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Delphi Automotive PLC (NYSE:DLPH)

Q4 2012 Earnings Conference Call

February 5, 2013 10:00 am ET

Executives

Jack Monti – Director-Investor Relations

Rodney O’Neal – President and Chief Executive Officer

Kevin P. Clark – Senior Vice President and Chief Financial Officer

Analysts

Brian A. Johnson – Barclays Capital

Rod Lache – Deutsche Bank

John Murphy – Bank of America Merrill Lynch

Christopher J. Ceraso – Crédit Suisse AG

Itay Michaeli – Citigroup Inc.

Aditya Oberoi – Goldman Sachs & Co.

Matt T. Stover – Guggenheim Securities LLC

Operator

Good morning, my name is Brandy and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi’s Fourth Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Jack Monti, Delphi’s Director of Investor Relations. Sir, you may now begin your conference.

Jack Monti

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

Joining today’s call will be Rodney O’Neal, Delphi’s CEO and President and Kevin Clark, our CFO.

And see on slide three, Rod O’Neal begin the call with an overview 2012 and our 2013 priorities, followed by Kevin Clark who will review our financial performance in greater detail, and provide 2013 in first quarter guidance. After Rod’s closing remarks, we’ll open the line for Q&A.

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

Rodney O'Neal

Thanks, Jack and good morning everyone and I appreciate you joining us as we close out our 2012 year and talk about our priorities for this year. Even with the challenging environment in Europe, we had a very solid quarter in Q4, that was consistent with our previous guidance reflects the cost structure and we implemented several restructuring initiatives primarily in Europe, and we continued to rotate our footprint to lower cost countries.

Our performance is a testament to our management team that is laser focused for operational execution and increasing shareholder value. Delphi has a lot to be excited about we are going to continue to stay focused on providing solutions for our customers’ challenges.

So let’s move into the presentation, and go to slide 5. overall 2012 was a great year for Delphi, while our revenue was relatively flat as a result of a soft market in Europe in the effect of foreign exchange.

EBITDA margins increased to 13.8% in earnings per share grew a robust 38%. Our credit ratings were increased to just under investment grade. We were added to the S&P 500 which is a real knock to the confidence we generated in the marketplace, and throughout 2012 we continue to reduce our industry leading cost structure, which positions us well to meet the challenges in 2013.

And as I’ve already mentioned we implemented several restructuring initiatives as we continue to rotate our footprint, optimize our cost structure, proactively address the soft market. Now at the same time, we’re continuing to invest these strategic growth initiatives. As an example, we completed acquisition of MVL last quarter, it significantly enhances our position in automotive connectors market, we expand about the progress we’ve made in integrating this company into Delphi.

We also expanded our footprint into China, I’ll discuss that in the minute. We also continue to invest in our Safe, Green and Connected product portfolio. That all of these things have us well positioned for top and bottom line expansion 2013 have begun.

Let’s go slide six, in April I’m going to be in China at the Shanghai Show to meet our customers, our partners, and my management team. And I could tell you that we are more excited endeavor up opportunities in the world’s largest automotive market. In 2012, we opened three new plants in China, in order to keep up with increase demand.

We have additional expansion plan for 2013 including opening up a diesel fuel injection plant in Yantai in the fourth quarter to serve the commercial vehicle market. In this past quarter, we completed the expansion of our Beijing operations to handle increase demand, gas fuel injection systems, then we will continue to significantly out growth the underlying market in this high growth region. We are on track to double the size of our China business over the next four to five years.

So let’s move into the technology, let’s go to slide seven, I said before about what our mission is, and we’re focused on solving our customers’ problems, that’s our value problem. And we invest $1.5 billion in gross engineering last year to focus on the mega trends of Safe, Green and Connected, that’s really starting to pay off.

Our gasoline direct injection technology has really taken a hold in the marketplace with the solution for better fuel economy. Our diesel products are getting a great reception as the customer to begin the oil business that helps them supply with the more stricter Euro 7 standards. We’re investing in China because we know that region will soon be the largest medium in heavy duty diesel market in the world.

In the area back to safety, in our MyFi products; we book $1.5 billion in new business last year in this arena, and with the acquisition of MVL we now have all the connectors to optimize an entire architecture.

So let’s move to slide eight; we will be expanding our Silicon Valley technology center in Q1 to better position us to elaborate with our technology partners. There is more of electronic content enters into the vehicle. Our partners there will help us remain at the forefront of this area

Let’s go slide nine, be an example how we’re leading the way technology; in last month Consumer Electronic show, we’ll built our capability in the connected vehicle space a collaboration with Verizon.

This unique device allows drivers to use their smartphones to lock or unlock their car, track their car’s location, and how it’s been driven. Maybe in the failure of these vehicle systems, problems they’re working hard. Our innovation received at a distorted work from popular mechanics at CES, we’ve already heard from other mobile phone carriers in Europe and in the U.S. who are very interested in the concept.

Let’s go to slide 10. We continue to receive active rights for our customers across the globe for exceeding their expectations of quality, delivery and launch. If you look the chart, you’ll see several customers who have given us the words in the last year. And this continued validation, both our advanced technologies and our operational excellence, which is key to our top line expansion are going to cover now.

Let’s go to slide 11. In 2012, we set a new record with $26 billion of new business book, and over the last 12 quarters, we’ve generated almost $70 billion in book. And in Q4, we booked only $6 million in new business, including some rising Chinese OEMs like JAC with one of those that have diesel fuel injection system contract, and from our second largest customer VW for electrical systems.

And you can see from the slide that we continue to increase the geographical diversification of our business. 2012 Asia represented 34% of our new business books, these numbers validate by higher sole optimistic about Delphi’s future.

Let’s go to slide 12. Now although my management team and I are proud of accomplishments in the 2012, we understand that our stakeholders want to know what’s next? Dealing with expected challenges in Europe in 2013, we know our continued focus on outstanding operating execution keep us on track for strong results and allow us to increase shareholder value. We will accelerate the continued rotation of our footprint to lower cost structures. we will continue to integrate MVL and deliver on the primary synergies. We will achieve disciplined revenue growth and further expand margins and earnings per share and we will increase cash flow. And we will continue to deploy capital in a very disciplined manner on our growth, our acquisitions and return cash to shareholders. So to sum it up, we will continue to be focused on creating value operating value to our shareholders. We did in our first year as a public company. We will continue to work hard to do so in 2013.

With that, I’ll turn it over to Kevin who will cover the numbers.

Kevin P. Clark

Thanks, Rod. Good morning everyone. I will begin by covering our fourth quarter and full-year 2012 results, then provide 2013 guidance and lastly wrap up with our net new business outlook for the 2013 through 2015 period. In the third quarter, we announced we’re implementing proactive restructuring initiatives, principally related to the streamlining of our European cost structure as well as the integration of the MVL acquisition.

In order to provide a clear view to the underlying fundamentals of the business, today’s discussion will exclude all restructuring and other non-recurring costs. The reconciliation between GAAP and non-GAAP results are included in the back of both the press releases and this presentation for your reference.

So let me start on slide 14 with a snapshot of our fourth quarter results, which as Rod already mentioned, we’re in line with our expectation. In a challenging environment, we delivered solid EBITDA margins, earnings per share and free cash flow, revenue totaled $3.8 billion and it's down 4% after adjusting for FX, commodities, acquisitions, divestitures. Continued weakness in Western European production, which was down roughly 15% during the quarter, proved to be a significant headwind across each of our segments, resulting in an 18% decline in total European revenues. As a result of our lean cost structure and strong operating execution, we maintained double-digit EBITDA margins in Europe and delivered consolidated margins of just under 13%. Net income totaled $287 million and earnings per share was $0.90.

Lastly, we generated free cash flow of $185 million that was net of $200 million payment related to 2010 long-term incentive plan, which was made at the end of the quarter.

So with that as a backdrop, let's move to slide 15. I'll review fourth-quarter revenue in more detail. Reported revenue declined 3.4% and just under $3.8 billion, volume declined $110 million or 3%. Foreign exchange and commodity prices created a 2 point headwind growth. Price down for 1.6% at the low end of our expected range of 1.5% to 2%. And acquisitions net of divestitures added $127 million to revenue, providing a 3 point tailwind to growth. On a regional basis as I mentioned European revenues were down 18% as a result of continued reproduction volumes of both the light vehicle and commercial vehicle segments.

Asia continue to be our fastest growing region, revenues increased 11% significantly over market, within that region China revenues increased 10%, 6 points above market, revenues in North America increased 6% reflecting our specific customer mix, our limited exposure in the Japanese transplants and continued weakness in the automotive aftermarket. in our smallest region, South America, revenues increased 4%, an improvement versus prior quarters are below market due to customer platform mix.

Slide 16, reconciles the year-over-year change in EBITDA. Before I get into the numbers, you may recall that in the fourth quarter of 2011, favorable mix and exceptional operating performance principally in our powertrain business which actually had over 18% margins in that quarter translated into very strong consolidated results, making year-over-year comparisons pretty challenging.

For the quarter, EBITDA totaled $486 million reflecting a negative effect of price down, flow-through and lower revenue, combined with unfavorable mix. Foreigner exchange in the mark-to-market accounting associated with the prior long-term incentive plans. Our operating performance net of all economics and excluding the benefit of the MVL acquisition more than offset the effect of price tax. EBITDA margins declined to 12.9%, adjusting for accounting associated with prior long-term incentive plan, EBITDA margins actually totaled 13.2%.

Now slide 17 includes our segment results. our Electrical Architecture’s revenue increased just under 3%, excluding the impact of the MVL acquisition driven by very strong growth in North America is up actually 20%, the result of a number of new program launches, and strong growth in South America and Asia, partially offset by a 17% decline in European revenues.

Segment EBITDA totaled $231 million representing a 13.1% EBITDA margin, which is up 200 basis points from the prior year. Revenue in our Powertrain segment was down almost 13% reflecting a 20% decline in European revenues, and lower revenues in North America primarily the result of continued weakness in the automotive after-market as well as lower revenues South America through platform mix, partially offset by strong revenue growth in Asia.

Segment EBITDA margins declined 400 basis points to 14%, the result of difficult comparison to the prior period that I mentioned previously, lower volumes and a lower mix of diesel fuel injection systems in Europe.

In our Electronics and Safety segment revenue declined 5% primarily the result of just over 13% decline in European revenues, and the 3% decline in North America partially offset by very strong revenue growth in Asia. Segment EBITDA margins improve 50 basis points to 14% as a result of the rotation of our lower margin business in our mechatronic and receiver product lines.

Thermal segment revenues declined almost 6% primarily the result of 20% decline in European revenues, and flat revenue growth in North America partially offset by single-digit growth in Asia and South America, EBITDA declined to $16 million.

Turning to slide 18, earnings per share totaled $0.90 reflecting lower volume in the accounting associated with the prior long-term incentive plan partially offset by the benefit of the MVL acquisition, a $0.05 benefit from a lower tax rate and share buyback, and in a $0.11 benefit from our reduction in other expenses primarily related to the 2011 IPO.

Moving to slide 19, the highlight of full year results we deliver solid EBITDA margin expansion in earnings growth. Revenue totaled $15.5 billion, a reduction of 2.3%. EBITDA totaled $2.142 billion and EBITDA margins increased to 13.8%.

Net income increase 6.1% to $1.24 billion and earnings per share totaled $3.84, an increase of 38% over the prior year. Free cash flow totaled $827 million and with that as a background, let’s move to slide 20 to review full year revenue growth in more detail.

As I mentioned, reported revenue declined 3.3% to a little over $15.5 billion. FX and commodity price had about a $700 million negative impact on revenue resulting in a four point headwind to our growth rate.

Price downs for a 1.7% inline with our expectations. Acquisition, net of divestitures totaled $110 million, a one point of growth and sales volumes totaled $339 million adding two points to our growth rate. Excluding FX and commodity prices as well acquisition submitted divestitures, revenues were up slightly to 0.4%. On a regional basis, revenues were weakest in Europe and South America. Both were down roughly 6%. Revenues in North America and Asia increased 6% and 11% respectively. In china revenue growth totaled, seven points over the annoying market.

Slide 21 underscores our ability to leverage of cost structure. EBITDA totaled $2.142 billion for the year negatively impacted by price down, foreign exchange mix in the accounting associated with our prior long-term incentive program. These headwinds were partially offset by record operating performance, flow to end volume growth and the impact of the MVL acquisition. EBITDA margins expanded 40 basis points to 13.8% and excluding the impact of the long-term incentive plan, EBITDA margins actually increased 80 basis points to 14.2%.

Slide 22, includes our segment financial results. Electrical architectures revenues increased over 5% driven by continued strong growth in North America and Asia, partially offset by declines in both Europe and South America. Segment EBITDA increased to $945 million. EBITDA margins expanded 13.9%.

Powertrain segment revenue was down just over 2%, result of a reduction of revenues in North America, South America and Europe, partially offset by very strong growth in Asia. Despite the lower revenues, EBITDA margins increased by 100 basis points to 15.5%, partially the result of lower warranty cost during the period. Revenue in our electronic and safety segment declined just over 3% primarily the result of a decline in European revenues, partially offset by a moderate growth in North America and Asia.

Overall, improved business mix and operating performance increased EBITDA margin by 50 basis points to 13.3%. Thermal segment revenues declined a little under 5%, primarily the result of significant revenue declines in Europe and South America. EBITDA declined to $111 million and EBITDA margins contracted 7.2%.

Turning to slide 23, earnings per share increased from a pro forma $3.57 per-share to $3.84 per share, the result of share buybacks, EBITDA growth, a lower tax rate and lower other expense, partially offset by accounting associated with the prior long-term incentive plan. Excluding the effect of the accounting for the long-term incentive plan, earnings per share increased 13% over the prior year’s pro forma amount.

Moving to cash flow on slide 24, we continue doing excellent job converting earnings into cash flow, strong EBITDA more than offset capital spending, cash interest taxes as well as restructuring expense. We generated $827 million in cash for financing which was used to repurchase over 400 million of stock and fund a portion of the purchase price for the MVL acquisition. Free cash flow as a percent of net income increased to almost 80% excluding the $200 million one-time payment for the long-term incentive plan at year-end.

Moving on to slide 25, we ended the year with a very solid balance sheet that reflected investment grade credit metrics providing us with multiple leverage to drive shareholder value. Cash on hand was over $1.1 billion and net debt was just under $1.4 billion, roughly 0.6 times EBITDA. liquidity totaled almost $2.4 billion providing significant financial flexibility and as you can see, we’ve no meaningful debt maturities until 2016.

Moving to slide 26 to review some of the assumptions underlying our 2013 guidance, based on several sources including customer schedules and IHS, we are forecasting a 1% increase in global production which basically represents flat year-over-year volume growth in production on a Delphi weighted market basis. Our forecasts in European production declined 4% for the full year with the first quarter expected to be down 15%, roughly flat on a sequential quarterly basis, and then beginning to stabilize and improve slightly during the back half of the year.

Turning to slide 27 to discuss our 2013 guidance, which excludes all the restructuring integration and other one-time items, we currently expect full-year revenue to be in the range of $16.2 billion to $16.6 billion. EBITDA is expected to be in the range of $2.325 billion to $2.425 billion, reflecting tailwinds from the MVL acquisition and accounting for the long-term incentive plan as well as the impact of 4:1 volume and the effect of mix.

EBITDA margins will be in the range of 14.4% to 14.6%. 2013 depreciation and amortization will increase to $600 million or 3.7% of revenues at the midpoint of our guidance range, reflecting the inclusion of MVL, which has roughly $70 million to depreciation and the amortization. And depreciation in new fixed assets, which adds an additional $60 million of depreciation to our 2012 full-year depreciation and amortization amount of $470 million.

We expect tax rate, 16% for the year, earnings per share is expected to be in the range of $4.12 to $4.38 and is based on a share count of $317 million representing 11% EPS growth at the midpoint of our guidance range. Cash flow before financing will be $1 billion with capital expenditures of roughly $750 million, providing us with significant flexibility to increase shareholder value through the continued disciplined deployment of capital.

Turning to the first quarter; our outlook for the first quarter of 2013 is largely consistent with the fourth quarter of 2012. We expect global industry volumes to decrease 6% with European production declining 13% on a year-over-year basis.

We expect revenues to be in the range of $3.9 billion to $4 billion. EBITDA will be in the range of $515 million to $540 million, representing EBITDA margins of 13.2% to 13.5%. EPS will be in the range of $0.93 to $1 and assumes $317 million shares outstanding and the 10% effective tax rate.

Cash flow generation will reflect the impact of cash spending from the restructuring as well as normal seasonality that was reflected in our 2012 cash flows. As Rod mentioned, we continue to have tremendous momentum in our bookings, the 2012 amount of over $26 billion represents a significant increase over last year’s record amount. It is reflected in the $400 million increase in net new business for the three-year period.

Slide 28 provides you with an update to our net new business, which totaled $3.2 billion for 2013 through 2015 versus the $2.8 billion for the 2012 through 2014 period that we reported previously. Net new business in 2013 is forecasted to be $0.5 billion, down from last year’s estimate, reflecting lower underlying industry volumes, principally in Europe and South America to lay in select programs such as the launch of electric and hybrid vehicles primarily in the North American market, lower high-content option take rates, and the negative effect of foreign exchange and commodity prices.

Net new business in 2014 is expected to be $1.1 billion that’s up slightly from our prior estimates. the increase is the result of the previously mentioned retaining of select programs and increased volumes in North America and China, partially offset by lower high content option take rates, and the negative effect of foreign exchange and commodity prices.

We expect net new business in 2015 to total $1.6 billion, the result of the recent record level of recent new business bookings. Our mix of net new business is significantly weighted towards Asia, given the region’s relative growth and in North America where we made strive to continue to diversify our customer base.

So with that, I’d like to turn it back over to Rod.

Rodney O’Neal

Thanks, Kevin. And before we move into the Q&A, I just want to remind everyone about the solid results the team achieved in 2012 despite the macroeconomic headwinds. And as always, we remain focused on outstanding execution where we’re above disciplined investments and our growth initiatives with actions to further reduce our cost structure.

So looking forward, given in a challenging European environment, we are well-positioned for a solid margin expansion in earnings per share growth. And we absolutely remain committed to achieve in our long-term objectives for the business and increasing shareholder value.

So operator, we’ll open it up now for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Brian Johnson with Barclays.

Brian A. Johnson – Barclays Capital

Good morning to you.

Rodney O’Neal

Good morning, Brian.

Brian A. Johnson – Barclays Capital

Just want to explore a couple of margin outliers, just to make sure, we understand the underlying run rate. Just first on the positive side, electronics and safety, you’ve had what looks to me to be a near two-year lowering revenue, you had a record margin number. what line on there? And then on the good side and then can we think about that going forward? And then second sort of be opposite is a year ago, powertrain had a very high 18%, we had hindsight was there that hasn’t been there in subsequent quarters and how should we think about that segment going forward?

Rodney O'Neal

E&S as I said in my statements, Brian, from a year-over-year standpoint like all of our businesses; we’re certainly affected by revenue or a weak market in Europe. so that’s the largest explanation as it relates to change in year-over-year revenue growth. As it relates to margin expansion, our unit business has done an exceptional job of putting together performance initiatives where they’ve offset, more than offset economics, one. And then two, we’ve talked about over the last few quarterly conference calls; our initiative to rotate our business out of some lower margin, mechatronic computer product lines and that is paying benefits.

On a go-forward basis, for the full year, we’d expect our E&S business to expand margins on a year-over-year basis. I’d tell you there will be some volatility when you look at it sequentially, because it’s a business where reimbursement for certain engineering activities where we partner with our customers, it’s not evenly allocated across each quarter of a calendar year. So that will be my explanation on E&S.

As it relates to powertrain, if you recall in the fourth quarter of last year, our powertrain business truly operated at an optimal level. They had 18% EBITDA margins. Revenue growth was extremely strong. Our product mix was significantly weighted towards diesel fuel injection systems and they had very solid operating performance. And I think we told people at that point in time that they should not assume that the business operates on a go forward basis at that sort of level.

So I would start with the product for your comp. As it relates to this quarter, our Powertrain business obviously was significantly affected by what’s going on in Europe. Our Eagle business is a little low for half of our total Powertrain business and as result it was affected by the European downturn from a volume standpoint, one. And then two, consistent with what we talked about in the third quarter, on the third quarter call we saw slight deterioration in mix in terms of diesel fuel injection systems in Europe in the fourth quarter for our Powertrain business. So that’s how I’ll explain the two periods.

Brian A. Johnson – Barclays Capital

And then on the Indian assets, is there a difference between electronics, safety possibility or is it just – it’s going to be a bit variable given – and you discussed, the software model that’s evolving and getting paid up front some of the engineering?

Rodney O’Neal

Yeah. I mean getting paid for the engineering is something that we’ve done consistently in the past. It’s very lumpy in terms of payments. I think it’s really a mix of two things. It’s a mix of more software business which is higher margin that tends to be in the safety arena. And we’ve been talking about the rotation of some of that lower margin business.

Brian A. Johnson – Barclays Capital

Okay. Thanks.

Operator

Our next question comes from line Rod Lache with Deutsche Bank.

Rod Lache – Deutsche Bank

Couple of questions; first, the new business backlog declined from $900 million or so this year to $500 million and it seems like that’s more than would be explained by production. And I believe that your 2014 increase was only about $100 million. So it seems like that wouldn't be fully explained by the push out as well. Can you give us a little bit more on what was behind that?

Rodney O'Neal

Sure, it's really a couple of things at the end of the day, Rod. It’s a mix of volume reduction which is industry volume reduction primarily in South America and in European. Mix change, so we've seen or assuming lower take rates on some of the higher content options principally in the area of electronics and safety. It’s the push out of electrical vehicles where we had a fairly significant growth in our prior guidance. Those are the largest changes.

Rod Lache – Deutsche Bank

Okay. And I was hoping you can maybe flesh out a little more on this earnings bridge till 2013. If we use the midpoint of your guidance, you’re showing EBITDA increasing by about $233 million. I think you’ve previously said that the decline in variable comp or that stock comp expenses like $90 million; so the underlying performance would be like $143 million if you subtracted that. And MVL based on what you’ve said previously about EBITDA margins, I would think as maybe a $110 million. So underlying that might be something like $33 billion of EBITDA improvement. And is that reasonable expectation and then on the revenue side, I’m assuming that we would subtract maybe $670 million related to MVL, so about $230 million of revenue growth?

Rodney O'Neal

Yeah. So let me touch on, I understand what you’re trying to get to. So why don’t I take a shot at it. It’s really, well let me start with, we would recommend based on where we see industry binds the turn of the market as people look at earnings, they really look at earnings on a sequential basis versus a year-over-year basis. so from the fourth quarter of last year to the first quarter of this year, we think it actually is a better comp to come off of.

So I would start with that sitting in your shoes. second, as you look at those tailwinds, there are two, there is the long-term incentive comp plan, you’re right if it goes away that tailwind of $80 million on an EBITDA basis, and there is a benefit of the MVL acquisition, which really has broken down to pieces, $100 million to $110 million of base MVL, and then roughly $30 million or $50 million of synergies associated with the MVL. So we call it year-over-year roughly, $150 million coming from MVL. So that’s those are the two pieces. three, you get volume growth, year-over-year and on a year-over-year basis that volume growth is we’re assuming partially offset by mix.

Rod Lache – Deutsche Bank

Okay. So based on that bridge, the underlying performance is pretty neutral on the year-over-year basis?

Rodney O'Neal

I’d say it’s up slightly.

Rod Lache – Deutsche Bank

Okay. And then lastly, normally for Delphi and I think most suppliers, the profitability is typically stronger in the first half than the second half because of production days.

Rodney O'Neal

Right.

Rod Lache – Deutsche Bank

And your guidance implies a pretty meaningful uptick, could you just tell us broadly what you are expecting will happen sequentially like from the first half to the second half? Is there a drag that moderates maybe in Thermal or in some other areas?

Rodney O'Neal

Yeah, that’s a great question. You are right. In this where you would typically see from a unit production standpoint of a 51-49 mix first half versus second half. As we look at 2013, we believe it’s going to be closer to 49-51, 50-50, somewhere in that range. Where you will see the improvement is a slight improvement in sequential volumes in Europe, but fairly slight strong improvements on a sequential basis in China and some improvements although not significant on a sequential basis in North America.

Rod Lache – Deutsche Bank

This is just an unusual timing of production I guess is what you are saying?

Rodney O'Neal

Relative to historical trends, it would be less typical, yes.

Rod Lache – Deutsche Bank

Okay, right. Thank you.

Operator

Our next question comes from the line of John Murphy with Bank of America.

John Murphy – Bank of America Merrill Lynch

Maybe just a kind of follow up on the [Katon’s] question, Kevin, would the synergies from MVL be more back half loaded, it might skewed the earnings through the course of the year?

Rodney O'Neal

Yes as you look at and I should have touched on that, if you look at the revenue and earnings through the back half of the year, in addition industry volumes a couple of things happened; one as it relates to new business win, they tend to come in at the back half of the year versus the front half. Two, you get the benefit of the MVL synergies which I mentioned are roughly $15 million, they are back half, they are back-end loaded, as well as restructuring benefits of $30 million, I’ve talked to you folks about previously.

Then again as I mentioned you get an uptick in industry volumes, we say you were to take the first quarter and analyze it, and compared that to the back half of the year throughout that three months period, you should see roughly a 3% to 4% increase in industry volumes. Again the biggest piece in China was some improvement, although small in Europe. And then we have performance which is just come on in the back half of the year.

John Murphy – Bank of America Merrill Lynch

Okay that's very helpful. The other clarification on the outlook, buybacks are not included in your EPS forecast is that correct?

Kevin P. Clark

Yes that is correct as I stated and Rod stated we're confident, we will generate a lot of cash flow in 2013 that we can use to drive shareholder value in a number of different ways, and we are purchasing fair amount of stock in 2012 that could be an option in 2013, but we've talked about in the past that I’d also look at accretive acquisitions and acquisitions in expanded margins, so that’s best to provide guidance to you folks without any assumptions as it relates to share repurchases timing of share repurchases or timing of share repurchases.

John Murphy – Bank of America Merrill Lynch

Okay, that's helpful. Then if you look at slide 28, I know there is some tugging and pushing between 2013 and 2014, based on the stuff you’ve talked about, but the idea that 2015 is a much higher net new business backlog number than the two previous years is somewhat unusual and shows that you have some pretty strong growth. I’m just curious as you talk to your customers, is this really a function of you continuing to win more net new business, because you’ve gotten further away from bankruptcy and they’re including you much more in the coding process or is this really just a function of the content that you’re seeing growing, I am just trying to figure out those two factors and how much they’re waiting in this number, because it’s unusual that your backlog will be so much higher in the third year?

Rodney O'Neal

Well, it’s not the bankruptcy issue; it’s actually the rotation of momentum that we have. And then as you recall, if you go back to, when we started the journey in Ohio, we were very centric here in North America, very centric to [Wisconsin]. And now, obviously we’re much more diversified geographic of customer base. and now, we enter the second, maybe, even the third contracts with the new customers that we did not have experienced with before and to be quite honest, they’ve been quite pleased with our performance. and so what you’re seeing is, what we said would occur with this balance this year that we were going to seek as we began to not turning back to North America and Europe, but begin to grow Asia and you see the bookings.

So this is the pace of movement particularly in China, which I think we would all agree is, probably not on an emerging market anymore, it is a large market when you look at 20 million units, going to 30 million over the next few years.

So with China as the corner stone of our Asia store we’re just getting round point of market that as big as robust, and all you are just seeing is the model that work as we describe is, it’s beautiful thing.

John Murphy – Bank of America Merrill Lynch

So Rod when we usually look at third year though we usually hear from a lot of companies that there’s a lot of opportunity left three years out in that 2015 number, are you bidding on a lot of business in addition to what you are showing us here?

Rodney O'Neal

Yeah, we are. It depends on the business, because the powertrain, it takes a little longer than a couple of years to bring to market, but some of the electronics and those kind of things are faster. So it depends on the portfolio, powertrain would be a little bit more extended beyond that.

John Murphy – Bank of America Merrill Lynch

Okay and then just lastly on the China plans that you’re building this year I mean all that stuff is still wholly-owned facilities, there's no JVs or anything like that, it's all accomplished in the Delphi umbrellas. Is that correct?

Rodney O'Neal

Basically the wholly-owned majority control, yes. Our half was consistent.

John Murphy – Bank of America Merrill Lynch

Great, thank you very much.

Rodney O'Neal

Okay.

Operator

Our next question comes from the line of David Leiker with Baird.

Unidentified Analyst

This is John in line for David.

Kevin P. Clark

Hi, how you?

Unidentified Analyst

Good. Just staying with net new business number, is there a way to segment that between the four businesses or just say may be directionally if a particular segment is growing faster than the others?

Kevin P. Clark

I would say directionally you see stronger growth in the EMS and powertrain segments over the period. So we’re not going to break it out specifically find it…

Unidentified Analyst

And then when you look at your powertrain business, it seems like the fuel injection business has fairly strong growth rates, I’m assuming a lot of that is the contribution from commercial vehicle. I’m just wondering what’s the opportunity in China as you look at it, because that’s obviously 1 million unit market that it looks like it’s about to inflect. so what may be the dollar opportunity or how much of the overall four to five year plan to double your business in China, is commercial vehicle related?

Rodney O’Neal

I don’t know if we’re going to break that out of this phone call, but the mere fact that I’m going to sink capital on the ground and you know how judicious we are in capital, and put up a new facility in the debt markets, that’s what we think of it. But we’re not going to signal to the competitors exactly where this revolver will do, it’s very well set space that we think we’re going to have significant opportunity. We could talk more about it later on, but we won’t today.

Unidentified Analyst

Okay. And my last one, is the suppliers that are giving three-year backlog numbers are kind of in a difficult position right now, because we’re basically a quarter or two into seeing kind of the high-content take rates turning down where so far the cycle before the last quarter to that dynamic have been pretty favorable. So I’m just wondering when you look at this three-year backlog, what sort of magnitude is around kind of the take rate assumption laying down the overall growth numbers, and how does that flip around as we maybe get back to our earlier cycle take rate option?

Kevin P. Clark

Yeah. I guess way I would answer that question. Our assumption is as it relates to high-content take rates and the guidance for net new business that we’re providing today are more conservative than our assumptions in the prior period of reflecting what we see more recently in terms of product mix. And I’m not going to give a specific number.

Itay Michaeli – Citigroup Inc.

Okay. I'll leave it there. Thanks guys.

Rodney O'Neal

Thanks.

Operator

Our next question comes from the line of Chris Ceraso with Crédit Suisse.

Christopher J. Ceraso – Crédit Suisse AG

Hey, good morning.

Kevin P. Clark

Good morning, Chris.

Rodney O'Neal

How are you?

Christopher J. Ceraso – Crédit Suisse AG

So the bridge on EBITDA was helpful. I was hoping to come back to that briefly and just think about maybe some of the headwinds you have to overcome in addition to the tailwinds you talked about. two of them in particular, one, are you anticipating any headwind associated with the launch of the full-size GM truck? That’s a pretty big program for you back at the envelope, probably something north of $1 billion in revenue, if our math is close. And you would expect that at least initially that would come on at lower margin than the current program that you’re on.

So is that right and have you taken that into account and can you kind of ballpark what that is for us in terms of a headwind? And then secondly, what are you expecting terms of an increase in pension and health care expense from ‘12 to ‘13?

Rodney O'Neal

In terms of launches, Chris I mean, we always – they’re in our numbers dealt by the perpetual launch. And so the numbers we give you, we have all that embedded in it, all right. So it’s in the soft…

Kevin P. Clark

Yeah Chris, I agree with Rod. He just said it’s in our assumptions. So that’s something that we watch. We watch very carefully obviously in our all over. As it relates to pension expense, we’ll see pension expense on year-over-year basis go up about $20 million. As you know, we really don’t – we don’t have a U.S. pension program, you’re defined benefit program. It really relates to a couple of small programs in Europe. So the increase in expense won’t be significant.

I guess the other potential headwind quite frankly and it’s on everybody’s mind, is what happens with Europe, is it down 4% or potentially more. as you know, Europe is a meaningful market for us roughly every 1% reduction in industry volume in Europe for us is worth about $60 million of [revenue]. So that is something that we’re watching very carefully and we’ve implemented restructuring plans or in the process of implementing restructuring plans to reduce our footprint there and after they optimize cost structure, we’re going to continue to evaluate price frankly whether we can do more and we’ll keep you guys posted about that, but that is the other potential headwind out there that we’re trying to stay in for us.

Christopher J. Ceraso – Crédit Suisse AG

So that’s helpful rules Kevin, so for each point $60 million revenues, what would we expect for the contribution on that with the decremental margin is at 25%, is that a good number at EBIT level?

Rodney O'Neal

At EBITDA level, I’d see about 30%.

Christopher J. Ceraso – Crédit Suisse AG

30% at the EBITDA level.

Rodney O'Neal

35% depending on what new fuel injection mix looks like.

Christopher J. Ceraso – Crédit Suisse AG

Okay. and then just a follow-up on the tax situation, have you assessed the risk that maybe a tax reform here in the U.S. might jeopardize very well cooperative effective tax rate, understanding that cash taxes would not be affected, but can you take us through what’s happening there and what you think might happen with the low tax rate on a go-forward basis?

Rodney O'Neal

Yeah. We’re still highly confident in our position in the fact that not a U.S. entity, we’re U.K. entity. It’s just rolled on with the federal government, it just stayed on. I wish that’s a more intelligent question.

Christopher J. Ceraso – Crédit Suisse AG

Okay. Thank you.

Operator

Our next question comes from the line of Itay Michaeli with Citigroup.

Itay Michaeli – Citigroup Inc.

Good morning.

Rodney O'Neal

Good morning.

Itay Michaeli – Citigroup Inc.

Just wanted to go back to slide 28, the backlog. North America and Asia seem like they’re up significantly versus the prior backlog. can you remind us what the margin contribution of those two regions, how that looks versus the corporate average and whether the shift in North America and Asia could continue to drive positive margins in the next couple of years?

Rodney O'Neal

We don’t disclose that if we will say it’s higher than our average, but we don’t provide margin by region.

Itay Michaeli – Citigroup Inc.

Okay. For both of those regions?

Rodney O'Neal

Both of those regions, the margins are higher than our average corporate margin, but again, we don’t disclose specific margin rates by region.

Itay Michaeli – Citigroup Inc.

So that’s helpful. And then just and I apologize if I missed this. Could you share what you’re assuming for European light vehicle production in the first quarter and just how you’re looking at your individual mix relative to perhaps the fourth quarter?

Rodney O'Neal

Sure. We are forecasting our European industry production to be down roughly 15%, and from a mix standpoint, we’re presuming mix is pretty consistent with what we had in the fourth quarter of last year.

Itay Michaeli – Citigroup Inc.

Last year. great, terrific, thanks so much guys.

Rodney O'Neal

Thanks.

Operator

Our next question comes from the line of Aditya Oberoi with Goldman Sachs.

Aditya Oberoi – Goldman Sachs & Co.

Great, thanks a lot. One more housekeeping on the European production side. I think you guys just told about your assumption for the first quarter. what are you assuming for European production for the full year if you don’t mind sharing?

Rodney O'Neal

Down 4%.

Aditya Oberoi – Goldman Sachs & Co.

Got it. And the other question is on pricing and the European cost. do you think you guys are from a cost footprint standpoint you guys are sufficiently positioned to manage the down 4% or you guys need more flexing, and a related question any aggressive pricing you are seeing from competitors or OEM's requesting more price downs in Europe then your up.

Rodney O'Neal

In terms of our flexibility we’ve always talked about the models that enable to flex proven to be true, and what we’re doing is making it better, identify some of the restructuring initiatives that we talked about last quarter, the bulk of that was aimed at your just to increase flexibility as move forward. So we feel very comfortable our ability to have the 4% downtime so, in terms of pricing; our pricing is really 1.5% to 2% you saw it in numbers in Q4 by the line, and that’s the way we see it going forward, so I can’t speak for other suppliers, but we’re maintaining that our pricing is going to be and that have range 1.5% to 2%.

Aditya Oberoi – Goldman Sachs & Co.

Okay.

Kevin P. Clark

And operator we only have time for one more question.

Operator

Our final question comes from the line of Matt Stover with Guggenheim.

Matt T. Stover – Guggenheim Securities LLC

Most of my questions have been asked on the restructuring front, can you give us a sense of the headcount impact to the $300 million, the cash, non-cash piece of that, and the timing of why you’d expect for the cash piece of that fourth row.

Kevin P. Clark

Sure let me when I start with just the ground, we’ve talked about previously, and where we are now Matt.

Matt T. Stover – Guggenheim Securities LLC

Sure.

Kevin P. Clark

So previously we talked about $250 million for restructuring, $175 million in 2012, $75 million in 2013 with cash out leads that were basically $50 million – a $150 million – $50 million in '12, $150 million in '13 and the balancing in '14.

Now we're estimating $300 million in restructuring charges, $170 million booked in 2012, the balance in 2013. From a cash standpoint, $50 million was spent in ’12. We’d expect roughly $200 million to be spent in '13 with the balance of in 2014. As we mentioned, 2013 benefits, we’re estimating roughly $70 million – $80 billion. That includes the MVL synergy savings in that number of $50 million. And then we would say it ramps up significantly in 2014 and beyond kind of 2 to 2.5 times of that 2013 savings numbers.

Matt T. Stover – Guggenheim Securities LLC

That's very helpful. One other follow-up question, as we look at the growth in your Chinese business, can you give us a sense of sort of the trends in the underlying profitability because if we look at some of the publically listed Chinese companies, we’ve seen as the market has growing in deterioration margin, I'm just trying to think about, as we look for a big 9% growth in the volume next year, how you folks are incorporating the margins assumptions and your underlying guidance?

Rodney O’Neal

We don't spec it out that way. But the business that is rolling on is equal to or better than the margins we have today.

Matt T. Stover – Guggenheim Securities LLC

Thanks.

Rodney O’Neal

Great.

Kevin P. Clark

This will conclude our conference. Turn it back to the operator.

Rodney O’Neal

Thanks for joining us. We’ll see you in the next quarter and stay safe.

Operator

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

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