Good morning. My name is Kayla, and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi Q2 2017 Earnings Conference Call. [Operator Instructions].

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

Thank you. Good morning, Kayla, and thank you to everyone for joining Delphi's Second Quarter 2017 Earnings Conference Call. To follow along with today's presentation, our slides can be found at delphi.com under the Investors section of the website. .

Consistent with prior calls, today's review of our actual and forecasted financials exclude restructuring and other special items and will address the continuing operations of Delphi. The reconciliation between GAAP and non-GAAP measures is included at the back of today's presentation and the press release. .

Please see Slide 2 for a disclosure on forward-looking statements, which reflects Delphi's current view of future financial performance, which may be materially different from our actual performance for reasons cited in our Form 10-K. .

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 a strategic update on the business, and then Joe will cover the financial results and our outlook for 2017 in more detail. .

With that, I'd like to hand the call over to Kevin Clark. .

Thanks, Elena, and good morning, everyone. Thanks for joining us. I'm going to begin by providing some highlights from the second quarter and then spend some time discussing our portfolio of advanced technologies.

Joe will then take you through our detailed financial results for the quarter and outlook for the third quarter and full year and as well as provide an update on the status of the spin-off of our Powertrain segment into a new independent company..

So let's begin with the highlights on Slide 5.

Our second quarter financial results reflect continued momentum of the positive trends we've experienced over the last few quarters, including mid-single-digit revenue growth translating into strong growth over market; solid margin expansion, while continuing to invest in strategic growth initiatives, demonstrating the benefits of our industry-leading cost structure; and strong new business wins, driven by a portfolio of key technologies.

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Based on our year-to-date operating results, we're raising our guidance for the full year. Joe will walk you through the details in a few minutes. Additionally, we're pleased with the progress we've made on the spin transaction, which we expect to take place by the end of the first quarter of 2018..

Turning now to Slide 6. The transformation of the automotive industry continues to dominate the news, with increased focus on safety, connectivity, electrification and automation, all of which are at the heart of our strategy. Customers are increasingly looking to Delphi to solve their toughest challenges.

And as you can see from the headlines on this slide, our technologies are front and center. .

Volvo's recent announcement to conclude electrification on all their vehicles beginning in 2019 is another great example of the industry's accelerating shift to electrification. The unveiling of the new Audi A8 last month, the first semi-automated vehicle, is moving into production with Level 3 functionality through Audi's Traffic Jam Pilot feature.

Delphi's Z-Fast multidomain controller for the Audi A8 is the most powerful, centralized computing platform in production today, enabling A8 drivers to give up vehicle control at speeds of up to 60 kilometers per hour. .

ADAS, infotainment and autonomous driving features are requiring more software, more signal distribution and more compute power.

And Delphi is uniquely positioned as the only provider of both the brain and the nervous system of the vehicle with software and systems integration capabilities, which are critical to seamlessly delivering these advanced automotive-grade solutions..

As highlighted on Slide 7, our portfolio of advanced technologies is, in fact, driving revenue growth today.

Beginning with RemainCo on the left, active safety remains on pace for over 50% growth in 2017 and is expected to continue at that pace into 2018 driven by the combination of increased penetration with existing customers, conquest wins with new customers and further penetration in less mature markets. .

Infotainment and user experience is expected to grow 15% to 20% in both 2017 and 2018, benefiting from the market shift to medium- and high-end infotainment systems, which is our sweet spot as well as an acceleration in the adoption of advanced cockpit controllers to enable improved graphics performance, greater computational power and support for multiple displays.

An industry-leading portfolio of high-margin engineered components positions us to grow faster than both the market and our competitors.

And high-voltage electrification is on pace to grow 45% in 2017 and actually accelerate in 2018, reflecting the growth in high-voltage electrical architecture that is necessary to support the increased demand for powertrain electrification. .

Turning to the right side of the slide, in the Powertrain business. Our power electronics product line has revenues totaling $150 million today and is currently growing at a compound rate of 25% and will meaningfully accelerate in 2018, driven by the roughly $4 billion of new business bookings.

GDi and variable valve train have each grown to roughly $350 million in revenues and continue to track at a solid mid-teens growth rate.

And heavy-duty and medium-duty diesel revenues are currently increasing at a rate of over 20%, driven by improving conditions in the commercial vehicle market and the work that our powertrain team has done to further penetrate strong global customers..

So in summary, our portfolio of advanced technologies, which represents over 35% of our current revenues, are growing mid-teens, which continues to 2018 and beyond. .

As you can see on Slide 8, we've broken out new business bookings for both RemainCo and the Powertrain business and further highlighted some of our key growth technologies. .

For RemainCo, the active safety, infotainment and user experience and high-voltage electronics bookings are accelerating, increasing at just under a 30% growth rate since 2011, totaling $25 billion of lifetime revenues and representing more than 25% of total bookings.

Active safety bookings have increased at a compound rate of 50% since 2011, and the $2 billion of year-to-date bookings have already surpassed 2016 total active safety bookings of $1.4 billion. .

Infotainment and user experience bookings have increased over 40% in the last year and have increased at a mid-teens compound rate since 2011, reflecting the benefits of new technologies and share gains with both new and existing customers.

And high-voltage electrification bookings and our Electrical Architecture business have grown at a 60% compound rate since 2011 and now total almost $4 billion..

RemainCo also continues to benefit from strong bookings in this base business, which includes wire harnesses, connectors, cable management and electronic controls, growing at a compound rate of 5% since 2011 and now totaling $78 billion. .

For our Powertrain business, key growth technologies, including GDi, variable valve train and power electronics have grown at over a 20% growth rate since 2011, totaling almost $13 billion and representing 30% of total bookings. GDi bookings now total $5.5 billion and have grown at a compound rate of 50% since 2011.

Bookings for power electronics have increased off of an initial low base and now total almost $4 billion. .

New business bookings in our Powertrain business have also benefited from $14 billion of cumulative awards from commercial vehicle customers, partially offsetting the slowdown in light-duty diesel bookings.

Delphi had another great quarter of bookings in the second quarter of this year, bringing our year-to-date total to $14 billion and putting us on a path to finish the year above 2016's record of $26 billion..

Slide 9 features just a few of the vehicle electrification and active safety bookings during the quarter. Growth in vehicle electrification results in increased constant opportunities for both RemainCo and the Powertrain business.

This is exemplified by significant high-voltage conquest award with FAW-VW in China for our Electrical Architecture business.

And the second major power electronics win with Volvo Geely in our Powertrain business for a new combined inverter DC/DC converter, with lifetime revenues of over $1 billion, bringing the year-to-date total on this project -- of this product line, rather, and with this customer to almost $2 billion.

In addition, we have received an active safety award from a large global customer with lifetime revenues well in excess of $1 billion. Each of these bookings highlights the success we've had, bringing new advanced technologies to the market. .

Now Slide 10 further underscores that increased powertrain electrification provides increased content opportunities when compared to low-voltage content for Electrical Architecture or the base internal combustion engine content for powertrain.

By 2025, we believe that over 30% of all vehicles produced will include some form of electrification, with roughly half of those utilizing 48-volt technologies. And as we've discussed, both the Powertrain business and RemainCo are well positioned to benefit from the trend of electrification, providing strong growth opportunities in years ahead. .

Today, we have roughly $400 million of electrification revenues, which have grown at a compound rate of over 50% per year but again off of a fairly low initial base.

Approximately $300 million of these revenues are high-voltage electrical distribution and connection systems offered through our Electrical Architecture segment with the balance from the Powertrain electronics products that are part of our Powertrain segment.

We've booked over $7 billion in vehicle electrification programs over the last 6 years, which we expect will translate into revenue growth in the range of 40% per year over the next few years..

Now turning to Slide 11. Our new business awards with Volvo Geely serve as further validation of our vehicle electrification strategy for the China market, the largest electrification market in the world.

China is forecasted to lead the global trend in powertrain electrification, representing over 50% of unit production in 2025, reflecting a 40-fold increase over today's levels.

We remain optimistic about the China market as a result of the underlying macro trends, which include increased government focus on emissions regulations, which are increasing demand for China's new energy vehicles; increased consumer demand for active safety and infotainment and user experience technologies; and accelerated penetration of higher-contented SUVs and luxury vehicles..

As a result of the underlying macro trends and our related business strategy, we've had double-digit revenue growth year-to-date, roughly 8 points above market in China, led by roughly 80% growth in GDi, over 60% growth in active safety revenues and over 20% growth in connectors and cable management revenues.

A record $5 billion of year-to-date bookings in the region reflects a more balanced blend of local Chinese customers, representing 2/3 of the bookings in the region. And as a result, our key growth technologies in China are forecasted to grow over 50% per year for the foreseeable future. .

Another example of the work we're doing in this region includes our recent automated ride-and-drive event from the Shanghai Auto Show. The event was very well received as customers and other key stakeholders came away excited about the social and environmental benefits of advanced driver assistance systems. .

Moving to Slide 12. We're focused on the safe, green and connected operations of the vehicle as we move towards a more connected and automated mobilities environment, validating our technology in standing up new mobility solutions that is going to be critical to providing solutions to our customers and unlocking value for our shareholders.

As a result, we're selectively expanding our automated driving pilot programs, which are terrific opportunities to commercialize our autonomous technologies, including automated mobility on-demand and data analytics solutions. .

Now we've previously discussed our automated mobility on-demand taxi service in Singapore's one-north business park. During the quarter, we also announced our Transdev partnership in France, where we will have several vehicles in operation in 2018.

Now as a reminder, Transdev is a leading mobility service provider, operating over 43,000 vehicles in multiple municipalities globally.

Our partnership with Transdev will combine their universal routing engine and remote control command software with Delphi's centralized sensing localization and planning automated driving platform, which we're developing in partnership with Mobileye and Intel.

We believe this partnership will help accelerate the development of a robust automated vehicle solution and provide a clear path to commercialization. .

We're also pleased to announce that we have reached agreement on a smart city pilot in the city of Boston. Leveraging our activities in Singapore and France, we're collaborating with Transdev in Boston to develop a commercially viable service, with similar Level 5 operations, fleet management and mobility cloud services.

We're also partnering with AT&T in Boston to provide vehicle to infrastructure solutions that demonstrate the value of vehicle data analytics for efficient city operations and equitable access to mobility. .

As part of the combined efforts with Transdev and AT&T, we'll be establishing a local software development presence in Boston, which will provide us with further access to top engineering talent in critical fields such as data analytics, machine learning and artificial intelligence.

These pilots collectively underscore the broader momentum in our autonomous driving in smart city collaborations. We look forward to further highlighting our strategy and technology roadmaps during our Investor Day on September 27 in Boston. Joe will take you through the details of that event later, and I look forward to seeing many of you there. .

With that, I'll hand the call over to Joe to take us through the second quarter results and our updated outlook for 2017. Go ahead, Joe. .

Thanks, Kevin. Good morning, everyone. Slide 14 provides a summary of our second quarter financial performance. .

Organic revenue growth of 5% was led by strong growth in E&S and Powertrain despite the declining market this quarter. Our EBITDA margins expanded 20 basis points on a pro forma basis to 17.7%, and operating margins also expanded 20 basis points to 13.6%.

Earnings per share grew 13%, primarily due to year-over-year operating income growth and a lower tax rate. We generated operating cash flow of approximately $600 million, an increase of 8% from prior year levels. And we returned $173 million of cash to shareholders, including $95 million of share repurchases. .

Turning to Slide 15. Let's look at revenue in the quarter in greater detail. Beginning with a walk on the left. On a pro forma basis, excluding Mechatronics, price downs of 1.9% and FX and commodity headwinds of $47 million came in better than expected.

Adjusted sales growth of 5%, well above the 1.5% decline in global vehicle production for the quarter, was driven by Europe and Asia, including strong active safety growth and new infotainment launches in E&S, accelerating gas and commercial vehicle volumes in North America and China in our Powertrain business.

South America was up over 15% in the quarter, albeit off a relatively low base. And North America revenue was flat, reflecting a 3% market decline.

Growth in Electrical Architecture was negatively impacted by tough year-over-year comparisons, including the impacts of lower FCA volumes from the previously discussed program cancellations as well as production ramp-downs and certain new model transitions..

Turning to operating income growth. Slide 16 walks the year-over-year change in the quarter. Operating income was $587 million, and operating margins were 13.6%, up 20 basis points adjusting for the sale of Mechatronics. Strong volume flow-through and positive net performance was partially offset by FX and commodity headwinds.

Overall, another quarter of strong year-over-year performance, having lapped certain operational challenges we had last year. .

Turning to the segments on Slide 17. Let's start with Electrical Architecture on the left. Sales were flat in the quarter, as mid-single-digit growth in our connector and cable management product lines and 44% growth in high-voltage electrification was offset by the previously mentioned program cancellations and OEM production cuts.

Electrical Architecture margins declined 50 basis points as a result of flat sales, combined with launch costs in the quarter associated with planned second half launches..

Moving to Electronics and Safety. Adjusted revenue grew 19% in the quarter, driven by new infotainment launches and higher penetration of active safety products. As Kevin referenced, our strong win rates and bookings in active safety continues to give us confidence in the outlook for 50-plus percent active safety growth this year and next.

E&S margins were 11.2%, down 10 basis points versus the prior year, as strong volume flow-through was offset by increased investments in automated driving, which accounted for approximately 100 basis points of margin in the quarter.

We remain on track with our original automated driving spending plan for the year of $50 million to $60 million and expect the costs to ramp in the second half of 2017..

Powertrain delivered 7% organic growth, with strong double-digit gains in power electronics, Gas Direct Injection and commercial vehicles. Powertrain margins expanded 200 basis points due to strong volume flow-through and benefits from prior period restructuring actions.

Our full year Powertrain outlook continues to contemplate a mid-single-digit decline in light-duty diesel revenues, which is being more than offset by strong double-digit growth in GDi, commercial vehicles and power electronics, giving us confidence in our outlook for mid-single-digit organic growth overall..

In summary, all of our businesses delivered above-market growth and performed at or better than expectations despite a more challenging macro environment. .

Slide 18 walks our EPS year-over-year, which grew 13% versus Q2 2016, driven by organic sales growth, a lower year-over-year tax rate, lower interest expense from last year's debt refinancing and a lower share count. As a result, EPS was $0.06 higher versus the midpoint of our guidance range. .

Slide 19 provides an update on key macros reflected in our updated full year outlook. Relative to our prior guidance, we are seeing faster growth in active safety, infotainment and GDi as recent launches with new customers have been strong, and we expect this activity to continue through 2017 and into next year.

FX and commodities are also driving higher reported revenues, particularly the strengthening euro, which we initially planned at $1.05. Our second half estimate now assumes the euro at $1.08, reflecting levels similar to what we saw in the first half. .

Moving to the right side. We remain mindful of certain cautionary indicators, which we believe could put pressure on production in the second half. We have reflected these in our latest outlook for the year, which now includes a 2% decline in North American production from 2016 levels versus our initial estimate of flat.

As a result, our view of global vehicle production is that it will now be down slightly for the year, representing a decrease of approximately 1% from our prior expectations. As we have consistently demonstrated, we are relentlessly focused on improving our cost structure and can quickly flex in response to varying market conditions.

For example, we've proactively targeted $20 million in annual cost savings to help mitigate the impact of lower volumes in North America and we'll begin taking actions in the second half of 2017. .

Turning to Slide 20. We've provided our guidance for the third quarter and updated outlook for the year.

The third quarter outlook reflects $4.05 billion of revenue at the midpoint, up approximately 3% organic or 3.5 points above market, driven by double-digit growth in E&S and mid-single-digit growth in Powertrain, offsetting weaker North American production, which is primarily impacting Electrical Architecture.

Margins are expected to be up approximately 30 basis points, reflecting continued volume growth and operating performance, partially offset by the previously mentioned ramp in automated driving investments in E&S. .

Earnings are expected to be in the range of $1.52 to $1.58 per share, up 8% at the midpoint. Revenues for the year are now expected in the range of $16.85 billion to $17.05 billion, $250 million higher at the midpoint.

Adjusted operating income is now expected to be $2.27 billion at the midpoint, with margins up approximately 20 to 30 basis points year-over-year. Earnings per share are now expected in the range of $6.55 to $6.75, a $0.10 increase at the midpoint, driven by higher operating income and the benefit of a slightly lower tax rate.

Cash flow guidance now reflects July payment to settle the unsecured creditors litigation of $310 million, and it's expected to be $1.85 billion net of that payment. .

In summary, we are confident in our raised outlook for the year, reflecting strong sales growth and operational performance versus the original guidance we set earlier this year. .

Turning to Slide 21 for a brief update on the status of the Powertrain spin transaction. As we discussed last quarter, the outcome of the separation will be 2 independent and well-positioned companies. Since the announcement in early May, we have filed our draft Form 10 and completed our initial assessments of capital structure planning.

We are pleased with the progress made to date, and the team remains on track to complete the spin-off by March 2018 as planned..

In the meantime, both teams are executing well and are excited to share their visions for the future at the upcoming investor conference on September 27 in Boston. There, we will provide a more in-depth review of both RemainCo and SpinCo as well as informative discussions around our technology roadmaps and long-term planning frameworks.

And as always, we will be featuring some of our latest innovations. .

I'd like to hand the call back to Kevin for his closing remarks. .

Thanks, Joe. Let me summarize on Slide 22 before opening the call to Q&A. .

We delivered another solid quarter, driven by continued strong demand for industry-leading technologies and solid operating execution. This positive momentum gives us confidence in our increased guidance for the full year, which reflects the strength of our first half financial results.

We continue to work tirelessly on increasing the efficiency and the flexibility of our cost structure and have been focused on positioning our business for the future as we work towards completing the spin-off of the Powertrain business.

We're encouraged by the overwhelmingly positive feedback from customers, from partners and from our employees that we have received since announcing the spin-off transaction, which reinforces the industrial logic and the significant growth opportunities on the horizon for both companies..

Each company will benefit from strong foundations of industry-leading advanced technologies, favorably aligned to evolving industry trends, each with increased flexibility to pursue strategies that will better position them to solve their customers' biggest challenges, resulting in accelerated revenue and earnings growth and increase shareholder value.

We look forward to sharing more with you on that front at our upcoming Investor Day on September 27. .

So with that, I'm sure there's some question. Let's open up the line, operator, to Q&A please. .

Kayla, we will now take our first question. .

[Operator Instructions] Our first question comes from the line of Rob Lache (sic) [ Rod Lache ] from Deutsche Bank. .

I just had a couple of questions. One is if you could just clarify the outlook for the second half in the Electrical Architecture business.

Is that headwind still going to continue through the end of the year from some of the canceled contracts? And also on the Electronics and Safety business, obviously, phenomenal growth, but there are some costs that you're incurring in R&D and, presumably, other places.

If you can just give us a sense of what the underlying conversion is or what the -- some of those headwinds are. .

Sure. Go ahead, Joe. .

Yes. Rod, so yes, I think, listen, when we talk about Electrical Architecture, there's a couple of things. We obviously have been discussing some pass car cancellations in last year as we set guidance that primarily impacted that business. We're continuing to see softness in pass car in North America, some in the first half.

We expect a little more in the second half. And then we're going through to fairly significant truck SUV launches at the moment that will really come in, in '18. So we sort of got the costs in a lot of them, the wind-down of the older model to deal with this year and the expected ramp coming next year.

So with respect to revenue, would expect that business to, primarily because of North America and the items I just discussed, have similar to slightly down revenue for the balance of the year. We will see margin expansion for the year, though, in that business.

They've done a nice job with performance, so we're still expecting that business to be up about 30 basis points of margin on a year-over-year basis. So this quarter, a little flat, just given the timing of some of the production cuts versus some of the launch costs. But on a full year basis, still expect margins to expand 30 basis points. .

And do you want to talk about investment in automated driving in E&S?.

Sure. So we're still on track for the $50 million to $60 million for the year. We see that ramping in the back half of the year. So about 60% of it will be spent in the back half. That's what you see coming out in the E&S margin. And in Q2, that was worth, as I mentioned, about 100 basis points of margin expansion in the E&S business. .

Great.

And just lastly, on the Powertrain business, any initial thoughts on expected capital structure for the SpinCo? And do you think you can sustain that kind of mid-single-digit growth rate even with maybe some stronger headwinds from diesel going forward?.

Yes, right -- let's hit the growth rate first. A mid-single-digit growth is where we see this business of between 4% and 6% over the next couple of years. Again, strong trajectory in the gas technology businesses and the power electronics, helped by commercial vehicles certainly this year. Also, light-duty diesel is still down about 3%.

So from what we're seeing, very consistent with our guide on that and would not expect that to change. .

Yes, Rod, if I can chime in. On the growth piece, to Joe's point, we've talked about light-duty diesel. And obviously, that's a headwind. So we have about $1 billion -- just under $1 billion of light-duty diesel business. About $600 million of that is specific to light-duty diesel in Europe. We see that declining.

Joe talked about the light-duty diesel growth rate but declining at kind of low to mid-single digits over the next couple of years in Europe, which basically equates to a, call it, $300 million headwind as it relates to light-duty diesel.

We think there's a portion of that light-duty diesel business that continues to grow outside of Europe or within Europe and globally on light commercial vehicles.

And then, as we've said, we've seen strong growth in heavy-duty diesel, medium-duty diesel and certainly Powertrain electrification that more than offset the headwind related to light-duty diesel. With respect to Powertrain and capital structure, and Joe should chime in on this.

Listen, our capital allocation strategy as a company, we think, is best-in-class. We think it's served us well, and we would expect the Powertrain business to continue with a very similar strategy on a go-forward basis. .

Yes, Rod, over the course of the quarter, we have firmed up discussions with rating agencies and such. So it's consistent, I think, with our initial thoughts that this would be a high-quality sub-investment grade sort of, call it, BB-type company from across the board from the agencies, very much aligned with expectations.

And we'd expect RemainCo post-spin to hold these ratings. .

Okay, so consistent leverage on both sides? Or is there... .

Yes. Yes, no, it is -- yes, no it's going to be [indiscernible]. It's going to be about a left pocket, right pocket. So I would think both of them -- think both businesses right around 2x leverage and just basically shifting the burden -- the debt burden to Powertrain commensurate with the EBITDA move over. .

Our next question comes from the line of Joseph Spak from RBC Capital Markets. .

I guess, just -- thanks for all the additional color on the segment puts and takes for the back half. But just to summarize, the lower top end of the organic growth guidance, I mean, it sounds like that is really just related to sort of the lower overall industry volume.

Is that if a fair assumption? So like, really, the rest of the stuff was mostly expected?.

Yes. I think that's the right assumption, Joe, and it's mostly North America. It's -- and it's 2 things. I think we've planned -- we've got a big truck SUV transition we're working through. And I think we've mentioned before in the past, that's going to be lumpy quarter-to-quarter. But we're on the old platform and we're on the new platform.

So we may bounce a little bit from a quarter-to-quarter perspective, but we'll come out in a very good place on the new platform. We've got another large truck launch that's going to hit in '18 in that Electrical Architecture business. So we were working through that. I think what we're now seeing is just slowdown in North American pass car.

I think a couple of BOEs have talked about it last week. We went from Q2 sort of normal -- what I'd call normal levels of summer shutdowns, and we're starting to see increase and have been notified of increased shutdowns. But again, I think this is all public in terms of what they're talking about.

That's basically what we're reflecting on that revenue guide. .

Okay, perfect. And then on the -- I thought the disclosure on the bookings growth certainly by RemainCo and SpinCo was pretty interesting. I mean, the -- I mean, it seems like what you're classifying as growth in key technologies is actually -- looks like a bigger part of, on a percent basis, in Powertrain versus RemainCo.

I mean, as we think about those 2 companies going forward, is there going to be greater catch-up in RemainCo? And is that part of that just because you're accounting that since 2011 and some of the more electrification and active safety efforts are more recent?.

Yes, Joe, I think, it underscores, quite frankly, the strength of that Powertrain business.

And it gets back to the question that Rod asked with respect to capital structure, right, that at the end of the day, what's important for us is that we position this business to pursue the opportunities that are in front of it to appropriately service customers and to invest.

And there's some terrific opportunities on the side of GDi and variable valve train and power electronics and others that are really going to drive growth there. As it relates to RemainCo, similarly, RemainCo is the larger base number in absolute terms. So you got to a bit careful of percentages.

But when you look at the growth opportunities in active safety, 50% plus, when you look at infotainment growth in the area of 15% to 20%, when you look at high-voltage electrification on the Electrical Architecture side extremely strong.

And then engineered components growth, you have very, very solid growth businesses within each business' portfolio. .

Okay. And then Joe, one quick housekeeping. I think in the quarter, there's a -- to get back to the adjusted number, the $17 million reserve for unsecured creditors. I think that was a positive in the first quarter and or -- and then a reversal this quarter. So was that just sort of timing or something coming a little bit different or... .

I think it's the other way around, Joe. We had originally accrued a higher number just based on our estimates. And then the settlement of $310 million was a little better than that. So you see the $17 million coming back in the second quarter. .

Yes, no, that's what I meant. Sorry if I said it backwards, yes. .

Yes. .

Our next question comes from the line of David Leiker from Baird. .

Kevin, if you could, Audi A8, we've been talking about that for a while and the Z-Fast controller on that and Delphi's involvement with it. I don't know that there's been a discussion of everything that you're doing on that vehicle and, in particular, everything that the Z-Fast controller is responsible for it.

Could you flesh that out a little bit?.

Yes, I can walk through that. So listen, I -- we've had a long-term relationship with Audi, as you know. We've been working on the Z-Fast controller with them over the last couple of years. As you know, it just launched and will continue to launch over the next year or so.

And when you look at it, there's both, what we call, a Z-Fast light as well as a Z-Fast high-end configuration. So the light basically reflecting Level 2, the higher end reflecting Level 3. Content on it includes drivers seat sensor module. It includes camera and visioning technology. It includes a controller itself.

It includes radar technology, ultrasonic sensing as well as some of our connections in Electrical Architecture systems. So it's a very robust, very robust product. .

Okay, great. And then on a different note. As you're going across the 2 businesses, I know there's a lot of talk in the industry of disruptors coming into the space, particularly from a Tier 1 perspective.

Can you talk if you're seeing any changes in that competitive landscape, if there's anybody new coming in there, anybody dropping off?.

And you're talking about specifically as it relates to multidomain controllers and... .

Well, no, really across the business. There's an argument out there that the tech companies are going to come and take over all the work for the Tier 1s and [indiscernible] with the Tier 1s. .

Yes, listen, I'm -- yes, and I'm familiar with that argument. And listen, a number of those players who are allegedly coming in and taking over the industry, coming into the industry are, quite frankly, partners that we do business with.

I think one of the recognitions from both the technology players outside of the industry as well as the industry itself is the complexity of performance, complexity of quality, the complexity related to how you need to architect the vehicle to do all the things that the industry consumers are asking vehicles to have, whether it be autonomous driving or active safety or infotainment or more clusters in a car.

All that requires more signal distribution, higher compute powers. And those are areas where, typically, those players don't have those capabilities. Players like us do. I would say, to be candid with you, that is a space where actually, based on our dialogue with customers, we're seeing less or fewer competitors.

And that if you're not a player who has a meaningful position in areas like active safety today, which we think the incremental benefit of being in the Electrical Architecture business puts us in a very, very unique position, that is really an area that's overly complex and too difficult to get into because you're really talking about the underlying architecture of the vehicle.

And that's something that, David, that we'll, quite frankly, talk -- you'll hear us talk more and more about including at the Investor Day in September. .

Our next question comes from the line of Itay Michaeli from Citi. .

Just going back to the second half organic growth, Joe.

Could you maybe share what Delphi's North America revenue -- how that splits between cars and light trucks segment? And then kind of how you see your North America production second half relative to Delphi's North America revenue second half?.

Yes, so Itay, we're -- in North America, Holdco is about 65% SUV truck versus pass cars. So we've worked very hard to position that -- the business in that way over the last few years, and that continues to hold and hold well.

Its bookings, quite honestly, probably actually a little stronger than that as you look out over the truck programs we're launching. So that looks good. I think as we think about the North American market for the year, we're thinking, as I mentioned, it's down 2 points for the year. Delphi revenue growth, I would call it, 2.5 points above market.

So 0.5 point to a little bit better than that. .

Great, that's helpful. Then as a follow-up and maybe for Kevin on Slide 12.

When you think about Delphi's role in future automated mobility on-demand, how should we think about the different opportunities you have, both the vehicle, of course, and Level 4? But also, should we think about potential services revenue, fleet management? And kind of how should we size that up in terms of the long-term opportunity for Delphi?.

Well, listen, the -- as we've talked about before, the data opportunity in this industry is huge. And as an industry, we've just scratched the surface.

We think mobility on-demand and specifically the business opportunities we have -- the fleet management firms or what I'd call the mobility on-demand providers, put us in a position where there's both opportunity within the vehicle from a data standpoint, but there's also real opportunity outside the vehicle.

And those are the -- those are what we are evaluating now. Those are the reasons why we're doing these smart city pilots with a select group of partners. And you'll hear us talk more about our plans as we firm them up. .

Our next question comes from the line of Brian Johnson from Barclays. .

Yes, two questions, one on the accounting, the other more strategic -- not accounting, on the quarter. Powertrain incremental is very strong, 30%. A couple of questions. You mentioned restructuring saves. What quarter do we start lacking those? And second, around Powertrain.

To what extent was there good commercial diesel volume? And did that help the incrementals?.

Joe, do you want to... .

Brian, I think on the restructuring that we've talked, that's really, for 2017, that we expect the business to be up well over 100 basis points for the year. That's really where the restructuring benefits come into. Next year, we'd expect it to return more to our normal expected margin expansion, call it, 20 to 40 basis points.

So this is really where you see the year of the step change. Commercial vehicle revenues were up about 20% in the quarter, very strong North America helping that. And I actually think it's a -- it's strong North America, but it's also representative of the types of customers we have.

We're on very strong global players, global platforms from a CV perspective in our Powertrain business. .

Okay. Second question is more strategic and sort of a RemainCo opportunity set. Not to focus on Tesla, but I think apart from the marketing and the brand, sort of the whole data architecture, Electrical Architecture, OTA updates, data harvesting and sending it back to the cloud seems to be ahead of most of the legacy industry.

And of course, they're out there talking about whether [indiscernible] goals for reducing the complexity of wiring in the cars while increasing the function.

Can you give us a sense of a few things in that area? Kind of, one, over time, what's the content opportunity in Delphi when, on the one hand, there's more data, more centralized controllers? On the other hand, is it realistic to think there'll be fewer kilometers of wires? And then just second, given the big need to re-architect the data in Electrical Architecture of their vehicles, where are the legacy industry on this? And is it becoming more of a priority for them?.

Yes, Brian, I think that's a great question. Listen, I -- Tesla is, as you know, an important customer of Delphi. We're their primary wire harness provider, I would say. So they're certainly a customer that we're familiar with from a strategy standpoint.

I think as it relates to their current dialogue about wire in the car, I mean, the reality is, from a manufacturing standpoint, simplification and automation in a cost standpoint, they're trying to reduce the amount of wire in the car.

On the flip side, the number of flex circuits and other cables that's necessary to optimize that, quite frankly, adds content, at least, near term.

I think, as it relates to the dialogue about architecture within the industry, I think it's a dialogue that you're starting to see -- we're starting to have more discussions with, principally, as you can imagine, with the European and, principally, with the European German luxury OEs.

And I think I believe it's really the realization of everything going into the car requires an architecture that is somewhat different, you optimize signal distribution, that you have more compute power, and software is a bigger competent of the overall value proposition or what's necessary to drive the technology and drive the capabilities.

And that's something, quite frankly, beginning with Audi a couple of years ago and the Z-Fast controller, that's something that we're front and center with, with a number of OEs today and it's, quite frankly, something that we're trying to drive. .

And in terms of timing when those would show up in bookings and eventually in program launches?.

Well, listen, I think Z-Fast [ the first ] will have more that are -- that will be coming out in 2019 and beyond. I think in terms of real meaningful change to the architecture of the car, that's out 5-plus years, right? That's as you'll see more adoption of Level 3 and then ultimately Level 4, Level 5 autonomous driving.

And you'll see more displays, more content going into the infotainment system and into the cockpit. .

Our next question comes from the line of Chris McNally from Evercore ISI. .

My question is around the acceleration of organic and outgrowth from this sort of current 5% level to something better in 2018, 2020, as your key growth drivers become larger portions of the portfolio. And I think you've been pretty explicit with the 7 secular drivers from some of the analyst days.

And I really just wanted to drill down into Electrical Architecture specifically. And kind of my question is, can we get back to this 4% to 5% type organic growth, which it seems to be the drag on the overall top line? We talked about the truck changeover.

But in a 0% production environment, and I guess, we're still in the early stages of the EV ramp, is that possible? Or do we have to wait for sort of electrification to be further along to hit sort of that mid-single-digit for that division?.

No, you won't -- Chris, we won't wait that long. I mean, even in '18, you'll see a bump-up in growth just as we get through the truck SUV transition and pass car settles out. So this business will have the growth over market.

I think there is -- it comes from its -- in part, from its scale, its platform concentration on higher contented vehicles Audi Q7s, GM truck SUVs. We'll be launching another big North American truck platform next year. So that growth will come back in '18.

As I said, this, for us, is a -- the confluence of the truck transition, which we knew about and was factored in on top of the pass car decline in North America. .

Yes, and just to be clear -- just to be real clear on it. The revenue growth in that business back half is really affected by 2 discrete items, and it's North America-specific and it's passenger car-specific and it's truck turnover. They moved through it to a new platform. So it's very discreet, and it's for a very short period of time.

And as you look at 2018, you'll have a business that returns to growing, as we said historically, roughly to maybe a little bit 2 points over the market. So the E/EA revenue growth from the back half of this year is very discrete.

As it relates to overall accelerated growth over the market, listen, I think at Investor Day and not to steal the thunder, I think you're going to hear us continue to say, we got strong bookings, we're in strong positions.

But I think our guidance on a go-forward basis is we're going to continue to commit to roughly 5 points of growth over the market because we don't, in fact, control some of the decisions that OEs make as it relates to production schedules.

And we always want to be in a position where, quite frankly, we're not explaining why organic growth isn't as strong and in a position explaining why it was better than what we originally forecasted. .

Kevin, no, that's really clear. I really appreciate it.

I mean, should we at least think about, though, if the EA is growing, like you said, maybe in a normal environment, which starts next year after the changeover is 2 points above market, we do get a nice material step-up, though, as we hit the end of the decade when full EV and plug-in start to take off because of the acceleration and the content per vehicle pickup that you talked about.

.

Yes. I think if you look at our bookings and growth in bookings on key technologies, you look at revenue growth rates on key technologies, both within what will be RemainCo as well as Powertrain, again, I think it's fair to surmise and look at it and say that the profile of both businesses are higher growth.

However, having said that, again, we don't control vehicle production schedules by OEs. And we want to limit the situation or the risk of ever having to explain to you folks why growth wasn't what we communicated. .

Our next question comes from the line of Adam Jonas from Morgan Stanley. .

First question, just following up on the -- on Tesla.

In addition to the wiring harness, where you mentioned you're the primary supplier there, could you confirm -- well, first, what else do you do for the Model 3, for example, that you might have disclosed or care to disclose now?.

Yes, it's principally Electrical Architecture. .

Okay.

Can you confirm that Elon's comment of taking the wiring length, and I know that's not the only to way to judge the value of the system, but let's say the kilometer down by roughly 50% from Model S to Model 3?.

Yes. I think they're working to reduce the amount of length, I can confirm that. I'm not going to give specifics as to exactly how much. .

All right.

But you also supplied the Model S wiring as well, correct?.

No, we don't. .

Okay.

I was just curious, if in an environment where we cut wiring length, are you able to fully offset the value of the Electrical Architecture through the connectors? Or is it kind of moving back [indiscernible]?.

Yes.

Listen, yes, I think, at the end of the day, from an architecture standpoint, we don't just provide wire, right? So I think at the end of the day, when you talk about what's going into a vehicle from a complexity standpoint, when you talk about everything that they're putting in from a technology standpoint, the reality is that requires more complex architecture, which is a mix of not only length of wire but type of wire, whether it's carbon fiber or copper as well as number of connection points.

So as you look at content growth for Delphi on those vehicles over a period of time, that specific OE, content growth has actually increased from a broad architecture standpoint. .

Kevin, just a couple of follow-ups, Foxconn.

Do you have a relationship with that company right now on the automotive side?.

No, no. .

Is there an interest or are there -- I don't know if you can confirm discussions or feeler or anything else.

Do we have a relationship?.

We have -- I guess, in theory, we could have a relationship. I don't have anything to confirm. We don't have a relationship today. I don't know your what your question is alluding to. .

Well, it's just that Foxconn wants to make cars according to the Chairman. That's all. That they want to supply -- make vehicles. Okay, fine. Then just the last one quick. There's 145,000 employees at RemainCo.

What would that number be on a kind of if you were to include the nonconsolidated, principally Chinese operations? I didn't know if there was like a broader number. I believe that the 145,000 is just the consolidated employees but [indiscernible].

Yes. No, that's total, Adam. And it's Joe. This for a lot of years. I mean, we're at this point, either own or majority control all the operations in China and have fully consolidated them. So that's the all-in number. .

Our next question comes from the line of Ryan Brinkman from JPMorgan. .

Just what spins into the Powertrain business comprise exactly what was in that division prior to the announcement of the spin or some product groups that sat in one division or another going to transfer between them prior to the spin? I asked just in part because I wasn't aware as the takeaway from Slide 10 seems to imply that the spin match will have at least more incremental, you clarified, leveraged electrification than the E/EA business.

Maybe that was always the case, and I just underappreciated it. .

No, Ryan. It's fine. So not to -- and we maybe caused confusion with you. Quite frankly, the power electronics business, which is powertrain-specific electrification, so outside of Electrical Architecture high-voltage wiring connectors, had historically sat within our E&S business.

About a year ago -- a little over a year ago, we moved that into our Powertrain business because there was more dialogue with powertrain experts within our customer base about power electronics. And given that, that was where the customer interface moved to, we thought it would best fit within that Powertrain business and that Powertrain segment.

So within Powertrain, we have the traditional powertrain product line from a gas fuel injection, diesel fuel injection and powertrain products, power electronics as well as the aftermarket business, which is principally powertrain product-related. .

Got it, that's helpful.

And in power electronics, to be clear, that has relevance not just for electrification of internal combustion engines but for pure electric vehicles, too?.

Yes. .

Yes, that's correct. It's the full product line. So your inverters, converters, those types of battery packs, those types of products. .

Great.

And then just finally, in light of all of this leverage we've been talking about to electrification of internal combustion engines of the spin and also to pure electric vehicles and then also combined with obviously the diesel headwinds, et cetera, on the light-duty side, what are the latest talks in terms of the SpinCo's kind of normalized organic growth relative to light vehicle production?.

I mentioned earlier, we have high confidence in that mid-single digit range. That accounts for light-duty diesel deterioration being offset by growth in the heavy-duty diesel business as well as the power electronics and the gas technologies.

I think in -- the way to think about it, if you focus on that roughly $950 million of revenue -- light-duty diesel revenue in Powertrain, about $550 million of that is pass car. So it's a relatively small number when you start to frame it.

The rest light-duty diesel is actually commercial vehicles not under the same types of pressures sort of, what I call, political and social pressures is light-duty pass car. So that's $550 million we see coming down and say it halves over the forecast period.

So your -- we can ring fence that revenue leakage pretty -- it's a pretty straightforward calculation. .

Our next question comes from the line of David Lim from Wells Fargo Securities. .

Just quickly, you talked about the SUV transition for you guys.

Is the new vehicle that you guys on or the replacement vehicle, is that of higher content?.

It's a little bit more. Roughly the same, a little bit more. .

And we expect it to grow over its life, too. They typically do. They'll add more content as the vehicle matures. .

Got you. And then on the power electronics, I think, in Q1, you guys mentioned $600 million of wins. Is there a number you guys could offer for Q2? I know you guys gave a lot of numbers, but I just want to be sure what your power electronics wins were in Q2. .

Yes, Q2 was strong as well. It was over $1 billion in power electronics bookings. .

Got you. And then a little bit on the longer term on electrification. I mean, a lot of headlines regarding solid-state battery technology and the application on -- on the applications even on the CV side.

If there was a truly a breakthrough over the next several years, any kind of thoughts on how that would impact your Powertrain business? Or do you see that not happening as rapidly as maybe one would think?.

Listen, are you talking about Powertrain electrification? Is the question related?.

Yes. So like, what's -- what we're hearing is Toyota's breakthrough on solid-state batteries to really extend the range and reduce the weight.

Now if there was truly a breakthrough there, would you -- would we see a faster-than-normal [ seed ] shift to electrification, whether that be light vehicle and commercial vehicles? And then the consequential impact on SpinCo, if you would?.

Yes. Listen, on -- electrification is good incrementally for both businesses. So let me start with that. So both benefit -- both businesses benefit, whether it's full EV or it's mild hybrid or its plug-in hybrid. It is a positive trend for both.

The content per vehicle opportunity is well in excess of what our average CPV is today on a vehicle, whether it has an internal combustion engine or related to low-voltage Electrical Architecture, which is in a standard car. To the extent vehicle electrification ramps up, it's a net benefit for both businesses.

The ability for it to accelerate, there is an opportunity there. But I think you need to think about infrastructure and other things that, quite frankly, will limit the amount of -- or the ability to accelerate things to some certain level.

As it relates to commercial vehicle, our view on electrification and commercial vehicle from an industry standpoint is there's an opportunity there for light commercial vehicle, maybe for last mile on heavy-duty commercial vehicle, Class 8 commercial vehicle.

But just given the dynamics in that industry and that market, it's going to be a diesel -- heavy-duty diesel business for quite a long time. .

And our final question comes from the line of David Tamberrino from Goldman Sachs. .

I think I caught that you mentioned your ADAS bookings being strong year-to-date at about $2 billion.

Is that what I heard?.

Yes. .

Yes. .

So that's pretty nice growth and acceleration over the past couple of years of about $1 billion, I think, you mentioned last year [ $1.8 billion ] in total.

Are you seeing an acceleration in the market for RFPs? Is your win rate higher or lower within that market? And then what level of ADAS are we seeing being quoted or requested the most from the OEM standpoint?.

Yes, I mean, it's -- so level of activity -- multiple questions. Level of activity, absolutely. And our win rate on that level of activity, I think we're close to 100% on the programs that we're bidding on. So level of activity has certainly gone up.

What's driving that is really democratization of active safety and further penetration in the more mature markets and then more rapid adoption in emerging markets like China. So we foresee, as we talked about, active safety growing over 50% this year and continue to 50% clip next year. So very, very strong growth.

What levels it tends to be, anywhere between Level 1 and what I'd call Level 2 plus, there are some programs like Z-Fast that have 3 capabilities. But those are -- those tend to be rarer and tend to be with the luxury German OEs today. .

Understood.

Within your response you mentioned of the programs you're bidding on, can you widen that out a little bit? How much larger is the market relative to what you're bidding on today? And what's bifurcating what you are going after than what you are going after?.

David, I'm not sure I can give you an exact number. It's obviously a big market. It's growing roughly mid-teens. Every OE is focused on it.

And if you can imagine at a 50% growth rate in revenues and roughly the same from a bookings standpoint, we're getting all the business that we can pursue at this point in time when you look at allocation of resources. .

Understood. And just the last one for me. Infotainment wins, you've had a lot. Over the past couple of years, you start to come in 15% to 20%.

Is this all display audio product? Is it some embedded navigation? And what are you seeing, at least, from a bidding activity from the OEMs going forward?.

Yes, it's a mix. I say we're seeing more activity -- or the area that we're more focused on, quite frankly, are areas where we have integrated cockpit controller so where we start with the architecture. So yes, Joe was saying, they tend to be mid- to high-end. It's about compute power, it's about graphics capability, and it's about scalability.

So we're really focusing our efforts on strategic relationships that the medium to high-end sort of infotainment levels where contents going to grow and you're going to see more displays in the car. .

Got it.

Has there been any fundamental change in your win rates what you're seeing there, following the acquisition by one of the larger competitors last year by Samsung?.

Listen, we have a solid win rate. Bookings levels have been extremely strong this year. Opportunities are a little bit more back half-loaded than what they've been in previous years, but we have some significant opportunities that we think we're in a great position to [indiscernible]. .

Yes, that $1.2 billion win in Q4 that we announced of the German luxury OE, that was a conquest win at a very -- on a very high-end system. So we think our product offering and our ability to take sort of the centralized computing know-how we have into that infotainment space is helping to drive that. .

That concludes the Delphi Q2 2017 Earnings Conference Call. Thank you for joining. You may now disconnect, and have a great day..