Delphi Automotive PLC Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 1.13 | About: Delphi Automotive (DLPH)

Delphi Automotive PLC (NYSE:DLPH)

Q1 2013 Earnings Call

May 01, 2013 10:00 am ET

Executives

Jack Monti

Rodney O'Neal - Chief Executive Officer, President and Director

Kevin P. Clark - Chief Financial Officer and Executive Vice President

Analysts

Brian Arthur Johnson - Barclays Capital, Research Division

Rod Lache - Deutsche Bank AG, Research Division

John Murphy - BofA Merrill Lynch, Research Division

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Ravi Shanker - Morgan Stanley, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Itay Michaeli - Citigroup Inc, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Anthony Deem - KeyBanc Capital Markets Inc., Research Division

Emmanuel Rosner - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Colin Langan - UBS Investment Bank, Research Division

Operator

Good morning. My name is Lisa, and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi's First Quarter 2013 Earnings Conference Call. [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, Lisa, and thanks so much, everyone, for joining Delphi's first quarter earnings call. To follow on with today's presentation, our slides can be found at delphi.com under the Investors section of the website. Please see Slide 2 for 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 today's call will be Rod O'Neal, Delphi's CEO and President; and Kevin Clark, our CFO. As seen on Slide 3, Rod O'Neal will begin the call with an overview of our first quarter, followed by Kevin Clark, who will review our financial performance in greater detail, discuss our 2013 outlook, and then open the line for Q&A. With that, I'll now turn the call over to Rod.

Rodney O'Neal

Thank you, Jack, and good morning, everyone. I'm very pleased with our performance in Q1, especially in light of the challenges we all faced in Europe.

So if you move to Slide 5, you'll see that, as expected, we had a very, very solid quarter. I'd like to share some of the highlights with you. We had adjusted earnings of $1.07 per share compared to $1.05 last year. We continued our initiatives to further optimize our cost structure and expand margins. We continue to invest in our bright future by increasing our investment in advanced engineering to support the development of new technologies in the areas of safety and interconnect.

We also bought back $122 million of stock in the first quarter. Now this brings our total share repurchases to just over $0.5 billion in the last 12 months, though $1 billion in total has been authorized by our Board of Directors. We also initiated a quarterly dividend of $0.17 a share that amounts to a little over $200 million of capital returned to our shareholders each year. So these combined activities show that our management team remains laser-focused in increasing shareholder value, even in this very challenging environment.

Turning to Slide 6. This slide shows validation of our ability to execute flawlessly as we continue to receive accolades from our customers for achieving their expectations on quality, delivery and launch. As you look at the chart, you'd see a diverse group of customers who have recognized us with awards in the last quarter. It's also important to note the number of awards from our Chinese customers. That region is very important to our growth strategy, so recognition from our customers there is very, very key to our success. So all of these awards reinforce that Delphi's providing customers with advanced, game-changing technologies the consumers want, which brings us to Slide 7.

I'm extremely proud to share that Delphi recently won another prestigious PACE Award and was finalist for 3 other products. We won with our game-changing common rail for heavy duty diesel. Now this award highlights our commitment to providing leading-edge technical solutions for the marketplace. Delphi now has 16 PACE Awards, more than any other company which is testament to the culture of innovation the team embodies.

Moving to Slide 8. Coming off of a record year in new bookings, last year in 2012, we're off to a great start in 2013, and we expect this trend to continue. In Q1, we received bookings from key customers that include a Nissan award for electrical architecture in North America, a Honda award for flex engine management systems in South America, a Renault award for radar camera system in Europe. We won a significant electrical architecture win in China. And we won a major award for our GDi technology in North America. So for the last 17 quarters, we generated almost $90 billion in bookings. As you can see from the pie chart, in Q1, we continued to increase the geographic diversification of our business with Asia representing 34% of the bookings.

So before I turn it over to Kevin, let me go to Slide 9. And to sum it up, we have great products and I have a great management team that executes flawlessly. Our priorities for the future, well, they remain unchanged, and they are focused on creating value for the customer and for the shareholder.

We will achieve disciplined revenue growth. We will further optimize our European footprint and relocated to lower cost countries. We will continue to delight our customers with award-winning technologies. We will further expand margins and increase earnings per share, and we will continue to deploy capital in a very disciplined manner. I'm extremely optimistic about the future of Delphi. And with that, I'll turn it over to Kevin who will cover the numbers. Kevin?

Kevin P. Clark

Thanks, Rod. Good morning, everyone. As Jack mentioned, I will begin by covering our first quarter result, and then provide second quarter and full year guidance. In order to provide a clear view into the underlying fundamentals for the business, today's review of the actual and forecasted results will exclude all restructuring and other nonrecurring cost. The reconciliation between GAAP and non-GAAP numbers are included at the back of both the press release as well as this presentation, for your reference.

So let me start on Slide 11 with a snapshot of our first quarter financial performance which, as Rod already mentioned, was in line with our expectations and impacted by continued weakness in the European market, most notably for us in Western Europe, as well as the continued slowdown in the global commercial vehicle market. Despite this challenging environment that impacted revenue, we delivered very solid EBITDA and operating margins as well as earnings per share growth.

Reported revenue totaled $4 billion. It's down 1.7%. If you adjust for foreign exchange, commodities, acquisitions and divestitures, revenue has actually declined 6%. As I mentioned, the weakness in European production continued to be a significant headwind across each of our segments, resulting in a 17% decline in European revenues versus an IHS estimate of 9% reduction in European light vehicle production, which includes a 14% decline in Western European production. However, as a result of our lean cost structure and continued very strong operating execution, we delivered very solid double-digit EBITDA margins in Europe and consolidated EBITDA margins of 14%.

During the quarter, net income totaled $336 million, and earnings per share was $1.07. It's up almost 2% on lower revenues.

Lastly, free cash flow totaled a negative $56 million. That is down from the prior year as a result of lower EBITDA, increased restructuring spend and dividend payments received from joint ventures in the prior period.

So with that as a backdrop, let's move to Slide 12, and I'll review our first quarter revenue in more detail. As I mentioned, our reported revenue declined 1.7% to just over $4 billion. Volume and mix, principally in our powertrain and E&S segments, resulted in a decline of $207 million or 5%. Foreign exchange and commodity prices created a $14 million headwind, or roughly 30 basis points, to our growth rate. Price downs were 1.3%, slightly below our forecasted range of 1.5% to 2% annually. And acquisitions net of divestitures added $207 million of revenue or 5 points to our growth rate.

If you look at our revenue on a regional basis, as I mentioned earlier, European revenues were down 17%, the result of continued weakness in light vehicle production vehicle production, further impacted by a labor disruption at one of our OE assembly plants in Belgium during the quarter, as well as the continued decline in commercial vehicle production.

Asia was our fastest-growing region where revenues increased 8%. Within that region, our revenues in China increased 11%, primarily the result of favorable customer mix.

Revenues in North America declined 2%, primarily due to lower production by our largest customer in the region on key platforms, including the full-size truck, the slowdown in commercial vehicle market as well as continued weakness in the automotive aftermarket.

And then lastly, in South America, revenues increased 7% year-over-year due to an increase in vehicle production, as well as customer mix, which also translated into an acceleration of our sequential growth.

Slide 13 reconciles the year-over-year change in EBITDA. For the quarter, EBITDA totaled $562 million, reflecting the negative effect of lower revenue and less favorable product mix principally in Europe, price downs, foreign exchange, an increased investment in advanced engineering, partially offset by very strong material and manufacturing performance, as well as a reduction in SG&A spend, benefits from the MVL acquisition and lower long-term incentive compensation expense. EBITDA margins declined 30 basis points to 14%.

Slide 14 include our segment results. Electrical architecture's adjusted revenue, which excludes the impact of MVL, totaled just over $1.7 billion, that's down 1% from the prior year period, driven by a double-digit decline in European revenues, almost entirely offset by a single-digit growth in North America and very strong double-digit growth in both Asia and South America.

Segment EBITDA totaled $285 million, representing 14.8% EBITDA margins. That's up 40 basis points from the prior year, primarily the result of the MVL acquisition and strong material and manufacturing performance, partially offset by investments in engineering and information systems as well as the OpEx impact of a stronger Mexican peso.

Revenue in our powertrain segment totaled just over $1.1 billion. That's down 12%, reflecting a double-digit decline in European revenues, as a result of continued weakness in the light vehicle and commercial vehicle markets and the related unfavorable product mix. And mid-single digit declines in both North and South America, reflecting customer mix and weakness in the automotive aftermarket, partially offset by sound revenue growth in Asia.

Segment EBITDA margins declined 140 basis points to 14.6%, reflecting lower revenues, principally in Europe, and a related lower sales of higher margin, diesel fuel injection systems, as well as increased investment in advanced engineering.

In our electronics and safety segment, revenue totaled just under $700 million. It represents a 7% reduction from the prior period, principally the result of lower revenues in Europe and North America. Segment EBITDA margins declined 40 basis points to 13%, a result of lower revenues, increased investment in engineering as well as the timing of engineering rebuilds, primarily offset by strong manufacturing and material performance.

Thermal revenues declined 8% driven by a double-digit decline in European revenues and a mid-single digit decline in North America, partially offset by very strong growth in Asia. EBITDA margins increased on a sequential basis, over 200 basis points to 6.9%, or down 120 basis points versus the prior year period, the result of lower volumes, partially offset by benefits from recent restructure initiatives.

Turning to Slide 15. Earnings per share increased to $1.07, driven by lower revenues, the impact of increased depreciation and amortization, the negative effect of foreign exchange, more than offset by accretion related to the MVL acquisition and benefits associated with a lower tax rate, roughly 11% in the quarter versus 18% in the prior year as well as share repurchases.

Moving to cash flow on Slide 16. We continue to do a great job converting earnings into cash flow. Q1 cash flow reflected the normal seasonality of our business and the associated investment in working capital, as well as lower EBITDA and increased restructuring expense. Over the last 12 months, we generated over $2.1 billion of EBITDA, which was converted into over $1.3 billion of operating cash flow, which we use to fund organic growth initiatives, dividend and share repurchases. To drive further shareholder value, we used balance sheet cash and raised debt to acquire MVL, which continued to deliver very solid financial results.

As we outlined in our recent Analyst Day, the disciplined long-term allocation of capital remains a top priority. On a normalized basis, we expect operating cash flow to average roughly 75% to 80% of EBITDA. We'll continue to use 35% to 40% of our operating cash flow for CapEx, 2/3 of which will support growth initiatives, 10% to 15% will fund our dividend program and the balance will fund opportunistic share repurchases and strategic M&A.

Turning to Slide 17. We highlight the strength of our cash flow conversion relative to our peer group. On an LTM basis, our operating cash flow, a percent of sales, is 10%, and free cash flow, as a percent of net income, was roughly 88%, reflecting industry-leading metrics.

Moving to Slide 18. We ended the quarter with a strong balance sheet with solid investment grade metrics, applying multiple levers that continue to drive shareholder value. Balance sheet cash totaled $834 million and total debt outstanding increased slightly, reflecting working capital seasonality, restructuring spend, dividend payments and $122 million of share repurchases during the quarter.

Net debt was just over $1.6 billion, roughly 0.8x LTM EBITDA. And as you can see, following our capital market activity in the first quarter, we have no meaningful debt maturities until 2018. And total liquidity remained very strong at over $2.3 billion.

Moving to Slide 19 to talk about our restructuring program. We increased the size of our restructuring program from the $300 million we discussed at our Q4 call to $375 million. We continue to optimize our cost structure by rotating our manufacturing and engineering footprints to lower cost regions and further streamlining administrative functions. Our activities continue to remain largely targeted at high cost Western Europe, which comprises over 80% of total restructuring spend and almost the entire increase to announce the amount of initial restructuring program. We expect savings of $80 million in 2013, which includes MVL synergies and approximately $200 million of cumulative benefits in 2014.

Now Slide 20 details some of the assumptions underlying our 2013 guidance. Based on several sources, including customer schedules and IHS, we're forecasting global production of just over 86 million units, a slight increase versus our prior forecast and just under a 2% increase with the current IHS estimate for 2012 production. Our current forecast assumes a 3% increase in year-over-year North American production, a 2-point improvement from our prior forecast. However, year-over-year production for our largest customer in the region is now forecast to be down over 0.5%, a one point deterioration from our prior forecast.

Production in China market is now forecasted to increase 10% versus the prior year, roughly 0.5 increase from our prior outlook. We're forecasting European production of just over 19 million units. That's a slight increase from our prior forecast from roughly a 5% decline in year-over-year production versus the current IHS estimate for 2012. It's important to note that this forecast assumes Western European production to be down almost 7%, a slight deterioration versus our prior outlook.

Stepping back considering the various puts and takes in each region that affects Delphi, we believe the overall impact of current forecast for global production and our prior outlook for revenue is really negligible.

So turning to Slide 21 to discuss our 2013 guidance. In total, our outlook remains largely unchanged and reflects a more balanced mix of revenue and profitability between the first and second half of the year. We continue to effect full year revenues in the range of $16.2 billion to $16.6 billion, full year EBITDA is expected to be in the range of $2.325 billion to $2.425 billion with EBITDA margins in the range of 14.4% to 14.6%.

We continue to expect a tax rate of 16% for the full year, and we've increased our EPS guidance slightly, reflecting a share count of 314 million for the year, in the range of 4.15% to 4.41%. And cash flow before financing will total $1 billion with CapEx expected to be roughly $750 million.

Turning to the second quarter, we expect revenues to be in the range of $4.15 billion to $4.25 billion, reflecting roughly a 4% increase on a sequential basis, primarily the result of an increase in a number of production days in the quarter. EBITDA will be in the range of $600 million to $630 million representing EBITDA margins of 14.5% to 14.8%, and EPS will be in the range of $1.05 to $1.15, assuming 340 million shares outstanding and an effective tax rate of 108% in the quarter. So with that, we'd like to open the line up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Brian Johnson with Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

Just want to go in a couple of segments in terms of the margin trends. In Powertrain, how much of a drag was the CV fall-off and kind of as you look to the full year, given your production forecast, are you looking for any recovery there?

Kevin P. Clark

Yes. As it relates to the impact of the CV fall-off, I think, Brian, as you know, the forecast for the first quarter or the actual results for the first quarter of commercial vehicle market globally was down roughly 12%, Europe slightly less than that -- or 12% North America, slightly less than that in Europe. As you know, we have a heavy duty diesel product within our Powertrain segment. So any slowdown in that segment does have a material impact on product mix, revenue and inherent profitability in that segment. As we look at the full year, we expect the commercial vehicle market in North America and Europe to continue to be down in Q2, but for the balance of the year, in Q3 and Q4 to actually improve and we'd expect that commercial vehicle market globally to be up in the mid-single digits for the full year.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And on E&S, you warned us last quarter not to extrapolate margins out. Can you give us any more color, just given the software intensive nature of engineering, intensive nature of the business, on the seasonal pace of engineering, recoveries and, hence, margins on that unit? Or it just depends when there's no seasonality?

Kevin P. Clark

There's a little bit of seasonality in terms of weighing. There tends to be more engineering rebuilds and recoveries in the fourth quarter versus the balance of the year. However, depending on specific development programs with specific customers, there is variability between quarter-to-quarter throughout the year.

Brian Arthur Johnson - Barclays Capital, Research Division

And in terms of a range of variabilities, at plus or minus a couple hundred basis points? Or is there...

Kevin P. Clark

Yes, a couple hundred basis points is reasonable.

Operator

And your next question comes from the line of Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

A couple things. One is, just -- your prior guidance suggested that you'd start with EBITDA margins in the 13.2% to 13.5% range and then accelerate the average 14.4% to 14.6%. And presumably, there were a few things that you did not anticipate that gave you that -- a much higher start in the 14% range. Could you talk a little bit about what those were? And in that context, you didn't raise the full year, you sort of de-risking the year or is it possible that there are a few elements here that are coming in better-than-expected?

Kevin P. Clark

Well, I would say, the primary driver, as it relates to Q1, is we had more volume relative to our prior guidance, which we efficiently generated EBITDA. And so $75 million more in revenue, if you take a look at the midpoint of our guidance for Q1, which translated into $25 million of EBITDA. So I think that was the real driver, slightly better build schedules primarily in Asia. As you look at the balance of the year, I do the mix of 2 things, Rod. I think it's one, we're very committed to hitting the guidance that we've laid out or committed to you folks. It's a relief -- we, from a management standpoint, haven't really seen a catalyst as it relates to Europe to get confidence if that market has actually improved. And third, to quite to be candid, to the extent that we do see healing in the market and we do see stronger revenues, we're going to use a portion of that stronger revenue to basically invest in the business, further invest in the business and growth initiatives and systems investment.

Rod Lache - Deutsche Bank AG, Research Division

Okay, great. And pricing for the longest time has been ranging from 1.5% to 2%. I think it was 1.8% in the fourth quarter, but it seems to be moderating. Is there anything unusual here or sustainable about this lower level?

Kevin P. Clark

We're still very confident that it's, for us, price downs will average 1.5% to 2% on an annual basis and there's a little bit of seasonality within any given year based on launch timing of certain programs.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And just lastly, obviously, there's been some media reports suggesting that you guys are may be in the running for a fairly sizable acquisition in electronics. Could you give us some thoughts on what the vision is there, what would be attractive as far as acquisitions you might be considering? And whether or not that might have an effect on your capital deployment plans?

Kevin P. Clark

Well, we don't comment on specific M&A items, as you can imagine. However, what we have said is, strategically, we're interested in areas that are in and around Powertrain electronics, that if we're to do M&A transaction, they're transactions that are accretive to our earnings growth, accretive to our margins and are effectively bolt-on from an integration standpoint. So from a strategy standpoint, nothing's changed.

Operator

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

John Murphy - BofA Merrill Lynch, Research Division

Just a first question and clarification on the guidance. There are not additional share buybacks there encompassed in your core EPS guidance, is that correct?

Kevin P. Clark

That is correct, sure.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And second question on CapEx, a little bit lower than needs -- the quarterly average run rate that you'd expect going through the course of the year. I'm sure there's some seasonality that works in there. But we heard from some other suppliers that there have been some program delays. Just curious, if your CapEx is being impacted by that and if you are seeing program delays from -- it sounds like a broad swath of automakers are pushing back some programs. Just curious to -- if there's any correlation there or what you're seeing on delays?

Rodney O'Neal

No. There's nothing material in our CapEx number that's -- in terms of the customer moving things out. I think we're just seeing is this -- is that in the noise of the macros, we try just to be a little bit more judicial around what it is we're doing in terms of capital spend. So nothing that has impacted long-term going forward from a customer perspective, okay?

John Murphy - BofA Merrill Lynch, Research Division

But also from the customers perspective, are you seeing any delays in programs, just being driven by them, not you, necessarily.

Rodney O'Neal

No, not really. Nothing material.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then just lastly, we've seen a pretty big pullback on copper this year, year-to-date, certainly, a decent pullback last year. Just curious how that will ultimately funnel through your P&L? And if you would see the benefit or just because you're seen as indexing with your customers and the customers would actually receive the benefit. Just trying to understand the dynamics there.

Kevin P. Clark

Yes, it's Kevin, John. Most of that, as you know, most of the change in the copper prices, it's over 80% now. Our index are passed onto our customers on a slight lag basis. So from a, excuse me, in that P&L standpoint, there's very little impact. Where it does show up, for us, is on a, I think, revenue impact, given the fact that we pass that on to our customers in terms of higher price.

Operator

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

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

I've got 2 questions here. First, on Asia. If we look at Slide 12, we got Asia reported revenues up 27%. The adjusted, up only 8%. Can you create that bit in terms of currency? I'm guessing there's -- MVL falls in there a little bit as well.

Kevin P. Clark

Yes. There's a little bit of currency, but it's mostly the impact of MVL. That's the biggest effect.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, as you look at the performance in China, I think you said China was up from 11% or 12%?

Kevin P. Clark

Yes.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Can you talk about what those new launches -- or is it more customer mix or content mix-related? Is there any additional color you can offer there, in terms of the sustainability of running revenues at that level?

Rodney O'Neal

Well, first of all, let's just go back and look at history. At that level of performance is basically what we've done over there, geez, the last decade. So it's nothing new there in terms of that number. And so it's just more of the same. A couple of things, the reason I would state to you that we feel pretty confident about it being sustainable, is the market -- is rotating into our space of more contented vehicles. And we see a shift, not only where the international OEs continue to offer very heavily content, but you're seeing the shift with the local Chinese brands also rotating in that direction. So it's just really more of what we've experienced over the last several years. So we feel pretty good about it.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Across the segments, is that impacting one of the segments more than the others? Or is it pretty evenly spread?

Rodney O'Neal

It's more directly in Electrical Architecture and our Powertrain. But as the market matures into our direction we're just now starting to see more content in other product offerings. We have about 21 of our 33 product lines there. I'm starting to see more electronics in those types of offerings that are coming into the vehicle, too. But primarily the driver is Powertrain and Electrical Architecture.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, there's a second question. If you look at the European restructuring, when we get to the end of this in 2014, I'm guessing, what portion of your European footprint is going to be manufacturing engineering overhead? Will it be Eastern Europe versus Western Europe?

Rodney O'Neal

I would say, we can get come back here and give you another number, but I'm going to say, off the top of my head, it's going to be in the low 80s.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay, and today, you're...

Rodney O'Neal

Below 80%.

Operator

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

Ravi Shanker - Morgan Stanley, Research Division

The year-on-year improvement in the electrical margin is pretty impressive. Kevin, you listed a series of drivers behind that. Can you help quantify some of those, so we can get a sense of exactly what drove that margin higher?

Kevin P. Clark

Ravi, at the end of the day, I don't want to go through line item and the year-over-year variances by line item. Clearly, this -- you can imagine, has the benefit of the MVL, which was a big driver of the overall year-over-year improvement. The division has done a very good job managing manufacturing, as well as material productivity doing an extremely strong job on that, as well as managing their SG&A line. Now offsetting that, we have made incremental investments. And what we call advanced engineering, which is product development, as well as information systems that enhance the productivity of the business.

Ravi Shanker - Morgan Stanley, Research Division

Understood. Can you give us a little bit more color on why you underperformed the market in Europe in the quarter? What platform and vehicle makes were like? And also how big that labor disruption was?

Kevin P. Clark

The labor disruption, relative to market, was worth roughly, I don't know, $40 million, 2 points of growth, on a year-over-year basis. And it affected a couple of our segments. And as it relates to the European market, our guidance in Q4 for the first quarter was we expected the European market, at least the customers we serve, to be down roughly 15% on a year-over-year basis. Based on our visibility, that's in fact what we saw based on our customer mix, our customer mix and our platform mix. And on a year-over-year basis, there's a unit volume effect. And as we've been talking about for the last couple of quarters, there's also a product mix effect as it related to diesel fuel injection systems as well as higher end infotainment systems that makes the year-over-year revenue comp and margins look -- explain the year-over-year revenue comp and margin.

Ravi Shanker - Morgan Stanley, Research Division

All right. And the labor disruption is now resolved?

Kevin P. Clark

Pardon me?

Ravi Shanker - Morgan Stanley, Research Division

The labor disruption is resolved?

Kevin P. Clark

The labor disruption? Yes, that is resolved.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And just finally, I don't know if you have detail on this, maybe early but did the Verizon plug-in module that you guys launched for the aftermarket, do you have a sense on how demand for that has picked up?

Kevin P. Clark

Well, we just launched it a few weeks ago. There's been demand. We're selling the product but we'll see how it plays out. It's still early.

Operator

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

Patrick Archambault - Goldman Sachs Group Inc., Research Division

I just wanted to follow up actually on that -- one of those last questions there. It seems, just on a very simple nominal level, you kind of maybe underperformed global production slightly or came actually very close to it. Your guidance has you outperforming it by 300 basis points, again ,just keeping things nominal and simple. There's been a few things you've mentioned here, the labor disruption sounds like mix ought to get better. But can you just tell us if we're forgetting anything? Why should you go from underperforming to outperforming in subsequent quarters?

Kevin P. Clark

Yes, listen, I would -- just to be clear, I'd say, in the first quarter, we were below our Delphi Way to market or -- as global production, so we underperformed. Part of that is -- relates to regional and customer mix. Part of that relates to, quite frankly, the product mix that we've been talking about, as it relates to diesel and the infotainment business. We expect that underperformance relative to pull their weight to market in IHS to continue into Q2. I think that you'll see a reduction in that underperformance in Q2. And beginning in Q3 and Q4, you will see outperformance relative to the market. That is due to a couple of things, Patrick. One, product deterioration, product mix annualizes, one. And two, we're going to see product launches in the back half of the year that drive incremental revenue growth. But I would say for the full year, our current outlook, depending whether you picked up, you pick the low end or the high end of the range. The low end, we'd be roughly a point below overall margin, at the high end, we'd roughly a point above.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Got it. Okay. That's a helpful way to frame it. Just as kind of a follow up on the new business piece. My guess is more longer dated, but on Slide 8, you have the new business bookings of $5.7 billion for the first quarter that annualizes to $22.8 billion. So it's a little bit below the run rate. Now is that -- is there some seasonality there that makes for sort of bigger bookings in subsequent quarters?

Rodney O'Neal

Yes. It's not smooth and linear like that. What we had in the Q1 was just a smaller to speak on terms of what we could. Our win rate is actually as good, or better, than it's been in the past. So it's just a matter of what was out there. We'll see that pick up relationship to the -- we expect to have a year equal to or better than to what we had last year.

Operator

Your next question comes from the line of Itay Michaeli.

Itay Michaeli - Citigroup Inc, Research Division

So a question on the restructuring. It looks like you're still finding opportunities. Kevin, can you talk about how we should maybe think about the payback of the new restructuring? And perhaps, do you have an early read on we should think about look for restructuring savings in 2014?

Kevin P. Clark

Yes. We -- let me answer the first part of your question. The paybacks on the newer program that had been implemented could be a short as 12 months, as long as 30 months. I would say, we would average 20 to 24 months when you mix those out. When you look at overall benefits associated with the restructuring program, we talked about run rate savings and/or cumulative savings in 2014 of roughly $200 million. That's off of a base in 2013 of $80 million, so an incremental $120 million.

Itay Michaeli - Citigroup Inc, Research Division

Great, that's very helpful. And then just two housekeeping questions. One, can you share what you're assuming for Q2 European light vehicle production on a year-over-year basis. And did I hear that correctly that you're expecting an 18% tax rate in the second quarter?

Kevin P. Clark

Right. For European production, our outlook is European production will be down 6% in Q2 on a year-over-year basis, up slightly on a sequential basis. And then, I'm not sure I understood the second part of your question, but our guidance does assume an 18% tax rate in Q2.

Itay Michaeli - Citigroup Inc, Research Division

Yes, I just wanted to confirm that.

Operator

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

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Just a couple of items. I want to come back to the comment about some potential program delays with global OEM platforms. We've heard about this from some other suppliers start shifting, instead of launching in '13 or '14, they might launch in '14 or 15. Are you saying that you haven't picked up evidence of that? And is there any change to your backlog over the next couple of years?

Rodney O'Neal

No, I haven't picked up on that. I haven't heard anything about customer shifting their global programs out 2 or 3 years. So we haven't seen it.

Kevin P. Clark

Nothing since we gave guidance on our Q4 call.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then the other question, you guys compete head to head against some of the bigger Japanese suppliers, Denso and Yazaki and so forth? Has there been any change in their behavior? And a lot of the discussion about the yen has been about the OEMs and pricing and so forth. But I'm interested if you're seeing, even any subtle changes in a way that those players are behaving with respect to contracteds or anything like that? Or if you anticipate any changes on a go-forward basis?

Rodney O'Neal

I haven't seen anything and I don't anticipate anything.

Rodney O'Neal

In reality, Chris, to add a little bit more color, we've talked in the past and we say if it plays out ultimately in the revenue and awards. That we've actually benefited from the opportunity to see more opportunities that those suppliers have historically been able to lock up. So from a positive standpoint, we've seen an increase in opportunity.

Rodney O'Neal

But lastly, the way our model's put together, kind of products -- I mean, it's really hard to beat us on amortizing an FX on the yen's perspective. They're going to try to land something out of Japan into the regions that we operate in, where we're shipping, producing product engineering that locally hits, it's sure going to be hard to beat us from a cost perspective. So turning down the charge on the FX just doesn't work in the long run when you're competing against Delphi.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And just the last point of clarification. You mentioned about the infotainment, some of the high-end infotainment hurting your mix in Europe, and you talked about this just last quarter. Just to be clear, is this a take rate issue where customers are not selecting that option as often on the vehicles that you supply? Or is it related to specific business that you have, and maybe there was a loss or a change in the contract that's specific to Delphi?

Kevin P. Clark

No, it's option take.

Rodney O'Neal

It's just option.

Operator

Your next question comes from the line of Brett Hoselton with KeyBanc Capital Management.

Anthony Deem - KeyBanc Capital Markets Inc., Research Division

This is Anthony Deem in for Brett Hoselton today. So there's 2 questions. First, I'd like to hit on the margins and the progress you plan to make throughout the rest of the year. You didn't make midpoint of your 2013 guidance. I'm looking at a 14.7% EBITDA margin in the back half, and first half at about 14.3%. And typical seasonality would be higher margins in the first half, sort of what you saw last year, and it looks like the absolute level of sales and tied within your guidance is actually slightly lower in the back half, albeit not much. So my question is simply, what are the big drivers to do better margin performance in the back half? Is it restructuring or synergies picking up?

Kevin P. Clark

Yes, it's the benefit of the restructuring initiatives and the MVL synergies.

Anthony Deem - KeyBanc Capital Markets Inc., Research Division

Okay. This is a reminder that $80 million for 2013 is that just mostly back half-loaded then, so assume $80 million for the back half?

Kevin P. Clark

It's mostly back half-loaded, it's not all back half. So I wouldn't plug $80 million in the...

Anthony Deem - KeyBanc Capital Markets Inc., Research Division

Okay, that's helpful. And then just secondly, on share buybacks. I understand they're not incorporated in your EPS forecast. But I was wondering if you could share some thoughts on the cadence of the share repurchases? $122 million first quarter here, have $525 million authorized for future repurchases. Do you have a specific target in mind for 2013, as to how much will be potentially spent, assuming that a significant acquisition might not occur?

Kevin P. Clark

I wouldn't say we have a specific target. We would like to remain opportunistic as it relates to share repurchases. So there are given points in time, or points in a quarter, where we want the flexibility to buy more or less. We said to the extent that we don't deploy for cash flow to pursue M&A opportunities, we will use that cash to repurchase stock. I think sitting in your seat, it's fair to assume that we continue to buy stock on an annualized basis at roughly the same level we've done over the last 12 months. And what we told people is in the range of $400 million to $500 million. But to the extent there aren't some interesting M&A opportunities, that amount will be more. What I caution you on is the timing as it relates to deploying that capital and at what price.

Operator

Your next question comes from the line of Emmanuel Rosner with CLSA.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

Just a first one, quick point of follow up on the -- an earlier question on the new business bookings. So in the quarter, you booked $5.7 billion of new bookings. That seems to compare to $7.7 billion that you had reported in last year's slides, so that's like down 25%, 26%. What gives you strong confidence that this will pick up? I realize it's obviously a very lumpy, the timing of signing contract. But I guess, is there -- is it something that you see in your quoting activity that gives you confidence that you will pick materially?

Rodney O'Neal

I tried to address that in the earlier question, I apologize if I didn't do a very good job, so I'll try once again. Basically, what it was is just how much was sitting out on a global opportunity perspective. Our win rate was equal to or better than any win rate that we've ever had. So it was just the opportunity, and we expect our ultimate bookings for the year to equal or exceed what we had last year which was a record year. So it was just what was out there from an OEM perspective in terms of opportunity in the first quarter. That was it.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

Understood, okay. And then just one question on your decremental margins in the quarter. If I just base myself from the slides of the revenue and EBITDA walk that you provide, it looks like the impact from the sales contraction was $77 million and the EBITDA level on $207 million on sales, that's about 37% decremental margin. That seems fairly high. Was there anything in particular that explains this? And can we expect such high level of incremental margins when the production actually turns on and becomes a tailwind?

Kevin P. Clark

Yes. That decremental margin reflects the mix effect that we talked to you about previously. Primarily, as it relates to lost volume in our Powertrain business. Specifically, diesel systems in Europe, which are higher margins, as well as lower sales of those higher end infotainment systems, which tend to have higher margins as well.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

So I guess in the back half, when you will expect some of that mix to turn around, you should benefit from that on the incremental margin as well?

Kevin P. Clark

Yes. Let me be clear. When we look at our full year guidance in back half, we're not assuming that mix actually improves from the current run rate. What actually happens is we're starting to see a mix deterioration late the third quarter of last year. What you're seeing is the effect of it annualizing. So you got a simpler comp. If the market does improve and like volume does improve, and we see higher mix of diesel fuel injection systems, as well as higher take rates on some of the higher end infotainment systems that we just talked about, you would see an improvement in margins. However, we've not assumed the change in those take rates for the back half of the year.

Operator

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

Ryan Brinkman - JP Morgan Chase & Co, Research Division

A lot of my questions have been answered, but maybe just on the thermal segment. I know that you've committed to fixing this business and, obviously, you've earned a lot of credibility with regard to your ability to turn businesses around. But when do you think we might reasonably expect to start to see some margin stabilization? What are the actions that you're taking there to improve margin? And then lastly, do you think that scale might be an issue here at all? Could thermal benefit from maybe partnering with another market participant, whatever form that partnership might take?

Rodney O'Neal

Well, I think, if you look at the expansion sequentially on thermal, our first quarter actually did start moving north. And so we are not satisfied with where we are, but we are pleased that we do have, now, our upward trajectory that we always thought we would have. And that comes from a lot of hard work by the team, in terms of removing cost and restructuring itself and getting ahead of the volume takedown. And as the volume comes back, we feel that we're going to get some nice leverage from a margin perspective. So I think we're on track now. In terms of M&A activity with thermal, we don't comment on that. And the business is $1.5 billion. So it's got a lot to go.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Great, I appreciate the color. And then I appreciate the color, too, on how your European business tracked, the reasons for it, relative to the industry. Maybe just a follow up on that. As we look out, say, 1 year or 2, as things have started to normalize there, hopefully, now how do you see organic revenues in Europe tracking, relative to the industry, longer term, in a more normalized environment?

Kevin P. Clark

In a more normalized environment, we're confident we outgrow the market in each of the regions that we operate in.

Operator

And your final question comes from the line of Colin Langan with UBS.

Colin Langan - UBS Investment Bank, Research Division

Most of mine have been answered but, any additional color on the restructuring in terms of how much of the actual actions have been completed? And maybe the cash impact going out, how much cash costs should we expect in the second half of the year when some of it get further deleted?

Kevin P. Clark

Yes, it's Kevin Clark. A number of the initiatives have been put in place from a cash standpoint for full year 2013. We're estimating roughly $200 million of the $375 million will be spent. Most of that will be in the back half of the year, a little bit of it spent in this first quarter.

Colin Langan - UBS Investment Bank, Research Division

Okay. And in the electronics and safety segment, you've mentioned in the past that you've been rolling off lower margin businesses and did seem like the market underperformance is not that bad this quarter. Is most of that roll off business complete or is there still more to come this year?

Kevin P. Clark

There's a little bit more to come for the balance of the year, but we're reaching a point where it's close to being complete.

Rodney O'Neal

Operator, we will just close out, and then we'll close the call, okay?

Operator

Yes, sir, thank you.

Rodney O'Neal

Again, thank you for joining. I'm really pleased with the results that's the team created in Q1. Delphi continues to change the game with our products and are focused on strong financials and creating shareholder value. Again, I appreciate you joining the call. And we'll see you in the next quarter. Please stay safe.

Operator

That concludes Delphi's First Quarter 2013 Earnings Release Conference Call. Thank you for joining. You may now disconnect.

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