Aptiv PLC (APTV) 2014 Q1 法說會逐字稿

My name is Steve and I will be your conference facilitator. At this time, I would like to welcome everyone to the Delphi Q1 2014 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 Jessica Holscott, Delphi's Vice President of Investor Relations. Jessica, you may begin your conference.

Thank you, Steve. And thanks for joining Delphi's first-quarter earnings call. To follow along with today's presentation, our slides can be found at Delphi.com under the Investor section of the website. Please see slide 2 for a 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 us today will be Rodney O'Neal, Delphi's CEO and President; as well as Kevin Clark, our CFO. As seen on slide 3, Rod will begin with an overview of the quarter, followed by Kevin, who will review our financial results in greater detail, discuss our 2014 outlook, and then we'll open up the line for Q&A.

With that, I'd like to turn it over to Rod.

Thank you, Jessica. And good morning to everyone. I deeply appreciate you joining us today. And let me start with a very important fact in that we had a great quarter. It was a great first quarter. And as you remember from our recent Investor Day in New York, we told you that Delphi would focus on three strategic imperatives to continue to drive shareholder value. And these included disciplined revenue growth, product expansion, and increasing returns on capital. Now our management team has built upon these imperatives in the first quarter, and we are meeting our commitments to continue to deliver value to our shareholders.

You can move to slide 5, please. Before I get into the quarter, I want to talk a little bit about the current macro environment. Europe has stabilized. South America, well, that market continues to deteriorate, so we are keeping a very close eye on that part of the world. North America is showing steady growth, and the market in China continues to be strong.

So let's look at the quarter. Revenue was up 6%, earnings were up 12%. And we returned $230 million of cash to the shareholders, including the repurchase of over $150 million of stock. We remain confident in Delphi and our outlook for 2014.

Slide 6, please. Game-changing technology is at the core of Delphi's success and here's more proof. Delphi recently won its 17th Automotive News PACE award and was a finalist for two other technologies. I'm really extremely proud of our technical community and the culture of innovation that they foster each and every day. This prestigious award highlights our commitment to providing leading-edge technical solutions to the marketplace.

Slide 7. Our Q1 bookings were aligned with our expectations and the customer cadence for the new business opportunities, which is consistent with last year. We remain confident that we'll achieve our target in 2014. Our first-quarter awards include electrical architecture wins in Asia with OEs like Geely and Great Wall, as well as a Chrysler award for infotainment in North America. We have a mission to further diversify revenues. As you can see from the chart on the right, we continue to do so with our bookings.

Slide 8. Delphi's 2014 priorities -- they remain unchanged. And we are focused on one thing and one thing only, and that is increasing shareholder value. We will do this through disciplined revenue growth, further optimizing our operating footprint and aggressively rationalizing our cost structure, and also introduce advanced technologies that provide solutions to our customers' challenges, all of which translates into expanded margins and increased earnings. And we will continue to drive increased shareholder value by deploying capital in a very disciplined manner.

With that, I'll turn the call over to Kevin to cover the numbers. Kevin?

Thanks a lot, Rod. Good morning, everyone. I'll begin by covering our first-quarter results and then provide an update of our full-year guidance in the second-quarter outlook. Consistent with our prior earnings calls, today's review of our actual and forecasted results will exclude all restructuring and other nonrecurring costs. The reconciliation between the GAAP and non-GAAP numbers are included at the back of both this presentation and the press release for your reference.

So, let me start on slide 10 with a snapshot of our first-quarter financial performance, which Rod has touched on. Revenue was in line with our expectations, primarily driven by very strong growth in China and North America, and an improving European market, which translated into significant margin expansion and earnings per share growth. Reported revenue totaled $4.3 billion. That's up over 6%. That's roughly 1 point over the mark-up. Operating income increased to $483 million, and operating margins expanded 60 basis points to 11.3%. Net income increased almost 10% to $368 million, reflecting earnings growth partially offset by an increased tax rate. And earnings per share increased over 12% to $1.20.

Lastly, operating cash flow totaled $136 million, reflecting the seasonal investment in working capital, as well as cash taxes and restructuring spend. I'll cover each of these financial metrics in greater detail during the presentation, so let's move to slide 11 and I'll review first-quarter revenue in greater detail.

As I just mentioned, reported revenue increased over 6% to $4.3 billion. Pricedowns of 1.4%, and lower copper pricing pass-throughs totaled $77 million. That -- combined, those present a 2 point headwind to our year-over-year growth rate. FX -- primarily the result of a stronger euro and $43 million to revenues, and over 1 point to our growth rate. And volume totaled $286 million, adding 7 points to growth.

Moving to revenues on a regional basis, European revenues were in line with the outlook we provided during our last earnings call, up just over 2%, reflecting increasing stability in the Western European market, partially offset by declining revenues in the automotive aftermarket. As a side note, operating margins expanded approximately 100 basis points in this region, due to the strong operating performance as well as benefits from the restructuring initiatives we put in place over the last 18 months.

North American revenues increased 8% as a result of solid market growth and strong revenues with the domestic OEs, primarily. Revenues in Asia continued to be very strong, increasing over 12%, driven by almost 15% revenue growth in China. And revenues in South America declined roughly 9%, reflecting the deterioration of the market that Rod commented on during his remarks, and the issue that we flagged as a potential concern during last quarter's earnings call. Fortunately, this region represents only 6% of our revenues, and we've adjusted our cost structure to address the macro environment in this market. We'll cover our outlook for this region in more detail when we review our second-quarter and full-year outlook.

Slide 12 reconciles the year-over-year change in operating income, which increased $52 million or over 12% to $483 million. The increase was the result of strong flow-through on revenue growth, solid operating performance net of incremental investments, and information systems and advanced engineering to support future growth, and benefits from foreign exchange, primarily a weaker Mexican peso, partially offset by pricedowns, and increased depreciation and amortization expense. As I mentioned, operating margins increased 60 basis points to 11.3%. Not on this chart but as a point of reference, EBITDA increased $66 million to $628 million, and EBITDA margins totaled 14.7%.

Slide 13 includes our segment results. Electrical architecture's adjusted revenue totaled over $2.1 billion. That's up over 10% from the prior period, driven by strong double-digit growth in North America and Asia, single-digit growth in Europe, partially offset by lower revenues in Brazil, reflecting the current market conditions. Segment operating income increased to $273 million, which represented 12.9% operating margins, up 90 basis points from the prior year, primarily the result of flow-through on the strong revenue growth. Very strong operating performance in synergies from the MBL acquisition. As a point of reference again, EBITDA increased 18% to $337 million in the segment, and EBITDA margins totaled roughly [15%].

Revenue in our Powertrain segment was in line with our expectations, totaling $1.1 billion, down about 3% year-over-year as a result of solid growth in North America, offset by slightly lower revenues in Europe, reflecting increasing stability in Western Europe, partially offset by slightly lower export revenues to the emerging markets of Russia and India, as well as lower revenues in Brazil, as well as continued softness in the automotive aftermarket really across all regions. We expect continued sequential improvement in the powertrain revenues, which will translate into very solid year-over-year growth in the back half of this year.

Segment operating income increased to $115 million, representing 10.4% operating margins. It's a 10 basis point increase over the prior year as a result of strong operating performance and the timing of engineering rebuilds. EBITDA increased to $166 million and EBITDA margins expanded 20 basis points to 14.9%.

In our Electronics and Safety segment, revenue totaled over $700 million, representing a 4% increase over the prior period, driven by very strong growth in Asia, solid growth in Europe, partially offset by lower revenues in Brazil related to the weakness in the market, as well as lower revenues in North America as a result of timing of new program launches. We are expecting continued sequential revenue growth in the E&S segment, driven by the ramp-up of new program launches in the back half of the year.

Segment operating margins increased 100 basis points to 11.4%, the result of flow-through on volume growth, strong operating performance, and the continued enhancement of our business mix. EBITDA increased over 13% to $102 million, and EBITDA margins expanded 120 basis points to 14%.

Thermal revenues increased almost 8% to $387 million, driven by solid growth in Europe, Asia and North America, partially offset by a decline in Brazilian revenues. Operating income totaled $12 million and operating margins were 3.1%, down on a year-over-year basis, but up 80 basis points on a sequential basis, representing the second straight quarter of sequential margin improvement. EBITDA totaled $23 million and EBITDA margins were 6% for the quarter. We remain on track to significantly improve the performance in this segment, and we're confident we'll achieve operating and EBITDA margins of over 5% and 8%, respectively, by the fourth quarter of this year.

Turning to slide 14, earnings per share increased over 12% to $1.20, driven by increased earnings and a lower share count, partially offset by a 6 point increase in the effective tax rate to 18.5%. That increases the results of the 2012 US R&D tax credit, which favorably impacted our 2013 first-quarter tax rates to the tune of about 6 points.

Moving to the balance sheet and capital deployment on slide 15. We ended the quarter with a solid balance sheet. That totaled $2.4 billion, and balance sheet cash declined $400 million to just under $1 billion, reflecting the normal seasonal investment in working capital and CapEx; $230 million of share repurchases and dividends that Rod referenced early; and $120 million of cash taxes and restructuring expense. As a result, net debt increased to $1.5 billion or 0.6 times EBITDA.

As outlined in detail at our recent Investor Day, and Rod reiterated it again today, we remain committed to executing a very balanced and a very disciplined capital allocation plan. The M&A environment remains positive, but to the extent we cannot complete a value-accretive transaction this year, we will accelerate our feats of returning cash to shareholders.

So, moving to slide 16, which details some of the assumptions underlying our 2014 guidance. We are forecasting global vehicle production of a little over 90 million units. That represents a 2% increase in global production. That's down about 1 point from our prior guidance. Looking at our forecast by major region, in North America, our guidance assumes a 4% increase in production. We are forecasting European production to increase just under 1%, reflecting continued stabilization of the Western European market, offset by a decline in vehicle production in Eastern Europe.

In China, we are expecting production growth of 9%. In South America, we are forecasting a 10% decline in production, due to the rapidly deteriorating macro environment in this region. For the second quarter, we are forecasting global vehicle production of roughly 22.5 million units. That's flat with the second quarter of last year.

Now turning to slide 17 to discuss our 2014 full-year guidance. We continue to expect revenues in the range of $17.2 billion to $17.6 billion, reflecting 3 points of growth over the underlying market. We've increased our outlook for operating income to a range of $1.975 billion to $2.05 billion, which includes $600 million of depreciation and amortization expense, a $60 million increase over the prior year. We continue to expect a tax rate of 18% for the full-year, and we've increased our EPS guidance to a range of $4.80 to $5.00, reflecting the strength of our first-quarter earnings and share counts of 306 million.

Cash flow before financing will total $1.1 billion, with CapEx expected to be roughly $800 million. Moving to the second quarter, we expect revenues to be in the range of $4.375 billion to $4.475 billion, reflecting a 4% increase year-over-year, 3 points over the underlying -- roughly 3 to 4 points over the underlying market. Operating income will be in the range of $525 million to $550 million, representing operating margins of 12% to 12.3%. And EPS will be in the range of $1.27 to $1.35. And that assumes 306 million shares outstanding, and an effective tax rate, which is just a little bit over 19%.

So, with that, we'd like to open the call up to questions.

(Operator Instructions). Rod Lache, Deutsche Bank.

I had a couple of things. I was hoping, first of all, you might be able to talk about -- obviously, the margins came in quite a bit stronger than you were expecting when you provided your guidance for the first quarter. Maybe just kind of directionally, what were some of the big buckets that changed since you provided that guidance? And just looking out to the second-quarter guidance margin of 12% to 12.3%, you did 12.1% last year. And just mathematically, it looks like an incremental margin of maybe 9% to 16%; this quarter was over 20%. What are some of the variances that we should be thinking about as we look at the guidance going forward?

Sure. Why don't I take this question and Rod can chime in. When you look at our actual results versus our original expectations when we gave guidance, and you break it down into the big buckets for favorability, you look at it -- flow-through in volume was very strong. That added about $10 million to $12 million of incremental operating income. I'd say that relates to the operating performance as well as business mix.

Pricing was a couple-million-dollars favorable to where we -- our original expectations. Performance from a material standpoint, we did extremely well during the quarter. That added about $10 million to $12 million of favorability. And then we got, I don't know, $12 million to $14 million, quite frankly, of favorability related to FX gains on hedges as well as commodity prices. So, those are the big buckets that reconcile the difference.

Okay. And then the incremental margin moderating in the second quarter?

Yes. I think if you look at it on a sequential basis, you have very, very strong flow-through going from Q1 to Q2. I think you'll see it's roughly 35% flow-through, so I want to start with that. I think, secondly, when you look at it on a year-over-year basis, one of the items that you've got to adjust for is, we had roughly $10 million or $12 million of commercial and legal settlements in the first quarter of last year that won't occur or won't repeat in -- or the second quarter of last year, I'm sorry, Rod -- that won't repeat in the second quarter of this year. If you adjust for that, you'll see that our flow-through is roughly 18% to 20% on an OI basis.

Okay. And on that EBIT bridge that you provide, the -- you've historically had net performance that's a lot closer to the price deflation that you see. I think that you guys have already commented that this year, you're planning to spend some additional money on IT infrastructure and a few other things. How should we be thinking about that, how that number is really kind of breaking down? And what should we be expecting for the rest of the year?

Yes. I think if you look at it, if you peel that performance piece apart, on the chart, it doesn't look like we're offsetting price. Again, on a year-over-year basis, there's about a $10 million headwind associated with legal and commercial settlements in the first quarter of last year that didn't repeat in the first quarter of this year. So, I'd say, in fact, we did. We talked about an incremental roughly $20 million year-over-year investment in engineering and IT-related growth initiatives. We did spend that money. So those would be my big -- the big buckets (inaudible) year-over-year results.

Okay. And just lastly, the pace of buybacks, the $150 million in the quarter, is that something that we should be assuming as kind of the run rate that you'd want to achieve this year? So maybe $600 million for buybacks and $300 million or so for dividends?

Yes, listen. Depending on how the M&A environment shakes out, I would say to the extent we don't complete a transaction this year, I would expect, in the back half of this year, the pace of activity to actually pick up a little bit.

Okay. Thank you.

Thank you.

Brian Johnson, Barclays.

Just a couple of questions here. Can you maybe talk about EEA, which seems to be your strongest growth? And are you seeing pull-through from, I guess, a couple different things -- kind of connected car? Is that beginning to show up through this? Kind of if you look at how that's actually outgrowing E&F, is this kind of the sort of a derivative beneficiary of connected car that could actually grow faster than E&S -- despite your, by the way, guidance for the mid-year, which seemed for the full -- two or three years, which were more conservative on EEA?

Yes, I think one, the connected car is really at the early stages, so you're not going to see any material significant dollar figure in our revenue this early on. We can circle back later and talk more in detail. But I guess the answer to your question is no.

What you're seeing is really the foundation -- the work that resulted in a foundation that we laid a few years back, in terms of diversification, both regionally and customer-based-wise with this customer -- and in addition of MBL into the business. And it's worked out exactly the way we thought it would -- and with significant increases in writing in the markets like China, et cetera, along with the tremendous amount of customers.

So it's just a model at work. And the entry of what I'll call the next phase of automated vehicles, that's not in play right now. You're just seeing the model doing what we always said it would do. And if there was another part of the question, I missed it.

Yes. No, that was EEA. So, does that mean that maybe EEA has upside to your guidance, and so you get more infotainment, more applications in the car kicking in over the next couple of years?

It's a very powerful force in the marketplace, this business. And assuming that the macros work itself out properly, we think what we're seeing will continue to transpire. But we do need the macros to cooperate. But the model is robust and this business is extremely strong.

(multiple speakers) One other item -- Rod's mentioned this before. One of the factors that we believe can affect the EEA growth -- it hasn't to date, but ultimately -- we see they're the number one player in the market. And as you get bigger and as you get a bigger portion of the overall market, obviously, it's harder to get market share gains, Brian.

Okay. And that was the assumption. And then maybe just a little more color. I know you gave some on sort of the seasonality of the bookings. And it is seasonally lower first-quarter, but this first-quarter was below first-quarter last year. I mean, what -- where is the quoting activity? And how do you get the confidence in hitting the [$26 million]?

Yes. It's very similar to last year, a little lower. But in terms of our expectations, it's right on path. It was just really the cadence of what the opportunities were out, and also what finally got done in the first quarter. So, it's -- I would expect a -- almost a replication of what occurred last year, where there was a steady move north, as we get through the quarter. So I'm just looking at the opportunities that are sitting there.

Our win rates have not gone backwards. And so the confidence just lies that we won what we were supposed to have won in the first quarter, and it's just a matter of -- amount of opportunities. As I said, it was just cadence. So, that's where the confidence comes from.

Okay, thanks.

John Murphy, Bank of America Merrill Lynch.

Just a first question and it sort of is a follow-up, Kevin. You did mention, I think, in slide 10 and 12, as you were going through the operating walk, and I think Rod touched on this -- but the IT and growth initiative costs in the quarter were a little bit of a headwind. Obviously, they are good things. But just curious when you think those ultimately may fade? Obviously, growth initiatives we want to never fade; but the IT and sort of infrastructure costs that you're working on right now, when do you think those fade? Or are those just ongoing?

Yes, I -- listen, I think it depends on the list of projects that we have and the returns on those listed products, the profitability they generate. As we talked about on our last call, we said on a full-year basis, we'd expect to spend $75 million to $100 million. I'd say we are on pace for the full-year -- from a full-year standpoint to probably spend roughly $90 million -- $80 million to $90 million. And I'd expect that to continue for the next couple of years.

Okay, that's helpful. And then just a second question. As we look at the restructuring in Europe, obviously, it was a little bit of an upside there, it sounds like, in the quarter. What do you think the opportunity is for further restructuring in Europe as far as your execution or actions that you may need to take? And then also, very importantly, on the realization of the benefits?

Well, we continue to look at opportunities to opportunistically reduce our overall cost structure and rotate our footprint out of Western Europe to Eastern Europe. A part of that is -- the decision related to that is operationally driven, depending where we sit from a capacity standpoint, production standpoint. And obviously, a part of it is a financial return standpoint. And I think we'll continue to look at our footprint. I would expect we'll continue to do some rotation of manufacturing and engineering over the next -- I don't know -- three-plus years out of Western Europe to Eastern Europe. But it won't be on quite the order of magnitude of what we've done over the last few years.

(multiple speakers) No, I think, as you well know, when you're dealing with Western Europe, it's extremely difficult when you're dealing with moving work from high-cost to low-cost. And then it's expensive. And so what we are always trying to do is balance the ability to do it with the payback. And there's moments in time where it just makes so much sense. That's why we seize the moment. And there's others that it just doesn't make a lick of sense for us to even deal with.

And so, I think we've done a pretty good job to date of taking advantage of the situations. And we're going to continue to look at it. As good as we are, there's a lot of opportunity for us to get better, but we are going to have to pick and choose where we decide to move. And it's always going to be based on the ability to get a decent return on the investment of it.

And based on where we are from a locational standpoint, John, quite candidly, we are now in the areas where the returns payback tend to be a longer payback, roughly 2.5 to 3 years, and slightly lower returns. So, again, to Rod's point, it's something that we look at very opportunistically.

Great. That's helpful. And then just lastly, Rod, there's two things that are happening in the market right now that seem they might impact the business in the longer term. And the first is that sort of cycle times or midcycle majors or midcycle refreshes are turning into majors. And the majors have a lot of electronic components being added, particularly the Camry -- the Toyota Camry is a great example right now.

So it seems like there's a lot more opportunity that might be coming a lot faster towards you, but then there's also this big question around recalls and what kind of impact that may have on the business in slowing sort of these midcycle majors and the product cycles. So I was just curious your view on the sort of those two competing forces on the potential to just clearly speed up and maybe slow down your business at the same time? Just generally what your thoughts are there.

Okay, you are off restructuring. I want to make sure I'm not -- you're just talking about some of the pace of that changes that we've been doing? (multiple speakers) No, I wouldn't call those like -- to me, it's nothing new. I mean, the speed-up has sort of been coming in the industry as OEs have tried to distinguish themselves from their competitors in the marketplace by constantly keeping their vehicles fresh. And so, it's -- there's the majors, which I think you're talking the sheet metal changes. And then there's also the content, which actually can run out of phase and sequence with the majors.

So, a little bit of the way I view it is that the majors, the majors may -- they are important in the fact that I think it keeps the cars selling on a customer base. And as you know, we don't make any money unless they sell the car. But in terms of the content, that's different. And I think the emerging governmental trends, the emerging consumer trends, that's a different issue that really may or may not have anything to do with the pace of the majors changes that the OEs are doing.

And so what we've got to keep track of, and we'll try to do a good job of communicating with you guys, and what we see these trends that aren't exactly attached to what I would call the majors of the vehicle, and how they will be dropped into existing vehicles, and then enhanced as the majors come along. I view it as all good and I don't see it slowing us down, okay? At all.

And you don't think the recall activity would slow that at all either?

I'm not sure why that would. Have you got an idea why you think it might?

Well, just given that you increased complexity of the vehicle, and obviously, every little thing is being scrutinized right now that they might hold off a little bit on making these changes.

No. I think, in general, the industry has been somewhat conservative in terms of introducing what I would call, like, massive change across a wide variety of vehicles of a technology that doesn't have a history. So, what the industry normally does is sticks its toe in the water with a very select vehicle -- more high-end loaded. And you run it, and then you put it on the vehicle, and you get through the process and you move on. So I don't view that at all as an issue. Okay? And I think that's the way it's still going to play itself out. I don't think you're going to see technology that hasn't been proven in the marketplace installed in across the entire fleet how it looks without it being introduced years in advance and incrementally bonded to the fleet.

Great. Thank you very much.

Itay Michaeli, Citi.

Just a question on EEA. Strong performance in the quarter. I know that's a big segment for you in China and Asia. Just curious whether you saw comparable margin performance in some of the other regions around the world in that segment?

Yes, Itay, it's Kevin. As we said before, we don't really break out operating margins by region for competitive reasons. They are fairly consistent across all regions. I would say in light of the Brazilian market, a little bit lower there, if I can give you some color. But otherwise, pretty consistent across each of the regions.

I'm sure. And just back to the net performance in the quarter of $17 million. Sorry, if I missed this, Kevin, but how much restructuring savings, if any, did you actually realize in the quarter? And then if you can just kind of remind us of what you expect this year and then maybe even preliminarily for next year, broadly?

Yes, MBL and restructuring benefits on a year-over-year basis are roughly $20 million, which is incremental to that $51 million of performance that I reconciled for Rod Lache -- I should've highlighted that. On a full-year basis, we are expecting roughly $100 million of restructuring and MBL benefits.

That's very helpful. And then just lastly, the other income of $0.04 benefit in the quarter, what was that exactly?

We had an insurance settlement related to the Japanese tsunami a couple of years ago that comes in below the line. It was for indirect business interruption activity. Those were roughly $13 million on an aggregate basis.

Perfect. That's very helpful. Thanks, guys, and congrats.

Thanks.

Ryan Brinkman, JPMorgan.

Congrats on the quarter. Thanks for taking my questions. Great. Maybe just comment a little bit about Europe production overall. I know you gave your full-year guidance, which I think is consistent with IHS. But a couple suppliers reported yesterday and were suggesting that, in 2Q as well as 1Q, we might see better-than-expected production looking for an increase there, IHS thinks it's down 1%. Based upon what you're seeing on the ground, your orders and customers, is there anything you can say about whether Europe can be a help again in 2Q?

Yes, I -- Ryan, it's Kevin. We've seen, again, increasing stabilization in Western Europe. But conversely, we've actually seen lower production numbers come out of Eastern Europe. So as we look at our build schedule relative to IHS, they are actually pretty close.

Okay, that's fair. That's helpful, thanks. And then is there anything you can say about your involvement in helping GM with their ignition switch recall issue? Maybe detail what you're doing there to help them? So, for example, is GM paying you for those parts? Or are you incurring any sort of overtime or premium freight costs? I don't think it would be material in any event. Just sort of curious.

And then how do you see your relationship with GM evolving? Could it be potentially strengthened by some extra efforts that you go through here? Or is it potentially hurt or kind of no impact at all? Or what can you say there?

Look, as you know, we don't talk about what we're doing with our customers on any issue. And so, a lot of those questions and answers will have to come from those guys. But let me say this. We are working very, very closely and seamlessly with GM on this issue in order to solve the ramp-up issues, and ultimately get this behind both of us.

And the way I view it is, any time we have an engagement with a customer, it's an opportunity to improve our relationship. So, I view that everything we've done to date with GM as being extremely seamlessly between the two companies, and -- because it's been a difficult situation, obviously. But I'm pleased with the progress we have made in terms of getting product to the marketplace. And we're going to continue to wrap it up and get it behind us.

Okay, excellent. Good to hear. And then just last question on the net performance/other line in your EBITDA lock, it looks like it was about $17 million this quarter. So is this the first quarter, I guess, now that does include synergies related to MBL, but it does not include like the higher income associated with the base MBL business, I guess? I mean, just how should we think about this line kind of evolving in 2014 in light of that fact?

Yes, I -- what -- you're right. It does not include the baseline and the outperformance. It would include standard operating performance, which would include material cost savings, manufacturing productivity, SG&A productivity, items like that, as well as restructuring benefits and synergy-related programs from MBL. And you should assume that, over the year, we offset price with performance, but we are going to spend a little bit of that performance or invest a little bit of that performance in incremental advanced engineering and IT to the tune of about $100 million.

Okay, thanks. Congrats again.

Thank you.

Thanks.

Patrick Archambault, Goldman Sachs.

I guess, one thing just on the guidance like, if I'm not mistaken, you beat sort of the numbers you put out there for the first quarter by, I think, $0.14. The -- I think if I look at the full-year, you are sort of raising the bottom end by [10] and raising the top end by [5]. So, I think some of this might have been answered in an earlier question, maybe Rod had asked it. But can you just kind of tell us like, why aren't we -- I mean, the outlook seems to be better on the margin. Why aren't we sort of raising the whole year by the beat or more?

Okay. Why don't I -- it's Kevin. I'll start. Starting with revenue, when you look at the overall environment, we'd agree with you Western Europe is stabilizing, but Eastern Europe is actually deteriorating. Brazil is significantly deteriorating. And there's really no changes to North America and to China. So you look at year-over-year growth and you look at global production units in the back half of this year, it's actually come down relative to where it was in February when we gave guidance for the first quarter and full-year.

So we would say there are actually certain markets that are actually being impacted negatively, most notably Brazil for us. And when you look at -- so that's the revenue line. When you look at from an earnings line and an EPS line, knocking off the easy ones, the insurance settlement that I talked about that happened in the first quarter, we originally expected that to get done and negotiated in the second quarter. So that's just re-timing, and that's roughly worth $0.03 to $0.04.

During the first quarter, there was roughly -- I mentioned $12 million to $14 million of FX and commodity benefits. Based on our outlook for where copper is going to go and where the euro is going to end the year, we don't see that repeating, and quite frankly, we see it reversing in the back half of the year. So we'll give some of that back. So those are the big -- big reconciling items, Patrick, that I hope will answer that question.

Yes. No, that's very helpful. I guess sort of just related, on the powertrain side, you were talking about sort of a second half inflection happening within that segment. Can we just go over the line items that are kind of driving that change in direction first-half to second-half?

From a revenue standpoint?

Yes.

It's really the introduction of -- on the powertrain business, it's the introduction or ramp-up of both light-duty diesel programs as well as heavy-duty diesel programs, primarily in Europe. On the aftermarket -- from an aftermarket standpoint, which, as you know, is included in that segment, some new programs our business wins that the aftermarket business has won and they will begin shipping. And then thirdly on the GAAP side of the powertrain business, there's the continued ramp-up of gas direct injection in North America as well as Europe.

And we also will have completed some of the ramp-downs of some of the outgoing business.

Got it. Okay. And just last one from me on that. Is -- I think before, you had been expecting diesel mix to be kind of a flat assumption sort of year-on-year, maybe slightly adverse in the first-half and positive in the second-half; kind of a wash for the full-year. It sounds like that is coming in better, right? Is that -- would that be a fair characterization?

It's coming in about where we expected. It's about what we expected.

Okay. All right, great. Thanks, guys. That's what I had.

Thanks.

Joe Spak, RBC Capital.

Maybe just a little bit more color on Europe since we seem to head back there a little bit. I know you said on the plus-2%, that was sort of dragged down versus by the aftermarket; so maybe optically versus what production was there, it doesn't look as good. How big is that European aftermarket business? And maybe can you give a sense of what the -- your European OE business did in the quarter?

European OE business in Europe was up slightly. Aftermarket business, it's about 40% of a $1.2 billion business, so a little over $400 million or $450 million. That was down double-digits.

Okay, great. That's helpful. And then, Rodney, maybe just going back to the bookings question, the confidence in the full-year. I know we just sort of went through the China auto show and I think, historically, a good amount of business is done there. Is there any -- obviously, when you come into the first quarter bookings, I don't believe, so is there any color you can provide from that show?

No. None other than the confirmation that the market continues to evolve more upscale as with more highly content in vehicles as we said it would. And just renewed confidence that its ability to actually grow in terms of units can grow in content over the next three years, where that marketplace is going to go from roughly the $20 million to the $30 million. I think it's just confirmation that we've got it right. So, we are excited about what's going on there. And the pace of change into our space, not only from the international players but from the local Chinese players, continues to accelerate. So we are pretty excited about China.

Okay. And maybe if I could sneak one more in. On the M&A market, it seemed -- at the Analyst Day, it seemed like you guys were into maybe that market is loosening up a little bit. Is there any further progress you can report? I mean, what sort of confidence do you -- or can you assign any probability to actually being able to do something by the end of the year?

Yes, I -- this is Kevin. Listen, I think it's a fair question. I think it is very difficult to assign a probability to a transaction. You need agreement between a buyer and a seller, it's tough. I'd say our level of activity still is very strong. So, we'll see.

Okay. Thanks a lot, guys.

Hey, one question, I would want to clarify, Joe, on your question -- I gave you an annualized automotive aftermarket number for Europe. So I want to make sure you didn't believe that was a quarterly revenue.

Yes.

David Lim, Wells Fargo Securities.

Just a question more on the longer-term. I mean, with the emissions control or emissions situation in China, and apparently more interest in electric vehicles, can you sort of talk about where you guys are positioned with China electric vehicles and hybrid vehicles over there?

We've got technology on the ground there and actually in vehicles. But when you look at the growth rate in that space of pure electrics, it's sort of played out there as it has here and really everywhere in the world, it just hasn't gotten the traction that everyone thought it would.

That being said, though, when you look at the quality of the air that the Chinese government is now beginning to deal with, the huge and most call it the medium to short-term impact I think is going to have to be dealt with more conventional technologies. As a result of that, I believe we are going to see more advancement on, one, the scrapping of older injection type of technologies that are in the fleet and the introduction -- and we're seeing it now, both on commercial vehicles as well as on light-duty -- of very contemporized injection systems, including GDI and common rail. And so, the EV in China is playing out really very similar to how it's playing out here.

Is the Chinese government being more aggressive with their regulations? I mean, we've always -- all of us already have sort of heard that they've always been pushing back, pushing back. But has that changed any in the last couple of months?

I wouldn't say the last couple of months. I think what we are seeing is that they are now putting together what I would call a very comprehensive policy to address that issue. And that issue actually -- it's -- every developing nation, including ourselves and Europe, have gone through the emergence -- always had to deal with the pollution issue, both not only air but water, et cetera, as it's industrialized.

So what you're seeing in these emerging countries as it rises its middle class is the need for the environment to be protected. And so I think they are just at that inflection point where it has to be dealt with, if they are to continue to progress north in terms of improving the quality of life for their people. As a result of that, the policies have to be put in place from a government perspective and that's beginning to be shaped.

But right now, I would say it's still in the formation period and it's not really what I'll call totally nailed down. But I think it's reasonable to assume that it's going to be a multifaceted approach, and the scrappage of the -- and just staying with auto, the scrappage of polluting type vehicles with old technology is an obvious no-brainer. That's going to get dealt with. And then the introduction of cleaner higher-tech injection systems is going to come too, as it relates to Delphi's position. There's tons of other things that we could get into that I don't think are relevant, but the movement from coal to cleaner technologies is -- but they've got a lot of things they've got to deal with.

And then one last question from me and more near home. When we look at US production rates, I think it peaked in the early 2000's at $17.5 million, what are your thoughts about us returning to that kind of level of production? And what's the propensity or the chance that we could actually exceed the prior peak? Thank you.

Look, I think there is a steady cadence north that I don't see abating. What the ultimate maximization is, I think it's -- it depends, I think, really on a lot of issues -- macro, et cetera. But the ability to get back to the $17 million, $18 million, I see it as not only probable but almost momentum will get you there. Whether it gets to $20 million or $21 million, I think depends on a lot of those things. So, I can -- to answer your question, I do think we'll get back to 2008/2007 types of levels.

Got you. Thank you.

Brett Hoselton, KeyBanc.

I was hoping to talk first on sales growth. You talked about it outperforming the market production-wise by about 1%. Based on your backlog, less pricing, it seems like this year, you're looking to outperform the market by, give or take, kind of 3% or more, something along those lines. And then if I look at your longer-term expectations of outperforming the market by 5%, I was hoping you could kind of just reconcile what appears to be maybe a little bit of underperformance relative to the full-year expectations in the first quarter. Is there some expectations of some acceleration due to some product launches as you move through the year?

Yes, it's Kevin. I'll start with that. Our revenue growth for the first quarter is exactly as we expected it to be and communicated. Our guidance was you'd see accelerating growth throughout the year relative to market; that we'd grow 3 points over market in 2014. We will grow north of 3 points over market in 2015, 2016, and beyond. What's going to drive that growth is the ramp-up of the new business wins that we had over the last number of years. So, it's new program launches.

Okay, excellent.

So revenue for the quarter came -- I just want to say it came exactly in line with what our expectations were. Mix was a little bit different with South America being a little bit weaker, but in the aggregate, it all netted out exactly where we expected it to be.

Now switching gears and just asking about capital deployment, if I take your $3.25 billion capital deployment -- and that's obviously M&A and share repurchase mix -- I divide it by 12 quarters, over the next three years, I get to $271 million per quarter. And you've kind of been running your share repurchase activity kind of around $90 million to $160 million per quarter.

And so, how do we think about that how much dry powder you're going to keep for M&A versus share repurchases? Should we be modeling some increases in share repurchase activity as we move through the next year or two? Or should we just kind of think, look, $90 million to $160 million is kind of the range, and you're probably going to make some acquisitions along the way?

Listen, I would -- that's a great question. It's a fair question. It's a tough one to answer on some respects. I think, first, when you look at our free cash flow and use of cash, you need to include dividends in that number. And you should assume that dividend growth is roughly equal to earnings growth.

Two, as it relates to the trade-off between share repurchases and M&A, it is very difficult, again, to predict the pace of M&A activity, the size of M&A activity. So, I think that's a bit challenging. My preference, quite frankly, at the end of the day is that analysts wouldn't factor share repurchases into the NOI number. But I know that's something that most of you aren't comfortable doing.

So, I think a reasonable approach is to assume that we continue at that same -- at the pace we've bought back at historically, with some upside EPS accretion from M&A opportunities. To the extent you're not comfortable with that, you should take free cash flow less dividend and dividend growth, and apply it to repurchases, and assume it's more back-half-loaded in a year than it is front-half-loaded, just given our -- the seasonality of our cash flow.

Excellent. Thank you very much, Kevin. Thank you.

Your last question comes from the line of Colin Langan from UBS. Your line is now open.

Thanks for taking my questions. Just overall, your prior guidance was based on global production up 3% and now it's flat, but your sales guidance seems to be the same. Why are you confident that sales are unchanged?? Is it just your lower exposure to South America or --?

Well, just to clarify, our outlook for full-year global production is that the market is up 2% versus 3%, just to make sure -- I wanted to make sure you had that number right or we communicated it correctly. When you look at our overall growth rate over market, it remains unchanged versus our prior guidance of roughly 3 points. If you look where FX rates were in the first quarter, we benefit a bit from where they were in the first quarter and where they are effectively to date. We see that swinging in the back half of the year and somewhat the back-end. So that's the reason for no change on revenue.

Okay. And when we look at Electronics and Safety, the margin there looks like a record margin. Anything unique going on in the quarter that helped that segment out? Or is this a new run rate for that segment?

And you're talking about the EEA segment? E&S segment?

E&S.

E&S is in a segment where we've seen consistent margin improvement, is really strong in operating performance, primarily on the material and manufacturing side. And again, it's the rotation of the business to more of a software model versus a historical mechanical model. So it's the nature of the business.

So this level we think is a good run rate? Or is there something unique going on?

Our guidance for the business is it continues north of this from a long-term margin expansion standpoint.

Okay. And then lastly (multiple speakers) --

We think margins will increase, just to be clear. We think margins will continue to increase.

Okay. And then on thermal, there seemed to be a very large quarter-over-quarter improvement. Is that restructuring ahead of schedule? Or any color there?

Thermal is in line with our expectations. You're talking about revenue growth. Margins are actually down on a year-over-year basis. They are up for the -- sequentially, second straight quarter. So it's performing in line with our expectations. The revenue growth reflects the new business wins they have rolling out.

But the quarter-over-quarter improvement that -- what was driving that, that was part of it?

Of revenue growth? New business wins. (multiple speakers)

The margin improvement quarter-over-quarter -- sorry.

It was just better execution.

No, but just to be clear, maybe we should talk thermal -- thermal margins quarter-on-quarter, year-over-year, are down. They are up sequentially. What's driving the sequential improvement is better operating performance and volume.

Okay. Thank you very much.

That concludes the Q&A portion of today's conference. I'll turn the call back over to Jessica Holscott.

Great. Thanks for participating in today's call. As always, we'll be available for any additional questions you may have after the call today. Thank you.

And that concludes the Delphi Q1 2014 earnings conference call. Thank you for joining. You may now disconnect.