Aptiv PLC (APTV) 2015 Q3 法說會逐字稿

Good morning, my name is Calia, and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi third-quarter 2015 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Jessica Holscott, Treasurer and Vice President of Investor Relations of Delphi. Jessica, you may now begin your conference.

Thank you, Calia, and thank you 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 Investors section of the website.

Please see slide 2 for a disclosure on forward-looking statements, which we'll 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 Kevin Clark, Delphi's CEO & President, and Mark Murphy, our CFO. As seen on slide 3, Kevin will provide an operations update, as well as an overview of the quarter. And then Mark will cover the financial results and 2015 outlook in more detail.

With that, I would like to turn it over to Kevin.

Thanks, Jessica. Good morning, everyone, and thanks for joining us.

Before Mark gets into our financial results, as Jessica mentioned, I'd like to provide some color on our third quarter, as well as the outlook for the full year. Let's begin with the macro environment on slide 5.

Our full year vehicle production in North America remained solid, in line with our prior outlook. European vehicle production has continued to strengthen since our last earnings call.

The China market is weaker than what we forecasted when we last reported. At that point in time, we expected vehicle production in China to increase 4% for the full year.

We have a very flexible business model in China, which we [flexed] in response to the recent market softness. We've also taken action, including permanent headcount reductions and deferred investments to maintain a rightsize cost structure for the changing environment. Although growth has moderated, we remain very bullish on the China market.

Our current forecast for 2016 vehicle production growth is up about 4%. And we expect to continue to out pace market growth by roughly 8 to 10 points, driven by our technology portfolio that benefits from the trend toward increased vehicle content.

So overall, continued growth in North America and improving European market is expected to partially offset a softer market in China, and continued weakness in South America. In addition, lower raw material prices continue help counter a portion of the negative affect of the stronger dollar.

Now moving to the highlights from the third quarter on slide 6. We delivered strong financial results, revenue growth was 4 points over the underlying market.

Operating income totaled a record $470 million. We returned almost $500 million of cash to shareholders through share repurchases and dividends.

Our team did a great job executing on 207 program launches. That's actually a 30% increase over last year, positioning us for a continued acceleration of growth as we head into the fourth quarter as well as 2016.

In addition, during the quarter, we continued to realign our product portfolio to drive increased value through accretive acquisitions. That strengthen our competitive position, while exiting businesses that don't fit with our strategic and financial objectives.

We reached an agreement to acquire Control-Tec, a telematics-based data capture and analytics software Company. We closed on the sale of our interest in our thermal joint venture in Korea. And we expect to complete the sale of our thermal joint venture interest in China in the second quarter of next year. Lastly, we've made significant progress on the integration preparation for the HellermannTyton acquisition, which we expect to close at the end of the year.

Our full-year outlook is referenced on slide 7, and reflects the current macro environment. In summary, we're expecting revenue growth to increase to 6 points over market, operating margins to total 13%. EBITDA margins to reach 16.5%, and free cash flow of $1.1 billion, providing us with tremendous flexibility to drive shareholder value.

Now we're on track this year to launch approximately 1,100 new product programs across our entire product portfolio. Our new business bookings are expected to exceed 2014 levels, and we'll complete eight transactions that will drive increased shareholder value.

Moving to PACE award nominations on slide 8. We're very proud of the 17 PACE awards we've received to date, and were excited to tell you about three more Delphi technologies that have been named finalists for 2016. Winners will be announced in early April of next year.

The PACE award recognizes innovation and technology achievements in the automotive industry. And Delphi has received more nominations and more awards than any other Company in the industry.

For 2016, we received two nominations for our electrical architecture technologies, and a nomination for one of our electronics and safety technologies. Bringing us to a total of 59 PACE finalists. As I mentioned, that's more than any of our peers. It's third-party validation like this that reflects our ongoing commitment to provide safe, green and connected solutions to meet our customers challenges.

Moving to slide 9. Last month, we had the opportunity to spend time with our customers and technology partners at the Frankfurt Motor Show. The theme of the show was Mobility Connects, and no other theme could have been more top of mind for the industry.

The show was a great venue for exhibiting our portfolio of innovative active safety and automated driving technologies. It was also a great opportunity to align strategies on the subject of vehicle connectivity and mobility with our customers and our technology partners. We came away from the show confident in our ability to provide industry-leading technology that addressed the increased demand for vehicle connectivity, active safety and automated driving solutions.

Now the theme from the Frankfurt Motor Show is a great lead into slide 10. As you all know, the pace of change is accelerating in our industry. And as a result, the landscape has significantly changed over the last 10 years.

Our team spends a great deal of time in Silicon Valley. Partnering with customers, working with current and future technology partners, and meeting with government agencies. Doing everything we can to stay in tune with the changing environment.

As a result, we have a pretty clear line of sight on the impact technologies will have on the automotive industry. So to put in context, Delphi will ship 20 billion lines of code on a daily basis in 2015. In 2019, we expect this increase to 200 billion, which we expect will translate into almost a threefold increase in our software-related revenues to over $1.3 billion.

Now to support this pace of change, we're going to significantly increase our presence in Silicon Valley and other global technology hubs. We'll more than double the number of software and systems engineers we have today to over 8,000, and increase the number of technology partners to over 50. These actions will ensure that we are well-positioned to execute on the opportunities in the fast-growing connected car market.

As outlined on slide 11, our active safety business continues to be our fastest growing product line. During the third quarter, we booked over $300 million of active safety awards, bringing our year-to-date total to over $700 million. We're on track to reach over $1 billion of new business bookings in active safety for the third straight year in a row.

As a result of new program launches and increased penetration rates, revenues are expected to increase almost 60% year-over-year. That's roughly 40 points faster than the underlying market. To ensure that we remain ahead of the competition to deliver strong profitable revenue growth, we continue to invest in our active safety technology portfolio.

In addition to organic investments in our radar and vision technologies, we've also partnered with Quanergy, to bring low-cost solid state LiDAR to market. And as you know, we acquired Ottomatika, a leading provider of automated driving software.

At the upcoming consumer electronics show in January, we'll be showcasing some of our more recent technology developments. Including data capabilities and high-speed architectures that are the nervous system for making all of these electronics function at greater speeds. We'll also demonstrate our latest connected technologies, from 3-D clusters to a completely touchless cockpit to help reduce driver distraction.

Slide 12 covers new business bookings, which totaled $7 billion during the third quarter. Bringing our year-to-date total to $22 billion. That's $5 billion more than last year at this time, and putting us solidly on the path to exceed our prior-year bookings amount.

During the quarter, we had several conquest bookings. Including an infotainment award with a premium European OEM, a cluster award with a major commercial vehicle customer, and an electrical architecture award with Renault Nissan. The right set of the chart reflects the geographic mix of our year-to-date bookings, which continues to reflect a balancing of our revenues across regions.

Slide 13 highlights the pace of our acquisition, investment and divestiture activities. All intended to drive increased returns. Today we announced an agreement to acquire Control-Tec. I'll touch more this transaction on the next slide.

In addition, during the third quarter, we moved closer to completing the sale of the last two joint ventures from our thermal business. And as I mentioned, the HellermannTyton acquisition has been approved by their shareholders and is on track to close by the end of the year.

Slide 14 provides an overview of the Control-Tec transaction. The acquisition will be funded with cash, and is expected to close during the fourth quarter.

Control-Tec is a telematics data collection management and analytics company. Focused on remote, real-time vehicle test data via a secure cloud-based system. The Company offers proprietary software that delivers highly customized data solutions to OEMs that significantly reduce testing cycles and product programs.

Immediate synergies between Control-Tec and Delphi are related to leveraging the existing technology into new customers, and applying Control-Tec software to new vehicle applications including ADAS. We're very excited about this acquisition which enhances our offering of scalable software service solutions.

So summarizing on slide 15. We had another record quarter, marked by solid operating performance which we translated into strong revenue and earnings growth. We expect to deliver strong operating performance during the balance of the year, with an acceleration of revenue growth and continued strong margin expansion and cash flow generation.

We've continued to be disciplined in our allocation of capital, using our free cash flow generation to both fund acquisitions and return cash to shareholders. And we continue to execute our plan for portfolio modifications that accelerate earnings growth and increase returns.

I'll now turn the call over to Mark for a more detailed look at our third quarter financial results. Mark?

Thanks, Kevin, and good morning, everyone. Consistent with prior calls, today's review of our actual and forecasted financials excludes restructuring and other special items. And will address the continuing operations at Delphi.

A reconciliation between GAAP and non-GAAP is included at the back of this presentation in the press release. Slide 17 provides a snapshot of our third-quarter financial performance.

Reported revenue totaled $3.6 billion, up 6% on an adjusted basis. Third-quarter operating income increased to a record $470 million. Operating margins expanded 110 basis points year over year to 12.9%.

Earnings per share were $1.28, up nearly 20%, excluding the effects of currency and commodities. During the quarter, we returned $477 million to shareholders through dividends and share repurchases.

Slide 18 provides greater detail on revenue. Revenue of $3.6 billion reflects $317 million of year-over-year currency and commodity headwinds. Mostly offset by strong, underlying volume growth.

In Europe, adjusted revenue increased 6%. Growth in Europe was driven by strong volume growth in electrical architecture. With program launches across all segments, we project Europe growth to accelerate in the fourth quarter.

North America adjusted revenue increased 9% or 4 points over market. Primarily driven by our Powertrain and Electrical Architecture businesses.

Growth in China was 3% or 11 points over market, and driven by electrical architecture and infotainment. South America performed in line with the market, but was down on continued underlying market weakness.

Slide 19 [walks] the third-quarter year-over-year change in operating income to a record $470 million, up 11%, excluding currency and commodity impacts. Operating margins expanded 110 basis point Europe year over year to 12.9%. Primarily due to volume leverage and continue productivity gains.

Slide 20 covers our segments. On an adjusted basis, Electrical Architectures revenue increased 6%, or 4 points over market, with growth in North America, Europe, and Asia. Powertrain program launches drove growth of 4%, with especially strong growth in North America.

Electronics and Safety revenue increased 6% or 4 points over market. With product launches in active safety and infotainment, we expect strong Electronics and Safety growth in the fourth quarter.

Operating margins expanded across all segments on volume growth and operating performance. Electrical Architecture expanded margins 100 basis points to 13.5%, Powertrain, 150 basis points to 11.7%, and Electronics and Safety, 70 basis points to 12.3%.

Turning to slide 21, operating income growth and share repurchases drove EPS growth of 13% for the period. Excluding the effects of currency and commodities, earnings per share grew nearly 20%.

Slide 22 provides our full-year guidance assumptions. We've reduced our full-year market outlook to reflect weaker China and South America markets, partially offset by stronger Europe production.

Our guidance maintains EUR1.10 rate. We've lowered renminbi and [real] rates to reflect current market conditions.

Our full-year guidance is on slide 23. Our latest revenue outlook is driven primarily by weaker China and currency FX. Our operating income guidance reflects the lower volumes and currency FX, partially offset by strong operating performance. Our EPS range is $5.15 to $5.25, with a projected tax rate of 16%.

In summary, Delphi had a record third quarter in the face of significant currency and regional volume headwinds. In the fourth quarter, we project growth to strengthen on program launches and an improving China market. Our full-year financial outlook reflects expanding growth over market, and continued strong operating performance driving solid earnings growth and cash flow generation.

With that, I will turn it over to Kevin for some final thoughts.

Thanks, Mark. Before we open up the lines for questions, I would like to make a few closing comments on 2015.

Taking a step back, we've delivered tremendous operating performance in what ended up being a much more volatile market than we had originally expected. Both from an industry volume, as well as an FX standpoint, as Mark alluded to.

Our performance in this environment validates the robustness of our business model, which is reflected in the numbers Mark just reviewed with you. 6 points of growth over market for the full year. 60 basis points of margin expansion, and roughly $1.5 billion of cash which we'll ultimately return to shareholders throughout the year. We've also made tremendous progress repositioning our product portfolio to further drive shareholder value.

So with that as a backdrop and what we believe will be an improving macro environment going forward, we strongly believe that we are well positioned for continued strong financial performance into 2016.

Operator, we'll now open up the line for questions.

(Operator Instructions)

Rod Lache, Deutsche Bank.

I had a couple of questions on the guidance. (technical difficulty).

(Operator Instructions)

John Murphy, Bank of America.

The first question, and sorry to jump over you here, Rod. But the first question is, as we think about 2016, and I know you guys aren't laying out guidance yet, and the backlog beyond that. Is there anything that is changing here in the short run that would change your view of margins or your backlog going forward?

Let's start with margins. We'll end the year with 16.5% EBITDA margins, 13% operating margins. So strong performance.

Operating performance and margin expansion on a year-over-year basis in a market where you look at industry volume growth, it was relatively muted given the impact of China. As you look at go forward -- we're going through our planning process right now. As we look at industry volumes, net net probably pretty consistent with what we talked about at our investor day a year ago.

We'd expect industry volumes to be up probably 2% to 3% on a year-over-year basis. Obviously, China a little bit slower. If we were to call the wall today, China vehicle production, like I said, up about 4% on a year-over-year basis.

And as we've implied in our fourth-quarter guidance and heading into next year, you're going to see a continued ramp up in growth over market. Fourth-quarter guidance has year-over-year revenue growth up 7.5% on our outlook for vehicle production of flat. Growth in vehicle production.

So tremendous growth on a year-over-year basis. So hopefully that answers your question.

Yes, that's very helpful. And then just a second question, you alluded to some deferred investment in China, and I notice the CapEx guidance went down by about $50 million. Does that signal anything about what's going on in China and your capital allocation strategy, or is that really just timing?

Listen, we're real optimistic. We're still optimistic about China. For the third quarter, it was significantly weaker than what we originally estimated.

If you recall, our outlook was China up about 3.5% or 4% in the third quarter, and it ended up actually being down 9%. So it was very fluid. For the fourth quarter, our original outlook was China volume up roughly 5%, the current outlook is a basically down 1 point.

However, when we look at sequentially third to fourth quarter, we are starting to see a pickup in orders. A strengthening in the market, sequential growth in vehicle production from Q3 to Q4 based on current outlook is about up 30%. So we are seeing an acceleration, although down on a year-over-year basis.

And as we head into next year, as I said, we're expecting vehicle production to grow 4%. And I think what's important as you've heard us articulate before, we're confident that will continue to grow 8 to 10 points over vehicle production rates in China, given the product portfolios of product areas that we sit in. Powertrain, Electronics and Safety, and Electrical Architecture.

That's great. And then just lastly on active safety and the software business. If you could just give us some guidance on how fast active safety rolls onto the vehicle once it's booked.

How fast do these launches come? Are they the regular cadence versus your launches or do -- or your business wins or do they come faster?

And then also as we look at that and software, it does seem like both active safety and software will have much higher margins than what you're looking at on corporate averages. If you could give us some directional guidance, or even actual numbers around the margins on those businesses.

So active safety, the rollout of active safety is consistent with other E&S businesses, usually two to maybe three years. So the E&S business, whether it's infotainment, active safety tends to roll on faster or sooner than businesses like our Powertrain business. So it tends to be at the shorter end.

Now, there's some variability by program, as you can imagine. As we said, active safety today we are investing in. The reality is, it's an area where we're putting or allocating a significant amount of resources to deal with the demand in the market and for the business pursuit.

So today, we're in investment mode. When we get to a run rate of about $350 million, that's what we've guided to the past, we end up at margin rates that are roughly in line with E&S current margin rates.

With respect to software, you're right. Ultimately, those are businesses that are buy and large software businesses. And that's quite frankly where the E&S business in the aggregate, those product lines are headed. And I think once you get to run rate, and you're not significantly ramping up investment, you're at margin rates that are higher than the Delphi margin (technical difficulty).

I'm not sure what happened or where I was to -- lost you. I talked for a little while. You asking about software. Software margin after safety Rob. Did you get any of my answer?

(Operator Instructions)

David Leiker, Baird.

This is Joe well in for David. Can you hear me?

We hear you. Hopefully you can hear us.

I wanted to maybe stay with the China topic for a second. It appears there's a fair amount of belt-tightening in the quarter. When you just look at the declines in SG&A spend, is China files to come back any meaningful way here in Q4, with the contribution margin the substantially above normal or should we think about the volume contribution maybe being offset by just read implementing some of the op expense?

Yes. That's the way I would think about it. I think to the extent we get confidence that production growth is normalized and we get confidence in our outlook in 2016, we will continue to or increase at least the current run rate of investment in that region. And you have normalized throw through.

Switching gears a bit. Just on the active safety detail you provided in the quarter. A couple of questions.

Obviously you have a strong relationship with Volvo. It seems like there's a couple suppliers involved with the Provo drive the project at this point.

Is there some sort of change happening in the industry where automakers or maybe assessing different partners or trying to port and partners anything that's going on competitively and then within your own growth so they 60% growth. What's maybe the constituency of that growth. Is it vision, radar now that you have lidar anything that differential Delphi versus others?

When you look at our current capabilities, very strong and vision and Rita. LiDAR today is not a product we are selling or is commercialized. It's a product that we are developing from a commercial standpoint. So effectively, it can be from a cost standpoint commercially viable.

That's our objective with Quanergy in our partnering there. How do we bring the cost of LiDAR down so it's usable and functional, especially as you try to enable level III, level IV automated driving.

Our strengths today are really in active safety and visioning, or in radar and visioning systems. We are seeing demand across both product areas.

When you talk about the nature of the industry, there is a lot of activity. There's a lot of activity within the supply base. There's a lot of activity, folks like ourselves with various partners, technology partners. As well as a lot of activity partnering with ROE customers.

So it's a very exciting area. There's a lot of interest, and it's the reason that you see the significant amount of revenue growth that we are currently experiencing.

I think at your Analyst Day you were expecting to gain market share within the active safety space. Are you just with the right customers, and as a virtue of that, you're going to be big picking up share or is there a particular capability that's doing it?

I think it's both. Because we've been with Volvo for a long time. And as you know, their brand is safety and that's an OE customer that we've had a very long-term strategic relationship with.

I think in addition to that, you look at our history. We've been in radar technology for a long time. And it dates back to the days of Delphi and E&S division and business or cooperation with Hughes Electronics year and years ago, so we have very strong with our capabilities.

So I would say that's a very strong competitive advantage and one that we're leveraging. With respect to market share gains, given the fact that we're growing 40 points over the underlying market, clearly, we are gaining share. And again, that's given our capabilities and that's partnering with the right technology partners, as well as with the right customers.

Rod Lache, Deutsche Bank.

I didn't hear the call for a couple minutes. And I don't want to have you guys repeat yourselves. So tell me if you've covered and I'll take it off-line.

But I was hoping just to get a little bit more clarification on the guidance for the fourth quarter. So it looks like the midpoint of your Q4 is [$3.74 billion], [$3.75 billion] something like that, but it looks like it's down a little bit over $400 million, $407 million.

Can you give us a high-level bridge just to walk us through some of the big components? What are you seeing as FX and commodity, what's the organic growth or divestiture impacts that we should be thinking about? Because it looks a little bit lower than I think what was expected previously.

Mark, I'll comment and Mark will chime in. Just to make sure that we are speaking off the same numbers.

So you're right. Midpoint about $3.75 billion. That's about $195 million change from the prior applied guidance. So you mentioned a different number.

When you look at that, what are the big changes? China, as I mentioned, we were forecasting China vehicle production of 5.5%. The last time we gave guidance for the fourth quarter, and it's coming down a point.

That's our current outlook. So almost 700 basis point swing. That translates into about $70 million, $80 million of lost revenue in China for the quarter.

In addition to that, you have the impact of full quarter of the weakened [RMB], as well as the Brazilian reais, which is another $80. So those are the big -- those quite frankly are the big contributors to the change. Mark, do you want to --?

That's right, Rod. And on the volume side, we've got some, beyond China, some incremental commercial vehicle and aftermarket. But it's principally China, as Kevin mentioned, and the related volume flow through and then the FX impact on the OI as well.

Can you maybe share with us what the organic growth looks like? To you, it's on a year-over-year basis adjusted for some of these things?

Yes. So year-over-year organic growth in the fourth quarter is going to be 7.5%. 7 plus points over market.

Okay. And as we're thinking about the outlook for next year, it's been a bit of time since you provided your backlog. But can you give us high-level expectations for how that organic growth should look next year.

There was an expectation that it would accelerate year over year. And how we should think about the relative performance of the divisions?

I think based on -- and we're in a planning process now, I'd expect growth over market to be basically roughly in line with what the prior implied growth over market was when we had our investor day in April of last year. So really no change.

And I think it would be consistent really across each of our segments. Strongest growth in E&S, probably would expect stronger growth in EEA than what we applied, just given their performance to date. Maybe slightly softer growth in Powertrain, given the performance of the commercial vehicle market to date.

Okay. Are you expecting any dislocations related to diesel or Volkswagen, which is a significant customer at this point?

We haven't seen any to date. We've seen no impact on order rates. If you recall, our prior forecast, Rod, actually assumed that light-duty diesel was going to be relatively flat.

And when you looked at penetration rates in Europe, that light-duty diesel penetration rates would actually decline on a couple points over roughly a three-year timeframe. But from a revenue standpoint, for us, it was relatively flat.

So we don't think that changes at this point in time. To the extent it does change, as we've talked to you about in the past, you look at -- it's important for the OEs, the OEs in reality in our view, need diesel to hit the COT targets. To the extent they decide they want to deviate away from diesel over the medium-term, they'd have to replace with high-end gas systems, systems with GDI.

A diesel system tends to intense run about 500 hours, a GDI system with variable [wealth] train would be about 350. So 60% to 70% on a content basis of a diesel.

And then you'd probably would need to outfit the engine with some hybrid technology. Which as you know for us, additional electrification adds significantly more content. So net net, we don't, for us, we don't think it's a big headwind, assuming the OEs are still trying to achieve the targets CO2 targets that are out there.

Okay. And just lastly, I know that the commodity bridges are a bit more complex because copper has passed through. But just on a -- if you were to assume commodities are at the level that you see today, on and EBIT basis, how do you think about the effect looking out to next year?

If commodities remained where they are today? There's been some weakening in commodity prices during the year, so maybe there is a slight pick up on a year-over-year basis. But we don't think it will be big. Mark?

They are not that large.

Dan Galves, Credit Suisse.

Same as Rod, I was off the call for a few minutes. So let me know if the questions have been asked.

It looks like the price downs have been ticking up throughout the year. Is that anything to be concerned about? Can you address that?

No, it's really mix. It's at the end of the day, E&S is -- and you'll see in the fourth quarter, very strong E&S growth. And as we've said in the past, E&S relative to our other businesses E&S price downs tend to average 2% to 3% on an annual basis. And to the extent they're are a bigger part of the overall revenue mix, you're going to naturally see price downs higher than what we've historically reflected of roughly 1.5%.

Okay, sounds good. And then longer term, you touched on hybridization as a positive. Have you seen any uptick in bidding activity for plug-in hybrids or EVs?

I also know that over the past couple of years, I think you've derisked your backlog by taking a more conservative approach to how much volume these programs would do. Is there any upside in the next few years, new business, if these vehicles actually started to gain some traction and the volumes came through as the automakers expected?

If they came through, there definitely would be upside. You're absolutely right.

We've significantly derisked the backlog. We've been disappointed with respect to EV volumes to date. We are on some EV programs or we have EV platforms, and we are working with customers on EV programs.

In terms of the near-term activity, it really isn't any different than what it was a year or two ago. So we'll see as we head into next year and into 2017. I think the important thing from our perspective, EV's or hybrids are great for us.

They have anywhere between 4 to 7 times the vehicle content of a standard vehicle. So it's a big revenue opportunity when it occurs, when it happens.

Okay, got it. And then in China, I know you're expecting minus 1% in Q4. Is that including commercial trucks?

And it looks like on they light vehicle side, the shipments in October to date are a lot better than that. What's your view of minus 1% based on it, and do you think that the tax stimulus or order activity is indicating anything better for Q4 potentially?

So when we talk about vehicle production rates, we always include commercial. It includes pass car and commercial vehicle. So when we reference volumes, we include both.

So it does include commercial vehicle. We have seen some strengthening in schedules since the incentive program has been put in place on 1.6 L engines or less. That's about 70% of our volume in China, in terms of when you look at those vehicles.

That tends to be weighted towards more pass car, than SUV or truck, which near-term, is good for us. So the near-term traction has been factored into our guidance, to the extent there's incremental traction, there will be upside to our numbers. But at this point in time, we're waiting to see how much of that happens and for how long.

Joe Spak, RBC Capital Markets.

I was actually cut out for a while, so I apologize if this was addressed. But I want to understand.

You talked about some of the expanding organic growth and outperformance versus the market in the fourth quarter, which is good to see. But the guidance also implies that the margins are flat on a year-over-year basis in the fourth quarter, versus the expansion you've seen in the first three. So is there something that we should be thinking about that's an offset there, or if organically some of that outperformance seems to be getting better?

Joe, we do have some increased in generic spend, and IT related spend to support some programs in the future. Specifically about $25 million, some of it related to some rebuilds. So if you were to adjust for that, I'd say $25 million, margins will be closer to 13.7% or so in the fourth.

So there is some timing. So last year, there was $25 million of incremental rebuilds in the fourth quarter of last year just given the cadence of programs. That we don't have in the fourth quarter of this year. And then the second piece to provide some additional color to Mark's comment on engineering, and he's absolutely right.

You look at a division like E&S in the active safety and infotainment launches, putting example on a sequential basis, our launch activity in E&S is going to be up over 40%. So near-term, we will incur some incremental engineering to launch those programs, and that will be reflected in the E&S margins quite frankly it the fourth-quarter.

Okay, thanks. And then on China, over the course of the year, you mentioned that China could be flattish for the year and you'd be able to flex in the scale and scale down. And of still maintain the low end of the previous range.

And now that market forecasting seems to be -- have come to fruition, but there was a little bit of guide down. So is that some of the still investing for the future growth in China that you're talking about. Some of the long-term bullishness that's not maybe causing you to flex down to meet the lower volume as much as you otherwise would have?

I think at the end of the day, the China market is a little bit worse than what we predicted. I think if you look at our performance in actions, our guide was if China volumes are declining from 4% full year, which was our prior outlook, to flat, we could hold profitability. We're going to be below that.

In addition, you have the impacts of FX, both translation and some transaction, quite frankly. As well as, as Mark said, a slightly softer CV and aftermarket business. So those are really the big changes.

Joe, I would just add that there were a lot of actions. And that's why the flow through on that lost volume is actually quite low. And particularly in China.

So had it been -- we lost for total a year on that, roughly $300 million and we only lost about $40 million of OI. Had it flowed through at normal rates, we would've lost probably $80 million to $100 million. So that's a tribute to the cost reduction activities done by the business.

David Lim, Wells Fargo.

So the question I have is on Q4, the outlook. Was there any kind of launch delays or program cancellations in China? I was wondering if you could give a little bit more detail related to that.

No, no cancellation of programs or launch delays. I'm sure some programs that were in launch, volumes were lower than what originally were planned. But nothing major there.

Got you. And then on the RMB, I know that you gave some -- the number about $80 million impact. Wondering, and that's including the [real], if you could just isolate the RMB, what was the RMB portion of that?

It's about $50 million.

$50 million. Great.

Paris Jean, Morgan Stanley.

A couple of questions here, and more based on some of the long-term industry trends. The [house] energy company recently proposed a bill to give fuel economy credits for active safety content in the car.

So, A, wanted to get your thoughts on that proposal. And, B, perhaps more importantly, what kind of fuel economy improvements can we see because a vehicle and now be driven a lot more vehicle efficiently? Because of stuff like adaptive cruise control, emergency braking, and all the 9 technologies mentioned -- if internally there has been an assessment on what that range could be.

There absolutely has been. As I said in my comments, we actually spend a lot of time with the government regulators, actually [nits]administrator rose time was out at our offices in Silicon Valley, with Jeff owens, who you know, talking about active safety and technologies in and around active safety. So those are dialogues that we are having all the time.

With respect to fuel economy improvements, when you think about automated driving, our estimates and we validate it with other outside sources, is it results in roughly a 9% to 10% improvement in overall fuel economy. So there's mileage and CO2 benefits in addition to safety benefits. I wasn't sure if you asking the question about adoption of end cap in the US or not, if that was the initial part of your question.

I wasn't, but feel free to add some color there.

I apologize for the misunderstanding. But our view, based on our discussions, we think at some point in time in the 2017 calendar year or by the 2017 calendar year. Active safety will be a part of the US end cap standards, which will be very, very helpful in terms of accelerating penetration rates for the technology in the US.

Excellent. That's great color. The second question I had it on EVs, and you mentioned about having incremental content for vehicle opportunity in an EV car. If you were to align the segments in order of incremental CPV opportunity from EV penetration, how would you rank your three segments?

It's probably first, quite frankly, Electrical Architecture, second, electronics and safety. Those are the two. And on a relative basis, it's significant for both, but when you think about the electrical architecture necessary for a full EV, it's really significant.

In the E&S business, we develop and manufacture inverters and converters. Quite frankly, one of the PACE nomination for the Electronics and Safety division is for an inverter product or an inverter technology. Both would benefit, but I think it incrementally, it would be the EEA business from an absolute dollar standpoint.

Understood. Thanks for the answers.

Brett Hoselton, KeyBanc.

I was also cut off. So I apologize.

No, we apologize.

Two different questions here. First, 2016, it sounds as though your backlog is relatively intact. And then, production outlook, maybe a little bit weaker in China or something along those lines.

But I'm wondering from a margin perspective, what are your general expectations for margins in 2016? Can you continue to see that margin expansion that you've outlined in some of your previous presentations?

Based on how we've performed this year, that was my point after Mark's wrap up. When you really look at how we've performed, our revenue growth as well as our margin expansion in 2015 in what was a pretty challenging market when you think about change in industry volumes when you think about FX and commodity prices.

The market was extremely volatile. We're going to add 60 basis points year over year to markets. And I think we're in the midst of our business planning today. I think we'll be at a similar level next year, roughly 50 basis point and well on our way to 17.5% EBITDA margins in 2017.

Secondly, as far as capital deployment, you've certainly made a lot of acquisitions. Some of them smaller, maybe one larger one in particular. But how do we think about your emphasis on acquisitions versus share repurchase?

We think we can do both this year. I think it was a great example. We'll end up buying over $1 billion of stock this year, as well as completing the acquisition of HellermannTyton and Control-Tec, as well as acquiring Automatica and making investments in Tula technology as well as Quanergy.

So given the cash flow dynamics of our business, we actually think we can do both. I think our preference, to the extent we can find really valued -- strategic valued accretive M&A opportunities, our bias would be in that direction. To the extent we don't find valued accretive transactions and we invest organically and we have extra free cash flow, certainly we'll return that to shareholders via the repurchase of stock as well as dividends.

Chris McNally, Evercore ISI.

Wanted to circle back to Q4 and the revenue shortfall. Because I think that you were getting a bunch of investor questions about it. Because it sounds like 2016 remains on track.

And if I understand your comments, it sounds about half of the shortfall came from China production, half from FX, and the FX insight is helpful for us. But our question is, where was the offset from European production which was probably revised up from your guide? And if we look at other supplier implied revenue guidance for Q4, there was a European offset to the China downside.

For us, Europe, from an automotive standpoint, up $30 million for the quarter. So China, down $70 million, South America down $10 million, Europe up $30 million. Commercial vehicle, we talked about, down $20 million to $30 million and then some softness in after market.

So that's fair. Is it also fair to say though, that given some of the upside that we are seeing in the China production schedule, as you mentioned, in Q4, you gave 4% for 2016. Should we think about this revenue shortfall as a one quarter issue, given that backlog remains, as you've said throughout the call, pretty much on target with your 2015 analyst day comments?

And I'm not sure I'd call it revenue shortfall. I'm not trying to be flippant about it. I think at the end of the day, the market changed.

And we're impacted by the vehicle production. So to the extent the vehicle production was not as strong or is stronger than what we expected, it affects our revenues. We had thought, in fact, when we gave Q3 Q4 revenue guidance, that vehicle production shut it was going to be 5.5% in the fourth quarter.

It looks like it's going to be down, it's going to be down 1%. And as a result, that affects is from a revenue standpoint. As you get into 2016, our prior outlook for China was up 6% for 2016, 2017.

If we called the [ball] today like I told you, we'd probably say up 4%, so slightly slower growth. But we'd expect to still grow roughly 8 to 10 points over that market. So it would be still very strong growth, but off of a slightly lower base.

Thank you for participating in today's call. One quick calendar item before we wrap up. We hope you can join our booth at CES on January 7. The invitation will be distributed next week. As always, we will be available for any additional questions you may have after the call today. Thank you.

That concludes Delphi's third quarter 2015 earnings conference call. Thank you for joining. You may now disconnect.