Aptiv PLC (APTV) 2016 Q4 法說會逐字稿

Good morning. My name is Kayla, and I will be the conference facilitator. At this time, I would like to welcome everyone to Delphi's Q4 2016 earnings conference call.

( Operator Instructions )

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

Thank you. Good morning, Kayla. Thank you for everyone for joining today's call.

To follow along with today's presentation, our slides can be found at Delphi.com under the investor section of the website. And 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 in our press release.

Please see slide 2 for a disclosure on forward-looking statements which reflect Delphi's current view of 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 overview of operations in the quarter, and then Joe will cover the financial results and our outlook for 2017 in more detail.

With that, I would like to turn it over to Kevin Clark.

Thanks, Elena; good morning, everyone. Thanks for joining us.

Before Joe gets into our financial results, let me provide some context on the fourth quarter and 2016 full year. Beginning with the highlights on slide 5, we had a record quarter delivering revenue and earnings growth above the top end of our guidance range. Joe will take you through the details in a minute, but revenue increased 10% in the quarter and 8% for the full year.

Operating income increased 20% in the quarter and 13% for the full year with margin expansion and double-digit earnings growth in every quarter. And we continue to convert more income to cash allowing us to reinvest in our business and return cash to shareholders which totaled almost $1 billion in 2016 between dividends and share repurchases.

We expect more of the same in 2017 with strong growth in sales, earnings, and cash flow, reinforcing the fact that our business model is working. Our portfolio of market relevant technologies is driving revenue growth in every business, and we continue to optimize our cost structure. And as a result, we believe we are well-positioned for the long-term.

Turning to slide 6, last month, we made our 21st appearance at the consumer electronics show in Las Vegas where the automotive industry's become a prominent focus. We hosted roughly 3,000 visitors including customers, investors, media, and government officials at our pavilion. We conducted well over 200 ride-and-drive in several vehicles including our 48-volt platform, a VDAX demonstration, and our automated vehicles featuring this CSLP platform in development without partner Mobileye.

We received positive feedback from participants on how intuitively the automated vehicles performed which was a testament to mobilize division processing and automatic as enhanced vehicle control algorithms. Importantly, customer interest in the CSLP platform continues to grow and discussions are underway with several OEMs.

Turning to slide 7, Delphi continues to build out its data analytics capabilities by leveraging our 2015 acquisition of Control-Tec. As many of you saw at CES, Control-Tec demonstrated real-time data streaming which collected, aggregated, and analyzed data from our demonstration vehicles including the average speed, drive-time cycles, and overall vehicle performance.

Data collected over the seven days confirmed our ability to consistently navigate the streets of Las Vegas under complete autonomous control 99% of the time with most trips completed with zero human intervention of any kind. Additionally, the data validated that automated vehicles performed with better fuel economy and lower vehicle emissions through optimized shifting and smoother drive control. Our experience is consistent with studies estimating roughly a 10% improvement in fuel economy.

The team also collected and analyzed real-time data on energy storage and uses on the 48-volt vehicles, validating a significant improvement in fuel economy. And in the near future, a feedback loop powered by our over-the-air technology, provided by our new acquisition Movimento, will enhance our end-to-end connected car services. This is the same technology supporting our mobility cloud solution in the Singapore LT automated vehicle demonstration program.

Our growing position in data management and analytics provides new modernization opportunities for both Delphi and our OEM customers, further strengthening our capabilities in the rapidly emerging connected car business. In fact, Ford just announced the introduction of a Delphi developed connected car device that will provide full app control to 2010 to 2016 model year vehicles over Verizon's cellular network. There's much more to come from Delphi in the area data collection, management, and analytics.

Slide 8 covers 2,000 bookings in more detail, which totaled a record $9 billion in the fourth quarter, bringing us to $26 billion for the full year. As we highlighted at Detroit Auto Show, adjusting for FX, commodities and our portfolio modifications, bookings have increased at a very strong compounded 10% rate since 2011 supporting our continued revenue growth.

On the right side of the chart, are both the 2016 calendar year and 2011 through 2016 cumulative bookings for some of our fastest growing safe, green, and connected technologies. As examples, in 2016, we booked over $1.4 billion in access safety business, almost $3 billion in infotainment and user experience, over $2 billion in electrification wins, and almost $2 billion in gas direct injection and variable valve train awards.

On a cumulative basis, these bookings total $30 billion and have grown at an average rate of 30% per year since 2011. So in summary, another great year of new business went for Delphi giving us confidence in our underlying growth outlook.

Slide 9 highlights a few of these customer bookings including a significant electrical architecture award with a large North American OEM, a conquest infotainment win with Audi in Europe. This win includes our integrated cockpit controller reflecting the third major award for this industry leading technology with more in the works.

In the GEI program for gas and hybrid power trains with SAICBW, the highest volume GEI engine family in China. Given our track record of innovation, our portfolio of safe, green, and connected technology solutions, and our focus on flawless execution, we're confident in our ability to satisfy the increasingly complex needs of our customers.

Turning to slide 10, our record bookings and conquest wins our a direct result of our technology leadership, which is a key differentiator with our customers. Recent examples of significant industry firsts that are providing technology leadership include centralized computing platforms, such as the integrated cockpit controller recently launched on the 2016 Ferrari GTC4 Lasso, which will launch onto several Volvo products in 2018 including the 40, 60, and 90 Series platforms and then with Audi in 2019. As well as the multi-domain controller for active safety which we launch next quarter with Audi. We're working with several other customers on advanced development programs so there are more awards to come with this new technology.

Both of these high-speed computing platforms are a huge competitive advantage for Delphi, linking our electrical architecture and electronics and safety capabilities, enabling more connected vehicle content, reducing both mass and cost while providing scalability for the OE, and positioning Delphi at the integrator of choice for many of our customers. As I mentioned, our autonomous driving capabilities continue to garner strong customer interest.

When you combine Mobileye's vision and road experience management systems with Delphi's a Best-in-Class 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 our CSLP automated driving platforms. We believe no other system will be faster to market; and as we've heard from our customers, no other company is in as strong a position as Delphi.

We're also providing OEMs with the best value solutions for vehicle electrification. Our 48-volt model hybrid system and components offer about a 10% to 15% fuel economy improvement at roughly 1/3 of the cost of a full hybrid, also providing engine power and torque, resulting in a better driving experience. Taken together, we're confident we have the right portfolio of advanced technology to deliver value to our OEM customers.

So as we -- so moving to slide 11, as we reflect on what we have accomplished in 2016, we believe we are well-positioned for the long-term with an even stronger, more focused portfolio of technologies, a leader cost structure, and more flexible business model. Making smart acquisitions like Pure Depth and Movimento, exiting slow-growth businesses like Mechatronics, increasing advanced engineering spend, advancing our automated driving partnerships and growing our software capabilities further positions us for future profitable growth.

Now, we would not have as much flexibility to make these investments if we were not relentless about managing our cost structure. We continue to streamline overhead, rotate our Western European footprint, and enhance the flexibility of our business model. We are confident that our operating discipline will yield more revenue growth, margin expansion, earnings, and capital generation all which will deliver long-term shareholder value.

So with that, I'll hand the call over to Joe.

Thanks, Kevin; and good morning, everyone.

I will review our fourth quarter and full year 2016 performance before discussing our guidance for 2017. Beginning on slide 13 with a summary of our fourth-quarter financial performance, as Kevin referenced, we are very pleased with our strong finish to the year. Adjusted revenue grew double-digits up 10%, driven by growth in all three segments as well as strong growth in China.

Our EBITDA margins expanded about 150 basis points to 18%, and operating margins expanded 110 basis points to 14.1%. Earnings per share grew 32% driven primarily by operating income growth as well as the lower year-over-year tax rate, and we generated our operating cash flow of $683 million.

Slide 14 provides greater detail on revenue in the quarter. Sales growth outpaced expectations with stronger-than-expected performance. Beginning with the walk on the left, FX and commodities where a headwind in the quarter, largely driven by the weakening euro and Chinese RMB and price downs were 1.5%. These were offset by more than 10% organic sales growth in the quarter. Finally, the net M&A, primarily HellermannTyton, contributed $190 million of revenue.

Moving to the right, we saw strong growth in all regions, in particular Asia was up 16% on an adjusted basis driven by 19% growth in China. China accounted for approximately $100 million of the revenue upside in the quarter. North America saw a 9% adjusted growth with strength in both powertrain electronics and safety, and South America saw its first increase in over three years although that remains a very challenging market.

Turning to operating income, slide 15 walks the year-over-year change for the fourth quarter. Overall, operating margins were 14.1%,up over 100 basis points driven by strong flow-through on volume as well as the benefit of a favorable year-over-year comparison resulting from weaker manufacturing performance in China in the fourth quarter of 2015.

Turning to slide 16, EPS grew 32% versus the prior year. Versus the midpoint of our guidance range, EPS was $0.23 higher, $0.17 from volume and operating performance, and another $0.06 driven by a lower effective tax rate primarily a result of the positive impact of a restructuring and cost-improvement actions on our tax structure.

Turning to our performance by segment, electrical architecture grew 7% in the fourth quarter. EEA margins expanded 280 basis points with approximately half of the benefit driven by favorable comparisons to 2015, which included certain production inefficiencies in China. Margins also benefited from stronger volumes as well as improved manufacturing performance.

Powertrain had 6% organic growth double-digit gains in power electronics, gas direct injection, and variable valve train. Powertrain margins in the quarter were negatively affected by a warranty settlement. The settlement impacted margins by approximately 210 basis points. Absent this, powertrain margins would have expanded approximately 50 basis points.

Electronics and safety adjusted growth accelerated to a record 23% in the fourth quarter. New program launches and strong take rates, particularly in active safety and infotainment continue to drive double-digit growth.

Once again, we exited our low-end switch business, Mechatronics, which was a drag on ENS revenue growth and have reflected both the reported and pro forma revenue figures on the chart. As a reminder, Mechatronics represented approximately $30 million of revenue and $90 million of OI in 2016. That going forward, will be excluded from the 2016 pro forma baseline.

Finally, E&S margins were also negatively impacted by an increase in warranty expense during the quarter. Operating margins, excluding the changes to warranty reserves, were approximately 14% for the quarter, reflecting both strong volumes and operating performance. It is also important to note that the underlying profitability for E&S continues to improve, driven by strong volume growth as well as improved performance, allowing us to continue to invest in key growth technologies.

You can see a recap of the full-year segment financials on slide 18. All three businesses saw good growth in the year and electrical architecture and electronics and safety performance outpaced expectations, up 8% and 6% respectively. Active safety and infotainment were up 45% and 22% respectively, and vehicle electrification, primarily high voltage electric systems, grew over 50%.

Powertrain, up 5% organic gross of the year, saw growth in gas systems and power electronics, more than offsetting a roughly 10% decline in commercial vehicle diesel. Our GDI business was up over 50%, valve train over 30%, and power electronics effectively tripled in the year with revenues exceeding $100 million. Operating performance improved across all segments, helped in part by our continued focus on our cost structure and overhead reduction initiatives. Adjusting for the warranty items previously discussed, margins expanded in all segments.

Slide 19 provides a summary of our 2016 full-year financial performance. For the year, our 8% organic growth included three points from global vehicle production, yielding 2016 sales of $16.7 billion. Our EBITDA margins expanded 90 basis points to 17.4%, and operating margins expanded 30 basis points to 13.3%. We finished the year with an effective tax rate of approximately 16% and earnings per share grew 20%.

Importantly, we generated cash driven by higher operating earnings and our capital allocation priorities remain unchanged. We will continue to have a disciplined and balanced approach to capital allocation focused first on investing in our business organically through growth investments and engineering in CapEx, then inorganically through accretive M&A.

We have established a track record of consistently returning excess cash to shareholders; and as Kevin mentioned, we returned almost $1 billion of cash to shareholders in 2016 in the form of dividends and share repurchases.

Turning to slide 20, you will find our outlook for full-year 2017 in the floor first quarter. And in an effort to simplify, we've included the pro forma 2016 baseline excluding Mechatronics.

Let me first start by saying our view of the market and performance expectations have not changed. We believe global vehicle production for passenger and commercial vehicles will be flat to 2016 levels with North America and Europe expected to be flat, China production up 1%, and we expect South America to stabilize effectively flat for the year.

However, with our strong portfolio of relevant technologies, Delphi will grow mid-single digit organic driven by our faster growing product lines. Electronics and safety is expected have another year of robust growth in 2017, driven by double-digit growth in active safety and infotainment. We are expecting more of the same at powertrain, up mid single digit, as double-digit growth at GDI and power electronics more than offsets a low, single-digit light duty diesel decline while electrical architecture growth will slow to low single digits in 2017, mainly reflecting program and platform cancellations.

In total, 2017 revenue guidance is $16.5 billion to $16.9 billion including approximately $400 million of net FX and commodity headwinds including the euro at 105 versus an average of 111 in 2016. While operating income is expected to be $2.2 billion and $2.3 billion with margins between 13.3% and 13.5%. Earnings are expected to be in the range of $6.40 to $6.70, up 7% to 11% over 2016, including the benefit from $600 million of share repurchases in 2017 which we are using for planning purposes. Our guidance assumes a 16% effective tax rate for the year, and we expect to generate over $2 billion of operating cash flow.

Moving to our first-quarter outlook, revenue is expected to be $4.1 billion at the midpoint, up 6% organic on 1% vehicle production growth. Margins are expected to expand 10 basis points year-over-year at the midpoint of guidance, adjusted for the divestiture of Mechatronics which contributed approximately $75 million of revenue and $23 million of operating income in Q1 last year. Earnings are expected to be in the range of $1.40 to $1.50, up 12% of the midpoint.

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

Thanks, Joe.

Wrapping up on slide 21, we delivered terrific performance in 2016 once again demonstrating our ability to execute even against the backdrop of a more dynamic macro environment. We made portfolio modifications that enhanced our position to leverage secular growth trends in 2017 and beyond.

Looking ahead, we're confident in our 2017 outlook which includes mid-single digit organic growth, roughly 40 basis points of operating margin expansion, and high single, low double-digit earnings-per-share growth. And our ability to effectively deploy capital provides additional leverage to drive shareholder value in the years to come.

So with that, we'll now open up the line for questions, operator. Thank you.

Kayla, we'll take our first question.

(Operator Instructions)

Rod Lache, Deutsche Bank.

Good morning, everybody.

Good morning, Rod.

Congratulations on these results. I had a couple of things. First, just a clarification. Did you say that the overall company operating margin would have been 14% next to the warranty reserve? Can you just break out what that number was? Is that in E&S? And just what is the actual -- the recall or the car the warranty in unusual numbers that you had both in E&S and powertrain?

Yes. Rod, it's Joe. Good morning. In total, think about it as about $50 million in the fourth quarter spread across E&S and powertrain. We're not going to speak specifically to which customers it is, but it was matters -- so evenly split across those two -- across those two segments about $50 million in the quarter.

Okay. And in powertrain, just thinking about outlook for 2017 beyond, I assume you're thinking 3% to 4% declines in the light vehicle diesel business, which is like $1 billion a year. So that's $30 million to $40 million negative, and then you've got some pretty significant growth in GDI and valve train.

Do you think that we should assume historical EBIT conversion rates in that business, or are these declines sort of a bigger drag on the decremental margin be greater than the incrementals?

So, Rod, I'll start in general, and Joe can certainly can follow more specifics.

Our outlook for our revenues in the light-duty diesel space out 2017 and beyond is kind of low single-digit declines in revenues more than offset by growth in GDI, variable valve train, power electronics, and some other products. I would say with respect to where we are now from a product portfolio standpoint and volume standpoint, I would expect incremental margins to be roughly the same going forward as they've been historically.

Okay. Great. And there's to last ones. One is just your expectations for FX and commodities for 2017; and then lastly, your bookings have been growing at 10% per year, you're talking about 4% to 6% organic growth obviously in kind of a weaker year for light vehicle production. But just help us reconcile the bookings trajectory versus the organic growth expectations that you've put out there.

Want to answer the --

Why don't I start -- why don't I start with the second cut with your last question, Rod.

Listen, I -- you know, our -- as we sit here and we look at long-term revenue outlook from a Delphi standpoint and look at 2017, we tell you that we are very confident in our ability to grow roughly 5 points over market. I think your point with respect to bookings growth and revenue growth with respect to bookings should translate into revenue growth that is in excess of that.

However, given what we ran into in the 2016, and quite frankly even 2015, with respect to changes in schedules with respect to OEs, cancellations of certain programs, as well as other things, we just held it most prudent from a planning standpoint, from a guidance standpoint to give a revenue outlook that accounted for virtually everything that we can contemplate happening out there that we don't have control of.

Joe, if you want to add to that.

No. I think we've discussed this earlier -- earlier in January. You know, I think from a market flat perspective, confidence in that mid-single-digit growth number and certainly to the extent markets are stronger, to the extent we don't necessarily see some of the headwinds that we've talked about, possible for us; but I think from a conservative perspective, that's -- we're very comfortable with the -- with the 5%.

On FX side, we factored in-- you know, our two big FX commodities are really the euro and copper. We used $1.05 for the euro. We've $2.50 a pound for copper. That's based into the assumptions. Chinese RMB, obviously, the weakening of that currency has impacted us in 2016, and we're currently assuming a 690 for the Chinese RMB, Rod.

Right. So on that -- if we think about high level, the bridge for 2017, the EBIT effect of -- I assume the peso might be a little bit of a tailwind, but just overall, when we think about that FX and commodities line, do you have a rough ballpark for how you're thinking about it?

Yes. On a full-year, it's about $400 million of revenue impact. It's small on OI. There's a lot of offsets. It's about $15 million round numbers.

The one interesting thing -- and you notice Q1 margin expansion is about 10 basis points. The OI impact of FX and commodity in Q1 is actually a little heavier. It's worth probably about 10 basis points in the quarter, and that's just really the timing of when the macros changed over the course of last year when you do the comps. So we absorb a little bit more of that headwind in Q1. On a full-year basis from an OI perspective, it's really not significant, though. It's about $15 million on the full year.

Great. Thank you.

Can I just make one point. I think I may have misspoke during my script. I referred to Mechatronics revenue at $30 million. It's obviously $300 million for 2016. I apologize for that.

Brian Johnson, Barclays.

Yes. Good morning. Just a couple of things. First, want to understand a bit -- a little bit of housekeeping around EA, but also perhaps strategic. 40% incremental margins in E/EA. Is that going to continue? Was there one off there? And then just the more strategic is as you think about the various components of E/EA: wiring harnesses, connectors, power electronics and other categories, how do you think about -- should we be thinking about the margins across those and how those chunks of content move as we move towards 48-volt and eventual full electrification?

Yes. Let me take the first part and then -- on the EA margins. So there are a couple of things going on in the fourth quarter. As you may recall, Q4 15, we got sort of whipsawed by Chinese production. We had taken down particularly headcount in China in the E/EA business. Had to ramp that backup quickly; and as we talked about last year, that probably cost us about $25 million of efficiency in Q4 of 15 so a negative. We obviously didn't have that this year, so that's about half of the margin expansion you're seeing.

The other half is they just had a really strong quarter. You know, we were staffed correctly, volume flowed fairly strongly in the quarter for E/EA, and they did make some progress. We had talked during the course of 2016 on operating and efficiencies in Mexico in particular, and the business has done a good job of making some progress on that.

We're not completely out of the woods on that yet. Certainly expect that to abate in the first half of 2017, but progress was made in Q4. So a couple of things going on there, but I think the one to focus on is just really the year-over-year comps about half of the benefit.

Okay.

And why don't I touch on the -- what we would call the engineered products portion of that electoral architecture segment, which for us -- I think as most of you know, the margin profile on connectors and on cable management products is roughly twice what the average is for the segment. So as you can imagine, and I think we have a track record of doing this. It's clearly a focus area for growth. It's clearly an area where we're putting incremental investment dollars for organic growth opportunities, as well as Joe and his M&A team are very active with respect to pursuing M&A opportunities to further round out the portfolio.

Okay. And just related to that, we've discussed this a few different times in the Q&As, but any sort of preliminary discussions, maybe just using E/EA since it's mostly done in low-cost countries, with customers on how either footprints or pricing, or burden sharing might evolve with whatever might come out of Washington around border taxes, tariffs, NAFTA, et cetera, et cetera?

Well, it's -- that's a great question. I think it's really tough to have detailed discussions with customers without a detailed proposal, or specifics with respect to what could be happening out of Washington. Listen, when you look at the wire harness space with respect to Delphi -- and quite frankly, I think all of our competitors, the reality is that is a product line, that is a supply chain that has been in Mexico, for instance, for quite a long time.

Since the 80s.

So that supply chain has developed and has been optimized to serve our customers exactly where they want to be served, because as we've talked about in the past, that is a product that shows up literally hours before it's put into a car in an assembly line. So years and years. To Joe's point, that production moved to Mexico back in the 1980s. It's been optimized. And any disruption to that, quite frankly, is going to add significant cost. I would tell you as I look at products and manufacturing process, that is not a product line that I see actually being able to move to the United States for a number of reasons, again, supply-chain costs, other.

Okay. Thanks.

Itay Michaeli, Citi.

Great. Thank you. Good morning, everyone.

Just firstly on the quarter itself. Joe, maybe could you just look at the kind of the dimension for us where the upside came from relative to your guidance that you provided back in November for the quarter?

Yes. About have of the revenue upside, about half of it, Itay, came from China. Particularly late in the quarter, we saw very strong demand in China. I think China totals up about 19% in the quarter. The rest was spread sort of evenly between Europe and -- Europe and North America. And again, we saw it flow strongly from an OI perspective, from a performance perspective. So it sort of mirrored that volume flow.

Great. That's helpful.

And then maybe strategically, maybe for Kevin, on the CLSP, you mentioned seeing interest from several customers. Just curious to what extent, if any -- we saw the news this week on Uber kind of opening up their platform to automakers, and one of them kind of signed up.

Do you think something like that could have the effect of accelerating automaker interest in kind of -- in the CSLP to get up and running in 2019 to the extent there's now a ride share network that's more open to allowing the automakers, and maybe just talk a little bit about the interest level that you are seeing there?

Listen, I would tell you, I think the interest level is extremely high. I don't think that the action from Google, quite frankly, will have any effect. I think you have a series of OE's who are doing work internally with partners who are moving as quickly as they can to have solutions on the road as quickly as they can.

You have OEs working with players like Delphi, Mobileye, and Intel that are looking for the full suite of solutions, CSLP platform. And the biggest -- the biggest push is how far along is your technology, and how quickly can you get it to a point where you can launch a program in 2019, 2020? So the level of dialogue, I would tell you over the last -- especially since (inaudible) but quite frankly even before that when we made the announcement with Mobileye has been through the roof.

Great.

And just lastly related to that, can you just talk about your ADAS booking share in 2016 relative to prior years? Do you think you're gaining shares -- and do you there's a CSLP, that the acceleration and momentum there can actually also help in terms of ADAS bookings going forward?

Yes. Listen, I think at the end of the day to be viable in automated driving, autonomous driving, you need have strong capabilities, quite frankly, in ADAS, very strong footprint in ADAS, given the reliance on technologies from a know-how standpoint and, quite frankly, from a cost standpoint. Otherwise, if it's not a business you're in, the cost would be prohibitive.

I think the second piece that we bring a competitive advantage on, and it's the controllers that we talked about. Whether they're multi-domain controllers that you need for ADAS or ultimately automated driving or integrated cockpit controllers is having the electrical architecture capabilities. I think brings you another -- you know, puts another arrow in your quivering, gives you another capability that you can further leverage. So I think both of those are very, very important. But being in ADAS is critical.

Absolutely the work we're doing in automated driving today has both near-term and long-term benefits as it relates to the development of active safety solutions. Itay, as you've heard us say, you get through level two autonomous driving, you can reduce 80% of the accidents that are out there. We have always talked about autonomous driving as being on the spectrum of active safety, and our objective is obviously to give our customers what they want, a big piece of which is making driving more safe.

With respect to bookings, another year of over $1.4 billion. I think it was slightly below our record year, we had two years ago -- and I'm talking maybe $2 million or $3 million below. I think it's the fifth or sixth straight year of over $1 billion. Clearly, based on our bookings growth and our revenue growth, we're well over three times overall market growth rate on active safety.

That's very helpful. Thanks so much and congrats.

Joseph Spak, RBC.

Thanks very much. Kevin, I just want to follow up on that last point. So given 80% of the safety at level two, 20% of the cost that you mentioned, and the great reception to the autonomous efforts you guys have been doing, I mean, especially considering it seems like the autonomous is almost built off the ADAS, are you securing more ADAS? Do you expect to be able to secure more in the near-term?

Yes. Listen, I think the autonomous driving conversations and relationships that we're developing with OEs fosters a more strategic relationship which is a positive. It increases customer intimacy and provides them with better visibility into what your capabilities are. So I can't quantify it precisely for you, Joe, but I think it translates into more commercial opportunities and a greater likelihood of winning those commercial opportunities.

I think one of the reasons we had such a strong booking year this year, and I expect to have a very strong bookings year next year is because of the dialogues that we're having both from an active safety standpoint as well as an automated driving standpoint with OEs.

Okay. Great.

And then just on M&A, which I think you touched on a little bit earlier, it sounds like you thought maybe there was still some opportunity in that electrical architecture business. I was wondering if you could -- if you could sort of point out what the pipeline looks like or where you may still have some holes. And then there's also reports that a turbo charger business is up for sale. I mean, I'm just curious your level of interest in going more into the powertrain side there.

Sure. Joe, it's Joe. Let me take the electrical architecture question first. So I'd start with there's nothing from a whole perspective. There's nothing we need to go out to buy to fill gaps. We're very comfortable with our existing product portfolio and the ability of the portfolio to sort of meet or exceed our commitments here.

What we do like and we've demonstrated a couple of times now between the MBL acquisition going back a few years, but most recently HellermannTyton that had a fantastic year plus 10% growth, is the ability to take what I'll call sort of components businesses, whether it's connectors, cable management type products, and integrate those with our broader electrical architecture business. We get both. We get cost synergies, a lot of efficiencies on the materials side; but over time, we're able to engineer those products that are then owned by Delphi into our electrical architecture systems, which provide effectively a nice channel for those businesses into our markets. And given the size and scale of the electrical architecture business, there's just a huge opportunity there.

So we'll look for those businesses. We like them. We know what to look for, and we think there are opportunities really globally for those types of acquisitions. They'll tend to be smaller, the size of HellermannTyton; but those are nice bolt-on deals, and we're very good at integrating those and moving forward on them quickly.

As it relates to -- you know, as it relates to M&A, whether it's in other parts of the business including powertrain, you know, we'll certainly take a look at things that make sense. We don't rule things out. I am familiar with that asset that you're referring to, have not heard much more than that initial announcement on it, though. But don't necessarily rule anything out from and M&A perspective. Kevin, I don't --

Listen, Joe. We're -- at the end of the day, it's about how do we create significant synergies of better competitive position and drive shareholder value? I think -- and there are opportunities across each of our segments. To be specific to that particular opportunity, to be honest with you, we're in the thermal business that didn't have great market structure, right?

I think given some of the players in that business who's been in it a long time, being a newer, smaller entrant is a real challenge; and the cost of capital that those two owners currently have relative to the cost of capital that a public company like Delphi has, I think would make that a challenge. If it didn't work for them, it'd probably be tough for it to work for us.

That's helpful. Thanks. Congrats, guys.

Sure.

John Murphy, Bank of America.

Good morning, guys.

Hello, John.

Just a first question here, I mean, portfolio actions are obviously becoming a big part of the story both on the buy sell -- or not a big part, but a good part of it. Would you ever consider selling the light-duty diesel business or, you know, is there a market for that you would sort of be an avenue to exit that business; or is that something you view as core even though it's coming under pressure?

Yes. Listen, our powertrain business is a great business. It is growing mid single digits and has 16% EBITDA margin. So it's a business that is doing well. You're right, light-duty diesel is certainly a space that over the longer-term is not a growth space. Our managing team within that segment has done a terrific job, quite frankly, optimizing and reducing costs in leveraging diesel capabilities within our gas business. So it's something that's operating well.

Having said that, John -- and this isn't about -- quite frankly, this isn't about light-duty diesel or about powertrain. Our objective is to increase shareholder value. So as we look at our portfolio, all of our products, all the spaces we fit in, to the extent that there are better alternatives that drive long-term shareholder values, those are things that we would consider and evaluate. So I hope that answers your question.

Yes. No. That's very helpful.

And then just a second question just broadly, you know, on Mexico and I know this is tough to answer questions with certainty right now just given the uncertainty in the proposals or proposed proposals at this point. What are you seeing in the workforce productivity in Mexico? Obviously, you guys historically have done very well down there, but there's a lot of unrest and a lot of unhappy people. I mean, as far as managing the workforce, are there any short-term issues that you see?

Then also, as you look at that business -- I mean, Kevin you were kind of alluding to the fact that you just don't not think wiring harnesses could move, but are there any pieces of the business that you're doing in Mexico that you could potentially move to the US in a cost-effective manner?

Yes. John, it's Joe. Let me start and then Kevin can go.

At this point, no short-term labor disruptions. I mean, we had challenges this year from an operating performance perspective in Mexico. Quite honestly, that was dealing in part with just the amount of launch activity and the growth we had down there. But that's a great workforce for us. They do a good job, and we're certainly not seeing any short-term disruptions.

The whole discussion around border attacks. It's actually broader than Mexico at this point, right? When they talk about import value, they're talking effectively globally. So clearly Mexico is a -- Mexico is a big piece of it, but it is hard to speak to specifics.

As it relates to businesses, you know, or types of operations down there, there are certainly more automated-type manufacturing processes down there which conceivably see coming back the -- or coming to the US. Some of these were never in the US. We've grown them in Mexico. We started them in Mexico. And we'll look at that depending on where the rules go, but it would have to be much more of the sort of the automated type manufacturing operations just given the difference -- the labor differential there.

Great.

And then just lastly on the slightly on the CSLP. Which automakers, or generally if you could classify some of the automakers that are expressing real interest in the near-term, because some of them -- some of the larger guys like Ford have kind of given some indication that they're skeptical about buying systems, but it looks like a lot of the other automakers are fairly receptive. I'm just curious if you have any you could rattle off or generally kind of classified interest there.

Yes. I'm not going to give names, but I would characterize it in kind of two or three buckets. Those that are interested in the CSLP light, so it's not all what the platform has to offer, but certain portions of software and systems integration; and then others who I think have the view and have had the view historically that technology like this is not core from a capability standpoint. It's costly, so they're better off partnering and bringing that technology in from the outside; and that tends to be CSLP heavy, which is, here's the whole plug-and-play -- plug-and-play solution. And then there are players that are -- that, quite frankly, are in between those two.

Okay. That's helpful. Thank you.

David Leiker, Baird.

Hello, this is Joe Vruwink for David.

Hello, Joe.

Hey, I wanted to discuss the competitive environment and infotainment; and not to say share gains for Delphi are unusual, but when I think about the magnitude of competitive wins coming to Delphi over the past year, there's Audi, there was Fiat Chrysler on the Uconnect, there was Volvo. It just seems like the magnitude is maybe unusually high. Is that a fair characterization of Delphi winning an abnormal amount of share relative to your other product lines?

Well, listen, I think -- you know, I think, obviously, gaining share based on the size of the wins. I mean, it's clearly -- it's a high-growth space within automotive, obviously gaining share. I think, though, the nature of space, quite frankly, has changed, Joe. I think it is now an addition to infotainment, it's about leveraging infotainment and clusters, it's about computing power, it's about leveraging computing power, it's about taking out mass and cost, it's about scalability, and it's about signal distribution.

So again, I come back to the traditional capabilities within our E&S business and the fact that we've been in the infotainment business for quite a while is certainly a valued and allows us to win business. I think when you couple that with our electrical architecture business, and you're able to develop really efficient controllers that can be scalable, I think -- I think that's the biggest driver for some of our more recent wins. I think it's a much more sophisticated solution than what OE's were asking for, you know, three, four, five years ago.

Then one other remarkable about things is it's not only a lot of growth; but as I look at the margin profile, just in this quarter, it sounds like I can add back maybe $25 million in warranty; and then if I think about D&A, that segments doing a high teens EBITDA margin. Typically infotainment guys are during 10%, low teens type numbers. Do you think you can keep that growth rate or realize what you've booked at the current level of margin for the business?

Yes. Absolutely. Absolutely. Absolutely. And the other great thing about business -- and, Joe, you can give some specifics on it. The other great thing about the ENS segment is when you look at it from a return-on-capital standpoint, it's very low CAPEX, right? So the reality is from an ROIC standpoint, it's actually our highest return product in the Delphi portfolio.

Yes. That's in part driven -- obviously, we've got high software content in there, so you've got the benefit of not having a lot of capital spend related to that. But that business has also done a very good job of leveraging their footprint globally. We do not have a lot of ENS manufacturing facilities. We've got concentration and good best-cost markets, and they're really able to leverage those facilities across all of E&S, not just within infotainment or active safety, which helps contribute to that margin profile.

That's great. Thank you very much.

Thanks.

Adam Jonas, Morgan Stanley.

Hi, everybody. Thanks. Just a couple questions on the M&A theme.

Would a battery or electric motor or an adjacent battery or electric motor acquisition be something you considered a hole in your portfolio, or is that -- or is that something you kind of keep working around and adding value?

Yes. Adam, it's Kevin. Listen, our view on -- that's something that we spent a lot of time in. And as you know, at one point in time, Delphi was in the battery business. We've concluded those are -- those are spaces where others have strong position and strong capabilities. And as we are marketing our 48-volt system principally in China today -- we're talking to some European OEs as well. We're relying on partners on both.

Okay.

For both.

Thank you for clarifying.

And just to your, kind of quote, We would explore anything that could enhance shareholder value. I think that was in response to the light-duty diesel kind of future within the company. Just to kind let the record straight on maybe more broader portfolio, I think there has been a theme in this call that you feel there is a lot of advantage of having all three business units together that progress in one can enhance new wins, and technical opportunities, and skill sets in others. And so is that message correct that you would also say that shareholder value is enhanced by having powertrain, E&S and E/EA together rather than apart?

Yes. Listen, I think -- I think both financially as well as -- kind of quantitatively as well as qualitatively, there's benefits of having the three within the product portfolio, right? Powertrain, electrification, obviously we have a power electronics business that sits in powertrain; but the reality is, Adam, we have an electrical architecture business that benefits as much or more from powertrain electrification as the powertrain business does.

So there are areas of leverage and areas of cross opportunities. You know, the comment -- and maybe clarify with respect to would consider, listen, we're evaluating our portfolio all the time. Since I have been here, we've sold three businesses, we've bought a number of businesses, so we're always working on optimizing the portfolio and identifying areas where we think we can drive shareholder value. So that is something that we're regularly -- quite frankly, regularly doing.

Okay. Thanks, Kevin, and just a final one.

I know you have provided disclosure in the past of percentage of workers in countries and geographically. I don't know if you're able to either refresh where you stand there, if there's any significant change. I suspect there's not, but any holistically given this debate of border tax. What portion of your, say, total value-added would you say is -- and this a round number question. I don't suspect you can be so precise. But what portion of your value added is imported versus made in America today?

Adam, it's Joe.

There's been no real change in the workforce. I think we put out before that about 90% of our hourly workforce is best-cost countries, and there's been no material changes in that over the last year or so. Listen, and I'll give out some numbers. I'm happy to discuss numbers; but as Kevin mentioned, this border tax adjustment is really not known at this point.

I think there's sort of three sentences in a 13-page document. That's what a lot of people are keying off of. But round numbers, our cost of sales value for imported materials into the US is about $4 billion. The majority of that is out of Mexico, about $3.5 billion, and we've talked about that back a couple of months ago when tariffs were sort of the topic of the day. The thing about total imported content, material content in the US is about $4 million.

All right. That's very helpful. Thanks. Thank you.

The other -- again, and not to answer a question you didn't ask, but I just anticipated. One other -- we often get the question when we're asked that question, how much is the content, we're then asked how much is the export content, because there's this notion out there that you'd receive some offsets. The export content is about $1.5 billion.

Appreciate that. Thank you.

Thank you.

We have time for just one more question, Kayla.

Ryan Brinkman, JPMorgan.

Good morning. This is Samak on behalf of Ryan Brinkman.

I did want to ask on commercial vehicles and what sort of built into your guidance for flat production in 2017 for the industry, what are you guys aiming for commercial vehicles; and what your thoughts about any potential upside and maybe the back half from all the discussion about global policies and higher infrastructure spending in the US?

Yes. That's -- we're not necessarily reflecting any new expectations from changes out of DC at this point. Obviously, there is a lot of talk at the moment. CB, we're at 3% growth in the guidance we've provided.

Okay. Good. Just quickly, last question. I know you don't disclose your R&D expenses on an ongoing basis, but where did you sort of end in 2016, and how do you compare with maybe some of the benchmarks in the industry that you use with your closest comps there? And what is the likely trajectory of that given the investments that are needed on the [technologies]?

Yes. No changes their overall. I'm not going to go into the industry benchmarks. We're very comfortable with our spend. We spent about 7%. We're a little bit more, 7% of sales on engineering which encompasses all of our R&D. We've talked about before, there's no change there.

We're comfortable we can do what we need to within that -- within that number. One of the things we've been very good at over the last -- last few years is reducing engineering expense in sort of the later stages in the manufacturing support stages, and being able to move those dollars to the advanced front end. So we're actually spending more in advance while not necessarily increasing the overall spent. And that's -- we're confident that'll remain within that range.

Good. That's very helpful. Thank you.

Thanks.

Thank you.

That concludes today's call. As always, I'm available for your questions and follow-ups for the rest of the day. Thank you.

Thanks, everyone.

Thank you, guys.

That concludes the Delphi Q4 2016 earnings conference call. Thank you for joining. You may now disconnect.