Aptiv PLC (APTV) 2012 Q3 法說會逐字稿

Good running. My name is Tracy and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi's third 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 Jack Monti from Delphi's Investor Relations Group. Sir, you may begin your conference.

Thanks, Tracy. And thanks so much everyone for joining Delphi's third quarter earnings call. Please see slide two for disclosure on forward-looking statements, which we will be making on today's call and only reflect Delphi's current view of future financial performance, which may be materially different from our actual performance.

Joining today's call will be Rod O'Neal, Delphi's President and CEO; and Kevin Clark, our CFO. As seen on slide three, Rod O'Neal will begin the call with an overview of our third quarter, followed by Kevin Clark who will review our financial performance in greater detail and provide an update to our guidance. After Rod's closing remarks, we'll open the line for Q&A.

With that, I'll now turn it over to Rod.

Good morning, everyone, and thanks for joining us. I'd first like to extend our deepest thoughts to those along the East Coast who have been affected by Hurricane Sandy. And we do appreciate everyone's flexibility in the rescheduling of this call.

So let me just quickly summarize our quarter and then we'll get into the details. We had a very solid quarter in a pretty challenging environment. We saw increased softening in Europe beginning in late August and we were able to rapidly respond by adjusting our cost structure. We are on track to expand our EBITDA margins 40 basis points to 50 basis points in 2012 on a reduction and reported revenue. And with this positive operating momentum, we are well positioned as we move into 2013. So, let's turn to the quarter and if you could move to slide five, please.

While our revenue growth was flat, adjusted EBITDA margins increased to 13.7% and earnings per share increased just under 13%. And as I mentioned in my opening remarks, we've taken and we will continue to take aggressive actions to increase the flexibility of our cost structure and better position us for margin expansion.

We've initiated restructuring plans as we continue to rotate our footprint, optimize our cost structure, and proactively address a much softer market. And at the same time, we continued to invest in strategic growth initiatives.

Production is up and running at two new plants in China and we broke ground on another in this quarter. We've introduced several new technologies. And as you know, we also completed the acquisition of MVL, all of which has us well positioned for top and bottom line growth in 2013 and beyond.

Turning to slide six, Kevin and I just returned from China where we held the grand opening for one of our electrical architecture wiring plants, Chongqing. Demand has been so strong at this plant that we expect to double our capacity next year.

Through our visit, the customer responses could not have been more positive. We met with senior leadership from SAIC for China and SVW. I came away from those meetings more optimistic than ever about our growth prospects in China. We will continue to significantly outgrow the underlying market there. And we are on track to double the size of our China business over the next four years.

We also held a groundbreaking ceremony for our new diesel facility in Yantai. Start of production expected late next year. And recently, we also opened a wire facility in Chengdu. So these three plants, Chengdu, Chongqing, and Yantai, are great examples of our success in China's rapidly growing market. But let's move to slide seven and discuss some of our technology. We had a great portfolio of high-tech products and we plan to continue to shape the market with our innovation. I know many of you have seen comments as recently as last week from the US government regarding automated vehicles being the next evolutionary step of innovation in the automotive transportation safety.

Well, Delphi is already part of the Department of Transportation's pilot program, which is putting 2,800 vehicles on the road for a year of testing of vehicle-to-vehicle and vehicle-to-infrastructure communication. There are eight leading OEMs that are participating. This is the largest field test ever and they're all using Delphi's advanced software and systems integration capability on these vehicles.

The objective is to reduce collisions and improve traffic flow by having these vehicles literally talk to each other and the surrounding infrastructure. So we're working with the government and we're working with our customers, and this is a great example of Delphi's stand on the leading edge of connectivity and active safety technologies.

Let's move to slide eight. Another significant investment in 2012 has been the acquisition of MVL as I mentioned. And as I told you back in May when we originally announced the transaction that I was really thrilled about this acquisition. MVL has been at the very top of our list of potential acquisitions for years and it really does fit us like a glove, significantly strengthens our high-growth, high-margin connector business from a product, portfolio, customer, age of footprint perspective.

So, when you look at MVL's performance to date, it has actually performed better than we originally planned. And as we sit here today, we're even more confident in our ability to deliver the significant synergies that will expand margins and accelerate earnings growth. We are highly confident in our ability to fully achieve run rate synergies of $80 million by 2015 and we expect 40 basis points to 50 basis points of margin enhancement and $0.24 of accretion in 2013, excluding integration of one-time costs. Bottom line, it's a great acquisition and we're happy to welcome MVL to Delphi. Move to slide nine.

As many of you know, the Automotive News PACE Award is the pinnacle of a technology achievement among automotive suppliers. The selection of three Delphi products and one manufacturing process as finalist for this prestigious award is validation once again that our technology investments are hitting the mark. Our nominations illustrate the type of innovative work being done by Delphi's technical experts all around the world.

The first product is Delphi's MyFi Radio. It's a feature-rich, embedded infotainment system that when coupled with our active safety products provide seamless integration of safety and connectivity. The second product we call Vehicle Proximity Alert and it's designed so that pedestrians can better detect nearly silent hybrid and electric vehicles. And this is a feature increasingly required by the European governments. Third product is what we call F2e and it's a diesel fuel injection pump system that will help OEs meet the more strident emission standards the governments require for heavy-duty trucks in the future.

And finally, in the manufacturing processing category, we were nominated for processing of our Gen 4 MAP Pressure Sensor, which is a product that goes into engine management systems. This manufacturing process is highly efficient and significantly reduces the required amount of production floor space.

Let's move to slide 10, which is our customer awards. We continue to receive accolades from our customers across the globe for exceeding their expectations on quality, on delivery, and on [technology]. And so when you look at the chart, you can see a sampling of a few of the awards that we've won in the last quarter. It is continued validation of our operational excellence, which is key to our topline expansion that I'm going to cover now.

Slide 11. Year-to-date on our bookings, we've booked over $21 billion in new business and we are on track to exceed last year's record of $24 billion. In Q3, we booked $5.5 billion which includes an award from BMW for radar application, an award from Toyota in North America for vehicle electrical systems. And in China, we received an award from SGM that relates to our gas fuel systems there. We've generated almost $64 billion in new business since 2010 and as the right side of this slide shows, we continued to increase the geographical diversification of our business with Asia bookings representing almost 35% of the total. These numbers validate the strong revenue growth that I've always talked about.

Now, let's move to slide 12. We don't talk a lot about our Enterprise Operating System, but as we presented at our Investor Day in April, it truly is how we run the Company. It's the reason we have performed so well and is the discipline that drives our operating performance and our industry-leading margins across the entire enterprise.

I'm confident that the discipline of our operating system will help us to continue to drive solid operating performance in the future. Our restructuring actions would further optimize our cost structure and rotate our footprint to lower-cost regions. And our continued focus on improving our operational excellence would keep us on track towards our longer-term EBITDA margin targets, even in this low-growth environment. And we continue to perform at the highest levels to ensure that we delight our customers and our focus as always will be on increasing shareholder value.

With that, turn it over to Kevin to [comment on the numbers, Kevin].

Thanks, Rod. Good morning, everyone. I'll begin by covering our third quarter results, then provide some additional background on the restructuring initiatives that Rod touched on and then wrap up with an update on our fourth quarter and full-year guidance.

So let me begin on slide 14 with a snapshot of our third-quarter results. As Rod mentioned, our overall financial performance this quarter was very solid, considering the challenging operating environment. We delivered strong EBITDA margins and earnings per share growth, offsetting headwinds related to the slowdown in European light vehicle production, foreign exchange translation and the mark-to-market accounting requirement of our long-term incentive plan.

Our revenue totaled almost $3.7 billion, that's essentially flat versus the prior year when you adjust for FX, commodities, and divestitures. We held 13.1% EBITDA margins, reflecting flexibility of our cost structure and continued strong operational execution. Net income totaled $269 million. Our earnings per share increased by $0.05 or 6% to $0.84. And then, lastly, we generated strong cash flow during the quarter of $254 million.

Now, if you move to slide 15, I'll review revenue in greater detail. Reported revenue declined 6.8%. Foreign exchange, commodity prices, and divestitures created a 6.5 point headwind to revenue growth. Volume-related growth was $62 million or 1.6%, partially offsetting price down to $72 million or 1.8%.

As I already mentioned, excluding foreign exchange, commodity prices and divestitures, revenue was basically flat. If you look at it by region, in Asia, we had almost 12% growth, significantly over market. Within the Asia region, we had 13% growth in China; 7 points better than the underlying market.

In North America, we had just under 3% growth, really reflecting our limited exposure to the Japanese transplants. In South America, we reported a revenue decline of 5%, primarily due to customer mix. And then, lastly, in Europe, we saw a 6% revenue decline, which is about 2 points better than the market, the result of favorable customer mix offset by a further reduction in customer schedules, both in the light vehicle and commercial vehicle segments that began, as Rod mentioned, in late August.

Slide 16 really underscores the flexibility of our cost structure and our ability to expand margins in a low-growth environment. EBITDA totaled $480 million, that's down $36 million from the prior year. This is reflective of the impact of price-downs, foreign exchange, and the accounting for the long-term incentive program, partially offset by roughly 30% flow-through on revenue growth, strong manufacturing and material performance, and the benefit of lower warranty expense.

EBITDA margins remained unchanged at 13.1%. And although our European revenues were down 6%, as I mentioned, we maintained very solid double-digit margins in this region. They actually increased slightly on a year-over-year basis. I also think it's important to note that if you adjust for the variable accounting associated with the long-term incentive plan, consolidated EBITDA margins actually increased 60 basis points to 13.7%, that's on flat revenues, really reflecting the resiliency of our cost structure.

Slide 17 includes our segment financial results. Electrical Architecture's revenue increased about 4%. It was driven by almost 14% growth in North America and over 9% growth in Asia. This was partially offset by a 2% decline in revenues in South America and an 8% decline in revenues in Europe. Segment EBITDA totaled $219 million, representing 13.6% EBITDA margins, that's down from the prior year, really reflecting the impact of increased launch costs, primarily in Mexico and in China, and our continued investment in advanced engineering to support future growth initiatives.

Powertrain segment revenue was down 2%. This is reflective of 23% growth in Asia, offset by a 1% reduction in European revenues, [affected] by the late-quarter slowdown in light-duty and commercial vehicle schedules, as well as a lower mix of diesel fuel injection system that Rod and I have touched on; a 14% reduction in revenues in North America and a 10% reduction in South American revenues; both of these regions were affected by customer mix and continued softness in the automotive aftermarket channel.

Despite the lower revenues, EBITDA increased to $175 million and EBITDA margins expanded to 16.1%. These results reflect solid operating performance and the benefit of lower warranty expense, partially offset by increased advanced engineering expense and lower engineering rebuilds.

In our Electronics and Safety segment, revenue declined a little under 5%, primarily the result of a 4% increase in revenues in Asia and flat revenues in South America, offset by an 8% decline in European revenues and just under a 3% decline in revenues in North America. In this segment, the growth rate across all regions continues to be affected by the ongoing pruning of our lower-margin business in our mechatronic and receiver product lines. Overall, the improved product mix resulted in an increase in EBITDA to $82 million and expansion of our EBITDA margins to 12.7%.

Thermal segment revenues declined a little under 4%, that's primarily the result of a 10% growth in North America and 8% growth in Asia. These results were offset by a 15% decline in European revenues and a 10% reduction in South American revenues. Adjusted EBITDA declined to $25 million and EBITDA margins contracted to 6.7% due to the lower volumes as well as the impact of foreign exchange.

Turning to slide 18, earnings per share increased $0.05 or 6% to $0.84, reflecting strong operating performance, a lower tax rate, flow-through on volume growth, and the benefit of share repurchases, partially offset by the impact of price-downs, FX in the accounting associated for the long-term incentive program. However, if you exclude the accounting for the long-term incentive plan, earnings per share actually increased $0.10 to $0.89, that's up 13%. And again, that's on reported revenues, which were down 6.8%, really reflecting or underscoring the leverage in the Delphi business model.

Moving to year-to-date cash flow on slide 19, we continue to do a terrific job converting earnings into cash flow. Strong year-to-date EBITDA has more than offset capital spending, cash interest and taxes. We've generated $642 million in cash before financing. That's up 20% over last year, which we've used to partially fund the purchase of MVL as well as repurchased $312 million of stock during the last two quarters. It's worth noting that we repurchased almost $0.5 billion of stock over the last 12 months.

Looking at our balance sheet on slide 20, we ended the quarter with over $1.6 billion of cash on hand, just under $2.1 billion of debt and $445 million of net debt, representing very solid investment grade credit metrics. The MVL transaction, which we closed on October 26, will slightly increase our pro forma credit statistics by less than half a turn. And lastly, the combination of our strong earnings growth and disciplined appointment of capital is generated an 8 point increase in return on net assets to 38%.

Moving to slide 21, as Rod has already mentioned, we implemented a restructuring program targeted at further optimizing our cost structure and expanding our margin. The program includes several initiatives, but is primarily focused on streamlining our European cost structure and includes continued rotation of our manufacturing and engineering footprint to lower-cost regions, further streamlining of administrative activities as well as the integration of the MVL operations into our Electrical Architecture segment.

Although we continue to perform very well relative to the market, we firmly believe there is always more that can be done to reduce our cost structure and increase our operating efficiency. The recent slowdown in Europe provides an opportunity to further address a portion of our cost structure, which is difficult to deal with in a higher-volume environment.

Total cost of the program will be approximately $250 million with about $175 million to be recognized in the fourth quarter of 2012 and the balance will be booked throughout 2013. Approximately 75% of the total spend relates to our European operations and about $80 million of the total is associated with the integration of the MVL operations into our Electrical Architectures segment. Approximately $240 million of the total restructuring charge will be cash, with about $35 million to $40 million to be spent in 2012, roughly $140 million to $150 million in 2013, and the balance in 2014. We expect the restructuring program to generate roughly $70 million, $80 million of total benefits in 2013, which includes about $40 million to $50 million of synergies related to the MVL acquisition.

Slide 22 details some of the assumptions underlying our updated guidance. We've provided the current production forecast from IHS for your reference only. We've highlighted the deterioration in their Q4 forecast in Europe. It is very

important to note that our guidance is based on current customer production schedules, which include lower production levels in Europe than are reflected in this latest IHS forecast. We're expecting fourth quarter global production of 20.6 million units, that's down 1.5% versus the prior year and that assumption includes production of 4.4 million units in Europe, just down roughly 15% from the same period last year.

Turning to slide 23 to discuss our fourth quarter guidance, our current outlook looks like a repeat of Q3, which reflects the lower European production schedules I just highlighted and a slightly lower mix of diesel fuel injection system due to softer sales in the commercial vehicle and light-duty markets, partially offset by a stronger euro. We expect revenues of $3.725 billion to $3.825 billion, including $125 million of revenue from MVL, which is net of roughly $15 million of inter-company sales.

Our EBITDA and earnings per share guidance excludes the fourth quarter restructuring charge of roughly $175 million as well as $11 million of MVL transaction-related expenses. We expect EBITDA to be in the range of $460 million to $500 million, reflecting less favorable flow-through effect on lower revenue and product mix, slightly offset by the translational effect of a stronger euro and approximately $22 million of EBITDA from MVL. Earnings per share will be in the range of $0.80 to $0.90, assuming 318 million shares outstanding and a 10% tax rate. Including the restructuring and MVL transaction-related expenses, earnings per share will be $0.30 to $0.40.

Turning to slide 24 to review our updated full-year guidance, based on our year-to-date actual results and fourth quarter outlook, we now expect full-year revenues of $15.475 billion to $15.575 billion, which again includes approximately $125 million of MVL revenues, net of their company sales. Excluding the fourth quarter restructuring charge and MVL transaction-related expenses, EBITDA will be in the range of $2.1 billion to $2.14 billion. And we've

tightened our earnings per share guidance to the lower end of our previous guidance range. Our current outlook is $3.68 to $3.78 per share.

Our earnings per share guidance assumes 324 million shares outstanding and a 17% full-year effective tax rate. Including restructuring and MVL-related transaction costs, earnings per share will be in the range of $3.18 to $3.28. We're now guiding to free cash flow of approximately $800 million, primarily reflecting lower EBITDA, cast restructuring spend, and transaction-related fees and expenses associated with MVL.

And with that, I'd like to turn it back over to Rod.

Thanks, Kevin. And before we move into Q&A, I just want to remind everyone that Delphi had a very strong Q3, despite the macroeconomic headwinds. And as always, we remain focused on outstanding execution and then balancing disciplined investment and growth initiatives with actions to further reduce our cost structure.

Our strong cash flow will continue to be deployed to enhance shareholder value as demonstrated by our MVL acquisition and the $312 million of stock we repurchased over the last two quarters. So, looking forward, even in a low-growth environment, we are well positioned for solid organic margin expansion and earnings per share growth. We remain committed to creating shareholder value and achieving our long-term objectives for the business, which we believe would further strengthen our position as the premier global automotive supplier.

So, operator, we'll now open the call up to questions.

(Operator Instructions) Brian Johnson, Barclays.

Good morning.

Good morning, Brian.

Good morning, Brian.

I just want to go -- because I think it's part of your culture for what I see is the soft spot here in the quarter, which overall I agree was good. On thermal, could you talk a little bit more? Last quarter, you flagged Brazil behind the soft margins, but in general, it seems to be a more competitive, less margin-risk business than powertrain and electronics. We saw [hollow] this morning around 8%, below where your other segments are. So can you talk maybe just both short-term and then mid-term about thermal and what kind of actions you've got the division on to bring margins up back into the low-teens or if we should not be thinking that?

No, I think, you should be thinking that, because it's exactly what we're thinking as double-digit margins is our goal. Look, we've been working very hard on it and the team has done an outstanding job of offsetting some very dramatic volume declines in Europe and in South America.

And so, the value prop of thermal has been and will continue to be its -- the margins, I agree, are lower than in some of the other businesses in Delphi, but it has outstanding return on invested capital. Doesn't require a lot of CapEx to invest in our engineering and not a lot of time and resources from the business perspective. So, it's a contributor to the Company, has been and will be going forward.

I think, the key here is just the shift that we saw in August and September from the volumes, particularly in Europe. So it is what it is in terms of the volume [downturn] and the industry characteristics are slightly different than some of our other businesses, but it creates outstanding value.

Can I interject?

Some of this restructuring targeted at this unit --?

Brian, it's Kevin Clark, I was going to touch on it. I would say, through the first two months of the last quarter, we were in a solid trajectory to -- I think as we communicated to you on our last call, our target was 10% plus EBITDA margins in that segment beginning in this quarter. And we're on solid trajectory to achieve that level and then we saw volume fall off late in the quarter in Europe. And secondly, yes, a part of the overall restructuring plan includes their activities, both in, well, actually, North America, Europe, as well as South America. So we're focused on further reducing the cost structure, adjusting the cost structure in light of lower volume, [we'll pick] a lower-volume outlook.

The broader question. During the quarter, you announced the share buyback program upsizing, could you maybe share some of your and the Board's thinking around cash share buyback strategy mid-term? And I guess a question we get from investors is, is this kind of a one-time somewhat grudging, we've got some excess cash, take it back or are you thinking about a kind of continual buyback program in the auto sector, we see AutoNation and AutoZone historically doing that, that we can kind of think about modeling in to continually reduce the share count?

Yes. Listen, we've talked about this previously. We look at the Delphi business model and our cost structure and our ability to expand margins and importantly generate significant cash flow. And we think one of our strong strategic advantages is the ability to generate that cash flow, deploy it in ways that generate shareholder value, whether they be strategic acquisitions like MVL that are accretive to margins or -- and EPS as well as return cash to shareholders. And on a go-forward basis, we think one of the staples that we have and we'll consistently use to drive shareholder value is to repurchase stock near term and then a little bit medium to longer term, probably a balance of some amount of a dividend, as well as share repurchase.

Okay, thanks.

Rod Lache, Deutsche Bank.

Good morning, everybody.

Good morning, Rod. [How are you]?

Was hoping you can maybe talk about your outlook for organic growth. Up until now, you've had some headwinds relative to the overall industry production. The GM year-over-year production changes were less, you had the South America issue. Can you just talk about how you expect that to look going forward, maybe the comparisons start to change here when the Japanese on a year-over-year basis are not driving as much of the year-over-year change and maybe start with that, the fourth quarter you are looking for 1.5% decline in production?

Yes. I make sure I understood the question, Rod. Your question is with respect to our growth rate relative to the Delphi markets we serve?

Correct.

[I've brought all to them]. I would say in the fourth quarter, given our outlook for Europe and given our customer mix, we would expect to grow roughly at market on a global basis and we would expect that to improve growth rate over market as we head into 2013.

Okay. So basically, the declines from some of the Germans now are looking in Europe like the overall market? Is that how I can read your statement?

I wouldn't say they look like the overall market, but in the past where they were growing on a year-over-year basis in a shrinking market, we have a slightly different dynamic today and are expecting that dynamic to continue in the fourth quarter.

Okay. And your comments on the margin expansion that you're anticipating for next year, is that basically a function of MVL, the long-term comp and the restructuring, or is there anything else that you see mix wise or productivity wise that could drive your margins next year?

Yes. Depending on the outlook for volume growth and then standard operational performance, those are the two other levers and we'll give guidance as it relates to our outlook for revenue growth in -- for 2013 when we announce our fourth quarter earnings.

Okay. And then, just lastly, I was hoping you might be able to explain the FX impact on your business. It looks like I think it's a bit higher than it's been running in terms of conversion. You had a $212 million impact on sales and it looked like a $45 million impact on EBITDA. What actually is happening there and how should we be thinking about how FX affects your earnings going forward?

Yes. I think if you look at it longer term, Rod, in reality, the FX effects, whether it'd be a plus or minus should flow through it slightly less than what our EBITDA margins are. I think that's a fair way to look at it. This quarter, I would say we had an incremental amount of transaction-related expense that affected our number.

You see that as a one-time kind of thing, not --?

Yes, I'd see it as a one-time kind of thing.

Okay. All right. Thank you.

Chris Ceraso, Credit Suisse.

Yes, thank you. Good morning.

Good morning, Chris.

Maybe we can just pick up there on the walk to 2013, if you could just quantify a little bit and repeat some of the numbers that you said. What's the magnitude of the step-down that you anticipate in stock comp, if you could remind us of that? And then, Rod, if you could repeat, or Kevin, the contribution you're expecting from MVL. And then, the restructuring I think you said was $80 million to $90 million. Just trying to think about all of the built-in tailwinds that you have in 2013 that are going to help offset the industry headwinds.

Yes, I think let's go through and we'll tick off one by one. So the restructuring benefit associated with this plan would be roughly $70 million to $80 million, I believe, is what I said. $40 million to $50 million of that related to the MVL transaction. Yes, roughly $80 million to $100 million of -- $80 million to $90 million of incentive comp reduction. And then, you have the, I guess, 10-month contribution versus 12-month contribution of the MVL transaction at roughly a 16% EBITDA margin on a business that has on a consolidated basis roughly $1 billion of consolidated revenues.

Okay.

All right. And then, what you would overlay on that would be assumptions as it relates to price, performance, volume, product mix.

Yes. And Chris, when we come back in the next quarter call, we'll be able to have greater clarity in terms of our assumptions for 2013. But the tailwinds are whether it's basically just math, but we really haven't locked in yet what we think the 2013 volumes are going to be. So we need a little bit more clarity on that.

And one more item on 2013 while you're at it, what is the tax rate that you expect for 2013? Is that going to be migrating higher?

We would expect a 17%, [about] where we are today, about a 17% effective tax rate.

Okay. And then, just the last item, you mentioned a few times in your walk-through the quarter, it sounded like some help from lower warranty expense, can you add all that up and quantify what kind of a help that was and if that's something that you anticipate continuing to be a tailwind in the fourth quarter and into next year?

Yes, I would expect -- I wouldn't expect it to be a tailwind on a go-forward basis. I'd say it's roughly $20 million in the quarter, primarily -- $20 million to $25 million, primarily in the powertrain segment.

Okay. Thank you very much.

Itay Michaeli, Citi.

Morning.

Good morning.

Morning. [What I want to talk] on the cash flow guidance, looks like it came down maybe $225 million pre-CapEx. Kevin, I know you mentioned a couple items including cash restructuring, I was hoping you can give us out the more detailed walk between those two items.

Yes, here is how I would look at the cash flow guidance or change in cash flow guidance. Roughly -- based on our current guidance for the fourth quarter, roughly $100 million less of EBITDA, $30 million -- $35 million of restructuring-related spend, $10 million of fees associated with the MVL transaction. And then our presumption now going forward is that we're going to pay the VCP -- make the VCP payment on 12/31 of this year, which is a headwind of about $200 million.

Great, that's helpful. And then, just with the macro conditions being what they are, are you seeing any change in launch schedule? It seems like your bookings are still very strong. There is any change or shift in timing of actual launches that may affect next year, particularly relative to the backlog you disclosed last for the 2013, and are you seeing any change in commercial settlement agreements or other type of activity with the OEMs?

Not really. I think the biggest change has been in the area of what I would call the electrification of the vehicle, which isn't really large volume issues. But definitely, you're seeing delays or in some cases even cancellation on EVs and in some cases even on the hybrids. But in general, the launch cadence has been pretty consistent across the globe, and not a lot of delays there. Some customers have had some issues with just launch. I won't go into the specifics of it, they had a little slowing in terms of making sure that the vehicles were launched with great quality. But overall, not a lot of movement in that area. And in terms of pricing, it's always the same. You better have something that matters or you are going to be under siege. We have something that matters.

Absolutely. I appreciate all that detail, guys. Thanks, again.

Yes, take care.

David Leiker, Baird.

Good morning, everyone.

Good morning.

Just a couple of housekeeping items here to start. Kevin, you talked about $70 million, $80 million of savings in 2013, but with the size of that, there's probably some carryover savings in 2014. Can you quantify that?

Yes. The restructuring plan would generate $70 million to $80 million in 2013. We'd expect 2014 for those numbers to effectively be a little bit more than twice that amount, so $150 million to $180 million of EBITDA.

And that's a cumulative number, not incremental?

That is a cumulative number, yes.

Okay. Great. And then, on the powertrain warranty, I don't think you've quantified what the impact of that was on the comp in powertrain. I guess that was mostly due to the warranty -- absence of the warranty?

It's roughly $20 million to $25 million.

$20 million to $25 million, okay, great. And then, last little number item here. If we look at the long-term incentive comp, where is that running year-to-date and what do you think the Q4 impact is?

The Q4 impact from a run rate standpoint will be roughly the same as what we had here in Q3. From a full-year standpoint, it's about $100 million of expense.

Okay. And then, on the European restructuring, can you give us some sense of the buckets across the businesses?

Just given where we are in the process, we'd rather not. And it's a mix of again manufacturing and engineering footprint as well as administrative activities.

Okay. Maybe if you look at this way, as you rotate that manufacturing, engineering footprint, where are you today in terms of high-cost Europe locations versus low-cost, and where do you want that to end up at the end of this restructuring?

I'd say in general in Europe, probably, we've got about 30% of our workforce as temporary. It's fallen a little bit because of our -- the volume shifts have [taken us probably] in the mid-20s now in terms of our contract. That mix was more or less 75% to 80% low-cost footprint in Europe. The remaining was primarily in the higher capital ends of our business.

And then, what we're doing now is just taking advantage of some of the noise that's in the environment and moving some of that footprint eastward. So ultimately, the goal is to get Europe as in line as the rest of the world, but there's a time and there's a cost for everything. And so we've got our margins in Europe at double-digit through some very smart execution of rotation. And this is just another one of those examples where we're taking advantage of a situation and moving forward. So it's around 80% today, 75% to 80% low cost.

Okay. And then, lastly here, as we look at China with the new business awards that you're getting there, is there a way that you could characterize how much of that is the manufacturers in China adopting your technology as opposed to market share gains versus folks who are already there?

Well, if you look at the characteristics of the Chinese market, it's very Western-like from a consumer preference standpoint.

Right.

They really like the heavily contented vehicles. And so today, we have about 20 of our 33 product lines in China. And so when you look at what the recent additions of the portfolio has been, [slightly] more electronics, more sophisticated infotainment, safety aspects, emission aspects. That's why we were pretty confident we're going to continue to outgrow the underlying market there because of the market shifting in our direction from a portfolio perspective. And then, also, we're pretty diversified, where around 60% of our business is with the multinational and around 40% is with the winning locals. So we feel the market is [rotating] perfectly into Delphi's safe, green, and connected sweet spot.

Great, thank you very much. A nice quarter.

Very good, thanks, appreciate it.

(Operator Instructions) Matt Stover, Guggenheim.

Thanks very much. You may have addressed this in your comments, I apologize, I was just interrupted, but can you put some meat on the bones of the margin performance on a year-over-year basis in the powertrain business and in the E/EA sector? And I have a follow-up question.

To make sure I understand your question, you're looking for more color on the margin performance year-over-year in E/EA and in powertrain?

Yes, can you provide some details? You saw nice margin improvements in powertrain and a deterioration in the E/EA.

Yes, the deterioration in E/EA, you're right, on a year-over-year basis, we saw a reduction in margins from 14.1% last year to, if you adjust out the variable accounting for the VCP, 13.6% this year; so a 50 basis point decline. So we saw strong flow-through on volume growth of about 30%.

However, from a manufacturing performance standpoint, we didn't see strong manufacturing performance, primarily the fact that Rod mentioned the new facilities that we're launching in China and in Mexico. Those affected manufacturing productivity as well as we made the conscious decision as we have been all year quite frankly to invest incremental dollars in advanced engineering for new product development.

As it relates to powertrain, you see margins increased some 200 basis points, so 14.1% to 16.1%. And what's driving growth there? You basically have revenues that are flat. So you have a slight degradation in margins on slightly lower revenues. Our manufacturing performance was very strong. So, to offset some of that, we continue to invest, again in that area, in advanced engineering, both on the gas side of the business, gas fuel injection systems as well as diesel fuel injection systems. And then, we have the benefit of the $20 million, $25 million of lower warranty expense.

Okay.

Yes.

Okay. And then, the last question is, so you've taken restructuring actions, the market outlook for Europe remains fairly uncertain and there's a possibility that will muddle along and get weaker here for a while. Should we expect that this is sort of the big bulk of action that gets taken in Europe or would we anticipate something similar to these elevated charges in 2013?

I just used the math to make sure. So of the $250 million of restructuring charge, as I told you, some of that is good. $175 million can be booked this year, with the balance booked next year. So you'll see a portion of this program. I would say based on what we see today in terms of volume and underlying assumptions, we would not expect there to be incremental restructuring plans, but it's something that we always watch and we're always focused on reducing and optimizing our cost structure. And if the opportunity presented itself and the returns made sense, it's something we would do.

Yes, look, this is an experienced management team. When we constructed this new company, one of the things that we made sure when we put it together is that it was flexible and it was nimble because we got a great strategy that produces a lot of opportunity and the team executes flawlessly and we seize that opportunity. We know where we are, we know where we want to go, we know how we're going to get there, but even as good as we are and what I just described, the world has a way of putting bumps in the road, always has, always will.

And the way we look at it, the way my philosophy is, we wake up in the morning, we look at what the world's put in front of us and we just deal with. And so, right now, I don't expect us to be doing anything significant in Europe based on the assumptions we have. But if the environment changes, we'll react to it, because we've got a company that we think we can continue to produce superior results even when the volume isn't there. And then, when the volume is there, where we can leverage it up. So philosophically, we'll just deal with whatever is in front of us.

And so, I think when we come back at the end of Q4, and we'll do the call, we'll be able to outline exactly, here is what we think the world is going to handle, go to us in terms of the hand and then we will just -- we would tell you quite clearly what we're going to do next to deal with it.

Thanks, guys. Appreciate it.

John Lovallo, Bank of America Merrill Lynch.

Good morning, guys. It's actually John Murphy, can you hear me okay?

Hey, John.

Hey, John, [how are you]?

Hi, guys, I am having troubles with my phone here. Just one of the themes that seems to be coming across here, a lot of [detailed questions have been asked], but one of the themes that's coming across is, there is a little bit of margin compression here in the short term as you're investing. I'm just more curious, less so about the margin and more just on return targets because one of the great parts of your story is that you have this return on invested capital that's in -- depending on how you're calculating it, in the mid to high 20s, really strong and it's really I think what attracts people to the Delphi story. Just trying to understand as you're putting these incremental dollars into the ground and the investment in growth in the future. If you think you'll be able to maintain those and how we should think about that going forward.

Well, John, I think our plan is, we will get it and I think we're highly confident that over the medium and long term, we'll be able to increase them. Volume affects us -- volume swings on a quarter-to-quarter basis may affect us. But every decision we make is made with the overlay and the intention that we're going to increase cash flow, cash flow efficiency and we're going to drive higher returns. So that's the way we look at whether it's an M&A opportunity, whether it's an organic investment in specific customer program or development of a new product or the launch of a new facility.

Okay, that's incredibly helpful. And then, just one other question and I apologize, I may have missed this part of the call, as we think about the movement in Europe to maybe more LCC sourcing there and where you are around the rest of the world, and as currencies are swinging around a little bit more than they have in historically, more recently, is there anymore risk to ForEx going forward that would be more economic and less just translational, or a lot of your contracts priced in the same currency that they are being produced?

I would say that our risk profile in light of the current macro environment foreign exchange rates hasn't -- no different than what it was early this year or last year. There is no change.

I think it's the beauty of the model where our pricing and our cost tend to be in the same currencies. So we minimized a massive amount of risk in that area.

That's very helpful. Thanks a lot, guys; keep it up.

Thanks. Appreciate it.

Operator, we only have time for one more question now. Thank you.

Richard Hilgert, Morningstar.

Thanks. Good morning, everyone.

Good morning, Richard.

Good morning.

A couple of questions here. We saw just recently one of the Japanese luxury guys had announced that they were going to be doing drive-by-wire launching within the next 12 months. We've been hearing about drive-by-wire and brake- by-wire for, geez, the last 15 years or so. Are we now going to start seeing -- actually seeing these products showing up in vehicles or is that particular manufacturer just kind of one that's kind of a prime mover and everybody is going to take a wait and see approach and see what happens with lawsuits or anything that might come from having the technology?

Well, I'm not sure I am totally tracking, but drive-by-wire and brake-by-wire are pretty prevalent across the entire industry in the more upscale cars. Are you talking about automated vehicles or just the technology of --?

No, this is not like a hybrid where you've got electrics driving a mechanical connection. This is purely electrical with a mechanical backup that actuates in the event that three redundant systems actually fail. So this is purely a completely electrical and this is the first time that it's in mass produced -- it's the first time it's being in a mass-produced vehicle. So --

Here is the way I look at it. It's a cost versus benefit issue and I think you just described a little bit of the cost when you got a system and then you got three backups, so it's going to go on a very special kind of car, one high end. It's not a technology at this stage that would be democratized across the entire vehicle fleet, so it's not that revolutionary. It can be done, it's not that -- it's always the issue is the benefit and does the consumer -- is the consumer wiling to pay for it. And so nothing new there, all right.

No. Okay, good. With a lot of your business being in the Asian region and given the dynamics there of the Japanese and the Chinese market, is there any impact there for you guys?

We're not -- we don't have a lot of -- in China, we don't have a lot of Japanese business, so we're not negatively impacted there. And to be honest, it's still early. We haven't seen a dramatic shift what I'll call the consumer has led the Japanese players and moved over to either the multinationals or local. I haven't seen that shift, but there are a lot of prediction that it will occur. I think it remains to be seen how permanent this is versus just a temporary emotional aspect, but right now, we don't see a big move in consumer preferences yet in terms of impacting sales of vehicles other than the fact that Japanese aren't selling, but there hasn't been a lot of rotation yet due to Chinese locals or multinationals.

Okay. And then, last, we've talked a little bit about Europe on the call here. Getting inventory levels or a read on inventory over there is a really difficult thing to do, to say the least. But I was curious if you've gotten a sense from your customers as to whether or not this is the amount that we're seeing production schedules dropping for the fourth quarter and the likelihood that they're still going to be pretty low, obviously, in the first quarter. Have we corrected or will we correct the inventory given these new production schedules or is there a sense that inventories are still pretty high and this is going to be an extended production low that we're seeing?

I don't know. I mean, we don't have a really good look into 2013 yet. So we will provide clarity to that in our next call. I guess I look at it from a positive standpoint that the behavior of the OEs in this environment is one where they are matching their production to demand and historically, as you look back in the past, that wasn't always there.

So I'm extremely encouraged with the actions and while we never want to see volumes taken down, this is really -- and it's important to take these kind of actions just to keep the industry in line such that we can stay healthy through this period. So first of all, I'm encouraged and I applaud the actions of the OEs and so all of us are making adjustments. The premise of this, we'll have to come back to you, but right now, we don't see anything that says that things are going to get dramatically worse. The question is, is it flat or slightly up, but we got to come back to you with clarity.

There are no further questions at this time.

Hey, I appreciate all of you joining. Thanks a lot. We'll see you in the next quarter. Stay safe.

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