costs and coming down the curve, which allows faster, more rapid, adoption. So that is something that is very positive, and as we talked about our partnership with Mobileye, one of the big compelling reasons there to do that was, how do we develop quickly a standardized system that can be leveraged across OEs or across vehicle platforms, can be done quickly and can be done at a very competitive cost? Because, as you know our OEs are very focused on cost as it relates to technology.

Okay, thanks.

Adam Jonas, Morgan Stanley

Hi, everybody. Good morning.

Two questions, first on Active Safety. And as a systems -- you cannot watch any sporting event or any 10-minute stretch of television without seeing another advertisement of a car stopping before hurting someone or killing somebody, and it seems to me you should be, you are in a great position to start getting some of the real-world data at a geometric rate, to analyze how much safer these technologies are, given the level of cost in your systems that you're providing your OEM customers. I guess the high level question is, putting the fully autonomous cars that could be theoretically thousands of times safer than human driving aside just for a moment, how much per unit, roughly, do you think the content is, per unit? They have a dramatic, like 30% or 40% or 50% reduction in vehicle-to-vehicle or vehicle-to-pedestrian type collisions, based on the data and the technology and you as a member of the scientific community are observing. Is it hundreds of dollars? Is it thousands? Or is it thousands of dollars?

That's a very accurate observation and it's a great question.

We have been really clear, as it relates to -- we look at automated driving as on the spectrum of active safety. And the reality is, if you get to Level III automated driving, you get 80% of safety benefits at 20% of the cost. We estimate total onboarding for automated driving is, Joe help me?

For automated driving? A couple thousand dollars.

At full volume.

A lot of benefit can really drive there. And look at going from Level III to Level IV or Level V, Level V especially, we see initial demand being primarily driven by mobility providers, folks that you're familiar with, who have another economic incentive to have a driver out of the car and for it to be fully autonomous.

There are additional OEs who are working on fully automated vehicles for a number of other reasons, but I think that's a great question, and in our view is at Level III, you get 80% of the benefit at 20% of the cost

That is very helpful, and I think that answer is consistent with your Tier 1 competitors. But I must say I've been asking every OEM the same question and we don't get the same specific answer. We get either no answer, or maybe thousands of dollars, and I'm curious, is that because maybe, if you can really get 80% of the benefit from $5 or $10 a month a monthly payment on a 72-month car loan, people might want to wait. You could have a buyers' strike, right? I don't know if you have any views on that, whether we could have an accelerated replacement demand based on safety at the margin of uninsurable cars which create some dislocation in the market.

I don't know if you care to comment on that, maybe it's another topic, but I had one other follow-up question?

I'm not sure I fully understand the last part of your question. I would say, at the end of the day, we have been booking north of $1 billion in Active Safety programs per year over the last four years. We'll do that this year as well. Our Active Safety business will grow close to 40% this year and revenues in Active Safety will be north of 40% next year. We see a tremendous ramp up in Active Safety sales. It's something that our customers are asking for; it's something that consumers are pulling, its helping OEs sell cars, and I think that is really important.

One final question: you mentioned outlook for 2017 of flat global light vehicle production? That is, while you may be able to handle that kind of environment while growing margins 30 or 40 basis points, and you can handle only 150 bps of margin absorption with 10% decline, your customers, your OEMs are unfortunately not in that as good a position. They tend to see margins drop significantly when we go flat. I guess with that -- we have seen this time and again. If that trend holds, what are your expectations for increased pricing pressure? I know it's always hard, and we know the communication on that. But could you not bake in a bit more aggressive price downs than we've seen over the last cyclical period of low to mid single-digit mobile production growth in the next year?

Listen. I think one thing is, you look at flat vehicle production where we sit today versus where we sit historically, I think there are two factors you need to consider. I cannot quantify it for you, but I think they're qualitative and they translate to quantitative. One is, our OEs from a cost structure standpoint are in better position than they have been historically. And I think that is really an incremental benefit. Two, when you look at vehicle mix, they're in a position where vehicle mix is better than what it historically has been. There is some element of buffering. I think as the market gets more challenged, will OEs potentially get more challenging from a pricing standpoint? Yes, it's possible. That is why Joe made the comment, I made the comment, in addition to our discussion about product portfolio and growth, we're always focused on our cost structure. So to the extent if price downs do go off and we need to respond to that, we have the ability to absorb that and still deliver strong margins.

I would echo that, Adam.

We're always focused on the potential for things like additional price and how to deal within the cost structure. And to be honest with you, and I know you mentioned this, but we hear price all the time. And price from customers is just as loud when volume is going up and they view us as benefiting from higher volumes and they want some of that back. It's a constant dialogue, and again, we often comment, the way we address like price or things like volume is really continued focus on the cost structure.

Great; thanks, Kevin and thanks, Joe.

Ryan Brinkman, JPMorgan

Thanks for taking my question.

Most of the suppliers with commercial vehicle and off-highway exposure that have reported so far this quarter, they've pointed to softer than expected end-market conditions? Is that what you are seeing as well? And do you have a view on when it might bottom?

We are seeing that as well. Our CB in the quarter was down about 4%. We expect for the full year to be about 3% down for the year; so we are seeing that. I think on the bottom at this point, 2016 was certainly lower than we were originally expecting. At this point, from a planning presumption we are expecting 2017 to be down slightly as well just as we go into this and want to make sure we are prepared. For us, I think the off-road cycle in particular is a little tougher to call the bottom, just given that is a unique market, whereas assets are not being -- when things slow down, assets actually get parked and are not necessarily utilized. Even if the market starts to come back, we have a little bit of catch-up on those assets before the replenishment cycle starts. We are seeing that as consistent with our view.

Okay, thanks.

Unrelated but still on commercial vehicles: does your partnership with Mobileye extend to commercial vehicles also? Or are you otherwise going after the business? I ask because there seems to have been a pickup in interest recently regarding autonomous trucks, especially after Uber's famous autonomous beer delivery. I'm curious if you're doing anything there?

Our partnership with Mobileye is focused on passenger car. But having said that, Ryan, we've been focused on the commercial vehicle and been having dialogues with several of the commercial vehicle manufacturers about automated driving. I will tell you, I wouldn't say that's a new phenomenon, to be candid with you. I think, again, given the fact they have a commercial interest in fuel economy and a commercial interest in increased safety and driver productivity, we've been working with several CBs over the last couple of years with respect to adoption of automated driving technologies in that space.

Very interesting. Thank you.

Joseph Spak, RBC Capital Markets

Good morning.

Going back to R&D, clearly a lot of interest, a lot of excitement and a lot of rapid change, which is why you're talking about some higher levels of R&D or engineering. I was wondering if, and maybe this is a little more difficult to quantify, the level of reliance that your customers are putting on you for electrification or connectivity or active safety, has that increased, do you think, over the past year or so?

Yes. Let me start with, overall, I think the reliance on, one, technology and two, probably as important, maybe more important, systems integration, has gone up. I think a great example for instance, is the multi-domain controller and the integrated cockpit controller that we are working on. I would say in general it's gone up. There are some OEs who tend to want to do more on their own. I think you can guess who those are. There are others who are more likely to outsource that to suppliers like ourselves. So it varies a little bit by OE. I would say, in general it is drafted up.

That is helpful.

Second question is on Hellerman. I wonder if we can get an update? If I look at your walks on sales and profit, just on acquisitions it looks like that margin was a little under 12%? I think it's been there the past couple of quarters. I think it's probably a little bit below what Hellerman did historically? So I was wondering if you can provide us an update on that integration and the savings? Are those savings coming in, in some other bucket? I guess related also, is the pound weakening a headwind for that business? Or has it been a headwind?

The business is doing great. And the integration is actually ahead of schedule. And Joe will comment on the rest of your question.

On the acquisitions line in that bridge on 2016, we also had Reception Systems coming out, so there's a bit of depression in the margins. That business is growing at 10%, which is in line. We were focused on 9% to 10% growth in the acquisition model. Its hitting its margin targets, its historical margin trends. And the synergy number, which was $50 million for 2018 will certainly be at that, and we're striving to be slightly above it on a run-rate basis for 2018. Things are going well with that deal. Its a nice business; its a good fit for Delphi. Its a very well run business, very strong management team that has remained with Delphi and continues to run that business.

Great, thanks for the color.

David Lim, Wells Fargo Securities

Several questions. I apologize for being granular on this.

The way we should think about the soft guidance for 2017 with the data points that you gave us, you said we take the full-year 2016 and then subtract $250 million, I think it was, for the Mechatronics business?

Yes.

And build up that way? Okay; got you.

Longer-term, China NCAP 2017 -- any kind of preliminary idea what they may institute and how that would impact your business, as in a tailwind from radar or camera, et cetera?

I would say, high level of confidence that they will implement some element from NCAP; not completely sure what specific items. It will definitely be a tailwind for Active Safety. We expect to benefit from it. The reality is our bookings, we have some bookings, Active Safety bookings in China. Some more recently, quite frankly. But it's not a big number that we're coming off of, so I would view that as longer-term potential upside.

And then, Kevin, on the bookings that you've announced for Q3, any idea, or can you give some color on how Active Safety broke out in the quarter? Thank you.

Yes, sure. I have it here somewhere.

Active Safety year to date is a little less than $900 million of bookings.

Got you, thank you so much.

Itay Michaeli, Citi

Good morning.

You talked about 2017 a bit. I was hoping to get a bit of an update on how you're thinking about 2018 targets that were provided at the April Investor Day?

Itay, we are still working through the out year, obviously. I think as we talk through things like market and FX rates from a 2017 perspective, those would obviously carry through to the 2018 numbers. But at this point we haven't really done much beyond that as we work through 2017.

Great. And back to 2017, given the uptick in restructuring spending this year, how do we think about the net performance relative to pricing in 2017? Is that a potentially a bigger source of margin expansion for you next year?

We took actions this year, we took actions earlier in the year, planned actions as I talked about. We accelerated them, particularly the closure of a Powertrain facility in western Europe. We continue to work our overhead structure down and that all accrues to the benefit of 2017. And for us, it really goes back to what I was talking about. We're in the process now of, how much do we reinvest in the business alongside the growth we're seeing, while expanding margins. For us, we are doing that on the cost side to be able to do both: expand margins and invest appropriate levels and keep technologies. And I think you see in the growth rates in E&S this quarter at 17%. We clearly think there's opportunity there and quite honestly, more opportunity down the road to be invested in it.

It's important, and Joe can explain.

A lot of our focus on cost structure optimizations is, one, to offset price down in economics; but to the extent we can drive incremental productivity, are there areas where we can make smart investments, all of which are variable, by the way. It's not investments in brick-and-mortar or fixed cost. But are there areas where we can make smart investments that allow us to drive future growth?

That is helpful.

And lastly, I think, Kevin, you mentioned seeing some customer interest for the Level IV or V offering you have with the Mobileye partnership. If we could talk more about that. Specifically, are you seeing any interest after you onboard in 2019? And then, are your customers looking to apply the system for more of a ride-sharing environment initially? Or direct sale to consumers for Level IV and V?

I think, given the dialogues we're having with select customers, they could have them in their vehicle close to 2019, or before 2021, put it that way, given some of the dialogue. In terms of pulling it forward, obviously what is critical is that our partnership begins working with OE sooner rather than later to integrate that. Whether with respect to ride sharing or it goes in their normal consumer fleet, I don't have any answer to that. I don't know.

Okay, great, that is helpful. Thanks so much guys.

Emmanuel Rosner, CLSA

Good morning, everybody.

I wanted to drill down a tiny bit more on the diesel; the diesel mix risk going into next year. Do you have any rule of thumb on content? Diesel -- you said diesel versus gas, but let's say customers just replaced their diesel vehicle with a GDI gas engine. What would be the content impact for you?

Round numbers, Emmanuel, we have used $500 on the diesel side and $300 on the gas. Gas is roughly 60% of diesel, generally speaking, from a content perspective for us.

So that $300 is already included the GDI system on it?

Yes, again, we work with averages. Every OE is a little different; but think of it as 60% gas to GDI.

Okay, understood.

And then, going back in the interest you are seeing with the autonomous systems with Mobileye. The customers you are talking to about it, are they generally automakers looking specifically for a turnkey solution, and would like to invest less? Is there a specific profile for interest in the system? Or is it generally as part of overall autonomous discussion? And how do they go about deciding whether this is the right system or whether it would be something where they have more direct involvement?

It is both. Both OEs who would want a straight turnkey solution, who historically don't look at what they have in terms of resources or value add being development of a system and incorporating what they do with what we would do; as well as work with some OEs who historically are very strong from a software standpoint, very strong from a technology standpoint, who would be involved in what it is that our partnership is doing. So there isn't a quote, unquote typical; it's both ends of the spectrum.

All right, that is great to hear.

And quickly on your electrification content opportunities? Obviously very big potential increases versus the current Powertrain content? Are some of these content based on early pricing, because it benefits from being low volume and therefore fairly high price, but could see some meaningful price reductions as volume comes up? Or do these content number already incorporate normalized volume assumptions?

I would say it's fairly normalized at this point. Remember, a big part of that for us is our electrical architecture content. That is well known, the cost in the marketplace, and the cost in the marketplace is well known for that. This isn't -- there is a lot for us -- electrification is important because it's very much our bread and butter, particularly as it relates to electrical architecture. So I would think of it as more normalized.

And Emmanuel, one thing I want to add to your question about diesel versus gas. This is really important. When you talk to our OE customers, especially on the European side with respect to light-duty diesel, to the extent there is a decline in light-duty diesel penetration rates, and there's an increase in gas direct injection, the reality is, without more light-duty diesel, they cannot meet standards that are out there. They are going to need to overlay increased vehicle electrification to achieve that. So, as we give you the trade-off between light-duty diesel and GDI, and spot on its a $0.60 on the dollar trade-off, you do really need to overlay some element of increased electrification. Whether that is 48-volt, whether it's full hybrid, or plug-in hybrid, or whatever the case may be.

So I don't think the calculus is as simple as saying, less light-duty diesel penetration replaced with lower content gas direct injection. There has to be an electrification quantification that you need to roll into your assumption to fully effect that.

Is that immediate, or can the automakers afford to wait a few years before one of those regulation milestones?

If you look, the EU emissions regulations on CO2 is 2021. Fuel economy is 2025 in North America. We are getting close. They certainly need to think through it. And then you've got the added complexity of additional content gets added to the vehicle there's additional demand for electricity within the vehicle, which places more demand on the internal combustion engine. Things like 48-volt become relevant very quickly.

Great, thanks for all the color.

Matt Stover, SIG

A detailed question and just a question-question.

A detail on that reclassification; what product lines were in there? And if we were to look at electrical, would there be other product lines that perhaps could be, from an outsider's perspective, classified within the context of Powertrain? In other words, are all of the Powertrain-related electronics being reclassified?

No, so the product would include things like controllers, software, inverters and converters, 48-volt driver modules. Those would be the bulk of the product lines that have shifted out of E&S and into Powertrain.

Okay. You said 48 -- inverters and 48-volt?

The software modules. The software.

So if we were to think about the growth in 48-volt systems, we think that some of that would accrue to the Powertrain and not just to EEA?

Yes, that would power electronics, the growth we're seeing in power electronics would now be in Powertrain, yes.

Okay. The second question is a big picture question about the bookings data. If I look at your year-over-year bookings data, the long-term growth it's plus 10%. If I look at the quarterly number, it's down 29%; if I look at the rolling four-quarter, it's down 23%. If I look at the [eight] year-to-year figure for year to date, it's minus18%. I know these things are clumpy; I just look at this data and wonder, what it is we should be deriving from it because it is so assumption-laden? What is it you want us as investors to walk away with?

One thing that is in particular, we had a very large award in Q1 of 2015 we've talked about since, plus $3 billion in the quarter. That does skew, and I would say when bookings are lumpy, timing from quarter to quarter is a little challenging, but that one was disproportionately large and is still affecting some of those year-over-year and quarter comps.

A bigger picture: I think this is one indicator of the strength of the revenue line. You are right. I wouldn't say, I don't know if I'd call them assumptions at the end of the day; I'd call them a number of variables get factored into this at a point in time. If global production is specific vehicle production, it's specific take rates within a vehicle, it's specific regions, foreign exchange, commodity prices. You're absolutely right; it's not a simple calculation.

I think the way that I've ultimately resigned to this is, this is one of several indicators for revenue growth the guys like you ought to look at. It shouldn't translate dollar for dollar in any given quarter or any given year. But it is one thing to think about and consider it as one additional bit of information that we give to you guys to talk about what we are doing. What it is we are seeing from a technology standpoint; where our revenue should ultimately mix out to; what sort of product lines and with what customers.

Thank you, gentlemen.

We have time for one more question.

Colin Langan, UBS

I wanted a clarification.

On Investor Day, the long-term growth was a 10% in a 2% market, which would mean in a flat market you're at 6%, 8%? When you talk about mid single, it seems to be either below or at the low end of the 6%, 8%? Does that mid single include FX and the $250 million divestiture? I want to clarify that?

The way to think about it is, we have had -- you're looking for probably about four points of growth from the math; just think about the math you just said. You're thinking, obviously, markets come down a couple of points. We're also seeing, if you want to talk about a couple of points, 2 to 3 points of program cancellations, and/or delays and take rates. So think of FCA. FCA cancelled past car programs in the past, the past few months.

The ramp on some of their MPV programs, their multi-passenger vehicle programs, are slower out of the gate. That is probably -- and then you think, some of things with GM and Ford, that's about 2 to 3 points of that. Then there is about a point of positive offset. So that's how you should think about that 4% coming down from the 8%; or let's call it, if we are 8% to 10%, we're at a midpoint of 9%, we're now saying mid single digits, call it midpoint of 5%, so that's the 4-point decline.

Got it. And then it would be a little lower if you take out the divestiture?

Yes.

Okay. And you commented earlier, I thought you said that it was margin-beneficial to get rid of it, but then it was $250 million and you're taking out $70 million in EBIT?

Growth-rate accretive. We been saying for a long time, that business has been shrinking. It will go down faster in our out years. We talked about that business being two or three points of growth free. And that's historically, from a negative impact, from a headwind from a growth rate perspective. Accretive from a growth rate perspective moving forward.

It's very similar to what happened with Reception Systems. We deemphasized the business -- you stop putting money into that business for pursuit activities, for product development, for engineering, so the margin is higher, but you are dealing with a fairly significant decline in revenue.

Going into next year, we think (inaudible) the core business should take a step down for the (inaudible) that's how we should model it?

That's how you can model that, take those numbers out, yes.

My last question, I hope this doesn't sound stupid, I'm looking at the restatement for the reclass for Powertrain and E&S? It looks like, if I look at last year, sales for Powertrain, or reclass up $7 million, but EBIT down $9 million? How should we think about that? I'm trying to understand the reclass? Was it a money-losing business that was being moved over? (multiple speakers)

We've talked about the power electronics business is growing significantly and ramping. It's just about hitting breakeven this year as it crosses the $100 million-plus level. And it really will be lumpy from a profitability perspective, very similar to Active Safety, until it hits that $300 million, $350 million, but it has hit breakeven a couple times this quarter. Last year it did lose money. So there's a lot of investment in that business and relatively low volumes, as we ramp on new programs. This is at the heart of the electrification discussion, the 48-volt inverter/converter-type business.

And the type of revenue, you said $30 million annually?

$30 million in the quarter.

Oh, the quarter, okay. Thank you very much. Thanks for squeezing me in.

That concludes the Delphi Q3 2016 earnings conference call. Thank you for joining and you may now disconnect.