Aptiv PLC (APTV) 2014 Q3 法說會逐字稿

Good morning, my name is Shawn and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Delphi Q3 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, Shawn. And thanks for joining Delphi's third 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, our Chief Operating Officer, Kevin Clark, as well as Mark Murphy, our CFO. With that, I'd like to turn it over to the Rod.

Thank you, Jessica. Good morning, everyone. And thanks for joining us today.

This is our first time together as the new management team, since we announced the new organization. So I want to plow into the macro environments and provide an update on the recent business activity in my section. And I have Kevin with me, who will discuss our strategy and priorities and we have Mark with us who will follow-up with our Q3 results as well as an update on our 2014 outlook. So let's focus on the quarter, if you could go to slide 5, please.

So I'll start out with our perspective on the current macro environment, which has played out largely in line with what we told you. Now, overall, our view is that this year's global vehicle production will increase roughly 3% to just over 91 million units. I expect the US economy to continue in its current path through the rest of the year, which should translate into approximately 5% growth here in North America vehicle production.

We continue to expect roughly 2% growth in Europe. And the macro environment in south America continues to be very difficult. We expect vehicle production to decline roughly 15% to 20%. And as discussed last quarter, we have implemented very aggressive restructuring actions to reduce our footprint in this region.

We continue to see strength in China. We expect high single digit growth rates, and let's just move into the third quarter highlights.

It was another solid quarter, a record quarter in fact, revenue up 3%, operating income up a robust 9%, OI margins expanded 60 basis points, and EPS up 20%. In addition to two acquisitions, we returned almost $400 million to the shareholders, about $300 million in stock repurchases, $75 million in dividends. And we are confident in Delphi and our earnings outlook for 2014.

As I told you in the past, we built an operating model that allows us to flex our cost structure to deliver on our margin, cash, and EPS commitments. And we continue to deliver on the strategic imperatives that drive shareholder value. Slide 6.

As you may have read, Delphi has formed a new technology advisory council as part of our ongoing commitment to leading Delphi towards a safer, greener, and more connected future. We have a panel of hand-picked prominent global technology thought leaders that will help Delphi produce product strategies and investments in technology to create growth of the enterprise, and value for our shareholders.

The counsel also advise Delphi on global mega trends, regional public policy and give us even more external touch points. Our initial meetings have proved very valuable in identifying further regulatory drive opportunities and leveraging partners for additional market penetration. Slide 7.

We're very proud of the PACE awards that we've received and we are excited to tell you about three more Delphi technologies that have been named finalists for 2015. The PACE awards recognize game-changing innovation, and Delphi is the leading recipient of the recognition and holds the largest number of nominations.

Delphi is always developing innovative technologies, time and time again, and we are recognized for providing leading edge solutions to the global automotive market. This accomplishment demonstrates our commitment to providing leading customer solutions around safe, green and connected. Slide 8.

In addition to the numbers that Mark will talk about later, I think this chart is what it's all about. During the quarter, we received three additional awards from our customers. And this is validation of our ability to execute flawlessly as we continue to receive praise.

If you look at the chart you will see the awards we have received from a very diverse group of customers that span the globe. These awards underscore our technology and operational leadership in all areas of our product portfolio.

And with that, I will turn the call over to Kevin to cover a few of our strategic items.

Thanks, Rod. Good morning, everyone. If you'd move to slide 10.

To pick up where Rod left off, we translate our operating capabilities into strong financial results and increased shareholder returns. And as you've heard us say before, we further drive shareholder value through a very balanced and disciplined capital allocation plan.

So to put this in perspective, from 2014 to 2016, we expect to generate roughly $7 billion of operating cash flow. Which we'll use to make organic investments in the business that accelerate revenue and earnings growth, execute share buybacks, increase our dividend, and complete strategic transactions that are accretive to value.

Moving to slide 11. Late in the third quarter, we announced two transactions. First we signed a definitive agreement to acquire Antaya Technologies, which closed in early November. Antaya is a leading provider of proprietary on-glass connectors that further strengthen our high growth electro connectors business and provides significant growth potential in China and in Europe.

Moving to slide 12. Second we also announced the acquisition of Unwired Technologies, which closed in early October. Unwired is a leading provider of infotainment connectivity modules which provides two way data connections between smartphones, tablets and in car infotainment systems allowing consumers to safely access content in their vehicle.

Unwired's products further strength our portfolio of high growth media connectivity products. These two transactions are a great strategic fit for Delphi further augmenting our connector product portfolio and we're confident they will be accretive to value. Move to the next slide.

In late September and early October, Rod and I had the opportunity to spend time with our customers and technology partners at the IAA commercial vehicle and Paris motor show. These shows are a great showcase for some of the most innovative automotive products in the world and are really a great opportunity to hear directly from our customers. We came away from our customer meetings even more confident in the strength of our product portfolio that align with the mega trends of safe, green and connected.

Moving to slide 14. Third quarter bookings were in line with the customer cadence for new business opportunities and include several conquest awards. A GDI award with VW and Dongfeng, a BMW award for ignition products an infotainment award with Shanghai GM, as well as a Ford wiring award, just to name a few. Based on the current funnel of remaining opportunities, we expect to end the year roughly in line with prior year booking levels.

As you see on slide 15, our priorities for this year remain unchanged, and they're similarly focused on driving increased shareholder value. Our first priority is disciplined revenue growth, with a focus on a diversified mix of customers and regions. By continuously optimizing our operating footprint, we're able to deliver consistently across the globe, on a cost effective basis.

We recognize how critical the mega trends of safe, green and connected are to the industry, and we provide our customers with technologies that offer solutions to both the issues and the opportunities that these trends create. Our cost structure is truly best in class which provides significant margin expansion opportunity. And is exemplified by the 60 basis points of margin expansion that we delivered this past quarter.

Finally, we have proven our commitment to deploy capital in a very disciplined manner. Year-to-date we've returned roughly $900 million of capital to shareholders, through share repurchases and dividends. And have announced the two M&A transactions that I mentioned earlier.

So in summary, we remain focused on the priorities that we are confident will drive increased shareholder value. And with that, I will turn the call over to Mark to cover the numbers. Mark?

Thanks, Kevin. And thank you, Rod, for the introduction.

I'll begin by covering our third quarter results. Then provide updated full-year guidance.

Consistent with prior earnings calls, today's review of our actual and forecasted financial results, exclude restructuring and other nonrecurring items. A reconciliation between GAAP and non-GAAP numbers are included in the back of this presentation and the press release.

Slide 17 provides a snapshot of our third quarter financial performance. Revenue increased over 3% to $4.1 billion. Operating income increased to $468 million and operating margins expanded 60 basis points to 11.3%. Earnings per share increased roughly 20% to $1.16, and operating cash flow increased over 25%.

Moving to slide 18, I will review third quarter revenue in more detail. As mentioned, reported revenue increased over 3% to $4.1 billion, price downs of 1.6% represented $63 million headwind year-over-year, changes in foreign exchange rates and commodity prices largely offset. Volume growth was $189 million, adding 5% to growth.

Regionally, European revenues came in as expected with solid growth in all segments with the exception of Electrical Architecture due to the timing of the roll-off and roll-on of vehicle programs that we discussed previously.

North American revenues increased near 6% driven by strong growth in the Electrical Architecture and Thermal segments. Revenue growth in Asia remained strong at roughly 9%. Revenues in South America declined 20%, which was more than our earlier expectations, reflecting ongoing weakness in the region.

Slide 19 walks over the year-over-year increase in operating income to $468 million, or roughly three times revenue growth. Strong material and manufacturing performance more than offset the impact of the gain on asset sale recognized last year, resulting in operating margin expansion of 60 basis points. Slide 20 covers our segment results.

Electrical Architecture's adjusted revenue totaled $2 billion, up 3% year-over-year, driven by continued strong growth in North America and Asia. This growth was partially offset by lower revenues in Europe and South America, on economic weakness and program timing.

Segment operating income increased to $254 million, representing 12.7% operating margins, flat from the prior year, due in part to a one-time gain on an asset sale in the third quarter of last year. Revenue in our Powertrain segment was over $1.1 billion, up over 6% on the launch of new diesel and GDI programs.

Segment operating income increased to $118 million and operating margins increased 140 basis points to 10.4%. The result of flow-through on sales growth and solid operating performance.

In Electronics and Safety revenue totaled $696 million, a 1% decrease from the prior period, the result of lower revenues in South America, and the continued rationalization of our reception systems and Megatronic's product portfolios. Segment operating income totaled $84 million, and operating margins increased 60 basis points on strong productivity.

Thermal revenues increased 7% to $389 million, driven by strong growth in all regions but South America. Thermal operating income was $12 million, and operating margins increased 170 basis points, over the prior year.

Turning to slide 21, earnings per share increased 20%, to $1.16, driven primarily by increased operating earnings and to a lesser extent a reduction in the effective tax rate and a lower share count.

Moving to slide 22. We continue to maintain a strong balance sheet. Cash decreased to $1 billion, reflecting normal seasonal investment and working capital, the timing of capital expenditures for growth, and roughly $900 million of share repurchases and dividends. Debt totaled under $2.5 billion and net debt $1.4 billion, representing a net debt to EBITDA ratio of 0.6 times.

Slide 23 covers assumptions underlying our 2014 guidance. As Rod discussed, we are forecasting global vehicle production of approximately 91 million units, a 3% increase in global production.

Looking at our forecast by region, in North America our guidance assumes a 5% increase in production. We are forecasting European production to increase 2%. In China, we anticipate production growth of 9%. And in South America, we are forecasting a 17% decline in production, based on continued economic weakness.

In light of the weakness in this market, restructuring initiatives are ongoing to further consolidate our footprint. For the quarter, we are forecasting global vehicle production 1% to 2% over last year.

Turning to slide 24 to discuss our 2014 guidance. We have adjusted our full-year revenue range to reflect a weaker Euro, weak economic fundamentals in South America and program timing. Our outlook for the operating income remains unchanged at $2 billion to $2.05 billion, on the strength of our operating model and our organization's ability to deliver strong operating leverage.

For the full-year, we expect record EBITDA and operating margins of 15.2% and 11.8%, respectively. We have raised the lower end of our EPS guidance to $5 to $5.10 on the strength of year-to-date earnings and assuming a 17% effective tax rate and share count of 302 million.

Cash flows before financing is also unchanged, and expected to total roughly $1.1 billion, with capital expenditures projected to be $800 million.

With that, we would like to open up the call to questions.

(Operator Instructions)

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

Good morning, everybody.

Good morning, Rod.

A couple questions on the margins. One is just if you can give us a little bit more color on, in your bridge, the performance of $43 million, compared with pricing of $63 million. You had mentioned that there'd be some spending this year, and I'm assuming that's related to -- the disparity between the two numbers was spending. And just more broadly, what are the levers that you're pulling to achieve basically similar EBITs through your prior guidance and actually better margin performance, despite slightly lower revenue than previously expected?

And do you have a second one, Rod? Or we'll handle it with a follow up. So why don't I start.

As you walk through our overall results on a year-over-year basis, and you take a look at performance versus price downs. I think we talk about roughly $43 million of performance on a year-over-year basis, that is net of some incremental investment in IT and engineering. We did throttle that back somewhat, as we talked about previously, in light of the softer volumes during the quarter, softer revenues during the quarter. On a year-over-year basis, also there's roughly $10 million to $15 million, Mark mentioned the one time gain on an asset sale in the prior period, within our EA divisions. As well as a commercial settlement that was worth about $10 million. So when you net out those two, you effectively offset price downs.

The commercial settlement was this year, $10 million?

No. That would've been the prior period. I'm sorry. The third quarter of last year. Both were in the third quarter of last year.

All right. And just two other things. One is it looks like you're anticipating some acceleration in organic growth here, towards the end of the year, I think to hit your guidance, organic growth would need to accelerate to 5% to 5.5%, something like that. And it was in the 3%s last quarter and this quarter. So maybe you can talk a little bit about what is coming in here? And any updates on acquisitions or divestitures that you might be contemplating?

Sure. So the first with respect to acceleration of growth is going to come primarily from Powertrain. You'll see continued very strong growth in Powertrain in the fourth quarter. That will be the result of the continued launch of some heavy duty diesel programs that we've talked about previously, as well as some of the gas direct injection programs. Continued solid growth in our Thermal segment, in line with what we reported for the third quarter.

As we talked about previously, E/EA will be slower growth in the back half of this year, versus what it was in the first half of the year, so that trend will continue. But that will be more than offset by the results of Powertrain and Thermal. With respect to M&A environment, we announced the two, this past quarter, both will be closed in the fourth quarter. I think as we've articulated previously, at a couple of investor events, we have a very long pipeline of opportunities that we continue to pursue. I'd like to say we'd like to be in a position where there's at some point next year we have the opportunity to announce some interesting opportunities.

Divestitures, anything?

We don't -- we don't comment on those sorts of matters, consistent with prior practice.

Hey Rod, in order to answer the one question of --and it's a very good one, how do we expand margins in an environment where the revenue wasn't climbing exactly as we would all have liked it? I would just like to say that there's nothing exotic, just a continuation of high execution across multi-fronts, from manufacturing, to engineering. And the continued productivity and efficiency and effectiveness of the organization.

And I've said it before and I'll say it again here. I mean we've come a long way as a Company in terms of our ability to perform in multiple areas. But throughout the travels, I continue to see areas where we can do better. And what we're doing is capitalizing on those areas. So nothing exotic. No one-time kind of things. It's just a continued execution with the team throwing multiple levers at the business and doing a great job at it.

Thank you.

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

Good morning. Want to follow up on a couple of questions around growth. First a micro, kind of housekeeping one and then a more strategic question. On the housekeeping one, it looks like you actually outgrew Europe this quarter. You were up 80 basis point, 90 basis points despite light vehicle production down and commercial vehicle production down significantly. Can you maybe give some color on what drove that outperformance and why it's kind of kicking in above production finally?

Sure, Brian. Why don't I start at least. Really, that's primarily driven by Powertrain. It's primarily driven by the launch of those heavy duty deal programs that we've been talking about.

Okay. And those were not yet in full ramp-up mode? Or they're not ramped fully?

Yes. Those were not yet in full ramp-up mode. They're ramping up now.

So if we want confidence in what you're saying about Powertrain, you can see it in the European outperformance this quarter.

Definitely. We see it in the European outperformance. I will tell you I think as we've discussed previously, the commercial vehicle market where that heavy duty diesel business plays, especially in Europe, is a market that's not -- that's playing out not quite as strong as what our original outlook was, at the beginning of the year. However, having said that, we're going to end up with north of 20% growth in that product line, as a result of those programs.

And the broader question is really how do you think about revenue versus margins versus bottom line? And maybe two particular kind of categories where it might come up. The first is just in general, as you look at business, look at the ROIC, are you finding that you want to pass on more bids or not follow where the bidding is going down, more than maybe you were a couple of years ago? And is that affecting the revenue growth outline, outlook?

The second one is more, as we talk to the OEMs, they'll talk a lot about value partnering and getting together and trying to think about ways to drive down input costs without sacrificing supplier margins or the kind of functionality of the OEM. So for example, Lear this morning talked about working with customers to take feet and yards of wires out of a car by moving to smarter junction boxes. JCI has talked about putting in cheaper, but better higher margin seat frames to help their clients lower the cost of seating. So how much of that kind of work is going on with your customers and how does that effect the revenue versus margin versus trade-off?

Brian, why don't I take the first, and then Rod can comment on the second. As we said in the past, we're very focused on return on capital and very cognizant of the fact that we operate in a business that has some element of cyclicality there -- cyclicality in it. And therefore, as a result, focused on margin. I think it's safe to say if you look at our bookings levels over the last couple of years, and what we forecast to book this year, roughly $26 billion, at the end of the day, I wouldn't say we are doing anything new.

I think we continue to be very disciplined in terms of the opportunities that we pursue and we quote on. And we have very disciplined thresholds with respect to the metrics that programs need to meet. So I would say it's been relatively consistent. Rod, you should comment on it.

Yes, and I think the partnering with OEs around the world has improved dramatically over the last several years, in terms of taking pure costs out and creating a win-win. But as we approach that line of scrimmage, we've got multiple focuses, as Kevin talked about. Return on invested capital. And margin. But we also are very focused on making sure that it's not just margin growth, but it's also the literal number gets bigger, in terms of EBITDA, OI, whatever.

And then there's one more aspect, Brian, we're focused on is the rotation. If you look at the bookings, we're very focused on rotating the Company to its final state, which would be a balance of where Asia would be bigger. And match up roughly at least a third when it matched up to the other two regions, the main regions of North America and Europe. So there's the financial aspect, and there's the diversification aspect as we look at bookings. Where we want to book, who we want to book with. And above all, making sure the financials stay in play. Bottom line though is that there's -- the partnerships have improved dramatically and we're working together to design cost out [with] and making it a win-win.

Okay, thanks.

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

Good morning, guys.

Good morning.

More recently, there's been a lot of rumblings from automakers here in North America that there's been some capacity shortages from suppliers. And I'm just curious whether you're seeing that in your own business or any of the suppliers you're dealing with? Or are you seeing that in adjacent suppliers that might end up disrupting production and maybe even creating some waves across to your business?

No, we're not seeing that at all.

Okay. That's good. A second question, if you were to sell any part of your business and maybe raise $500 million to $1 billion, where do you think you would take those proceeds and allocate them?

Why don't I start. Listen, John, at the end of the day, with respect to cash, right, consistent with what we've said in the past, our objectives for deploying free cash flow are one, internal to the business, to generate incremental growth. Two, value accretive M&A transactions. And to the extent there aren't attractive opportunities to do either of those, we'll return that cash to shareholders, either via increased dividends, or share repurchases.

So it would very much go through the same funnel as usual?

Yes.

And then just lastly, as we look at slide 19, the middle bar there, foreign exchange versus commodities. I was just curious, what kind of benefit you got from commodities in the quarter? I thought we were looking at mostly sort of pass-through and indexing and that seems like that was a pretty material offset to the foreign exchange headwinds. I'm just trying to understand what the magnitude of each of those two components is and what the benefit from commodities was?

At the end of the day, it's Kevin, it's really not a lot. It is primarily copper. There's a little bit of aluminum. But net-net, John, it's actually very small number.

Okay. That's very helpful. Thank you.

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

Good morning.

Good morning.

Just a question on the revenue guidance, I think the range that you have now is a little bit higher than what you have typically going into a quarter. Can you maybe talk about what could cause you to be at the low end or high end of range? And maybe update us on the after-market of the business within that as well.

Sure. Let me start with the after-market business. The after-market business, you'll see again accelerated growth in the back half of this year, principally in Q4, as a result of improvements in the European market, as well as the launch of some new programs here in North America.

With respect to what affects our overall guidance and the range of our overall guidance, it's really, it could be a couple of things. One, FX. You've seen a lot of volatility in and around the euro and some of the other currencies. That's translational for us. And then with respect to some variability's potentially in the market.

South America is, as Mark had said, ended up a weaker market in the third quarter than what we expected it to be. We continue to expect it to be relatively weak, so there's possibly some volatility there. I would tell you, I think those are the two -- really the two big things, Itay.

That's helpful. And then as we think about 2015, I think your previous backlog number is about $1.2 billion. How do you feel about that today kind of looking at the markets? Do we dial that back a little bit perhaps a little but for FX and market changes? Any update you can provide on how you feel about that backlog number.

Listen, I would say relative to how this year is shaping out from a revenue standpoint, that number likely needs to be adjusted, certainly for FX, given where rates are today. And maybe a little bit as it relates to program volumes, but it's not a significant amount.

Great. That's very helpful. Thanks so much, guys.

Sure.

Your next question comes from the line of Ravi Shanker from Morgan Stanley. Your line is open.

Thanks, good morning, everyone. On the Unwired acquisition, the product sounds like an infotainment hardware product, but you guys are categorizing it and putting it within electrical because you see that as more of a connector type business -- connector type margins. A, can you confirm if that is the case? And also, within your E&S, business, if you look at your incremental R&D spending, how much of that is going to AS versus infotainment?

Why don't I take the first, Rod, and you can come in on the second. With respect to where that business will reside, you're right, Ravi, it'll be in the electrical architecture business and the connector business. We have a product portfolio that actually is complimentary with what they do. And would make sense to actually put that business into that segment. With respect to R&D spend, active safety versus infotainment?

I think when you look at active safety, we'll be somewhere in the low double-digit spend on R&D.

Got it. And you recently said that within your current revenue base, about $0.5 billion comes from software, and you expect that to grow about three times within the next five years to six years. That's a fairly largish number. How much visibility do you have on that growth? And is it linear from this point? Or do you think it's more back end loaded?

Well, I'll take the first shot. Listen, I think there's probably a bit more of it being back-end loaded, given the pace of new business bookings in around AS. Ravi, as we've said, last year, we booked $1 billion of new business. That was more than the prior three years combined. This year we will book well over $1 billion in active safety business. It will take a couple years for that business to effectively roll on. So based on where we sit today, I think the real ramp-up is a couple years out.

And I think the other area where [code] comes into play is in the electrification area. And as you know that space is a great space, and we think it does a lot for Delphi's both top and bottom line. But a lot of that is also dependent on some of the market factors, oil pricing and customer acceptance, et cetera, Ravi. So a little bit of the linear thing sort of depends on some of the macro issues but that's another high code area for us in terms of software.

Understood. And just lastly, the Thermal business has seen some pretty good margin improvement in the last couple of quarters. There's been some recent speculation that you're potentially looking at strategic options for that business. Can you confirm that the margin improvement is kinds of core performance gains? And not, just putting off some of the costs because the business is potentially up for sale?

Well, listen, we're not going to comment on the speculation. With respect to the business, as we've told you, it's a great business. We had real opportunities to improve profitability for some operating initiative, cost reduction initiatives, restructuring initiatives, and the benefit of volume. And all that is playing out. You're going to continue to see strong performance, strong results, in that business, for the balance of this year, and next year.

And Ravi remember, we did say that we felt the business, it's proper placed, in terms of margin and EBITDA, would be double digits, low double digits. And this is just the move toward that destination.

Very good. Thank you.

Your next question comes from the line of Patrick Archambault from Goldman Sachs. Your line is open.

Thank you very much. I guess sort of a shorter term and longer term question. First, just on the guidance revision, sorry if you guys said this already, but how much -- you kept the EBITDA, or the EBIT, excuse me, unchanged and EPS up of course. There was a little nudge down to revenue, which you offset with better incrementals. On the revenue side, how much of that tweak was FX or end market, and how much of it was other things?

If you look at the tweak, Patrick, from the midpoint, there's [100 to 125] that is FX related. The balance would be a mix of E&S, a little bit softer than what we had originally had going into the year. Commercial vehicle, although again as I said our revenues being extremely strong, not being quite as strong as originally anticipated. And then the balance would be just markets in general, places like South America, being softer.

Understood. I guess longer term, can we just, taking a step back beyond this quarter, can we just revisit the questions of margins? Because there's been a number of themes on business mix, and stuff like that, that I think are important. Getting to that, I believe it is 16%, in 2016 that you've highlighted. How much of that is some of the business mix shift that's been kind of discussed in this call? How much of it is leverage and structural costs, that sort of stuff?

Listen, some of it is business mix. It's, for example the benefits of the MVL transaction and increased connector content in our business. A lot of it as Rod had said to the earlier question, is just continuing to execute extremely well. I think if you look at our guidance and you measure the midpoint, we'll end up at roughly 15.3% EBITDA margins this year. I'd say that's actually a bit ahead of the pace that we would have expected a year or so ago. And I think in light of that, we have a high, continued high level of confidence to deliver on the 16% EBITDA margins in 2016.

Okay. Great. Helpful color. Thanks a lot, guys.

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

Hi, thanks for taking my question. You've mentioned before that the Thermal business introduced you to some new OEMs that you've since had success on your other wears, too. Where do you think you are along in that process? Does Thermal continue to open new doors for you or have you effectively entered those doors already?

I'll be honest, it actually has played out like we said. It's still in the infant stages, but we have seen a lot of great drafting off of it.

Great. And then you have a very well laid out and clearly communicated capital allocations strategy, right, one of the best out there, regarding CapEx, growth-related R&D, dividends, repurchase and M&A. Of course, that communicated plan is predicated upon your view of operating cash flow for the forecast window, so this question comes at it from a little bit different of an angle. If you did happen to stumble into some sort of additional capital not accounted for in your current plan, say nonoperating related cash inflow, how should investors think about what you might do with that?

Presumably it might not need to go toward the CapEx or growth-related R&D because that is the first thing that you'd already sufficiently funded in the current plan. So do you think you would look to lean more toward return to shareholders or maybe acquisition that raises your growth and margin profile? Thanks.

Listen, I think it's a version of the question asked earlier. I think based on where we sit here today, I think it's fair to say you're right, it probably does not get -- not probably, it doesn't get plowed back into the business. It's either used to pursue value accretive M&A opportunities or to buy back stock. It's one or the other. So depending on the attractiveness of those two alternatives we decide how best to deploy the capital.

Okay. That's helpful. Congrats on the quarter. Good to see the margin traction. Thanks.

Thank you.

Your next question comes from the line of Daniel Galves from Credit Suisse. Your line is open.

Good morning, guys.

Good morning.

Wanted to ask about China. There's been some concern over kind of the pace of volume. It seems like your revenue growth in the quarter was basically in line with industry production, where as usually it's a little bit better. Just talk about kind of what we should be expecting in the next couple of quarters, in terms of what you're seeing in the production schedules.

And then if you could remind us more medium term, what's baked into your kind of medium term targets for China industry growth, and where do you see your revenue growth kind of above that?

Look, let's go back in history, though. I mean there's been a lot of naysayers over the past three years on China that it had reached its peak and things were going to begin to slow. The only part that we agreed with is that, particularly in our industry, is that it would slow from the mid double digits, down into the high single digits, simply because the market had gotten so big. At 20 million units going to 30 million units by 2018.

And so as we've looked at it, and we'll talk more about it at the beginning of the year, when we talk about 2015 and beyond, we still see China in the high single digit growth areas. And that over the long term, we will see us outperform that market. And so we're very positive, we're robust on it. When you look at safety and connected these are the very trends that will catch on fire in China.

So we're perfectly positioned today and even more in the future as the consumer and the government begins to plow deeply into the spaces that we already occupy. And so our forecast of doubling the revenue of China that we gave you back in March, I believe we said we would double by 2017, we still maintain we will do that.

And listen, if I can kind of overlay on a nearer term comment. With respect to our growth relative to the China market, our view is we grew a point or so over market this quarter. To give more specific color, our revenue was impacted by some new vehicle change-over programs that were going on with some of the multinational companies there. Where they were ramping down production of a couple of platforms but we'll begin ramping up some new platforms in Q4. So we'll get the benefit of that, and you'll see an acceleration of growth in China in the fourth quarter.

And we'll come back to you. I need to go check something. But I also think that there's some scrappage of the lower end vehicles, too, that might impact some of the numbers. But in our space, we're pleased with what happened. And when we look into our schedules we're pretty confident that we see occurring is going to continue to occur.

Okay, great. And then kind of a similar question, on Electrical Architecture. Fantastic performing business over the last couple of years. Revenue growth slowing. How long should we expect that to kind of persist? And as you kind of look to the quoting activity around this business, do you still see substantial content growth per vehicle in this segment over time?

With respect to the trend in revenues and Rod, you can comment on the trend in electric content. As we said, on our last earnings call, growth rate of the [E/EA] segment was slow in the back half of this year. Would begin to pick up from a growth rate standpoint early next year but really accelerate in the back half. That's primarily related to the roll-off of programs or timing of the roll-off of programs, principally in Europe. And then the roll-on of new programs.

And in terms of the market dynamics, it's a great space to be in. Continued content growth on the vehicle side drives additional requirements of both connectors and well as wiring requirements on our side. And so this business is the premier business in its space. We continue to make sure it stays that way.

And when you look at the bookings that this organization is bringing to launch, even as we speak, it's diversified, geographically, customer-base wise, margin expansion continues to occur. We're very pleased with this portion of the Company and we expect it to be a pillar of the Company going forward.

Okay. Thanks very much.

Your next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is open.

Thanks for taking my question. Rodney, you started talking about some of this, but just given that you are -- you guys are so well positioned in China, really a leader there. I was wondering if you could comment on a little bit more on some of the bigger picture issues going on there, maybe? You mentioned the scrappage, I know there was a program put in place earlier this year, what -- an update, what you see going on there? Anything on some of the antitrust work that's been done there? Or even more recently, a certain supplier calling out some negative mix impacts, specifically with some content issues on high, on more luxury type vehicles.

Well, first of all, let me just start with -- I can't answer what other people have said, other than I can say is China, like every other region in the world, you got to know what you're doing, otherwise your money's not going to show up. So one our longevity there is a big issue, it's a big plus. We're approaching our third decade of operation in that space. So and we have great partners. We're in control of our own destiny. As you know we own and operate all of our businesses, 100% of majority control. We have excellent connections with the proper government officials.

What we're seeing, let's just talk about the marketplace a little bit, is a rapid evolution of the Chinese automobile market to a very European and/or Western kind of standard. Both in terms of what the customer prefers -- and now that the government is beginning to move in, particularly on safety, which is still in the early stages, but environmental, particularly emissions and fuel efficiency, is front and center. And so you may have recently seen in the newspaper where they were -- they've committed to deeply enforce emissions and fuel efficiencies with all of the OEs.

And so what we have said to you, in the past, has proven to be true, and it looks like it's going to accelerate. Is that the space of green and safety will definitely accelerate from the government side, as it begins to focus on these issues. So very positive environment. And the consumer there, is very sophisticated, very demanding, as a result the content of the vehicles are going to be right in line with what we do, too. So very positive environment, both legislative-wise, as well as consumer preference-wise.

Okay. And then maybe just a little bit more on the business and going back to Thermal, obviously good traction. I think earlier this year you mentioned you could still, you could exit at an operating margin of something close to 5%. Is that still the plan?

Yes, that would still be the plan.

Okay. Thanks a lot, guys.

Your next question comes from the line of David Lim from Wells Fargo Securities. Your line is open.

Good morning, everybody.

Good morning, David.

When you look at your manufacturing capability and capacity, how much additional flow-through can you drive? You mentioned earlier that there are opportunities and wouldn't that improvement translate into stronger operating leverage for you guys?

Yes -- you're talking about incrementals?

Yes, exactly. Correct.

Listen, I think consistent with what we've said in the past, from an incremental EBITDA margin standpoint, we'd steer you guys toward using kind of 20% incremental EBITDA margins to forecast profit growth in the future on revenue growth. I want to make sure I answered your question.

That answers the seconds part. I was actually wondering in your current manufacturing footprint, with the efficiencies that you guys could probably isolate, where can we take that per let's say per plant, for example?

You mean could we get better than the 20%?

Yes, I mean because you're driving with improvement, where you could improve let's say the flow-through on your plant, I would guess you could probably get above that 20% if you were able to get the flow-through.

Look, I think there's two things. One, just getting better. And a little bit is the mix. As you know, our businesses are a little different in terms of their backward integration models. And so Powertrain would have higher incrementals than perhaps like in E&S.

And so I will say this. I mean I think what Kevin said in terms of sticking in your model, I think you should go with the 20%. But just trust that we're always trying to do better, and when we actually feel better than the 20%, we will tell you.

Got you. And my final question is, on the FX rate, what are you anticipating for Q4? And can we get sort of a preliminary read for 2015 what you're thinking?

Yes I think FX rate for the fourth quarter we're using is about [129] at this point in time. Visibility going forward from a planning standpoint, we'll probably use a rate roughly in line with that.

Great. Thank you very much.

Your next question comes from the line of Brett Hoselton from KeyBanc. Your line is open.

Good morning, gentlemen.

Good morning.

First simple question is I think in the investment community we're having a little bit of a difficult time reconciling that new business revenue growth with your revenue performance. I was hoping, Kevin, you might be able to kind of walk through that.

I mean as I look at the quarter, if I were to say the production was up maybe 2% in the quarter, and if you 5% new business revenue growth and 1.5% price give-backs, I would have kind of thought that you would have had maybe 5.5% revenue growth. How do I kind of think about maybe the other moving pieces or parts that gets us down to like 3.2%?

I think at the end of the day, that new business is an attempt to simplify something that is highly complex. We're on multiple platforms with multiple OEs across multiple regions, and it does not take into account the effect of mix. I think if you do the simple math, you're absolutely right. But you can't take into account the simple math.

I guess if I were to take a step back and look at net new business, for 2014, relative to what we originally communicated, I think we said roughly $800 million in net new business was our forecast. 2014, in light of South America, in light of a little bit softer commercial vehicle market, I'd have to say net new business would be a bit shy of that. I don't have an exact number, but wouldn't quite equate to the $800 million.

Very good answer. Thank you very much. And then Rodney, I know you're not retired yet, but since you've announced it, congratulations.

Thank you.

Very good job with you and your team at this Company. You guys have really done an outstanding job. So congratulations.

My question here is, Kevin, how do we think about the potential changes in direction at the Company, as Rodney steps down and you step into that role? Do you see any material or significant changes taking place? Or is this more along the lines of we're on a good road, we're just going to kind of keep the course?

We're on a great -- I mean two things. One we're on a great road and we continue the course. I think two, we got to remind you, I've been here, it's hard to believe 4.5 years. So I've been working with Rod in support of developing and executing the regular ongoing refinement of the strategy, and it's worked extremely well and there's no reason to change it.

Excellent. Thank you very much, gentlemen.

Have a good day.

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

Thanks for taking my questions. I only have a couple left. I apologize if I missed this. Any color on the revenue impact from the recent acquisitions? Is that going to be material to next year?

No. For next year, yes, for next year we'll be north of $100 million.

For both together?

For both together, yes. Excuse me.

And the margins are similar to your current business?

Margins are in line with connector-like margins.

And then you confirmed that you're looking for a 5% margin in Thermal in Q4. What are the drivers that quarter over quarter that are going to get you there? Because I think you're only at 3.1% in this quarter.

The fourth quarter, the third quarter, as you know, from a seasonal standpoint, have you more startups and shutdowns in North America and Europe. So you just naturally run less efficient. And I think if you look across all of our segments, with the exception of quite frankly E&S, that is the case. So you'll see the normal cadence of stable volume, stable production in fourth quarter that we'll benefit from. And then two it's just the ongoing benefit associated with the cost improvements and productivity initiatives that they're executing.

And then last question, on E&S, you mentioned Mechatronic is being a headwind again. When does that roll-off complete? Is that mostly done? Or is there some, a couple quarters stuff?

By and large it rolls-off in the back half of 2015. It is about a 2 point head wind to E&S growth rate today. It'll continue to be about a 2 point headwind in the back half of 2015. But then it gets to a point where it's at a level and the roll-off is such that's less pronounced.

There are no further questions at this time. Presenters, I turn the call back to you.

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

That concludes Delphi Q3 2014 earnings conference call. Thank you for joining. You may now disconnect.