Delphi Automotive PLC Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: Delphi Automotive (DLPH)

Delphi Automotive PLC (NYSE:DLPH)

Q4 2013 Earnings Call

February 04, 2014 9:00 am ET

Executives

Jessica L. Holscott - Vice President of Investor Relations

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

Itay Michaeli - Citigroup Inc, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Emmanuel Rosner - CLSA Limited, Research Division

David H. Lim - Wells Fargo Securities, LLC, Research Division

Joseph Spak - RBC Capital Markets, LLC, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Colin Langan - UBS Investment Bank, Research Division

Operator

Good morning. My name is Tony, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Delphi Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jessica Holscott, Delphi's Vice President of Investor Relations. Jessica, you may now begin your conference.

Jessica L. Holscott

Thank you, Tony, and thanks for joining Delphi's Fourth Quarter Earnings Call. To follow along with today's presentation, our slides can be found at delphi.com under the Investors section of the website. Please see Slide 2 for a disclosure on forward-looking statements, which we'll be making on today's call and only reflect Delphi's current view of future financial performance, which may be materially different from our actual performance.

Joining today's call will be Rod O'Neal, Delphi's CEO and President; and Kevin Clark, our CFO. As seen on Slide 3, Rod will begin the call with an overview of our fourth quarter, followed by Kevin, who will review our financial results in greater detail, discuss our 2014 outlook, and then after Rod's concluding comments, we'll open the line up for Q&A. With that, I'd like to turn it over to Rod.

Rodney O'Neal

Thank you, Jessica. Good morning, everyone. I appreciate you joining us. We had a record fourth quarter and finished the year extremely strong. In fact, when you look at what Delphi has accomplished in the last year, it's further proof that our company remains laser-focused on delivering value to our customers and to our shareholders.

Move to Slide 5, please. We capped off 2013 with a record fourth quarter. Revenues were up 11%. EBITDA margins expanded 170 basis points and the EPS grew 24%. For the year, Delphi's revenues were $16.5 billion, up 6%. Our earnings per share increased 15%. So in summary, 2013 was a great year.

We're very optimistic that we will achieve double-digit EPS growth in 2014. We continue to maintain a disciplined focus on capital allocation. Our Board recently approved $1 billion share repurchase plan and increased our annual dividend payout from $0.68 to $1 per share. And we will continue to invest in our game-changing Safe, Green and Connected portfolio.

So Delphi has a lot to be excited about, and I am extremely proud of our continued strong results. It's a testament to Delphi's focus on technologies that our customers want and the markets are demanding. And because of that, we're well-positioned for growth and profitability.

Slide 6. You've heard me say this before, but there's no better technology showcase than the Consumer Electronics Show in Las Vegas. Automotive has become one of the top attractions at CES. All of the OEs were there. And I had a chance to meet with our customers and several of our partners, like Tesla, Intel, NVIDIA and Apple.

Slide 7. The week after CES, I and my team met with the top leadership of our customers at the 2014 North American International Auto Show. This year's show had the highest attendance in 10 years, a sign of positive momentum we're seeing in the North American industry.

Let's go to Slide 8. Delphi continues to focus on solving our customers' problems, and we will continue to invest in innovation for the future. This year, we will invest close to $1.7 billion in engineering and development, and plan to increase the number of engineers to 20,000. And as further proof that our technology investments continue to hit the mark, Delphi has 3 technologies that are finalists for the prestigious Automotive News PACE Award this year. We've already won 16 PACE Awards, more than any other company. And these awards are validation of both our advanced technologies and our operational excellence. And in 2014, our technologies will continue to wow the marketplace.

Slide 9. We had a record fourth quarter of $8 billion in new business bookings that included an award for Ford for global safety electronics and a BAIC Mercedes award for wiring in China. And as you can see, we continue to diversify the regional mix of our revenue.

Let's go to Slide 10. Our priorities are very simple, and they remain unchanged. All are focused on increasing shareholder value through disciplined revenue growth, optimizing our footprint, accelerating the introduction of advanced technologies, expanding margins, increasing earnings per share and deploying capital in a very disciplined manner.

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

Kevin P. Clark

Thanks, Rod. Good morning, everybody. I'll begin by covering our fourth quarter results, and then discuss full year and first quarter guidance.

Consistent with our prior earnings call, today's discussions will exclude all restructuring and other nonrecurring costs to provide clear visibility into the underlying performance of the business. For your reference, the reconciliation between GAAP and non-GAAP numbers are included at the back of both the press release as well as this presentation.

So let me start on Slide 12 with a snapshot of our fourth quarter financial performance. As Rod already mentioned, we were very pleased with our results, which reflected strong underlying markets, especially in China and North America, and continued very solid operating performance. The net result was strong revenue, strong earnings and cash flow growth. However, we remain cautious about the macros in Europe and have concerns about the current environment in South America, which I'll touch on later in the presentation.

Revenue totaled $4.2 billion, that's up 11% for the quarter. Adjusting for the effects of FX, commodity prices and acquisitions, revenues increased 8%. That's roughly 4 points over our underlying market.

EBITDA increased almost 26% to $611 million, and EBITDA margins expanded 170 basis points to 14.6%. Operating income reached $472 million, and operating margins expanded to 11.3%. That's 190 basis point year-over-year increase.

Net income totaled $345 million, and earnings per share increased, as Rod said, over 24% to $1.12.

Lastly, cash flow totaled $520 million. So with that as the backdrop, move to Slide 13, and I'll review revenue in greater detail.

As I mentioned, revenue increased over $400 million, or 11%, to just under $4.2 billion during the quarter. Price down to 1.6% and lower copper pricing pass-throughs presented a combined $78 million, or almost a 2-point headwind to year-over-year growth. FX added $55 million to revenues and over 1 point to our growth rate. Volume totaled $369 million, adding 10 points of growth. And the MVL acquisition, which we closed on in late October of 2012, added roughly $70 million of revenue or 2 points to our growth rate.

On a regional basis, European revenues were up 7%, primarily the result of easier year-over-year comps. If you recall, in the fourth quarter of 2012, the European market was very weak, and our revenues were down over 18%. However, during the quarter, we did benefit from the ongoing improvement in the underlying market, especially during the month of December. But as I mentioned, we remain cautious about the pace of this improving trend.

North American revenues increased roughly 9%, reflecting very strong December production schedules, partially driven by the transition to the K2XX platform. Asia continued to be our fastest-growing region. Revenues increased over 14%. China revenues actually increased 17%, and were actually up over 20% in the month of December alone, driven by strong growth across each of our business segments.

Revenues in South America decreased 6%, reflecting the recent softness in the market, which gives us some concern regarding the outlook for 2014 production in the South American region.

Slide 14 reconciles the $125 million increase in EBITDA to $611 million. As I mentioned, that's an increase of 26%, reflecting flow-through on higher revenue, solid operating performance, and MVL-related synergies, partially offset by price downs and increased investment in information systems and advanced engineering. As already mentioned, EBITDA margins increased 170 basis points to 14.6%.

Slide 15 details our segment results. Electrical architecture adjusted revenue was up 12% from the prior period, driven by strong growth in China, North America and Europe. Segment EBITDA increased to $318 million. That represents 15.5% EBITDA margins, up 240 basis points from the prior year, the result of flow-through on revenue growth, continued strong operating performance and synergies from the MVL acquisition.

Revenue in our Powertrain segment totaled just under $1.1 billion. That's up roughly 3%, the result of strong growth in North America, low-single digit growth in Europe and Asia, partially offset by lower revenues in South America.

As I mentioned on our third quarter call, the mix headwind related to lower sales of diesel fuel injection systems is behind us, but it will not turn into a tailwind during 2014.

Segment EBITDA increased $29 million to $177 million, and EBITDA margins expanded to 16%, primarily the result of savings from our restructuring initiatives, timing of engineering rebuilds and volume growth.

In our Electronics and Safety segment, revenue totaled $692 million. That's an 8% increase from the prior period, the result of strong double-digit growth in Asia and solid growth in North America and Europe, partially offset by lower revenues in South America. The sale of Active Safety products almost doubled during the quarter, which is partially offset by lower sales of less profitable mechatronics products.

Segment EBITDA increased to $99 million, and margins totaled 14%, reflecting flow-through on higher revenues and improved product mix, more than offset by increased spend-related advanced engineering and information systems, as well as timing associated with engineering rebuilds.

Lastly, Thermal revenues increased 7% to $373 million, and EBITDA was up slightly to $17 million, representing 4.6% margins, flat year-over-year, but up sequentially. We expect Thermal margins to continue to improve on a sequential basis throughout the balance of 2014.

Turning to Slide 16. Earnings per share increased $0.22 or 24% to $1.12, driven by increased earnings and a lower share count, partially offset by a higher tax rate, which was 9% for the quarter versus 8% in the same period last year.

Moving to Slide 17 to touch on our full year results. We delivered strong margin expansion and earnings growth in a relatively challenging environment in Europe during the first half of the year. Revenue totaled $16.5 billion. That's up 6%. EBITDA totaled almost $2.4 billion. And EBITDA margins increased 70 basis points to 14.5%. Net income increased to just under $1.4 billion. Earnings per share totaled $4.40. That's an increase of almost 15%. And free cash flow totaled just under $1.1 billion.

So with that as a backdrop, let's move to Slide 18 to review revenue for the full year in greater detail.

As I mentioned, reported revenue was up 6% to just under $16.5 billion. Price down totaled 1.5%, which were in line with our expectations. FX and commodity prices had about a $67 million positive impact on revenue, adding 1 point to our year-over-year growth rate. Sales volume totaled $417 million, adding 3 points growth. Acquisitions, net of divestitures, added $695 million of revenues or 5 points of growth. Excluding FX, commodity prices and acquisitions, revenues were up 1%.

On a regional basis, our revenues were strongest in Asia, up 11%, driven by continued strong double-digit growth in China. Revenues increased 5% in North America and 2% in South America, and declined 6% in Europe, reflecting lower vehicle production, further exacerbated by mix headwinds related to the sale of diesel fuel injection systems in the light vehicle and the commercial vehicle markets.

Slide 19 illustrates the benefits of our lean and flexible cost structure, which has driven significant margin expansion. EBITDA totaled almost $2.4 billion for the year. That's an increase of over 11%, reflecting the impact of price downs, which is more than offset by very strong operating performance flow-through and volume growth, MVL-related synergies and restructuring benefits. EBITDA margins expanded 70 basis points to 14.5%.

Slide 20 includes our segment financial results. Electrical architecture's adjusted revenues increased 6% to over $7.2 billion, and EBITDA margins expanded 160 basis points to 15.5%.

Revenue in our Powertrain segment was down 6% to $4.4 billion, primarily the result of a 10% reduction in European revenues and softness in the global automotive aftermarkets. EBITDA margins in this segment declined 30 basis points to 15.2%, reflecting the impact of this lower revenue, as well as product mix, partially offset by cost reduction initiatives.

Revenue in our Electronics and Safety segment was up 2% to almost $2.8 billion, driven by strong growth in Asia and mid-single-digit growth in North America, partially offset by lower revenues in Europe and South America. As a result of revenue growth, improved business mix and operating performance, EBITDA margins increased by 70 basis points to 14%. And lastly, thermal revenues declined 2% and EBITDA margins totaled 5.4% for the year.

Turning to Slide 21. Earnings per share increased 15% from $3.84 to $4.40, primarily the result of earnings growth, but also benefiting from share buybacks, both of these partially offset by higher taxes on a year-over-year basis.

Moving to Slide 22. In 2013, we generated almost $1.8 billion of operating cash flow. That's up almost $300 million from the prior year, primarily the result of increased earnings and lower CapEx. We used our cash flow to fund just over $680 million of CapEx during the year, make $85 million of mandatory debt paydowns and returned almost $670 million of cash to shareholders through share repurchases and dividends. We remain very committed to executing a very balanced and disciplined capital allocation plan.

Slide 23 details the assumptions underlying our 2014 guidance. We're forecasting global production of roughly 90 million units, which represents a 3% increase. Looking at our forecast by major region, in North America, our guidance assumes a 4% increase of production. In China, we're expecting production growth of 9%. We're forecasting European production to increase 1% year-over-year. And in South America, we're forecasting a 5% increase in production for the year, which, as I mentioned earlier, we're watching closely. It does give us some concern based on the recent environment in the region. For the first quarter, we're forecasting global vehicle production of roughly 22.5 million units that represents a 4% year-over-year increase.

Turning to Slide 24 to reiterate the 2014 full year guidance we provided at the Deutsche Bank conference in January. Before I get into the numbers, we previously mentioned that we intend to implement additional restructuring initiatives during 2014 to further reduce our Western European footprint. These initiatives will bring our cash outlays related to restructuring to roughly $200 million in 2014. That's an increase of roughly $50 million over the prior year. As a result of the nature and timing of the initiatives, savings in 2014 for these incremental programs will not be significant.

We currently expect full year revenue to be in the range of $17.2 billion to $17.6 billion. That's a 6% increase over 2013, roughly 3-points over Delphi's served markets at the midpoint of our guidance range. Operating income is forecast to be $1.95 billion to $2.05 billion, reflecting the impact of flow-through on volume and continued strong operating performance, partially offset by a $60 million increase in depreciation and amortization expense, which will total roughly $600 million in 2014.

Operating margins will increase to 11.3% to 11.6%, and EBITDA margins will be in the range of 14.8% to 15.1%. Earnings per share are expected to be in the range of $4.70 to $4.95, representing 10% growth at the midpoint and is based on a share count of 309 million and an 18% tax rate.

Turning to the first quarter, we expect revenues to be in the range of $4.2 billion to $4.3 billion, representing 6% growth, roughly 2-points over market. Operating income will be in the range of $435 million to $460 million, reflecting the benefits of volume growth, partially offset by increased engineering and information systems expense and lower engineering rebuilds. Operating margins will be in the range of 10.4% to 10.7%, and EBITDA margins will be in the range of 13.7% to 14%.

We expect EPS to be in the range of $1.04 to $1.08, and again, that assumes 309 million shares outstanding. We expect the first and second quarter tax rates to be 19% this year. That's about 1 point higher than our outlook for the full year reflecting regional mix and timing of planning initiatives. I'll now turn it back to Rod for some closing remarks before Q&A.

Rodney O'Neal

Thanks, Kevin. Please move to Slide 26. In closing, before we go to the Q&A, just a reminder. Delphi had a terrific year, and the team did a great job in terms of execution. So looking forward, we are well-positioned for top and bottom line expansion, driving earnings per share growth. We continue to invest in market-leading technologies and we continue to have a very disciplined approach to how we allocate our capital.

So with that, let's open up the call to questions.

Question-and-Answer Session

Operator

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

Brian Arthur Johnson - Barclays Capital, Research Division

A couple of housekeeping questions and a strategic question. On the housekeeping backlog, are you going to be giving that to us at the Investor Day, or can you comment on it?

Kevin P. Clark

Yes, Brian, we're going to give that to you at the Investor Day. We needed to save something new for that day in March. I will say, we've talked about it in the past. As we look at 2014, we would expect net new business to be between $800 million and $900 million for the year, to give you an idea of our perspective for the current calendar year.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And second, on the guidance, you talked about FX and commodity rates stable, South America growing. What's the risk there from the current emerging market headwinds in South America, and is that something you thought about -- you've considered when you've reiterated your 2014 guide?

Kevin P. Clark

Yes, it's something we've considered. When you look at our exposure to emerging markets, really, setting aside China, we have a business model where we typically don't price in local currency. When we do, we have the ability to pass on labor inflation or changes in foreign exchange, Brian. And most of the emerging markets, including places like Turkey, are actually locations that we manufacture in and export out of. So again, the current environment was contemplated in our guidance, and we have it well-managed.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And then the more strategic question is, where can you really see EA going? It looks like you're getting both good revenue growth there with say, because of Connected Car and good margin results there, certainly year-over-year. Do you see room for both acceleration of revenue growth and for margin expansion? Or is it more revenue growth and the margins are where they're going to get?

Kevin P. Clark

No, we think there's an opportunity for both. I mean, to your point, as content -- as electric content goes into the car, there's more opportunity for the electronic backbone and nurse [ph] center that electrical architecture provides. And as you look at margin, based on both operating performance, as well as mix, when you look at connectors relative to wire harnesses, there's the opportunity to further enhance the margin profile of the business. And we'll update at our March investor meeting our outlook for long-term margins in the business.

Rodney O'Neal

Brian, that was a little bit of the beauty of the MVL acquisition. It was to slightly modify the DNA of our existing electrical architecture business with the infusion of additional connectors. As a result of that, what we tried to create and have accomplished is a business that has really good top line, but also margin expansion. And so we'll get into it more at the Investor Day, but we're quite pleased with where we are and we believe we have significant market momentum going forward.

Brian Arthur Johnson - Barclays Capital, Research Division

And roughly, what is connectors as a percent of EA now after the integration of MVL?

Kevin P. Clark

It's 20% to 25%.

Operator

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

Rod Lache - Deutsche Bank AG, Research Division

Can you give us a little bit more on that Q1 guidance. If we were to sort of think of about the bridge year-over-year, you've got, in your guidance, like $176 million to $276 million of top line growth and EBIT growth of $4 million to $29 million. What are some of the headwinds that are incorporated in that?

Kevin P. Clark

Yes, you -- what a nice turf. Rod, I'd look at it 2 ways. One, I'd look at it on a sequential basis. I think that's helpful. And as you look at revenues on a sequential basis, the business will grow roughly 3%. When you -- on a sequential basis, when you look at things like engineering rebuilds, which tend to be much stronger in the fourth quarter than they are in the first quarter, you have about $30 million to $40 million of engineering rebuilds that fall out on a sequential basis. So that should help explain some of the transition in profitability. When you look at it on a year-over-year basis, again, 6% growth, about 2 points above market. When you look at flow-through, we have, on an incremental basis, we've talked about spending an additional -- making additional investments, I'm sorry, in IT and engineering, there's about $20 million or $25 million on a year-over-year basis that I would call growth investments in engineering and IT that affect the margin. So those -- that's the big explanation of the change regarding flow-through on a year-over-year basis.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And what are your regional production assumptions in the quarter?

Kevin P. Clark

Our regional production assumptions -- bear with me one moment, if I could. Europe, up about 3.5%; North America, 6.5%; China, about 8%; and year-over-year, about 4% production.

Rod Lache - Deutsche Bank AG, Research Division

Okay. In the quarter in your bridge, you showed performance of about $50 million, pricing was $60 million, so it's largely being offset. But I think you include the MVL in that line? Could you just comment a little bit about -- if we were to extrapolate from that, what's the underlying ability to mitigate price deflation as you look out to 2014?

Rodney O'Neal

Sure. Well, in that line, as you can imagine, there is a lot of moving parts. We build a plan to have performance initiatives that offset price, as well as economics. And we work hard to perform towards that. When you look at it on a fourth quarter basis, we had performance initiatives that actually exceeded price. But we had a little bit of mix, quite frankly, that went against us in the quarter on a year-over-year basis to the tune, I don't know, of about $30 million.

Rod Lache - Deutsche Bank AG, Research Division

Okay. But you're still expecting to exceed that. I think you were originally targeting something like $120 million of synergies in 2014. Is that something that you feel pretty comfortable exceeding the pricing in the year?

Kevin P. Clark

Yes, as we look at 2014, the last that we talked about it on Q3, our Q3 call, as we expected, between $100 million to $120 million of synergies and restructuring benefits in 2014 calendar year.

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 on South America. I know it's about 6% of your total sales. But could you just comment on your profitability down there just so we can understand what the risk is around sort of the potential macro swings?

Kevin P. Clark

Yes, we don't give profitability by region, John. But as we said in the past, that is a region, over the last couple of years, given what's going on from an inflation standpoint, labor cost standpoint, it's been less profitable than our corporate average.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then just a second question on Powertrain. You've had a couple of good quarters here. Second quarter was 16.4% on EBITDA margin and then fourth quarter was 16%. It sounds like the business is normalizing as far as mix in Europe. Are we going to see a 16% margin potential in Powertrain in the near term? I know that's kind of sort of longer-term, which some people are expecting. But it sounds like you guys are performing very well there. I know the second quarter was a big quarter, but we got another good one here in the fourth quarter.

Kevin P. Clark

Yes, I -- listen, I don't know, sitting in my chair right now. We're going to definitely have quarters throughout the calendar year that are at 16% or better. I would -- as I look at 2014, our expectation would be that EBITDA margins be a little bit below 16% at this point in time, and then we'd be above 16% in '15 and beyond.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then just on DNA versus CapEx. The DNA at $600 million versus CapEx of $800 million, the spread between DNA and CapEx is opening up, which indicates you've got a lot of investment for growth coming in '14 that should come in '15, '16 and '17. Is that sort of a correct interpretation? Or is there something going on with timing? And over time, are we 3 to 5 years out when DNA matches CapEx or are we going to continue to see this kind of gap for a while?

Kevin P. Clark

Hey, listen, it's probably 5 years out. When you look at our CapEx spend for 2013 and calendar year '14, roughly 30% to 40% would be what we refer to as maintenance. The balance is all related to growth initiatives, new programs.

John Murphy - BofA Merrill Lynch, Research Division

Okay, that's helpful. And then just lastly, on the European restructuring, $200 million being spent in '14, what's the payback period you expect for that roughly?

Kevin P. Clark

Those programs tend to be, as you may know in Europe, the restructuring in Europe tends to be more costly. The average program is roughly 3 years. And that's why you're not going to see much incremental benefit in calendar year 2014.

Operator

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

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

Can I start on Slide 8 where you listed a bunch of new technologies there. Can you talk about how much of your revenue base -- I don't know if that's possible, but how much of your revenue base comes from those products and how much of your backlog does if there -- or any color you can give in that kind of context would be great.

Rodney O'Neal

Well, I think we'll cover a lot more of that at the Investor Day. And so if you could just wait a few weeks, we'll make you happy.

Kevin P. Clark

I would say, these are all technologies that we introduced in 2013 calendar year. So David, as you look at, or you talk about these specific part numbers, they tend to be relatively small. Now there's some technologies, right, that are advances on our existing technologies and -- like the heavy-duty diesel common rail system that needs new standards. We can update you in March.

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

Okay. And then can we talk a bit about the commercial vehicle side and the Euro 6 pre-buy, very strong build rates here at the end of Q4, very weak in Q1, and how much of a factor that's playing into some of the revenue numbers we're seeing?

Kevin P. Clark

Yes, we saw a very strong December. And across our businesses, we estimate that the prebuy was roughly $20 million in the quarter. So that does explain a little bit of a walk from Q4 to Q1.

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

Yes, okay. And then, lastly, just at the CES, you showed a lot of technology, a lot of investments and focus on infotainment, and that's been a part of the business in the past around that you've sort of backed away from a little bit. It looks like it's moved back to the front burner as a growth opportunity for you. Can you just talk about that a bit?

Rodney O'Neal

Well, it's a very interesting space. Very dynamic. And David, I don't know if I backed away from that. I think I was just being more futuristic in terms of where I thought the ultimate business would go. But we're very pleased with where the business was today. And also, over the short-term horizon, we always felt that it would be a growth engine for our company. And so we're pretty excited about it. And as you -- as the convergence of infotainment and safety continue to come together, there's plenty of opportunity. I think you saw an announcement yesterday where the government is beginning to think about legislation of having vehicles talk to one another. The rules of engagement have yet to be determined. But obviously, it's pretty exciting for us to hear that because it's not so much that the vehicles will talk to one another. What's exciting to me and the team is what do we have the opportunity to do when they do begin to communicate because obviously, you have to take that communication and do something with it in order to mitigate potential collisions, et cetera. So it's a pretty exciting space, as it -- particularly when you look at it from a convergence and the safety aspect. And we'll cover more of that in March.

Operator

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

Ravi Shanker - Morgan Stanley, Research Division

A couple of questions on 1Q, the guidance. I think 1Q of 2013 was probably a trough quarter for European production. So I'm expecting that's going to be a tailwind in 1Q '14 that should at least partially help offset the R&D investment cost. So if you could just comment on that. And also, you seem to be guiding to a pretty sharp ramp in margins through 2014. Does that mean most of investment costs are going to be in 1Q?

Kevin P. Clark

Yes, Ravi, this is Kevin. I'll take the first shot at it, and Rod, if you want comment. As we look at the first quarter, when we look at Europe, I would say Europe's going to be our slowest, actually, from a growth rate standpoint, it'll be towards the slower end of overall growth for us. A part of that will continue to be Powertrain. It's stabilized in Q3 and grew slightly in Q4. But when you look at the year-over-year comparison to Q1 of 2013, it'll still be down. So that's my point on it won't be a tailwind in Q1, and quite frankly, it probably won't be in Q2, either. So that's a bit of what affects growth in the first quarter or the optics of growth in the first quarter of the year. As it relates to investments. Our investment, I think it's fair to say, is fairly front-end loaded, and performance initiatives kind of roll out through the balance of the year. So it's timing of spend, and it's not all in Q1, it's spreaded throughout the year. But it's also timing of the rollout of the various performance and productivity initiatives that we have.

Rodney O'Neal

And Ravi, the other thing is as you saw in Q3 and Q4 of 2013, the stabilization of both our Powertrain and our Thermal business. And this, sequentially, as Kevin talked about, was the improvement year. So that's a little bit of the ramp-up you're seeing also.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And just one housekeeping question. Kevin, you said that the first half tax rate is going to be 19%, and you have 18% over the full year. I'm assuming that means 17% for the second half and not 18% for second half.

Kevin P. Clark

Yes, I -- that's fair. It may in Q3 and Q4 vary a little bit off that 17%, Ravi. But that is a good assumption.

Operator

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

Itay Michaeli - Citigroup Inc, Research Division

Just a question on Slide 9 on the bookings. You had a terrific fourth quarter. Rod, I was hoping you could maybe talk about what you're seeing out there in the pipeline today. Was there any pull in Q4 from perhaps, 2014 opportunities? And then are you actually targeting a bookings number for the full year?

Rodney O'Neal

What we see for 2014 is a year that's equal to or better than '13. And there's plenty of opportunity. And we ended the year with a very high win rate. So in that, we expect that to carry over. So equal to or better than 2013 is where we're looking at.

Itay Michaeli - Citigroup Inc, Research Division

Perfect. That's very helpful. And then, Kevin, just a question on the Thermal segment. I think you mentioned that you expect margins to gradually rise throughout the year. I think that segment actually has a bit higher South America exposure than some of the others. Can you maybe talk about the dynamics there and just sort of what the drivers are for margin improvement throughout the year in Thermal?

Kevin P. Clark

It's -- Itay, that's a great question. It's a mix of a couple of things: The restructuring program, the cost reduction initiatives that we've been putting in place and having them play out for the balance of the year, as well as you'll see a nice revenue ramp up throughout the year as a result of some of the new business bookings that they've won over the last couple of years. So a mix of cost-reduction, restructuring benefits and volume.

Itay Michaeli - Citigroup Inc, Research Division

Great. And just lastly, a quick housekeeping. What was the aftermarket contribution in the fourth quarter? Did that help the powertrain margins at all or is that not a big factor?

Kevin P. Clark

Not a big factor. Aftermarket was up year-over-year in the fourth quarter for us. But it's, as you know, it's a relatively small business and it wasn't a big contributor to that Powertrain growth.

Operator

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

Patrick Archambault - Goldman Sachs Group Inc., Research Division

I guess, the main one I had left was on the revenue outperformance, you -- last year, obviously, I think organic growth you said was in and around 1%. I don't know if I'm getting that right. But somewhere kind of around or maybe lower than the addressable market. This year -- obviously, in the fourth quarter, that changed. You outperformed the addressable market pretty substantially. And it seems like you have something similar baked in for maybe around 200 basis points of outperformance for -- or 300 for 2014. So can you just give us a breakdown of the components of that shift? How much of it is backlog? How much of it is mix? Sort of geographic versus customer? Just to help us understand that.

Kevin P. Clark

Yes, Patrick, it's Kevin. I'm not sure I have it quite laid out in that sort of way. It is a mix of the new business bookings that we've had as well as at least in the back half of the year, when you look at it on a year-over-year basis, not having that -- seeing the Powertrain business actually continue to grow sequentially, as well as year-over-year. That will be a big driver of the growth. Electrical Architecture will continue to have very robust growth on a full year basis, as will Thermal. Thermal, as we see, have continued improvement in their overall business.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. And maybe just diving into one element of that. I don't think we brought up as much at this call, which was obviously a big focus last year which was mix in Europe. One of the things that's been kind of commented on by your peers is that some of the rebounds you're seeing might be in Southern Europe more than Germany. How do you see the mix playing out within Europe for your major customers for 2014 versus '13?

Kevin P. Clark

I think if you look at the industry numbers today, I think you're right. Today, they would say that the OEs in Southern Europe, from a growth rate standpoint, coming off of a fairly low base, will outgrow the Northern Europeans. I think that's some of the base line, including in our production assumptions, as well as our revenue assumptions for 2014. So Rod, if you want to...

Rodney O'Neal

Absolutely, I mean, when you look at the year-over-year, the bulk of the improvement is actually in some of the OEs that had, quite frankly, a disastrous '13. So it's up but up off of a very low number.

Operator

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

Emmanuel Rosner - CLSA Limited, Research Division

Just wanted to come back for a second on your pace of organic growth. Obviously, the fourth quarter was a good one in terms of outperformance versus the industry. For '14, you're guiding to about 3 point above the market. When we -- when you look further out into your book to business, do you feel that, over time, beyond '14, where maybe there's some delayed launches, do you feel like over time you have the room to outperform the market by a larger amount than 2 or 3 points?

Kevin P. Clark

Yes. Yes, we do. I think the -- when you look at our level of booked business, setting aside some of the shifting of schedules for launches which can take place. If you look at our product areas and where we reside and where we make products, we're confident that we have a business that grows in excess of 3 points over market.

Emmanuel Rosner - CLSA Limited, Research Division

Okay. And would that be back to sort of your historical range of like 4%, 5%? Or is that -- or is it too early to quantify?

Kevin P. Clark

I think it's maybe a little early to quantify. But I think 4 to 5 points over market is very reasonable.

Emmanuel Rosner - CLSA Limited, Research Division

Okay. And then just a clarification on the additional investments in IT and engineering. So you're pretty clear that in the first quarter, this could be sort of a $20 million, $25 million incremental cost on the year-over-year basis, and that a lot of these things are front-end loaded. How should we think about that year-over-year walk for the remaining quarter of the year? Is it all mostly spent in the first quarter or is it still going to be sort of an incremental cost?

Kevin P. Clark

No, it will be an incremental cost. So when you look at IT growth -- what we're calling growth investments in IT and engineering on a year-over-year basis, spend will be between $75 million and $100 million. Now that spend, we can calibrate. We can adjust to the extent the market softens and we need to respond to things. Correspondingly, it's spend that we can accelerate if we need to -- if the market strengthens.

Emmanuel Rosner - CLSA Limited, Research Division

Understood. And then finally, could you maybe comment on the -- what you're seeing in terms of the environment for acquisition? Obviously, you had completed a very successful one at the end of 2012, but not in 2013. Can you maybe tell us what you're seeing these days?

Kevin P. Clark

Yes, in the fourth quarter of this past year, at least the acquisition environment improved and the amount of activity we had in and around acquisitions increased -- or potential acquisitions increased. So the environment was very strong in Q4. We'll see if that continues during 2014.

Operator

Your next question comes from the line of David Lim with Wells Fargo.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Just a couple of questions. I just wanted to get your idea or color on infotainment take rates in the quarter. Have you seen an acceleration there? And also if you could sort of characterize the acceleration of recent bookings in the safety and infotainment entertainment space?

Kevin P. Clark

It's Kevin. With respect to take rates on infotainment systems and even in the high end, we've seen an increase bulk [ph] in the high-single digits from a take rate standpoint on infotainment systems. As it relates to Active Safety, growth in 2013 was significant. Year-over-year growth rate was almost doubled from an Active Safety standpoint. So extremely strong. We booked over $1 billion of Active Safety business in 2013, which is more than we booked cumulatively the prior 3 years. So very strong market as it relates to Active Safety. Your third question, I'm sorry?

David H. Lim - Wells Fargo Securities, LLC, Research Division

No, that was actually it. But I do have a follow-up question. I mean, if you did $1 billion in bookings in 2013 -- and maybe I'm getting a little ahead of myself pre-Analyst Day. But any idea of the growth rate that you're anticipating for 2014?

Kevin P. Clark

2014 for Active Safety, looking at our Active Safety business, growth rate will be about 50%.

Operator

Your next question comes from the line of Joseph Spak with RBC Capital Market.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Just headed back to the acquisition environment comment earlier. I mean, obviously, you did a very successful one on the E&A side. What about -- and I think you've said in the past, you'd still be interested in additional tuck-ins there, although they may not be available. But what about on the E&S side? I mean, how -- are you comfortable with your portfolio? Is that an area where you could also look to -- for some tuck-in acquisitions?

Rodney O'Neal

Yes, I mean, we've been pretty consistent in terms of the space that we're focused on from an acquisition perspective. It was Powertrain, electronics and electrical. And so the answer to your question explicitly is yes, it is -- it's an area of focus, and we're always looking.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay. And just bigger picture on the E&A side. I mean, I think, typically, you haven't seen a lot of displacement. So once you're in with the customer, or certainly, a platform, given the critical nature and the design process, you're in there. But in speaking to some of the players in the industry, it does seem like there's maybe been a little bit more movement, at least in terms of share, on that front. Can you comment on that or confirm that? And if there is a little bit more movement than in the past, why do you think that's happening?

Rodney O'Neal

I want to make sure I understand your question. When you say the movement of share, you mean like movement from, like, Delphi to another competitor?

Joseph Spak - RBC Capital Markets, LLC, Research Division

Are you -- if you're gaining share or losing share. I guess, I just want to get your perspective on just share shifts.

Rodney O'Neal

No, we're doing quite well, obviously. This business has a very wide moat and deep moat, and it's able to conquest business because of its technical promise and also, because of complexity of the business, its operational excellence, and its global span. I think it operates in like 33 countries. So it's absolutely impressive. And so our win rates have actually accelerated in our business, particularly as the electrical architecture or the more content in vehicles have gotten more complex. And so we're actually seeing a movement in the marketplace into our sweet spot of complexity and ability to have to -- to do multiple things for the OE to win in the marketplace, and one is elimination of waste, creation of space by shrinking the amount of real estate that our electrical architect occupies. And so we have a wonderful value prop, not just technically, operationally, but also how we bring it all together to create a value profit that does so many things for the vehicle, all the way down to improving fuel economy.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay. Kevin, if I could sneak one in just housekeeping. It's really back to the cadence here. I mean, in the fourth quarter, you outperformed the goal production by about 4 points, and the second quarter it's sort of looking more like 2. Even if we adjust for the year of prebuy which is maybe 50 bps, is that just cadence of launch of the backlog is also a little bit more back-half weighted?

Kevin P. Clark

Yes, I think it's just roll-on and roll-off of business. If I can make one additional comment on EA, because I think it's important. If you look at that business, in this past year, it grew roughly 3 points over market. Some of that is growth in content in vehicles. Some of that is market share. Having said that, the one thing, and we don't talk about it a lot, but it's worth noting. There is business that we've decided that we had and we've decided not to pursue because it's not at margin rates or returns that are acceptable. And that is most prevalent, quite frankly, in the European region. So I just wanted to add that.

Operator

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

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Just one to kind of follow on with the M&A questions. What do you think the likelihood of -- you're obviously looking at a number of deals, so on and so forth, but where are you at in the stage of looking at those deals? Are you kind of in initial stages? Or is there something that you're maybe a little bit farther down the road? I guess, what I'm really driving at is what's the likelihood, in your opinion, of completing something in that 2014 timeframe?

Kevin P. Clark

We would say it's impossible to predict, right? I mean, looking at acquisitions, it takes 2 parties to agree on value, on timing, and there are a lot of variables that affect that. So it's too difficult to predict. I would say the level of activity, our activity and just general activity in the market increased in Q4, and I would expect that to continue at least into the early part of 2014.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Okay. And then switching gears and talking about margins. As I look back at your presentation from last year, you've got about 50 to 150 basis points of margin expansion necessary to kind of hit the -- your objectives in the electrical powertrain and electronics segments. As I look at the Thermal, it looks like it's kind of around 600, 650 basis points of margin expansion from where you're currently at. Pretty significant change there. Can you talk about what are your expectations today in that Thermal segment for margins longer-term? And then, secondly, what are the primary drivers to allow you to improve the margins in that segment?

Rodney O'Neal

Yes, the expectations are -- should be in the double-digit range, above double-digit, actually. And what's going to drive it is the diversification, both customer and geographic, of the book business, which has been significant, that is now starting to roll on. So we're going to get a revenue lift and then we will also get an operational lift because we're going to be executing at a higher level.

Operator

Your next question comes from the line of Matthew Stover with Guggenheim.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Most of my questions have been answered. I just have a couple of details here. Kevin, did you say that on the EBITDA walk, your R&D rebuilds were a favorable effect in the fourth quarter year-over-year comp?

Kevin P. Clark

Yes.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

To what magnitude?

Kevin P. Clark

About $20 million to $30 million year-over-year.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Okay. And if I think of synergy at 100 to 120 this year, obviously, most of the synergy confers to E&A. What businesses should we see the biggest effects from a restructuring standpoint?

Kevin P. Clark

You'll see -- I mean, some of that does reside in E&A. You'll see continued benefit at E&S. You'll see continued benefits at Thermal, as well as some benefits at Powertrain.

Operator

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

Colin Langan - UBS Investment Bank, Research Division

At the beginning of the Q&A, I believe you mentioned that the backlog for '14 was $800 million to $900 million, which seems to be down from $1.1 billion last year and the 3-year backlog guidance. Any color on why it's down? Is it just remeasurements or is there business that's been pushed out?

Kevin P. Clark

No, it's really, Colin it's Kevin, it's the pushout of some programs, both European programs that were scheduled to launch that were pushed out by the OEs, as well as some delays in some of the electric vehicle programs in North America and in Europe.

Colin Langan - UBS Investment Bank, Research Division

Okay. And can you remind me the impact from lower management incentive accruals this year? I thought it was something like $80 million?

Kevin P. Clark

It's about $80 million from walking from '12 to '13.

Colin Langan - UBS Investment Bank, Research Division

And is there any change this year? Because that was a tailwind, right?

Kevin P. Clark

It'll be a headwind this year. It will be up roughly $10 million to $20 million.

Colin Langan - UBS Investment Bank, Research Division

Okay. And with that $80 million, that will be embedded in your net performance and other walk?

Kevin P. Clark

Yes. Yes.

Colin Langan - UBS Investment Bank, Research Division

And then just lastly, on cash flow, I mean, maybe a little color. It looks like your guidance for cash flow before financing is flat year-over-year. Is that mostly just a higher CapEx? And I think you mentioned $50 million in incremental restructuring?

Kevin P. Clark

Yes, yes, if you break it down, there's about $150 million of CapEx, $50 million of incremental restructuring spend, and then you have the investment in working capital as the business grows.

Colin Langan - UBS Investment Bank, Research Division

Okay. So some working capital. And in terms of that restructuring, it's about $200 million. So is that a tailwind when that comes off in '15?

Kevin P. Clark

Yes, I would expect it to be a tailwind in '15.

Colin Langan - UBS Investment Bank, Research Division

Of about $200 million...

Kevin P. Clark

Probably not about $200 million dollars. Probably in the neighborhood of $50 million to $100 million.

Jessica L. Holscott

Great. Thank you for participating in today's call. We hope you could join us for our Investor Day in New York on March 11. As always, we'll be available for any additional questions you may have after the call today. So thank you.

Rodney O'Neal

Thanks, everyone.

Operator

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

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