Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delphi Q1 2017 Earnings Conference Call. [Operator Instructions] Thank you. Elena Rosman, Vice President of Investor Relations, you may begin your conference.

Thank you. Good morning, Kim, and thank you for -- everyone for joining Delphi's First 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. And 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 reconciliations between GAAP and non-GAAP measures are included in the back of the presentation and the press release. I also want to mention that during the first quarter, we adopted a recent accounting pronouncement that changes the presentation of net pension and postretirement benefit costs but has no impact to overall net earnings. This has been reflected in our Q1 2016 and Q1 2017 financial results as well as our financial guidance for the remainder of 2017. Additional details of the prior period impacts are included in the appendix of today's presentation. We have also presented our Q1 2016 financials on a pro forma basis excluding the results of our Mechatronics divestiture, which we sold at the end of last year, and provided a reconciliation in the appendix of our presentation as well. 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 that we cite 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 including an overview of today's portfolio announcement, and then Joe will cover the financial results and our outlook for 2017 in more detail. With that, I would like to turn the call over to Kevin Clark.

So thanks, Elena. Good morning, everybody. Thanks for joining us. Before Joe gets into our financial results, I'll provide highlights around the first quarter and then spend some time discussing this morning's announcement of our plans for a tax-free spin-off of our Powertrain segment into a new independent company. Starting with the first quarter. Our results reflect a great start to the year with a positive trend we saw in the fourth quarter continuing including strong growth in revenue, operating margin and earnings per share and new business awards driven by the strength of our technology portfolio. Based on our results, we remain confident in our 2017 outlook. Staying on Slide 5. The spin transaction we announced today reflects the company's continued evolution and positioning to strengthen our capabilities to solve our customers' biggest challenges and drive increased value for our shareholders. The convergence of the technologies underpinning the safe, green and connected megatrends, is driving the need for an exponential increase in computing power and faster signal distribution to deliver increased vehicle safety and connectivity. At the same time, more stringent regulatory requirements targeting reduced CO2 emissions and improved fuel efficiency are requiring increasingly complex powertrain technologies. As the pace of change accelerates and the needs of our customers continue to evolve, we feel now is the right time to establish 2 strong strategically, well-positioned companies, each with a great portfolio of relevant technologies, a global footprint, a lean and flexible cost structure and the financial flexibility to pursue organic and inorganic growth opportunities, all of which translate into a compelling growth outlook. Turning now to Slide 6. Since our IPO in 2011, we've been executing our strategy to strengthen our business and expand our capabilities through organic investments, acquisitions and minority investments in key technologies, all aligned to…

Thanks, Kevin, and good morning, everyone. Beginning on Slide 12. Delphi had another quarter of strong new business bookings across the portfolio totaling $6 billion, following record-breaking levels in the fourth quarter. As you can see from the chart on the left, key growth technologies including active safety, electrification, infotainment user experience and advanced gas systems have represented an increasing portion of our bookings since 2011 and that trend continued into the first quarter, putting us on track to exceed last year's record of almost $26 billion of bookings. Our core businesses, representing established product lines that form the foundation for many of our new technologies, continue to see new bookings growth as well. On the right side of the chart, we highlight several key wins including a major power electronics win from Geely and Volvo for production in both Asia and Europe, a global active safety win with a large North American OE, a significant Electrical Architecture conquest win with SGM in China; and an infotainment user experience conquest win with a large OEM in Europe. In summary, another great quarter of business wins. Slide 13 provides a summary of our first quarter financial performance. As Kevin said, we are very pleased with our solid start to the year. Organic revenue growth in the quarter was 9%, led by strong growth in every region and business. Our EBITDA margins expanded 20 basis points on a pro forma basis to 16.5% and operating margins expanded 20 basis points to 12.5%. As Elena mentioned, the adoption of a new pension accounting standard resulted in a $7 million reclass of certain pension costs from operating expense to other expense with no impact to net earnings. Earnings per share grew 23%, primarily due to strong volume flow-through, partially offset by FX and commodity…

Thanks, Joe. Let me summarize on Slide 21 before turning it over for Q&A. Delphi delivered another strong quarter with solid revenue and earnings growth, which was a continuation of the positive trend we saw across the company over the course of 2016. Our great start gives us confidence in our outlook for the full year, as Joe said: mid-single-digit organic revenue growth, 30 basis points of margin expansion and double-digit earnings growth. We remain committed to staying in front of evolving market dynamics and trends to ensure that our business is always positioned to deliver significant value to our customers and outsized returns to our shareholders. We believe the strategic rationale for the spin-off of our Powertrain segment reinforces that commitment. By creating two well-positioned companies aligned to evolving industry trends, each with increased flexibility to pursue distinct strategies that will better position them to solve our customers' biggest challenges, accelerate revenue and earnings growth and increase shareholder value. So with that, we'll open up the call for questions.

Thank you, Kevin. We'll now take our first question.

Your first question comes from the line of Rod Lache from Deutsche Bank.

Congratulation on this move. I think it's going to be very well received. I had a couple of questions on the spin. First, can you just give us a sense of how you're thinking about the capital structure of the new co versus the RemainCo. And if we were to think about how overhead costs would be allocated, so we'd obviously see what you guys reported on a segment basis for EBIT and EBITDA, if we were to adjust that for what the company would look like on a stand-alone basis.

Sure. Joe, you want to?

Rod, it's Joe. So we're still early days working through the capital structure obviously and that process will commence at a quicker pace postannouncement. But we'd expect RemainCo to maintain its investment-grade rating. There will be a dividend from SpinCo to RemainCo for some deleveraging to do that. Those exact amounts and the exact structures, again, it's something we'll work through over the next 2 months as we -- following up from the announcement. As it relates to overhead costs, a couple of ways to think about it: one, we do allocate overhead costs to our segments. So there is a portion of Delphi's overhead and stand-alone company -- public company costs already in the Powertrain numbers. As we look at it today, we would not -- there'll be some incremental, but we do not believe it would be material to stand Powertrain up on a stand-alone basis. Those same amounts would be effectively stranded costs for RemainCo. We expect the stranded costs, based on our initial analysis, to be slightly more than we had with Thermal. As you recall, we had about $60 million of stranded costs with Thermal. We expect the Powertrain stranded costs to be more than that, but still less than $100 million and we would expect to work our way through those over the first 18 to 24 months following the spin, much like we did after the sale of Thermal.

Rod, if I can add to Joe's comments. Just philosophically, listen, our view on this transaction is the best time to do something like this is when businesses are doing well and you're coming off a position of strength. Our philosophy, as it relates to capital allocation and use of cash, I think, obviously, it's driven value for our shareholders and that's something, a philosophy, that we certainly would maintain at RemainCo and certainly would expect some mix of that to remain with this spun Powertrain business.

It makes sense. And I was also hoping you can maybe talk a little bit about the expected growth rate that you've got for the Powertrain business, what you've assumed in terms of light-vehicle diesel. And then kind of more broadly, there's a lot of discussion about consolidation in both spaces. There've been some articles about -- even the Delphi Powertrain business, but certainly in electronics and software and so forth. And just what is your perspective on -- in the participation of each of those businesses vis-a-vis industry consolidation?

Sure, Rod. It's Joe. I'll take the light-duty diesel question and Kevin can follow up on your second part. So our view right now, and this has been very consistent over really the last year plus, we have light-duty diesel revenues, which, for us, is primarily pass car and light commercial vehicle in Europe. We have those revenues decreasing 3% per year over the next couple of years through our forecast period of 2019, effectively following down light-duty diesel penetration in that carpark. At this point, there continues to be discussion and I would say a lot of differing views on that. But we think we're consistent with where our customers are at, we're consistent with what we're seeing in schedules, and certainly, some of the forecasting agencies, their projections of between now and 2019, 2020, light-duty diesel penetration sort of being -- going from the high 40s to the low 40 percentage. So that is unchanged at this point and we think that's the right place to be.

Yes. And then to augment that, Rod, listen, when you look -- when you break it down by segment at a high level, our outlook for revenue growth is mid-single digit for Powertrain. So obviously, as Joe's talked about before, very strong growth in the Gas Direct Injection, very strong growth in heavy-duty and medium-duty commercial vehicle, very strong growth in power electronics offsetting that light-duty diesel headwind. As it relates to Electronics and Safety, very strong double-digit growth. Electrical Architecture, low to mid-single-digit growth just given its market position. But we think with the separation of these 2 companies, the increased focus on developing advanced technologies, those are growth rates and profit margins that should actually improve. As it relates to consolidation within the industry, listen, consolidation has been something that's talked about a long time in this industry, both at a OE as well as a supplier level. Our rationale for the CSLP partnership with both Mobileye and Intel was really about how do you leverage the capabilities across the industry, whether it's through formal consolidation or informal partnerships. And listen, we're in areas of technology that are going to require more focused investment, increased investment and I think there are multiple ways to fund that, whether it be through physical consolidation, acquisitions and mergers, et cetera, for less formal or more formal strategic partnerships like we have. Hopefully that answers your question.

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

I want to follow up on that with some more questions around the Powertrain vision. If you take a OEM who wants to, say, do 48-volt and then evolve into a plug-in hybrid, before we've heard about how the different business units within current Delphi worked together on that, can you give us a sense of, A, how bundled or separate those decisions really are; and then B, how that's addressed in this new 2-company structure?

Sure. Sure, I'll start, Brian. Listen, from a bundling product standpoint, they're completely separate from a technology and product standpoint. Go-to-market, where it makes sense from a customer standpoint, that's where we partner. We're doing a lot of that now in China and we'd expect by the end of the year to have a few joint programs, one unannounced. Postspin, we'd expect, as long as we are continuing to drive value for each separate, independent business, that's a cooperation that we would continue to have.

So the components that would go into, say, a plug-in hybrid system apart from the electrical architecture, things like inverters, converters, maybe at some point motors, control algorithms, those would be part of Powertrain, not RemainCo?

Yes, let me be clear. So all that product portfolio that, about a year ago, we moved out of Electronics and Safety into Powertrain because that's where the decision was being made from a purchase and engineering standpoint. So inverters, converters, all the products that you just mentioned, that will sit within the Powertrain business.

Okay. So I guess that means that Powertrain isn't just a runoff internal combustion engine company, it can participate in the shift in powertrains?

No, no. Let me make it really clear. We have a great Powertrain business that's very well positioned, that has a great product portfolio including power electronics. And this is about how do we position it to increase the flexibility, to accelerate investment, to increase growth, increase profitability and to be in a better position to serve our customers.

And have you had any feedback this morning from some of your OEMs?

Yes, we've had -- we've spoken to all of our major OEMs and the feedback is all positive.

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

Congratulations on this. This is a great move. As we look at the business, are there any structural issues that you would take, that you would look at, either further divestitures or potential places where you're looking to add on onto the 2 businesses?

Yes, listen, I wouldn't say we have structural issues or gaps. I think both businesses will look at opportunities to further enhance their product portfolio, whether that be through organic investment or acquisitions.

Okay. And then one on the quarter here. Good bookings number here again. Can you give a little discussion about what the bidding activity is? And how robust is that? And are you seeing any new players that you're bumping into as you're bidding on new contracts?

Yes. Listen, the activity is roughly in line with what we had last year. I think the funnel's actually a little bit larger. We'd expect our bookings this year to be in excess of what we booked last year, which was $26 billion. With respect to new entrants or new players bidding on business, I'm not seeing anything noteworthy. Joe, do you have anything...

No, nothing from a new entrant perspective. David, I would say that bookings are very lumpy, right? If you looked at '15 and '16, bookings were probably a little more heavily weighted to the beginning of the year. In '17, normal flow, have them a little more weighted to the back end of the year. That would be the only thing I'd point out.

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

So Joe, I think on Powertrain you mentioned an expectation of continued mid-single-digit top line growth beyond 2017. Hoping we could talk a little bit about, just perspectively and I know it's early days as you kind of go through the numbers, but margin in the next couple of years and whether you anticipated any potential increase in R&D or anything else kind of post the spin for the Powertrain business.

Well, certainly, from -- I think as a stand-alone business that we'll be able to make capital deployment investment decisions based on where they see that technology going. That business has worked very hard. That team -- Liam and his team have worked very hard to improve the margin structure of that business. And certainly, much like Delphi has done, I think the expectation would be continued margin expansion while investing in new technologies. I certainly wouldn't see that changing. And again, they've done a great job with their footprint rotation and making smart investments in that business. So we'll obviously come out with that later as we get past the Q2 release then to Investor Day, but I don't see any major changes coming from that perspective.

Yes. Listen, I would say, thematically, Liam and his team are great operators who have executed really well from a cost structure standpoint, so we'll experience very solid operating margin expansion this year. Into the out years, even with increased investments, I think Liam as well as, you're all familiar with Tim Manganello, they're very focused on revenue growth and profit improvement. So thematically, you would see no change.

That's very helpful. And just a quick follow-up on the quarter. On the sales growth flow-through, I think it was quite a bit stronger than the past several quarters. Just wondering how we should think about that the rest of the year? Kind of what drove the strength in the quarter? And what are some of the puts and takes to think about as we model that going forward?

Yes, I think it's very similar to our discussion in the fourth quarter where we saw fairly strong flow-through. We've been forecasting for flat market, continue to do so. To the extent there is volume upside, we will flow stronger. And as we planned, we've talked about -- as we plan for flat volume, that's how we think about capital deployment, that's how we think about investment expense management. So to the extent we get concentrated, first, of higher volume, which we've seen particularly in China, Q4 and Q1 and again in Europe as well, we tend to flow stronger. I would focus on -- I think, our margin guidance that we're providing for the full year, Itay, is where -- is certainly where we're planning to be. And again, we're going back to forecasting flat market, and to the extent there's upsides in various markets, we should flow a little stronger.

Great. If I could just quickly follow up on that, Joe. Is the strong flow-through on the base business? Or is it also on new backlog, new launches coming through or maybe both?

It's probably -- it's on both. It's on both. We're getting the volume from new launches. Take rates in E&S, very strong in both China and Europe particularly in active safety and infotainment. But the base business is, particularly in the Electrical Architecture space, is seeing some performance gains after some of the challenges they had last year.

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

Also, great move. Timing couldn't be better. So I might have missed this earlier on the call, but would you care to comment on those reports that you held recent talks with Continental in combining your respective Powertrain ops?

Listen, we don't comment on market rumors so [indiscernible]

Okay, that's fine. I mean, Kevin, I respect that. I do think that if you're not going to categorically deny it, your customers and investors will probably assume you did, but that's neither here nor there. I guess, the question then is there any logic in having -- if you don't comment on that, whether you had talked, is there a logic in potentially having discussions with someone like Conti on getting cost savings and working on growth opportunities for Powertrain?

Listen, Adam, I'd answer it this way, we really mean this: we have a great Powertrain business that's very well positioned, that has some tremendous opportunity out there that we believe, by setting up as a separate public company, they're better positioned to pursue. And as a result, they'll be a better supplier to their customers and all that will translate to better value for shareholders. Having said that, you saw the road map slide that I walked through. We're about driving shareholder value and making sure we do it in a way that benefits our customers. So that's how I'd respond.

All right, I appreciate that. Just one follow-up. You mentioned that -- I think, the way you describe it is that the separation can actually provide a revenue synergy for both companies, that you can actually pursue growth and/or margin expansion opportunity even better separately than together. But I would assume there may be some dissynergies as well that could be netted off against the synergies. I don't know if you could highlight some of the maybe obvious areas of either where you are able to get business when you go to market together or any cost-sharing or other material buy or anything that might be -- we could consider in the net -- netting of it, if you will?

Yes -- no, that's a great question. Listen, short term, I think there definitely are some dissynergies. I don't think they're huge, but there are some. Joe alluded to the, let's call it, the corporate or overhead costs. There'll be some duplication for a brief a period of time. There is a benefit in scale, things like sourcing that you just talked about. There's also some benefit with respect to leveraging technology like electronics between, for example, Electronics and Safety as well as our Powertrain business, ease of use. Having said that, given how rapidly this industry is evolving, given how complex the technology is getting, given the amount of convergence that's going on between historically what we refer to as Electrical Architecture and what's going on in autonomous driving and infotainment and user experience, I think being focused, laser focused, is going to drive faster development of technologies, and quite frankly, more revenue benefit and more margin benefit. And I think having two -- both businesses separate gives you more flexibility, gives the management teams more flexibility to make those decisions and maybe not have to assess as many of the trade-offs, Adam.

Your next question comes from the line of Chris McNally from Evercore.

Congrats again on the strategic decision. So just a slight alteration to some of the questions that have already been asked. So the power electronics, which will remain in Powertrain, I think it's like 60% of your content per vehicle in EV. So I guess, that means you really still have a heavy, if not a positive, transition from internal combustion engine to EVs within Powertrain. I guess my question is does it make sense at some point to get into some of the more hard components, electric motors, drive modules? Or do you think that there's not an advantage to bundling everything that would be relevant to EV?

Yes, listen, there is -- as it relates to systems, there always is a benefit from an efficiency and a cost standpoint to have a system. The reality is, though, we have a customer base, most of our customers, to be candid with you, in that area in and around Powertrain like to buy in components. So that's something that you need to be cognizant of. We have -- and Liam and team, I'm sure, will continue to evaluate other areas within their product portfolio in and around EVs or powertrain electronics where they'll decide they want to be in the business versus partnering with somebody who's in the business today and I think that'll be a capital allocation trade-off.

Okay. I mean, is the way to interpret that, I mean, it doesn't have to -- you can maybe have collaborations rather than actual capital market mergers of...

Yes, I think -- some of the products that you mentioned, our view today is that it's likely some of those become commodity-like and that you're better off buying versus making, and there is a universe out there of very capable suppliers that are happy to partner with a company like Delphi to provide that product in a system.

Yes, Chris, motors are a good example of that. We have a couple of partnerships in place now in the Powertrain business including a motor provider in China that's a big part of our product offering there. So there are opportunities in the marketplace to do that without deploying capital.

Perfect. And if I may, just one real quick follow-up on E&S where you had this big warranty. We've now had sort of 2 quarters in a row where you had warranty expenses that you haven't called out in your non-GAAP items and they've been pretty big. Quite frankly, the 2 quarters would look spectacular if you didn't have these expenses. How do we think about quantifying them going forward? I mean, should we think about them truly as onetime? Or is this the type of thing that could come up on a more regular basis?

Well, listen, the two items that you're referring to, fourth quarter and first quarter, related to, let's call it, older technologies that are out there. I'll start and Joe should get into more detail. When you look at warranties, the reality is there's a big chunk of warranty that is lumpy at the end of the day. It's a lumpy expense. And I think, based on that, I think our conclusion was we're better off keeping them in the numbers and highlighting them for you. And Joe, I should...

Yes. No, Chris, Kevin nailed it. It is lumpy. It's obviously hard to forecast. The way I think about it and the reason we haven't called it out or referred to it as nonrecurring, if you look at the past 5 or 6 years since we've been public, we average about $100 million of warranty expense in a year. Now there's 1 year where just the timing it's $140 million and the next year it's $60 million. But that tends to be the way to think about it. It's not a trend. This is not something we see increasing over time. That range of somewhere right around $100 million per year on a 5- or 6-year base is where we think about it. But in a given quarter, it's just going to stick out a bit. It's going to be lumpy, and again, that's the reason we haven't backed it out and wouldn't advise to.

Your next question goes -- comes from the line of David Lim from Wells Fargo.

Kevin and Joe, with this spin-off, can you give us an idea of how the backlog would look between RemainCo and the SpinCo, if you would?

Yes, well, we've talked about it, if we go to the deck, I think, from a bookings perspective, if you want to use '16 as a proxy of our $26 billion in bookings round numbers, about $19 billion sits in RemainCo, $17 billion sits in Powertrain -- I'm sorry, $7 billion sits in Powertrain. And that ratio is generally consistent.

Got you. And then can you give us some color on how China is sort of unfolding as you see it? I mean, I guess, there are some discussions that maybe Q2 or Q3, there might be a little bit of a chop. But I was wondering, what's your guys' take on it?

Yes, from our perspective, we're seeing that. We've had China in our full year guidance. It's just 1% growth. Clearly, Q4 was strong, Q1 was stronger than that. We do start to see it catch up to itself, though, obviously, as the year goes on, particularly lapping in Q3 and Q4. We see China market growth actually turning negative in Q4, down 1%, to finish at sort of that 1% for the year, but clearly tailing off from here. But that's been in our guidance from the beginning, it's how we're running the business, and it's what we're seeing on the ground for the most part.

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

Congrats on the quarter and spin. I understand you think the Powertrain business and internal combustion efficiency boost in general is secularly aligned. I heard you say today that you thought maybe Powertrain could grow something like 6% versus the industry, which is forecast by IHS to grow more like 2%. But it's part of the logic behind the spin just the idea that they do exist in the market, these debates about the leverage of the Powertrain business, the secular trends within the industry, whereas there really are no debates about the alignment of the E/EA and E&S businesses and so this transaction would allow the multiple of the RemainCo to fully reflect the potential of the fastest growing parts of the business including autonomous driving, which now rises materially as a percent of total revenue?

Yes, Ryan, listen, I think, again, I want to go back, we strongly believe that there's significant growth above vehicle production that sits within the powertrain spaces where we operate. We are very confident of that. We have no doubt. Our view of the concern about the demise of the internal combustion engine, our view is, in 2025, 95% of powertrains are going to be ICE, right, with some electrification, with some amount of EVs and there's tremendous opportunity for growth and profitability serving all those various categories. We think as regulations get increasingly more stringent, especially in Europe and China, the reality is the acceleration of technology serving those spaces would increase and technology development is going to have to be more rapid. Having said that, and it gets to the capital allocation question, there is a view among investors about the value of a Powertrain dollar of earnings versus some of the other businesses we're in. And we believe that having these separate, having more flexibility to decide where investment is made and takes place, possibly having a slightly different makeup of shareholders, results in incremental value at the end of the day for the existing Delphi shareholder base.

Okay, great. And then just, lastly, for me, we can see clearly the relative margin of the 3 current businesses, but could you also talk about and how would you rate, on a relative basis, the 3 businesses' current returns on invested capital and cash generation?

Yes, I mean, today, when you look at cash generation and return on capital per dollar of revenue, the two highest are in our Electrical Architecture and our Electronic and Safety business, right? E&S is principally software related. We're working to make that or create more of a software model within that E&S business. Electrical Architecture is, I think you all know, a portion of that business is very high-margin, high-growth connectors and engineered components. The other component is Electrical Architecture, which isn't quite as high margin, but has very little capital expense related to it and therefore is a big cash generator.

Your next question comes from the line of John Murphy from Bank of America.

I surprisingly still have some questions on the spin. I mean, I would imagine you can't comment on specific rumors, but you ran a full process of potentially thinking about a sale or spin here and just came up with the best economic outcome for shareholders, right?

Well, we evaluated all alternatives, right, and came up with the conclusion that, to your point, this was the right path to go down to drive value for shareholders and to position the business to best serve our customers.

Okay. And then if we think about the RemainCo, and you keep calling it the RemainCo and not Delphi, which I find interesting, is there the potential to change the name and rebrand the core RemainCo company something else? And do you think, by doing this, you might get access to capital at a much lower cost because we're seeing some of these new auto tech companies get almost free capital? I mean, would you potentially consider raising capital at lower costs to grow the business in that RemainCo?

Well, listen, with respect to names, we actually really like the Delphi name. But having said that, we're going through a whole process now to determine where it best fits and evaluating are there other naming alternatives, whether it sits with the Powertrain business or the RemainCo business.

Okay. And then potential for capital at lower cost on this new branded company?

If the capital is free, you mentioned free capital. I guess, that I'd be supportive of -- I think with respect to raising other capital, I think Joe would have to go through a cost of capital analysis and weigh that versus what some of the options are in terms of deploying it. Joe, do you...

Yes, John, I mean, we're not certainly at that point yet. I think, as I mentioned, we expect the RemainCo to maintain its investment-grade rating. And much beyond that, we really haven't [ looked into it ].

Okay. And then, just lastly, the earnings in the first quarter were particularly strong yet you kept the full year guidance largely the same. Is there anything out there that is kind of bugging you or concerning you that would lead you not to raise the guidance? Or is this just steady as you go and relative conservatism?

Yes, I think steady as you go. It's early in the year, right? We feel from a flat -- forecasting a flat marketing and planning to that has benefited us in terms of just how we deploy our capital, how we manage our costs and allow us to flow a little stronger to the extent there is volume pickup. But it's steady as you go and it's awful early in the year. I think from a -- again, we feel comfortable with our flat forecast. I think what we're looking at, obviously keep an eye on inventory levels, although what we're seeing at the moment, those seem to be building ahead of -- some are shutdowns and some model transitions. Also watching just the continued pass car-SUV mix and what's happening with pass car, particularly in North America. So keeping an eye on those, but again, within our expectations at the moment based on our original forecast.

If I can go back to a prior question asked. I'm a little bit -- and you didn't ask it, John, but a little bit remiss with respect to cash flow profile of our business. I didn't mention the Powertrain business. The reality is although that is a business that has the office of being much more capital-intensive, given the nature of the product and the manufacturing process, it's a business, from a cash-generation standpoint, that actually does a very good job. From a return on capital standpoint, it's a bit lower than what we have at E&S and E/EA but still solid returns on invested capital and we're on it.

Your next question comes from the line of David Tamberrino from Goldman Sachs.

Maybe just to follow up there on this flat production, just given where we are with inventories in North America and effectively China as well. The sales environment, it's a little bit slower than what, I think, most folks were thinking about and inventories that continue to pile up. I think we've seen some announced production shutdowns for the summer so far and maybe we need a little bit more. I mean is flat really still the right way to be looking at this right now?

Well, listen, let's dissect your question a little bit. In terms of the guidance that we give to Wall Street, the evaluation, the puts and takes, whether it be North America, China, South America, Western Europe, Eastern Europe, yes, we think it's the right way to look at it. With respect to how we operate our business and how we're always positioned, listen, you've heard Joe say this before, we're always aggressively attacking our cost structure to make it more variable, to make it more flexible, to put it in a better position to the extent -- so that to the extent there is any softening in vehicle production, that is something that we can absorb. Joe?

Yes. No, David, we often answer the revenue or the market question with a cost question first. I mean, we've been very focused on really from late last year on a flat market and what are the implications of that from a cost perspective and we continue to maintain that discipline internally. We'll obviously even be more focused on it now just given the spin-off. But we tend to focus on, first and foremost, on where that cost structure needs to be to maintain our margin expansion and EPS growth commitments. And what we're now viewing is a flat market. Certainly, to the extent that things change, those market concerns materialize, we'd go to what we do very well, which is managing that cost structure.

Okay, understood. That's helpful. If I think about, from a European standpoint, light-duty diesel, we saw the declines in the sales in the first quarter. Have the production schedules from your OEM partners changed to reflect that? And I ask the question because what they were producing in the first quarter wasn't necessarily reflective of what they're selling. So as a result, is there a catch-up, a little bit more of an air pocket for diesel production in the second quarter to get those inventories in line? Or are we not thinking about that the right way?

Well, listen, when you think about production schedules, we get production schedules that are 30 to 60 days out with some adjustment at the front end. So I would tell you at least as it relates to the first few months of the second quarter, those would reflect their outlook, their current situations relates to inventory and their outlook for sales.

Yes, and we have Europe forecasted as a down quarter on a year-over-year basis anyway, so we're not saying anything beyond that.

Okay. And then, I guess, just lastly for me on the Powertrain business. As we think about the competitive dynamic going forward, can you remind us what the current annual price-downs within that business is today on your product lines and then, again, how competitive you think the go-forward is going to be from incremental CapEx and R&D perspective that needs to be spent within the business to pivot it further into a 48-volt all the way through better electric vehicles?

Sure, we'll talk about that. It's a business that price-downs average between 1.5% to 2%. So from a pricing standpoint, it's well positioned. From a portfolio standpoint, this business is very focused on serving those areas, where there's only a, quite frankly, a handful of suppliers that have -- that serve that market. And the business works real hard to have technologies that are better than the technologies of its competitors. From an engineering standpoint, our Powertrain businesses spends about 10% of sales. So there's an intensive -- engineering-intensive aspect of that business. Today, that encompasses a lot of the power electronics that we're selling today and under development right now. Liam and team will kind of evaluate, just as they do now, the trade-offs between more investment and where they can offset it in their cost structure to maintain and continue to expand margins, and we'll talk about that more at the Investor Day in the fall.

Your next question comes from the line of Matt Stover from SIG.

Two questions and just I guess a riff off of 2 previously asked questions, first is on the cap structure. Typically, on a dividend spin situation like this, we would think that the leverage on the SpinCo would be high. Now the business, as you just referenced, Kevin, has terrific returns, but it has a high operating leverage and capital requirement. And so how should we think about that capital structure for that business given where we are in the cycle relative to sort of normal course behavior?

Yes, well, listen, and Joe can give more specifics. Again, this business will have a capital structure that positions it and allows it to continue to invest and grow the business. So I start with that. That's -- at the end of the day, that is how it's going to be positioned. I guess, we could debate a little bit what is high, but in this industry and all of us familiar with the industry, I think we'd be at a fairly tight band on what we consider high. Joe, why don't you...

Yes. No, Matt, like I said, we're obviously still working through that. Some of that needed to come sort of postannouncement just given who all gets involved with that type of planning. But it will be higher than RemainCos. But at this point, we haven't set an exact level, but to Kevin's point, I mean, our expectation and our goal is that this business is positioned with a capital structure that allows it to operate effectively, allows it to invest and that, I think, from an equity perspective, it fits well within its overall weighted average cost of capital.

Okay. And the second question, you've stated -- I just want to make sure I'm clear on this, but if we look at the Powertrain business, it's going to have access to all the products and IT that would enable that business over the long term to compete effectively in a world that has an electrified drivetrain, whether that be hybrid to EV. Is that the correct way to think about this? Or should I be thinking about this in a different way?

That is correct, yes. No, we moved -- as Kevin mentioned, we moved our power electronics business, which is inverters, converters, all that type of technology, into Powertrain from E&S over a year ago, I guess, a year ago this time and that business belongs in Powertrain and is going with the spin.

I now turn the call back over to the presenters.

So this is Kevin Clark. Thank you, everybody, for your time. We appreciate you listening in on our conference call. Have a great day.

This concludes today's conference call. You may now disconnect.