Aptiv PLC (APTV) 2012 Q1 法說會逐字稿

Good morning. My name is Zutania and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi's first-quarter 2012 earnings conference call. All lines have been place on mute to prevent any background noise. After the speaker's remarks, there would be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Eric Creech. Sir, you may now begin your conference.

Thank you, operator. Good morning and welcome to Delphi's first-quarter earnings call. Today's call is being webcast, and you can view the slides we will be presenting today at our web site at delphi.com under the Investor Relations tab. Please note today's presentation will include certain forward-looking statements that reflect the Company's current views with respect to current events and financial performance.

See side 2 for discussion of the risks and uncertainties that may effect financial performance. With that, joining today's call will be Rodney O'Neal, Delphi's Chief Executive Officer, and Kevin Clark, Delphi's Chief Financial Officer.

On the agenda for today, Rodney O'Neal will begin the earnings call by providing a business overview of our first quarter performance, along with priorities for the future. Next, Kevin Clark will review the first quarter results and provide updated 2012 guidance. After the end of the formal remarks today, we will then open up the lines for Q&A. With that, I'll now turn it over to our Chief Executive Officer, Rodney O'Neal.

Thank you, Eric, and good morning, everyone. If you could move to slide 4, we'll get started. I'm very proud of our Q1 results. Given all of the macro financial issues that are in Europe and the dynamics in South America, Q1 was an excellent test of Delphi's model that I've been speaking to you about for the past couple of years.

Where we are in the right space of safe being connected with the right award-winning market-relevant products, having tremendous geographic and customer diversification, and the right cost structure. All wrapped in flawless execution delivered by an experienced management team. Moving to slide 5, all of this has generated an outstanding Q1, where revenue was up year-over-year five points.

We had record EBITDA margin of over 14%, and net income was up a healthy 18% year-over-year, validation that Delphi's model is robust, and we'll deliver as promised, even in times of macro uncertainty. Now, let me get into some of the other highlights of the quarter. Move to slide 6, please.

In Q1, three major auto shows took place around the globe, and Delphi technologies were in many of the models displayed, and I'll mention just a couple. Ford's best selling, the Fusion, has extensive Delphi content through most of our segments, including active safety, electrical architecture, and power electronics technologies.

The Audi A6 Allroad that was unveiled at the Geneva show features several Delphi technologies, including our MyFi connected navigational radio, and the Mahindra XUV shown at the Auto Expo in India, in New Delhi, is a popular model in India, and is equipped with our connection systems and wire harness technologies; again this is validation that Delphi's technologies are market relevant, and on the hottest vehicles in every geography. We continue to win with the winners.

Moving to slide 7. A geographic rotation continues to support our customers that are growing around the world. The China market is expanding, and we are adding capacity as we grow our China revenue from $2 billion today to over $3.5 billion by 2015, almost doubling. In support of this growth, we opened a new facility in Wuhan, one of four plants that we will open this year. In this particular one, we produce wire harnesses for customers in the Wuhan region.

Moving to slide 8. This slide is validation, once again, of our ability to execute flawlessly. 16 more customer and quality awards in the quarter. Again, recognition by our customers around the world for our ability to meet and exceed their expectations.

Slide 9, please. We were honored this year to have four finalists at the 2012 Pace Awards, and last night in Detroit we were the only supplier to win two awards, one in product technology, the L-Shape Crimp, and one in manufacturing processing for our folded tube condenser.

To be successful, it takes innovative product technology along with leading edge engineering and manufacturing capability, and it's the combination of great products and great processing that allows the Delphi team to create tremendous value.

Slide 10. We had a record $24 billion in bookings last year, as you know, and we continued that momentum into Q1 with nearly $8 billion in new business bookings. As you can see on the chart, we had great diversification of bookings across the regions, as we continue to build on our strategy to achieve our targeted geographic mix.

Slide 11. At our Investor Show last week in New York, I stated my four priorities for the future to create shareholder value. The first is that we would continue to develop a solid pipeline of advanced technologies. Secondly, we will leverage our leading position in emerging markets. Third, we will continue our relentless focus on cost structure. Lastly, we will be tenacious on flawless execution.

As a result, Delphi will be perfectly positioned and poised to win, and all of this adds up to top and bottom line growth to make us what we are, the premiere global automotive supplier. I'll conclude here and I'll turn it over to Kevin.

Thanks Rod, and good morning everyone. I will begin by covering our first-quarter results and then I'll provide updated 2012 guidance. Let me begin on slide 13 with a snapshot of our financial performance. As Rod said, we had a strong start to the year delivering very solid financial results. Revenues increased 4.7% on an FX and commodity-adjusted basis to almost $4.1 billion. That's more then five points faster than our served markets.

EBITDA increased almost 10% to $578 million. EBITDA margins expanded 90 basis points to a record 14.1%. Net income increased 17.5% to $342 million, and earnings per share increased to $1.04. That's up 150% over the same period last year. Operating cash flow increased almost $140 million to over $290 million, and cash flow before financing totaled $53 million, which is inline with our expectations and reflects the normal seasonality of the business.

With that as the backdrop, let's move to the waterfall chart on slide 14 to discuss revenue growth in more detail. Reported revenues increased $95 million, or 2.4%, to $4.1 billion. Volume related growth accounted for a 6.5% increase, or $258 million, but was partially offset by headwinds from price downs, which totaled $71 million, or 1.8%, in line with our expectations of 1.5% to 2% annually, and foreign exchange and commodities, which reduced revenues by $92 million, or 2.3%.

On slide 15 is our revenue growth by region. Our fastest growing region was Asia. Reported revenues increased 13.7%. Adjusted for FX and commodities, revenues in China increased 9%. That's 13 points over the underlying market, reflecting continued solid growth across each of our business segments, and favorable customer mix.

Recall approximately two-thirds of our sales in China are to the large global OEMs. Although reported revenues were flat in Europe, on an adjusted basis they were up 4%. That's 11 points over the market, driven by demand for diesel engine management systems and continued strong growth with VW, the luxury automotive OEs, commercial vehicle manufacturers, and the automotive after-market.

North American revenues increased almost 6%, below market growth, primarily result of limited exposure to the transplant OEMs, who experienced significant year-over-year growth during the quarter, and lower after-market sales, possibly due to the mild winter. Sales in our smallest region, South America, were down 17%. That's 11% on an adjusted basis, reflecting the slowdown in the Brazilian vehicle market that continued into the first quarter of the year.

As shown on slide 16, we leverage our revenue growth in a margin expansion. EBITDA margins increased 90 basis points to a record 14.1%. EBITDA increased $49 million to $578 million, reflecting 27% flow-through on volume growth, nonrecurring one-time items that were recognized in the prior period totaling $46 million, which included a $76 million commercial settlement, and continued strong operating performance.

These items were partially offset by price-downs, FX, and a $29 million variable accounting charge related to the mark-to-market requirement of our long-term incentive plan.

Turning to segment performance on slide 17, Electrical Architecture had reported revenue growth of over 7%, 10% on an adjusted basis, to over $1.7 billion, the result of strong growth in North America and Asia. EBITDA margins for the quarter were approximately 15% when adjusted to exclude the variable accounting charge, reflecting the benefits of flow-through on volume growth, offset by expenses associated with the launch of new facilities in China and Mexico during the quarter.

Powertrain revenues increased to almost $1.3 billion, representing 2.2% revenue growth on a reported basis, but over 4% growth on an adjusted basis, reflecting very strong growth in Europe and China, partially offset by a reduction in after-market sales in North America and continued slow sales growth in South America.

EBITDA margins expanded to 16.6% on an adjusted basis, reflecting volume flow-through, continued operating performance, and one-time items incurred in the prior period. Reported revenues in the E&S Segment declined a little less then 3%, but were flat on an adjusted basis, primarily reflecting the ongoing pruning of certain lower margin mechatronic and receiver product lines that we've talked about previously.

Adjusted EBITDA margins totalled 13.7%. That's basically flat to 2011. Lastly, thermal revenues declined 6.7%, 4.4% on an adjusted basis, a result of the ongoing slowdown in the Brazilian market, which also negatively impacted EBITDA margins. We expect EBITDA margins in this segment to begin to improve on a sequential basis as a result of the recent stabilization of the Brazilian market and benefits associated with recent cost reduction initiatives begin to materialize.

Turning to our EPS walk on slide 18, earnings per share increased from $0.42 in the first quarter last year to $1.04 in the current quarter, the result of accretion associated with the redemption of the Class A and C membership interest in the first quarter last year, earnings growth and a 10-point reduction in our effective tax rate to 18%, partially offset by an increase in interest expense associated with the financing of the redemption transaction.

Moving to cash flow on slide 19. During the quarter we generated $53 million of cash flow before financing, reflecting solid earnings, partially offset by investment in working capital as a result of revenue growth and increased CapEx. Year-to-date free cash flow is in line with our expectations, as well as the historical seasonal patterns of the business. Return on net assets increased from 22% last year to 37% in the current period, primarily the result of an increase in operating income and a lower effective tax rate.

Turning to our balance sheet on slide 20, we ended the quarter with over $1.4 billion of cash and just under $2.1 billion of debt, representing $660 million of net debt. Debt-to-EBITDA and net-debt-to-EBITDA totaled 1 times and 0.3 times respectively, reflecting very solid investment grade metrics.

During the quarter our corporate credit ratings were raised to BB-plus from BB by S&P and Ba1 from Ba2 by Moody's, both positive steps towards an investment grade rating. Also, we recently filed a Form S4 with the SEC to exchange a light principal amount of existing private senior notes for new registered public senior notes. The exchange will become effective on May 7.

Slide 21 details the key assumptions related to our 2012 financial outlook. In addition to updated customer schedules and recent HIS volumes, our guidance assumes average rates for the euro at 1.30, the Mexican peso at 12.8, and the Brazilian real at 1.74. Our assumptions also include an average rate for copper at $3.91 per pound, aluminum at $1.05 per pound, and oil at $108 per barrel.

Turning to slide 22 for our current guidance, beginning with the second quarter, we expect revenue of a little over $4 billion to $4.1 billion. The year-over-year change in FX rates will continue to have a significant impact on our reported revenue. At constant FX, revenues are forecasted to increase 3% to 5%, roughly four points over the growth in our served markets.

EBITDA's forecasted to be in the range of $540 million to $580 million, and includes an additional $13 million of expense versus our previous guidance, associated with a variable accounting requirement of our long-term incentive plan, reflecting the first-quarter increase in our stock price. EBITDA margins are expected to be 13.4% to 14.1%. Earnings per share of $0.87 to $0.99, assuming a fully diluted share count of 329 million.

Our tax rate is expected to increase to 21% to 23%, reflecting the timing of benefits related to tax planning initiatives, compared to a 19% tax rate in the same quarter last year. For the 2012 calendar year, revenue guidance remains unchanged in the range of $16.2 billion to $16.5 billion, representing a slight increase in our forecasted growth rate, 4% to 6% at constant FX rate, about four points over the market.

We've raised the bottom end of our EBITDA guidance range by $25 million to $2.175 billion and kept the top end of the range unchanged at $2.25 billion, representing EBITDA margins of 13.4% to 13.6%.

Our updated guidance incorporates our strong first quarter performance and includes an additional $65 million of expense versus our previous guidance, associated with the variable accounting requirement of our long-term incentive plan, again reflecting the strong first quarter increase in our stock price. On a year over year basis, the increase represents about $70 million of incremental expense.

We've increased our guidance for earnings per share to $3.63 to $3.85, assuming a fully diluted share count of 329 million, the result of an increased outlook for operating earnings, reflecting strong operating performance and reduced depreciation expense, and slightly lower interest expense, partially offset by the additional $65 million variable accounting charge I previously mentioned.

Our guidance for cash flow before financing remains unchanged at approximately $1 billion, which is net of $750 million of CapEx. In addition, our guidance for the full year effective tax rate remains unchanged at 19%.

Moving to slide 23 to cover a few other items, the Company still has its full $300 million share repurchase authorization in place and fully available, and we intend to file our first-quarter 10Q by Friday, April 27. That ends our formal review of the results. We will now open the call up for questions.

(Operator Instructions)

John Murphy, Banc of America.

Just a question on the outlook for the year. I mean, if you look at the first quarter, the EBITDA margin was 14.1% when you don't adjust for the accounting for the long-term incentive comp and it's 15.0% when you back that out. So the margin in the first quarter is above what you're looking for the full-year EBITDA margin. I'm just curious what factors you think will drive that margin down through the remaining three quarters of the year, or is that just conservatism in the forecast?

Yes. Listen, John. I think if you look at our performance on a historical basis, our fist quarter has tended to be stronger from a margin basis, and I think that's a mix of really two things. The timing of expense is one, some mix, two, and then third, the fact that as we move out into the year, we tend to have more product launches, or an acceleration of product launches, and therefore incremental expense relative to the first quarter.

Then you've got the down time in Europe for the holidays, et cetera. So it's not as robust of a --

Okay. And then just a second question. Rodney, you mentioned, I think as you were going through slide 10, the bookings sound like they picked up pretty dramatically again in the first quarter, $8 billion of new business won in the first quarter of this year. What are you seeing out there that's changing, because if you annualize last year, it was like $6 billion -- or quarterize last year it was $6 billion a quarter. This is a $2 billion pickup in the first quarter. What's going on with the bookings that you're having that big increase?

Well, one, let's just start with the value prop. We've got a value prop that works out there. A little bit of the acceleration is just the fact of how some of the programs have come to be. So it's a combination, the opportunity was sort of heavy loaded in the first quarter and we took advantage of it. I don't have a good outlook in terms of how that's going to project out through the year, but we should do no worse than what we did last year, for sure.

But Is there anything that's changed in the short run where the new bookings has increased, or the interest has increased sequentially from what we saw last year? I'm just trying to understand if there's anything changed, or this is just maybe a seasonal cadence?

I'll say this. The appetite has been immense for our portfolio across the globe. That that continues with our customer base, and I think the opportunities were just there from a customer perspective, but I don't want to downplay the interest. It's quite serious. We still, though, have a lot of discipline around who we are selecting as the customers, the platforms on those particular customers.

We're also trying to manage our rotational mix such that we continue to grow faster in the emerging markets, particularly China, than we do without turning our back on North America and Europe. So we're also managing our growth aspects in a lot of ways, too. So there's not a lot to complain about in this area. I can tell you that.

Then just one question on the outlook and as you plan the business going forward. Kevin, I mean, you outlined some small changes in your outlook, and those were relatively small and not too material, but you maintain $1 billion in free cash flow for your guidance for this year.

As you look towards the short term and then the long term as you're planning and shooting for financial targets, is this free cash flow number really top of the list, and really paramount in your mind as the target, as opposed to a CAGR and a 15% EBITDA margin? Is this free cash flow really the thing that we should be thinking of as really top of your list?

Yes. Listen, it's at the very top of the list, John. Maybe to your point, maybe there's a little upside opportunity as it relates to our current free cash flow guidance at $1 billion, that's a fairly big number, but it's at the very top of our overall list, as we've said in the past.

Okay, and then just lastly. Rodney, you've been in this industry for a long time. You've seen hiccups like we're seeing with this resin shortage right now. I'm just curious what you're seeing in the near term based on that. And maybe sort of the long-term impact to tier one suppliers and the relationship between automakers and suppliers, and how sort of these hiccups might either give you more leverage or less leverage with the automakers?

Let me start with us Delphi, as it relates to the current situation. Our team's done a great job of working with the OEMs and our complete supply chain in order to understand exactly all aspects of where we would be impacted. There are a minimum amount of areas that we're impacted. We've got great runway, and we've already worked through most of the substitutions.

So I don't see this as an issue for Delphi. That is, we've interfaced with other suppliers and with OEMs. I think that is the same across the globe. Again, the industry's tremendously flexible and fast at addressing that. I don't see this as a crisis in terms of tremendous downtime at all for anyone around the world. So this is another one of those that we're working through.

In terms of how it impacts our thinking as players in this industry, I think you're always making a tradeoff between protection of supply and cost. There's no such thing as zero exposure. I think we'll all continue to just understand where we all are as we work with our customer base and our suppliers.

And again make sure we're in the sweet spot of mitigation of catastrophes, but yet and still making sure that we're able to have the right cost structure and continue to have, in our case, margin expansion and value creation for our shareholders. So I don't see massive changing on our part, but we're going to always look at what we have and see if we can make it better.

Rodney, do you think this is maybe just a reminder to the automakers that it's a really good thing to have strong partners in their tier one suppliers that can help them manage through the hiccups like this?

Absolutely. I mean, when you start looking at the tremendous capability that someone like Delphi has, and for that matter even some of our very competent competitors. There's no substitution for having the bandwidth, and experience, and resources that you can throw at a problem like this around the globe.

So we have seen a tremendous shift for Delphi in terms of what I would call the strategic relationships around the globe with the vast majority of our suppliers -- of our customers, and as a result of that, the commercial line of scrimmage seems and feels and acts totally different than it has in the past, where it's not all about just pricing.

It's about value and ability to bring great technology to market, and then I'll talk about this execution issue and this is one aspect of it. Things don't always go well, and when things go bad, the ability to execute flawlessly and keep everything running is another attribute of a company like Delphi working with OEMs that's deeply appreciated.

Rod Lache.

Just a couple of things I was hoping you could clarify. You had, at one point, provided some guidance on net new business growth of around $900 million for this year. Was that evenly disbursed over the course of the year, so it would have been like $225 million of the $258 million sales growth that you had this quarter?

Yes, Rod, I'm trying to think about it. Listen, I think it was fairly reasonably disbursed. I don't have an exact number by quarter that's in front of me, but I think it's reasonable to assume that it would be fairly balanced. It may be a little bit back-end loaded versus front-end loaded, but I don't think it's a significant quarterly.

Okay, and just focusing a little bit on the second quarter guidance. Maybe you can provide for us what the FX hit is that you're expecting on a year-over-year basis. It looks like it might be around $300 million, so maybe 3.5% top line growth, excluding that. If that's right, that compares with HIS production forecasts of around 11%.

So maybe you can just provide a little bit of color on what, from one quarter to the next, kind of ebbs and flows which would cause you to you exceed or slightly underperform? I know for the full year you're expecting to outperform the overall market.

I think the FX and commodity impact, as you recall, we pass on most of our copper exposure, is $250 million to $300 million. So that would be the headwind we'd be facing on a year-over-year basis. I think as it relates to the balance comparing us to the HIS volumes, I think you've got to mix out where our exposure is from a geography standpoint. I think when you take a look at our exposure as it relates to Europe, North America, Asia Pacific, and South America, we would continue to grow at about four to five points over the underlying market.

Just one reminder, though. In North America, when you look at a lot of the growth, it's Japanese-based, and a lot of that is because of the tremendous comeback that they're having from when they were down because of the tsunami, and we really aren't on those vehicles. So we won't participate in that upside.

Okay, and just another point here of clarification. Last year in the quarter, your financials showed a $76 million warranty charge, and the bridge on your EBITDA shows a $46 million adjustment for one-timers. What's the difference there? And is it entirely in Powertrain that we would apply that difference?

No. It wouldn't all be in Powertrain. And you're right., last year we had a $76 million commercial settlement with one of our customers that affected our Powertrain business. Offsetting that, though, were some, what I'd call good guys in the first quarter of last year as well that did not repeat in the first quarter of this year. So there were things like customer recoveries, insurance recoveries, gains on asset sales that offset that $76 million. So the net is $46 million. Some of those are in the Powertrain segment, some are not.

Okay, and lastly, you have that $300 million authorization, but you didn't really execute on that in the quarter. Can you just give us some broad color on what your strategy is going to be relative to buying back stock?

Yes. I think our strategy at this point in time, Rod, is really to be opportunistic and take the opportunity where we see weakness in stock price to move into the market and purchase stock. This last quarter we saw a fairly significant ramp up in our stock price from the beginning of the quarter, or mid-January, through the end of the quarter. The stock performed fairly well through the first lockup, and on a go-forward basis we'll continue to look at our stock price and using our share repurchase program on truly an opportunistic basis.

Brian Johnson, Barclays.

Just want to talk in the business side, and then maybe get a couple more housekeeping questions in. Compared to our expectations, most of the businesses were pretty much in line, Powertrain was above, but Thermal was a bit softer. Is that seasonality? Should we just be thinking about the Thermal business not as a double-digit EBITDA margin business but a bit lower? Were there launch costs, or something going on in the quarter to get to us to 7.9%?

No. The biggest impact as it relates to Thermal is low volume, and especially lower volumes in South America. That is a region of the world where they are, from a profitability standpoint, slightly more profitable than the rest of the geographic regions, and given a fairly significant down trend in that market has affected them to a great extent on a EBITDA margin standpoint.

We think that's bottomed out, Brian. This quarter we expect to see sequential improvements in EBITDA margin in the Thermal business beginning in Q2, and actually see year-over-year EBITDA expansion beginning in Q3, and our medium- to longer-term objective is to have that at double-digit EBITDA margins, and we think we can.

Okay, and moving onto the second quarter guidance, are you assuming anything different from HIS consensus vis-a-vis each of the geographies, or your mix within that? You talked about North America, which is understandable that you're not exposed to the transplant year-over-year rebound, but is there anything in the other regions we ought to take into account?

Well, we take into account, for example, we spend a lot of time talking about Europe, and our exposure in Europe is a big component of our revenue base. We have a fairly diversified customer mix, though, as it relates to Europe, with a significant portion of our revenue mix being non-light vehicle, so commercial vehicle and automotive after-market, and then significant exposure to the luxury OEs as well as to Volkswagen.

So that certainly is factored into our guidance as it relates to Europe in general. Then I guess more specifically, and it's across each geographic region, near term we really look at vehicle build schedules as it relates to our business and our customer platform exposure. We factor that in our near-term forecast. Those build schedules are usually pretty good two to three months out, and then use HIS for the balance of the year.

Okay, and are you expecting European commercial vehicle and after-markets to be a headwind going forward in the year?

In Q2, no. We would expect to see continued year-over-year growth.

And final, and we can follow up offline with either Keith or Eric. Can you just give us a rule of thumb on accounting for the accounting effect of the LTI program, that is for X% increase in stock price you ought to expect $Y in headwinds?

Yes, that's a good question, and it's not a simple answer, but I'll give you, I think, as simple a guideline as we possibly can. The expense is based on, or the plan is based on, average stock price during the period, and it's averaged by day as well as distributions.

Today, for 2012 our presumption is we have roughly $145 million of total expense in our projection. To the extent our stock price averages 20% higher or lower from where it is today, it would add another $25 million to $30 million, or it would be reduced $25 million to $30 million if it were to decline, in either direction. Does that answer your question, Brian?

Right. So the 50% increase in the quarter, was all of that taken into account in the quarter, or did some of that accounting go into that $145 million?

All of that is in the current $145 million, and then our outlook for the balance of the year.

Okay, but the impact, say your stock is just stalled at $20 in the quarter, how much lower would that LTI roughly have been?

Well, I have a number in front of me. If our stock were to average for the balance of the year $26 million, the expense would be, for the year, $120 million. So you'd see roughly a $25 million reduction in expense.

Okay, and just to clarify, when you report a segment, that segment EBITDA is including the headwind from that expense?

Yes. It does include it on a reported basis. In today's presentation we gave you an adjusted EBITDA number on those slides to show it, excluding or keeping it flat on a year-over-year basis.

Patrick Archambault, Goldman Sachs.

Just on Brian's question. So just to tick and tie that. I think you had $80 million in your previous guidance, right? $20 million per quarter, and this goes up to $145 million now on your new guidance, correct, in terms of the VCP stuff?

That is accurate.

Okay, all right. One question I had, just on the business segments. You spoke about Thermal. So I think I understand the rationale there. In terms of the E&S Segment, can you tell us a little bit more about the timing of some of the portfolio pruning you're doing, getting out of some of the low-end mechatronic stuff, like when might that be expected to have an impact on the incrementals and overall margin?

Yes, will back half of this year. So beginning in Q3, you'll see the impact of that on growth rate as well as margin expansion.

Got you, okay, and then wanted to follow-up on Europe as well. Up 4% FX and commodities is obviously just an incredibly strong number, given that end market, although I suppose that production wasn't quite as down as some people thought. Can you give us a sense of how your order book is shaping up, what you're seeing there?

As we look out to the next quarter, are orders from companies like Volkswagen and the German luxury guys as strong? Is there any concern about inventories being built up, just given that production wasn't that down? Maybe just a little bit of an idea of how things are shaping up for Q2?

Yes, I think it's pretty stable, a little softer but nothing radical. So nothing alarming in terms of like a tremendous falloff. So we've been blessed to have a pretty stable environment with that set of customer bases.

Okay. So sequentially same level of activity. Then last one I had is maybe just going back -- actually I did have one follow-up in Thermal. I think, if I remember well, during your Analyst Day you had said that you had a pretty big win in Thermal off of the Japanese -- for the Japanese companies, so really something from Denso's backyard.

Can you tell us a little bit about when that might have an impact in your Thermal results, and then also be curious just what the competitive rationale for that win was. What was it that you guys were bringing to the table that obviously a huge competitor like Denso wasn't able to retain that?

Well, first of all in terms of lead time in Thermal, it's around 3.5 to 4 years in terms of coming to market. They did have a huge strategic win with a Japanese player, and they also had a huge strategic win with a German player that we're quite proud of. The question gets to be how did we do it? Was that it?

That is it.

Yes. Well, in both cases it was the team has some pretty outstanding technology, particularly around packaging, that they've created. And when you start looking at packaging and some other issues in terms of managing critical real estate in the vehicle, that was one of the issues. It was an outstanding overall technology value prop that worked. They're quite good; they really are.

So we're quite pleased with the two wins, and you look at the bookings that the guys had last year, it's just representative of the amount of momentum they have in the marketplace. Now that being said, we understand the short-term issues we've got to get our arms around and get fixed.

Chris Ceraso, Credit Suisse.

A couple of things. Looking at North America in Q1, if I strip out what the Japanese guys did and just look at the domestics, it looks like production was up low double digits. Your revenues were up maybe 6%. Can you talk about maybe some platform exposure or why your revenues didn't keep pace with the industry, even if I just look at the domestics?

Yes. I think you're just seeing the result of just some of our selective portfolio culling as we make sure we stay on top of how we want our company to look from a margin perspective. So nothing alarming on our end, just making sure the portfolio's right and producing the kind of value we want it to produce.

Then as we walk to Q2 in North America, obviously GM's large trucks are going to be down. Is that enough to make a dent in your top line? Have you factored that into your guidance?

It's in our numbers, yes.

Okay. Can you talk about the GDI business? I know that's an important strategic product for you, but maybe just help us frame how big is that for you now? How much are your revenues currently in that business, and where will that be, let's say three years from now, looking at the programs that you've won?

Well, first of all, we are excited about the space. We've begun our launches here in North America. We'll rotate into China next, and then we're looking at Europe in terms of our third phase. Out over the time horizon, we see this growing to like 20% to 25% of the marketplace really around the globe, somewhere late this decade, and our particular number today was about 25%. Yes, I think we talked about that at the Investor Day, and I think our revenue today is under $50 million, and we see it growing to roughly $250 million over the next couple years, by 2015.

By 2015, okay, and then just last question. On the after-market, you said that also weighed on you a little bit in North America. Can you just remind us the size of your after-market business in North America? And what components are you selling that might be weather sensitive? You're not doing batteries anymore, so what is it that --

Yes. On an annualized basis, our after-market business is $1.2 billion to $1.4 billion annualized. It is a broad mix of products, but has a heavier mix of Powertrain and Thermal products, but it has normal replacement parts as well.

Okay. So your comment about the weather referred to what specifically?

Comment is, I think I said it could have had an impact on the year-over-year revenue growth. I don't have a specific calculus associated with that, but it's weather-related wear and tear.

Okay, and the $1.2 billion to $1.4 billion is global after-market. Is that at what, 50% North America?

Call it a little less than 0.5.

David Leiker, RW Baird.

I might have missed this, but if we have it we could go back on it. The E/EA business, pretty nice revenue growth there. You've got reasonable exposure to Brazil there. What was offsetting that headwind for you in the quarter?

The growth in Asia Pacific, particularly China and Europe was excellent.

So Europe's obviously driven off of new program awards, given the end markets there? Is that correct?

Yes, and then in China, because they're the number one player in China.

Right, and that in the Brazil market, is your exposure down there all automotive, or you have some truck exposure there as well?

Pretty much automotive.

Matthew Stover, Guggenheim.

Two questions. One, you had made reference to cost savings that would begin to bear fruit in Thermal. I was wondering if you can put some meat on the bones there. And two, your CapEx is ramping up here and your depreciation comps have been favorable, and I'm wondering when you'd expect for us to start to model in an increase in the D&A. Should that be something we take into account the back end of this year, or not until next?

Yes, Matthew. Let me start with the cost reduction issue. They primarily relate to effectively downsizing from an employee headcount standpoint. Primarily in South America, but also using the opportunity to do some pruning in other regions as well. It really accounts for the lower revenue forecast in Thermal, or lower revenue growth in Thermal, and I don't have an exact dollar amount in front of me. It's meaningful to the point where beginning in Q3, you're going to see year-over-year margin expansion.

A part of that's revenue, but a big piece of it is actually higher margin as it relates to a lower cost structure. As it relates to capital spend and outlook for D&A, I think at some point in 2013, and maybe it's fair to assume it's at the front of the year, we balance between -- CapEx spend and D&A start to converge. So not sure if it's really '13. It's probably mid to late '13 and then '14, you see it at that point.

Richard Hilgert, Morningstar.

On the Brazil issue, I noticed you were down 17% South America. For the first quarter, new car sales in Brazil were down 0.8%, and the currency probably would have represented about a 6% or 7% hit for you. So I'm curious, on the 17% decline, what's some of the difference there?

Well, a little bit of it, you're looking at sales and there's a production. What matters to us is production. Production was down, and your sales would also include imports, et cetera, and that actually had impacted the market significantly over the past quarter. Now, the government's taking some moves to sort of slow the import issue down. We'll see how that works. Then there were some specific customer mixes, but hopefully that's helpful to you.

Yes, Richard. To be precise, FX is worth about six points. So on an FX-adjusted basis, we were down about 11%. Depending what industry source you talk, they'd say production in the region was down anywhere between 6% to 11% on a year-over-year basis. So our view on our performance in Brazil is that we're roughly in line with markup.

Okay. Fiat's got the number one market share in Brazil. Volkswagen's doing pretty good. GM is in there. Is Fiat your largest customer down there or is it GM?

GM's our largest customer.

Okay. So inventory correction going on in Brazil is pretty much the difference?

I believe that's the way it's playing itself out, in that [low ends] were matching up the production to their inventories, and we did begin to see a slight uptick in production. So we're hopeful that this thing's going north.

Ravi Shanker, Morgan Stanley.

In 4Q of last year you had really strong operating leverage. I think, if I remember correctly, driven by some of your facilities winning new business that came through at a very high incremental margin. Can you confirm if that continued into 1Q, and if so, how sustainable that is?

Yes. We saw a strong flow-through on new volume. In total it was 27% for the Company. We saw a continued strong flow-through in the E/EA business, as well as in the Powertrain business. As you can see from the numbers, E&S revenue was largely flat, and in Thermal down. But on a total Company basis as well as in our two largest segments, they continued to perform extremely well.

Is there anything there that's a one-time initial there that's driving that, or is it mostly sustainable?

Nothing one-time in nature, and we're working hard to make it sustainable.

Got it. And also on your guidance, you've raised the midpoint of your EBITDA guidance, but your cash flow remains unchanged. Is it because of just a small move, or is there some other offsetting factor there?

No offsetting factors. I think when you factor in, and when you think about our guidance, we raised the bottom end of the range as well as we absorbed the incremental costs associated, or incremental accounting associated with the VCP plan of $65 million. So raise the bottom end of the range by $25 million plus absorb that $65 million.

All of EBITDA does not flow through to cash flow, as you know. As you look at our business model in the past, it's tended to be about 40% to 50% of EBITDA. So I think as I mentioned when Rod asked the question, I think there might be a little upside as it relates to our free cash flow.

Graham Mattison, Lazard Capital Markets.

Most of my questions have been answered, but just a question on the bookings in Europe. Are you seeing any change on the -- and I apologize if I missed this, but are you seeing any change on the split between commercial and export? Have you seen that in the past, and do you see any change in that going forward?

Are you talking about commercial vehicles?

Right, or just the customer split in Europe.

No. Our bookings are pretty much pro rata the way we are today. We like the chemistry make-up of Europe, and we're trying to make sure that stays the same going into the future, and primarily we're just trying to manage our rotation into a more diversified company globally. So we're seeking to grow faster in the emerging markets, particularly China, than we are in Europe and North America.

Itay Michaeli, Citi.

Hello. This is Chris Reenock for Itay. If we could just go back to margins for a second. If you hit the high end of your Q2 EBITDA margin, that'll be a 14% margin for the first half. Do you think there'd be some upside to 2012 guidance if you're able to hit that high end in Q2?

Yes. Listen, I would assume if we operated at the high end of the range in Q2, and you factored in our first quarter performance, we would be at the high end or above the high end of the range for our full-year guidance.

Okay, great, and looking at pricing impact in Q1 on margins, it was about 1.8%, a little worse than the initial 2012 guidance. Is there anything going on there?

Well, first it's not any different than our 2012 guidance. We said we'd be in the range of 1.5% to 2%.

Okay.

We've been consistent about that, and it's right at the midpoint of our guidance, and we'd expect it to be in that range for the balance of the year.

Great, and then just a final one. If you could just give us a little color on where you see the tax rate migrating over the next few years?

Yes. For this year our full-year guidance is a 19% effective tax rate versus 20% last year. It'll bounce around a little bit quarter-by-quarter. As we talked about, Q2 it's going to be up due to timing and some planning initiatives. We think we can, over the next couple of years, lower that tax rate to 16% or 17%.

Kirk Ludtke, CRT Capital Group.

I just wanted to go back to the new business wins for a second, and I understand the lead time is relatively long in at least some of your businesses. Do any of the first-quarter wins impact the cadence that you've provided, the three-year cadence?

You mean in terms of our growth?

Yes.

No, pretty much the way we've outlined our growth out over the next three years, these bookings would not really impact the first year, the second year, some in the third year.

So Kirk, those were factored into the guidance that we -- the model that we talked about it at our Investor Day, if that's your question.

Yes, essentially, and have you talked about your wins in 2008 and '09?

I'm not sure I understand.

No. (Multiple speakers) Kevin. Given the fact that we have a much different business today than what we had in '08, we have not talked about new business wins in that period. I think in the fourth quarter 2009, we've previously talked about roughly $8 million or $9 million of new business wins during that specific quarter, but we've not talked about wins beyond that.

At this point in time, we have no further questions. I will turn the call back over to Rodney O'Neal.

I just want to thank everyone for calling in. A reminder, I really am proud of the quarter that the team threw up, particularly in this [troubling] environment. We've achieved a lot; still have a lot of opportunity. We're going to continue to focus on taking advantage of these opportunities in order to hit our long-term objectives that will ultimately define us as the premier global automotive supplier. Take care, stay safe, and we'll see you in the next quarter.

That concludes Delphi's first quarter 2012 earnings release conference call. Thank you for joining. You may now disconnect.