Aptiv PLC (APTV) 2012 Q2 法說會逐字稿

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

(Operator Instructions)

I would now like to turn the call over to Eric Creech, from Delphi's Investors Group. Sir, you may begin your conference.

Thank you, operator. Good morning, and welcome to Delphi second-quarter earnings call. Today's call is being web cast and you can view the slides we will be presenting today at our website 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 from financial performance. See slide 2 for a discussion of the risks and uncertainties that may affect financial performance and where to go to get more information on our risks.

With that, joining today's call is 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 second-quarter performance. Next, Kevin Clark will review the second-quarter results and provide updated 2012 guidance. After the end of the formal remarks today, we will then open the line for Q&A.

With that, I'll turn it over to Chief Executive Officer, Rodney O'Neal.

Thanks, Eric, and good morning, everyone. Thanks for joining us. I'm really pleased with our record performance in Q2, especially in light of the current macroeconomic environment in Europe and South America, so if you could move to slide 5, despite the challenges that I mentioned in Europe and South America, we really did have an exceptional Q2. Adjusted revenue was up 1.3% in a down underlying market and we had a record quarter on the EBITDA line where EBITDA margins expanded by 160 basis points to a lofty 14.5%. This is our 11th straight quarter of last 12 month EBITDA and EBITDA margin expansion. And this expansion is balanced across the globe with solid double digit margins in our three largest segments with improving margins in South America and thermal. And equally important, we converted those earnings into cash, increasing free cash flow over 50% to $335 million. Bottom line, the team rocked in terms of operational performance, and Kevin will cover the financial detail in the call.

Let me get into some of the other highlights in the quarter if you move to slide 6. We remain committed to our value proposition of solving our customers' problems and addressing the government regulations and consumer preferences in the space of safe [greener] connected. So during the quarter, there were several developments that will drive growth opportunities for Delphi -- interactive radar system product offerings; the Euro end cap announced that by 2014 it will require automatic emergency braking systems in order for vehicles to earn a five-star rating in Europe on safety; and in the US, the insurance institute for highway safety cited a 14% reduction in front-to-rear crashes for vehicles equipped with forward collision avoidance technologies.

In addition, we spent time with legislators in Washington, DC. Volvo joined us on Capital Hill to showcase the Delphi MyFi vehicle. If you recall, we showed you this vehicle in our investor day in April. During the event, government officials personally experienced Delphi's technical offering aimed at mitigating driver distraction. Now, this is a very important step for us in helping to shake legislation as the senate commerce committee is expected to hold hearings on driver distraction this fall. And while all these activities support future acceptance of our product offerings, customer sourcing decisions are what count and, during the quarter, Kia began featuring Delphi's MyFi technology on its new premium sedan, and this is the first time our active safety technologies have been offered on a Kia vehicle.

Move to slide 7. On the green front in Q2, we moved forward with our plans to construct a new diesel injection facility in China and on the gas side of the business, we're in the early phases of introducing GDI systems globally. We've already launched this product in North America and we secured future business both in China and in Europe where we expect significant expansion of this technology across the globe over the next several years, which presents a meaningful growth opportunity for Delphi. And as our OEMs work towards achieving the US EPA standard of 54.5 miles per gallon by 2025, we're focused on leveraging our technical capabilities across Delphi's diesel and gas systems to produce a step change in next-generation gas injection technologies. An example, we're currently work on GDI high compression injectors, which enable vehicles to achieve up to 70 miles per gallon.

Moving to slide 8, these are two examples of our technology introduction. One was our Delphi heated temp injector for the South American market. This innovation helps ethanol based systems reduce emissions and improves cold start performance and our reconfigurable display, which allows drivers to customize their in vehicle experience through intuitive driver interface, currently offered on several Cadillac models, and in the near future will be spread to other OE models. Moving to slide 9, we continue to receive accolades from our customers across the globe for exceeding their expectations on quality, on delivery, and on large performance.

Year-to-date, we've launched, virtually flawless, 257 customer programs of our over 800 planned this year. Slide 10. We are on track to exceed last year's record bookings of $24 billion with nearly $16 billion in new business secured in the first six months of 2012. And on the right side of this slide, it shows that we continue to increase our geographic diversification with Asia bookings representing over 30% of the total.

Let's move to slide 11. I'll wrap up before I turn it over to Kevin. Thinking about the road ahead, where we've got great products with winning customers, and we continue to deliver solid performance. And we're aggressively managing our cost structure to deal with the macro head winds in Europe and South America and our priorities for the future remain unchanged, all focused on delivering share holder value. We will continue to provide customers with solutions to the challenges in the marketplace, targeting the trends of safe greener connected and we will leverage our global footprint with our laser focus on maintaining the industries leanest and most flexible cost structure, and we will execute at the highest levels to ensure that we delight our customers.

I'll turn it over to Kevin.

Thanks, Rod. Good morning, everyone. I would like to begin by covering our second-quarter results, I'll then review our 2012 guidance. All the comparisons that we are going to go through today are to the prior year's quarter.

So let's begin on slide 13 with the snapshot of our Q2 financial results. As Rod mentioned, our overall financial performance this quarter was outstanding. We delivered record EBITDA and EBITDA margins offsetting FX related head winds. Revenue grew 1.3% when adjusted for foreign exchange, commodity prices and divestitures. That's solid growth considering the market conditions. EBITDA increased almost 7% to $581 million and EBITDA margins expanded 160 basis points to 14.5%, reflecting leverage in our operating model.

Net income totaled $330 million, representing a 10.7% increase over the prior period. Earnings per share increased by $0.13 or 15% to $1.01, and lastly cash flow before financing increased $114 million to $335 million. I will go through each one of these items in greater detail. Moving to slide 14 to review year-over-year revenue growth in greater detail. As I just said, adjusted revenue grew by 1.3%, volume-related growth totaled $129 million or 3.1%, partially offset by price downs of $74 million or 1.8%, which is in line with our expectations of 1.5% to 2% annually. Our growth over market totaled 1.2 points, reflecting our geographic channel and customer mix.

Strong year-to-date revenues coupled with our forecast for the balance of the year make us confident that we're still on track to grow about three to four points over the underlying market for full-year 2012. Looking at revenue growth by region on slide 15, Asia continues to be our fastest growing region with revenues increasing almost 10% to $666 million. That's largely driven by continued strong growth from China. North America revenue was also strong as the market continued to improve with revenues up over 7%, lower than the regions underlying market growth reflecting our limited exposure to the tsunami-related rebound in Japanese transplant volumes. While the European market was down 10%, our revenues decline less than 3% on an adjusted basis, reflecting softness in southern Europe, partially offset by continued solid demand for the German OEs, as well as for diesel fuel injection systems.

Lastly, and as expected, South America remains soft. Adjusted revenue was down 13.1%. It looks like the market has begun to stabilize and we expect to see year-over-year growth beginning in Q4 this year. It's worth noting that EBITDA margins increased across each region on a sequential basis. With the market improving in South America, we expect to be operating in double-digit EBITDA margins across all regions by Q4 this year, reflecting the balance provide by our regional footprint that Rod touched on.

The next two slides underscore the strength of the Delphi business model. Our ability to offset FX head winds, commodity prices, and operate in a less-robust volume environment. As shown on slide 16, we achieved record EBITDA margins of 14.5% for the quarter. This was the result of strong flow through on sales growth, roughly 30%, further augmented by exceptionally strong material performance of 5% during the quarter and manufacturing performance of 3%, as well as a small reduction in warranty expense and a small contribution from gains on asset sales during the quarter. The segment performance graphs on slide 17 also illustrates a balance inherent in our business and the strength of our two largest segments, which combined represent roughly 80% of our revenues and our EBITDA.

EEA adjusted revenue grew 5.3%, driven by strong performance in North America and Asia, partially offset by slightly lower revenues in Europe and continued weak sales in South America. EBITDA for the segment grew 15.7% to over $250 million and EBITDA margins expanded 220 basis points to 14.7%, driven by roughly 35% flow through due to volume growth, as well as very strong material performance during the quarter. Adjusted revenue in our power train segment increased 1% for a result of 4.4% growth in Europe, and over 12% growth in Asia partially offset by lower sales in North America, the result of continued softness in the Automotive aftermarket channel.

EBITDA improved 7.4% to over $200 million and EBITDA margins increased to 16.2%, a 180 basis point increase driven by volume growth, material performance, and the benefits of manufacturing rotation to eastern Europe, as well as the reduction in warranty expense that I mentioned previously. Excluding the reduction of this warranty expense item, flow through for the quarter was roughly 30% on volume. E&S adjusted revenue declined just under 3%. This reflected the ongoing pruning of our lower-margin business in our Megatronic and Receiver product lines. The improved product mix and, again, very strong material performance during the quarter resulted in 100 basis point increase in EBITDA margins to 13.2%.

The Thermal segment continued to be adversely affected by its exposure to South America, as well as a slower market in Europe. Adjusted revenue was down 7%, EBITDA margins declined 90 basis points to 8.8%. However, as a result of the profit proven initiatives that have been implemented, we have seen sequential improvement in the profitability of the segment and we expect this trend to continue through the balance of the year.

Turning to slide 18, earnings per share grew by 15%. That's a $0.13 increase over the prior year, $0.11 of that increase is from operational performance. $0.03 is a result of accretion associated with the $330 million of stock we've repurchased since Q3 of last year. $0.02 is a result of lower interest expense due to debt pay downs. These items are partially offset by $0.03 of taxes and other items, which includes actually $0.08 from higher taxes, partially offset by $0.05 of other income.

Moving to cash flow, on slide 19, we continue to do an excellent job converting earnings into cash flow. EBITDA and cash from working capital more than offset spending on CapEx, interest, and taxes. Cash flow before financing totaled $335 million, that represented 102% of our reported net income. If you move to our balance sheet on slide 20, we ended the quarter with over $1.5 billion of cash on hand, just under $2.1 billion of debt, and $529 million of net debt. Realty driving solid investment great credit metrics. Return on net assets increased 12 points to 38%, reflecting earnings growth and very disciplined capital deployment.

Slide 21 details our ratings progression since April of last year. As you may have seen, early last week we received an investment grade rating of BBB minus from Fitch and we were upgraded by S&P & Moody's in March of this year to one notch below investment grade. We continue to believe that an investment grade rating is important. It would enhance our access to the capital markets, better position us to pursue commercial opportunities with select OEs, and increase value for our stake holders.

Slide 22 details our prospective on the market and the key assumptions related to our guidance. Given the recent dramatic moves in foreign exchange rates and commodity prices, we are providing average assumptions for both the calendar year as well as for Q3. Our largest currency exposure is Europe and it's recent decline has had a significant impact on both our reported and our forecasted revenues. We expect global volume to be up just under 5% for 2012 calendar year. That's versus almost 6% at the time of our prior guidance. Reflecting about $1.3 million fewer global units in Q3 and Q4.

If you turn to slide 23 to review view our Q3 and full-year guidance, we are reducing our full-year revenue guidance by $600 million, 2/3 of this reduction is related to changes in foreign exchange rates, primarily the Euro and Brazilian reals with a rate remaining 0.333 the result of lower production volumes. As it relates to calendar year EBITDA, our guidance remains unchanged at $2.175 billion to $2.25 billion, reflecting our solid performance to date as well as benefits associated with ongoing operating initiatives, offsetting any foreign exchange head winds, and lower volumes. We're increasing our earnings per share guides to 368 to 391, the result of lower share count due to Q2 share repurchases. Our tax rate guidance remains unchanged at 19%, but will continue to be lumpy due to the timing of discrete items. We currently expect a 25% tax rate in Q3 with a significantly lower rate in the fourth quarter. Our guidance to free cash flow remains unchanged at approximately $1 billion.

Turning to Q3, this year's Q3 production levels are more consistent with traditional seasonal patterns that we have seen. Our customers are forecasting increased down time in the third quarter. This is particularly apparent in Europe, where OEs are planning extended shutdown periods. As a result of the Q3 build schedule, and foreign exchange head winds, we expect to see Q3 revenue to be down about $300 million sequentially from Q2 of this year and about $200 million from the prior year to arrange a $3.65 billion to $3.75 billion.

EBITDA will be in the range of $450 million to $500 million, reflecting the benefit of flow through on a relatively small increase in volume, offset by the negative effect of foreign exchange and a $24 million year-over-year increase in variable accounting expense associated with the management VCP plan. Earnings per share for Q3 will be in the range of $0.65 to $0.80, assuming 323 million shares outstanding and a 25% tax rate. We would say that given the tone of the current macro environment, we believe it would be prudent for investors to assume that we operate between the midpoint and the lower end of our full-year and Q3 guidance range.

Before I open the call for questions, I'd like to briefly update you on a few other matters. First, during the second quarter, we repurchased 5.3 million shares of stock for $150 million. That's at an average price of a little over $28 per share. We intend to continue to opportunistically repurchase the balance of the $300 million that has been authorized by our board and then review with our board the prospect of increasing the size of the share repurchase program.

Second, a quick update on the status of the MVL transaction. We have executed the SPA and continue to move forward with the regulatory approval process. We have already received both US and EU antitrust approvals and currently expect to close the transaction by early Q4. The business continues to perform at our expectations. We remain excited about the benefits of the transaction, which we believe will better position us to accelerate revenue growth, enhance our margins, and increase earnings and cash flow growth.

Lastly, we would like to announce we hired a new director of Investor Relations. His name is Jack Monti. Jack has spent seven years in [cellified] research, most recently with UBS as a research analyst in the technology center. He's also supported research analyst within the Automotive sector prior to joining UBS. He began his career here in the Automotive industry and we feel he'll bring great experience and an outside perspective to our IR team. With that, we'd like to thank Eric Creech for all his hard work over the past couple of years and wish him luck with his new assignment in the treasury department here at Delphi.

So that ends our formal review of the results. We'll now open the call for questions.

(Operator Instructions)

Your first question come from the line of Brian Johnson with Barclays.

Good morning. Just want to maybe get some understanding -- I got one housekeeping question. And then a (inaudible) question. Let me get the housekeeping out of the way.

Can you just recap for us a couple of things? In your revised revenue guidance, is there any impact from copper, which seemed to have an impact on EA this quarter? And then secondly, can you just recap first quarter versus second quarter repurchases?

Sure. Brian, this is Kevin.

As it relates to the full-year impact due to lower copper prices, it's roughly $30 million to $40 million. That's included in our revised guidance.

As it relates to first quarter versus second quarter share repurchases, we didn't repurchase any stock in the first quarter. We repurchased $150 million of stock in the second quarter. And, if you may or may not recall in the third quarter of last year, we repurchased $180 million worth of stock. So $330 million over the last nine months.

Okay. And then strategically -- you know, we had mixed reports from some of the other auto parts makers and one thing we heard in a couple of companies was, in addition to the volume in currency pressures in Europe, OEMs were beginning to get tougher about pricedowns in order to pad their own margins. What are you seeing there? Are you seeing any difference vis-a-vis earlier in the year? Has your answer changed at all over the course of -- over the period? And then, what gives you confidence in your, in particular, fourth quarter margin performance, when that is to our understanding when a lot of these pricing issues get chewed up for the year?

Brian -- well, one -- if I could start right out, I will just remind you that we had roughly 1.8% price downs during the second quarter, which was consistent with where we were in the first; and as it relates to our guidance, the assumption is that those price downs -- those price down level remained the same.

Our price downs are contractual so -- at the end of the day, is it any worse than it was? I don't think so.

We have always been in a very tough industry, and I think that what sets Delphi apart it is that it's got some unique products and that operates in a unique space with a unique value prop, and our history has proven and including in our bookings what our price downs are. You know, unless there's a strategic reason to alter our arrangements with our customers, which so far I haven't heard of one that actually makes sense for us to do, I'm extremely confident with our price downs in the fourth quarter because we know what it is, because it's contractually bound.

So are you getting additional requests and saying no? Or do the OEMs know not to ask you?

No, they're going to ask. I wouldn't call it additional requests. It's pretty much the same. It's always been tough, but there's a word called no, and there's a word that operates unless there's a value prop -- but this thing has got to work both ways. And so at the end of the day, our pricing pressures are no different than they've been over the last several years. It's always tough and you got to have market-relevant technologies. You have to make a difference and people's got to care that you exist.

I just want to remind everybody that we have signed contracts on what our pricing is. That's why I have high confidence in terms of what it is going to be in the fourth quarter.

Okay, thanks.

Your next question comes from the line of John Murphy with Bank of America/Merrill Lynch.

Good morning, guys.

If I do some basic math on the outlook that you've put out for the full year, what you're looking for the third quarter -- the fourth quarter looks like it's very strong on EBITDA margins, really, almost approaching 15%. It's like 14.9% on the dumb guy's math I'm doing. Is that a correct interpretation of what you think is going to happen in the fourth quarter? And why do you have confidence, or why are you looking for such improved margin in the fourth quarter versus the rest of the year?

John, this is Kevin.

When we do the math, we roughly, for Q4, have EBITDA margins that are fairly consistent with what we reported in Q2. So as we look at Q4 relative to Q2, we characterize it as a repeat.

Okay. And the improvement from the third quarter is because you view South America as recovering? Or is it because of internal operations and execution?

It's a mix of two things. It's increasing volume. It's slightly lower year-over-year headwinds as it relates to foreign exchange. And as we've talked about before, our manufacturing and material performance is impacted by volume in a given quarter.

So when you look at Q3 and our Q3 numbers, we're seeing extended shutdowns from primarily the European OEs, and that starting and stopping drives incremental costs into our system and we don't believe we'll be experiencing that in the fourth quarter. In addition, when you look at the third quarter, another point I should highlight is, on a year-over-year basis, Q3 to Q3, there's $24 million of that -- I know you're probably tired of listening to us about it -- but that's variable accounting impact associated with the management incentive plan. So the ramp up from Q3 to Q4 isn't quite as pronounced as it looks on a sequential basis.

Okay, that's very helpful.

And if we think about Europe, it's very tough to call exactly what's going to happen in the market at this point. Could you just remind us what kind of levers you have to pull in response to some potential downside in volumes that you're expecting right now? You have a lot more flexibility because you're in Eastern Europe. I'm trying to understand what levers you have to pull for Europe.

We probably have right around 33% of some of our work force that's temporary. Not only in low cost but also temporary, and so we can immediately react to any sudden downturn in volume. So tremendous flexibility in Europe, when you look at our footprint and then also how the work force is put together. So we think we've got tremendous flexibility, and obviously the material comes right out 54% or so for every dollar of revenue so we know how to get that out. We think we're pretty well set to go in either direction if we have to.

Okay, and then just a last question -- it looks like you're making great progress on your backlog. I'm just curious if you have seen any change in quoting activity, positively or negatively, given the variability that we have seen in expectations for the macro in the short run. Is there still this commitment to launching new product in the long run and really pulling Delphi content into those vehicles?

Yes, the gain has been pretty consistent. We have not seen, at this stage, OEMs deciding to move programs out, so right now, it looks pretty consistent. We've got to keep our eye on it, obviously, because we have engineering and capital dedicated to these business winds, but right now the future bookings look extremely consistent and the OEs are not delaying programs at this stage.

Great, thank you very much.

Your next question come from the line of Rod Lache with Deutche Bank

Good morning, everybody.

Just a couple of questions, first of all on the cost side -- the operating leverage of 30% looks pretty normal, but this cost savings, or performance, of $107 million is a big rampup from what we saw -- I think it was $39 million last quarter. You just mentioned that maybe Q3, it's a little tougher to get there because of the shutdowns, but is that a run rate that we would carry forward as we look out to Q4? Or is there something unusual about that number that you achieved?

Yes. Rod, it's Kevin.

I would say a more normalized rate for performance for us is in the $70 million to $80 million range on a quarterly basis. Q3, again, is affected by volume; and of that performance, the majority of it relates to material performance. We had 5% net performance in Q2 this year on a year-over-year basis, so did extremely well -- and that's off of the things with at the end of the day, I think we also experienced really light level of economics. So increases as it relates to raw material and other supplies, with roughly 3% manufacturing performance.

All right, but we should not assume that, that gets carried forward in the fourth quarter?

No, don't put $107 million in your model for each quarter. I think as we look at Q4, you're probably closer to $80 million.

All right. How should we be thinking about this variable comp issue as we look out to 2013? It's been pretty volatile here this year. I think elevated as well. Any preliminary thoughts on how we should be thinking about that?

Yes, well, effectively, it [vested] and paid on December 31, 2012 and the expense goes away -- or a big portion, the variable accounting piece goes away in 2013, because the program is gone. So I think on a year-over-year basis, we should see roughly $75 million to $80 million reduction in incentive comp expense going into '13.

Great. That's super helpful.

And just lastly, as you look out, you're outperforming pretty nicely here in Europe versus the overall market. Maybe any kind of color that you can provide us on the degree of outperformance that you would expect in the second half? It seems like maybe the mix of industry production moderates a little bit vis-a-vis the Germans? And similarly in Asia, there's been a lot of talk about inventory being pretty high in China. When you look at your customer-adjusted -- not this overall market -- but when you look at your customer-adjusted production, do you think you continue to have that same delta of outperformance, or does mix affect you?

As it relates to Europe for the balance of the year, Q3 and Q4, we would expect roughly the same outperformance in Europe. And as it relates to China, we'd actually expect slightly improved outperformance in Q3 and Q4 relative to what we had in Q2.

Okay, thank you.

Your next question come from the line of Patrick Archambault of Goldman Sachs.

Good morning.

I just wanted to actually follow up on the question on slide 16. The 5% materials efficiency -- can you break that down? Is that just commodity reductions, based on where material prices have gone? Or is that variable efficiencies, if you will?

No. Patrick, it's not commodity prices at all. It's really specific projects, or initiatives, that our sourcing and engineering group have in place. It's a balance between what we refer to price-to-price -- which is better negotiation of lower prices from our vendor base -- through purchase consolidation and maybe rotation; and then secondly what we call effectively re-engineering certain parts to take costs out and working with our supply network to do that. And it's a balance of both; it's roughly half and half effectively. But it's an area that we have been and we continue to be very focused on.

Okay, that's helpful. Maybe on the manufacturing front, even going to a run rate of those two things together, of $70 million to $80 million, is obviously pretty nice tailwind from both variable and fixed footprint actions on the manufacturing side. What are the levers there that are driving this pretty significant performance here?

A lot of the manufacturing performance we've actually experienced out of our powertrain segment. You've seen that in the margins. As we've talked about to a few of you, we put capacity in place in Eastern Europe in 2010, and a big piece for manufacturing benefit is the rotation out of Western Europe into Eastern Europe. And avoiding any start-up costs associated with that facility -- so that's big benefit, one. And then, two -- as you run more efficiently, you have lower scrap, lower overtime, you have better manning. So just executing steady state of it better.

Okay. Understood.

My final one is -- I think you had mentioned that, if I heard you correctly, upon exhausting the $300 million buy-back program that you have, you might actually consider doing more. But I also do remember that I think you had been talking about a dividend policy at one point as well, potentially even by year-end. With everything going on, maybe you can just refresh us on your thoughts there.

Sure. It's a great question.

I should start with -- as said in my comments, it's important for us to be investment-grade. We think there's a real benefit to shareholders, to debtholders; and for us, there's a commercial benefit to a segment of our customer base that an investment-grade rating makes a difference, primarily the Japanese OEs. So it opens up additional opportunities there -- it's tough to quantify. We have a business, as we said, that generates a lot of free cash flow. A portion of this year's free cash flow we have already used to repurchase stock.

We used roughly $600 million of the cash on the balance sheet, that which we're going to generate, as a part of the MVL transaction. The balance would be a little bit of debt paydown and share repurchase. So that's the near-term plan.

As it relates to dividend ultimately, we think the right answer for share holders is a mix of share repurchase and dividends. Our view is, the dividend decision is something that needs to wait until after this election cycle, until we see what happens from a tax policy standpoint, whether it's distributing cash back via dividend is efficient for our shareholders. But assuming things don't change, we expect at some point next year to be a dividend payer, assuming tax policy doesn't change. We would have some amount of dividend and some amount of share repurchase.

Okay, great. Very helpful. Thank you very much.

Your next question comes from Chris Ceraso with Credit Suisse.

Thank you. Good morning.

I just wanted to clarify -- there were a couple of items that you mentioned there to help margin in the quarter, including a reduction of warranty, and I think maybe you said a gain on asset sale in addition to the material performance? Can you just run through those items?

Yes, no problem. The year-over-year warranty reduction was $10 million. The bulk of that was within our powertrain division. And then we had a small $3 million gain on asset sale.

And then the material performance you said was how much?

Material performance was $103 million. That was really across all of our divisions. We saw, I would say, slightly stronger performance relative to size within our EEA business and our E&S business.

Okay. So is it really the performance in Q2 and the run rate on some of these items that gives you the confidence to take your margin expectations up for the year? Or is there anything else influencing that -- maybe less revenue from FX, actually -- helps margin? Or anything else in there that's giving you comfort in that number?

No. It's -- we're executing well. We have initiatives in place that we have a high level of confidence in.

The team's doing a great job of execution.

Okay. Then just the last question -- I think you said that ex divestitures in FX, growth was 1.3%. Relative to global industry, that seemed to be below your target of exceeding by 3 to 4 points. Is that right? And why is that? Why do you expect to be able to hit that 3 to 4 point in excess number for the year?

Yes, it's right. The way we look at our growth rate is relative to our markets we serve. So, for instance, we have virtually no revenue into the Japanese OEs, so we backed that out when we talked about market growth. You're right for the quarter for our Delphi. What we call Delphi weighted market. We're a little over a point over market. That has been the lowest we've experienced, actually, for the last number of quarters. We're roughly five points over market in the first quarter, and we expect to be three to four points over market in Q3 and Q4 -- over our weighted market. And one of the [eyed] drive, quite frankly, is the growth relative to the broader market, especially as it relates to the Japanese OEs is that, it's a rebound associated with the -- if you recall, the tsunami that took place a year ago.

Sure. Okay, thanks for the help.

Your next question from the line of David Leiker with Robert W. Baird.

Good morning, everyone.

Hey, Kevin, one more question on slide 16. The performance of $107 million -- it looks like all of that or most all of that is going to run through across the sales line, versus SG&A or engineering -- is that right?

Yes. That's accurate.

And then, as we look at -- Rodney, as you look at your new bookings, can you give us any color on that of how much of that might be incremental revenue versus replacement business for you? And anything in particular there that you can talk about that you're excited -- that makes you excited?

Well, it's pretty much spread across the -- pro rata, across our business, by division and product. I think the thing that is exciting is that we continue the pace towards our destination of growing Asia, particularly China. And as I said, we announced our construction of our diesel facility in China, and so when you look at our split of 30%, it's been that way for the last several quarters -- over 30% in Asia, particularly China. It says that we're accelerating our diversification. Without turning our backs on North America and Europe, we're growing Asia very rapid, so I'm extremely excited about that.

And then obviously, when you start looking at the next wave of gasoline injection, GDI -- we've always said that's going to catch a lot of traction, and it has. And as I said, we've already kicked off production here in North America and we have bookings now in China and in Europe, so I'm pretty excited across the entire front. More importantly, though, as we told you in our road show, is as much transformation as we have had to date, we still had the diversification that still needed to be done from a regional perspective, and Asia was probably in the 15% to 16% at the time of the IPO. Now it's closer to 20%, and we want it to be well above 30%. So that's really what's pretty exciting -- is the balance and also to be a participator in the growth in the region.

And then as you went through the realignment of your manufacturing footprint, obviously you have done a great job here in North America in the emerging market. Have you done everything you want to do in Europe? Or are there some actions there that you need to take yet?

We have some actions we need to do there. They're not revolutionary, but they are incremental. The bulk of what's left in Western Europe is primarily high cap-based kind of manufacturing, so labor is not a very big issue. But as we move forward opportunistically, in terms of future, we'll rotate that; but the cost to move some of the stuff was a lot of bucks and the payback was slow, so we do it over time on a wind down.

So nothing radical, revolutionary. I think in our re-structuring numbers, what do we have into Europe, not much, right? So it's not significant, but we'll get at it every step of the way over time and nothing radical, though.

One last item here, Kevin. The difference in the tax rates in Q3 versus the others -- I'm guessing that has something to do with European level of profits in Q3?

It's a mix of regional profitability and some discrete items like the US R&D tax credit and timing associated with that.

Okay, great. Thank you.

Your next question come from Ravi Shanker with Morgan Stanley.

Thanks. Good morning.

Kevin, you indicated to us that we should be looking more towards the midpoint of your guidance range than the high end. Can you talk about the factors, or what you might see in the market that might get you towards the high end of that range?

Yes. Well, let me repeat what I said -- midpoint to low end of our range, just to be clear.

Right.

My reasons for saying that, Ravi -- you guys read the same newspapers we do, and hear about the same macro headwinds -- those are items that affect us and something that we work hard to respond to. And we just think, in light of the current macro environment that we operate in, it would be prudent for people to assume that we operate at that end of the range versus the top end of the range.

So just micro -- any fluid [variations] and schedules and such.

Yes. Exactly. Stuff does happen, right? The world does change, and as I said, we're poised to respond to that as quickly as we can, but there are certain factors that we don't control. As it relates to how the business is running and what we control -- to echo Rob's point, this business is operating extremely well. We did in Q2, we did in Q1. We definitely did in the fourth quarter of last year, and we think we can continue that momentum from an operational standpoint as long as the macros hold up.

Got it. And also -- Rod, post FCI, can you give us an update on your M&A priorities here?

You mean for the rest of the year?

Rest of the year and looking out into 2013. What areas you're looking at now that you have shored up the connectors business.

We have been transparent in terms of what spaces we had our priorities. It was powertrain and in our electric/electronics arena. Again, we will look at more [descript], more bolt-on, nothing transformational size-wise, $1 billion or less and very strategic. We're not trying to just buy a business and increase our top end. It's got to do something for us strategically. And so a little bit is opportunistic. I don't see us doing anything major in terms of horizon, terms of activity. Clearly we're focused on the one we've already got, and we got to bring this one home and start the integration of that.

So, Ravi, I don't see us in terms of what I see today as announcing anything in the short term, okay?

Understood. Thank you.

Your next question come from the line of Graham Mattison with Lazard Capital.

Good morning, everyone.

Just a question on the thermal side. It seems like you're pretty optimistic in terms of the performance there improving. What's underpinning that more? Is it more a function of volumes, or some of the actions you have taken over the past 12 or 14 months to get back to that level?

A little bit of both. As Kevin said, it looks like the volumes in South America beginning to stabilize. Also the team had to adjust itself to the new realities of that market and also Europe. So, with the operational adjustments and improvements, and we said that in the beginning of the year that we were disappointed in terms of where we were with the business. But we said we would improve, and we have done exactly that, and we are on plane in terms of the amount of improvement that we said we would create from the time we began to move forward. So, it's basically stabilization of the volume and also readjustment of the business to the new reality.

Are there any additional actions that you need to take to get back to that? Or is it everything you have, you have got in place?

We still need to execute the plan, and so it's nothing radical. It's just good old-fashioned adjusting and making the move. So we know what we need to do. Fortunately, it's in a sweet spot of something we do extremely well, which is execute. And so we got the plan, and that's exactly what we're going to do and with Kevin and I, we expect to be back at double-digit margins from a run rate perspective towards the end of the year.

Okay, great. Thank you very much.

Your next question come from the line of Kirk Ludtke of CRT Capital Group.

Good morning, everyone.

Rodney, you mentioned the pricing environment in Europe, and I was curious if you see any evidence, or you expect any other behavioral changes on the part of your customers as a result of the environment over there, in terms of maybe product cadence slowing down, or de-contenting product offering, or anything like that?

I think what we all have to do is be a little flexible as this thing plays itself out. There's no doubt there's been a contraction. There hasn't been the deep contraction we should have thought might have happened, and the question really gets to be is, how deep and how long? Right now, I don't see a lot of what I would call cadence movement in terms of progress, because one of the key things that OEMs are going to have to do to get out of this is often create exciting products. They can't shove a tremendous amount of programs out, otherwise it's self-defeating.

So a lot of behavior is not really aimed with what I would call at a massive restructuring of the industry. On their side, they are spending a lot of time on their capacity issues. It's been pretty evident in the press. So what I see in Europe, what we have to do is be extremely flexible, and we've always said that we would delay capital implementations and any expense in terms of volume, as long as possible. And I think that's proven to be a very prudent way of doing business on our part, and we can only do that because of the speed at which the team is able to operate in terms of executing and being flexible.

We've been in this environment before, where things aren't going well, and we know how to operate. Europe's tough. Fortunately our model and channels, our customers -- we did a lot of forward thinking up front and we've got a great model. It's not immune to everything, obviously. We had a little contraction; nothing like the market over there. We just keep an eye on it. I'm constantly, cautiously optimistic that our customer base -- the ones we have and the channels -- we will continue to do well in a very tough environment.

Thank you. That's helpful.

I was wondering if you could also expand on why you're more optimistic about South America in the second half.

Well, there's been a slowing of what I would call the contraction. Actually, it's been a rebound. They put a little bit of an incentive in place that's actually spurred some of the sales. So when we look at the forward production schedules, they seem to be improving, because, what has happened is that they had some pretty good sales rates when you look at May and June; and while the production wasn't there, the sales were. So they sold a lot off the inventory. So the inventory and the productionists now got back in line and it looks like they're going to start building more vehicles. And so that's why I'm a little bit optimistic. It's really based on what we're seeing schedule-wise.

Okay. Fantastic.

Kevin, you may have mentioned this; I apologize if you did. Is the acquisition in the guidance and if so --

No. No. I did not. That's a great question.

No, the acquisition isn't in the guidance. It's not in the guidance because we're not exactly sure what the timing is. As I said, we expect it to close early Q4. If possible, it could be late Q3; I think it's unlikely. Once we announce that we're close on the transaction, we'll update guidance for the full year.

But the business is actually performing at our expectations -- actually, a little bit better from a revenue, earnings, and cash flow standpoint. So they're doing extremely well. They're executing on their plan. We've been active as it relates to teams from their side and our side discussing opportunities for integration, operating single business. Once we're ready for the deal to close, we're hitting the ground running.

Great. Thank you very much.

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

Thank, good morning.

Kevin, I was hoping you could elaborate on the tax rate a bit more. The lumpiness we're see in Q3; and then how much visibility do you have into Q4, and exactly what's driving that down?

No. We have a lot of visibility in it, just relates to resolution and outstanding tax matters, one. Two -- implementation of certain tax planning initiatives. And the bump you see from Q2 to Q3 is really the result of some discrete planning items, both specifically as it relates to some German tax planning and a US R&D tax credit. So just timing associated with those; and actually looks like they're going current Q4 versus the possibility of Q3.

That's helpful.

We have a lot of visibility on it. We scrutinize and take a look at it on a regular basis.

That's terrific. And then on the revenue growth -- I know, in January you updated your three-year net new business. I think it was showing about $900 million of incoming backlog in 2012. Is that still what you're launching? Have you seen push outs of those launches? And if you have a number of what you've launched, net new business in the first half, that would be great.

I don't have it for first half. We're confident that it remains at roughly the same level; and when we give 2013 guidance, we'll provide you guys with updated net new business for the next couple of years.

Great. That's all I have. Thanks, guys.

Thanks.

Thank you, Operator. At this point I think we have time for one more question, please.

Thank you. Your final question comes from the line of Ryan Brinkman with JP Morgan.

Thanks for taking my call.

You definitely deserve a lot of credit on the margin progress. In relation to that -- is there any reason to revisit your 2015 margin targets in light of the fact you just predicted a14.5%? And secondly, I'm curious whether you think there might be any reason also that future pricing negotiations with automakers could potentially become more difficult as you earn ever higher and higher EBITDA margins?

In terms of because of margins are high -- is that your question? Because I have high margins, that it's going to be difficult because the OEM will want my margins?

Essentially.

Yes.

I know you don't see it that way.

I'm sure it might come up in a [diology] that way. Look, we're not the only ones out there with excellent margins. Borg-Warner has them, Gentex and a couple other players have excellent margins. Our role, our role is to help OEMs solve problems. I say this a lot and want to say it again -- we don't price our products based upon anything but the value that they create. And as a result of that, the reason that we have what we have is, while we have a great cost structure and this team knows how to get it done in terms of execution. But also, we've got products that make a difference in the spaces that they operate; and not easily replaced and also technically developed. So we've earned the right to have the margins that we have.

And because of all of the hard work that this team has put together, we're not about to give it away at the commercial line of scrimmage because someone is asking us to do so. So we're just doing what the market place allows us to do, and -- actually, hopeful that maybe we could actually increase prices. I don't know. We have to work at it. In terms of the run rate of 15% prior to 2015, I'm comfortable with where we are on that. I haven't had a discussion with my CFO on that issue, but I think we're going to maintain 15% and 15%. Do you agree with that?

Yes. Listen, I think we'll have an Investor Day next year, we'll take a look at our long-term objectives in light of where the world is at that point in time, in light of the MVL transaction and give an updated outlook.

Okay. And just lastly -- I'll let you go -- I'm curious of the extent to which you might like to make a portion of your upcoming variable compensation payments in cash rather than stock, as I think you have the flexibility to do; which would be tantamount to an additional buy-back of sorts.

Yes. The comp committee has the ability to pay it out in cash or stock. The more junior people of the company that participate in the program, it was always contemplated that they would be paid out in cash. The senior executives, the contemplation was a balance of cash and stock. We haven't concluded exactly what that amount is, but you're right. If I were sitting in your shoes, and looking at it from a dilution standpoint, I'd view it as, any amount paid in cash as commensurate with -- consistent with the share repurchase program.

Okay. I appreciate all the color. Congrats on the quarter again.

Thank you.

Appreciate it.

There are no further questions at this time. I'll turn the floor back to Management for closing remarks.

I appreciate your joining the call and above all, I appreciate your support. Obviously, we did have a great quarter, achieving record EBITDA margins in a very tough environment. Bottom line is, we're going to continue to focus on creating value for the shareholder, and moving forward, achieving our long-term objectives that ultimately will define us as the premier global automotive supplier.

Take care of yourselves and stay safe.

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