Delphi Automotive Plc (DLPH) Q4 2015 Results - Earnings Call Transcript

| About: Delphi Automotive (DLPH)

Delphi Automotive Plc (NYSE:DLPH)

Q4 2015 Earnings Call

February 04, 2016 9:00 am ET

Executives

Elena Doom Rosman - Vice President of Investor Relations, Delphi Automotive Plc

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Mark J. Murphy - Chief Financial Officer & Executive Vice President

Analysts

Rod A. Lache - Deutsche Bank Securities, Inc.

John J. Murphy - Bank of America Merrill Lynch

Brian A. Johnson - Barclays Capital, Inc.

David Tamberrino - Goldman Sachs & Co.

Ryan J. Brinkman - JPMorgan Securities LLC

Adam Michael Jonas - Morgan Stanley & Co. LLC

Joseph R. Spak - RBC Capital Markets LLC

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

David H. Lim - Wells Fargo Securities LLC

Emmanuel Rosner - CLSA Americas LLC

Anthony J. Deem - KeyBanc Capital Markets, Inc.

Matthew Stover - Susquehanna Financial Group LLLP

Operator

Good morning. My name is Maria, and I'll be your conference facilitator. At this time, I would like to welcome everyone to Delphi's Fourth Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

I would now like to turn the call over to Elena Doom, Delphi's Vice President of Investor Relations. Elena, you may begin your conference.

Elena Doom Rosman - Vice President of Investor Relations, Delphi Automotive Plc

Thank you, Maria. Good morning, and thank you for joining Delphi's fourth quarter earnings call. To follow along with today's presentation our slides can be found at Delphi.com under investor presentations. Please see slide two for a disclosure on our forward-looking statements, which do reflect Delphi's current view of future financial performance that can and may materially be different from our actual performance.

Joining us today is Kevin Clark, Delphi's CEO and President, and Mark Murphy, our CFO. As seen on slide three, Kevin will provide an operations update as well as an overview of the quarter, and then Mark will cover the financial results and the (sic) 2016 outlook in more detail.

With that, I'd like to turn the call over to Kevin Clark.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Okay. Thanks, Elena. Good morning, everybody. Thanks for joining us. Before Mark gets into our financial results I'd like to provide some color on the fourth quarter and 2015 full year as well as our outlook for 2016.

So let's begin with highlights on slide five. In summary, we had another good quarter, which was a really nice finish to a challenging year, in which we had very strong operating performance. Organic revenue growth was a robust 11% for the quarter and 6% for the full year, driven by just under 20% growth in China and roughly 13% growth in our Electrical Architecture and Electronics and Safety segments during the quarter.

Operating income totaled a record $503 million. That was above our guidance. However, operating margins lagged the prior year, primarily the result of the sequential whipsaw in China volumes. You probably recall that in response to the third quarter slowdown in China, we actually reduced head count by about 4,000 employees, and then, had to add back over 6,000 employees to meet the 40% sequential increase in volumes that we experienced in the fourth quarter.

While growth over market inflected in the quarter due to new launch activity, our outlook and our performance also reflected higher manufacturing costs as a result of this increased launch activity. So to put it in perspective, our operating team did an outstanding job executing on a record 75 major new program launches during the quarter and roughly 150 for the full year.

Lastly, Mark will take you through the details, but FX was a bigger impact to margins in the quarter, especially at our E&S segment. For the full year, operating income totaled almost $2 billion, representing a 60 basis point increase in operating margins. New business bookings exceeded 2014 levels, reaching a record $26 billion. And during the year we further optimized our manufacturing footprint, improving the flexibility of our cost structure.

And we generated $1.7 billion of cash flow from operations, and returned roughly $1.5 billion to shareholders through share repurchases and dividends throughout the year. While at the same time making significant progress realigning our product portfolio through accretive acquisitions and investments that strengthen our competitive position, while exiting businesses that did not fit with our strategic and our financial objectives.

Slide six covers 2015 new business bookings in more detail, which as I mentioned totaled over $26 billion a year. We actually totaled over $4 billion for the fourth quarter. During the quarter, we had a number of important customer bookings as well as several conquest wins, including a GDi win with a major North American customer, Electrical Architecture awards with both Toyota and PSA, and the second wave multi-domain controller award with a European OE. We continue to be successful retaining replacement business with our existing customers, as reflected by our win rate on incumbent business of almost 90%.

The right side of the chart reflects the balanced geographic mix of our bookings, which will drive strong revenue growth over the next few years. And as important, the increased geographic and customer diversity ensures that we're not dependent on any one region, segment, or customer for growth. Given our focus on innovation, our portfolio of safe, green, and connected technology solutions and our track record of flawless execution, we continue to be an important strategic partner for our customers.

Slide seven outlines the view of the macro environment in 2016, beginning with our view of the tailwinds on the left. Regulatory trends and consumer demands continue to influence fuel economy, emissions, and vehicle safety standards, driving content for vehicle growth. As a result we see strong demand for our safe, green and connected technologies. We continue to expect solid growth in global vehicle production, primarily driven by strong growth in China, North America, and Western Europe.

As we sit here today, we do not expect foreign exchange rates to be as significant of a headwind as they were in 2015. Additionally, customer price-downs remain relatively stable.

However, we are anticipating some headwinds as detailed on the right side of the slide, including continued softness in vehicle production in both South America and in Eastern Europe and ongoing weakness in the global commercial vehicle market. As such, we will continue to aggressively optimize our cost structure. The flexibility of our cost structure and ability to execute in a challenging macro environment gives us confidence we'll continue to deliver on both our short as well as our long term financial commitments.

Turning to slide eight. Our strong bookings growth has led to a significant increase in major program launches, which in turn has accelerated revenue growth across each of our segments. To put this into perspective, major launches were up five-fold in the fourth quarter 2015 and two-fold for the four year – for the full year rather.

We expect that trend to continue as launches more than double in the first quarter of 2016. These major launches require additional manufacturing resources, as we trend to normalized run rates over the next couple quarters, which translates into a steady increase in margins over the course of the year. And we remain on track to deliver both 2016 and 2017 margin targets.

Turning to slide nine. Last month we made our 20th appearance at the Consumer Electronics Show, which seems to have a larger automotive presence each year. CES is a fantastic venue to showcase a few of our advanced technologies that will create a safer, more connected vehicle and ultimately drive significant revenue and earnings growth.

Our customers, our suppliers, and investors had the chance to travel the streets of [Las] Vegas in our two automated vehicles and experience first-hand some of our newer V [vehicle]-to-everything technologies. We returned from the show optimistic about the tremendous opportunities in active safety, automated driving, and vehicle connectivity, which is further validated by roughly $1.2 billion of active safety and $2 billion of Infotainment bookings during 2015.

And lastly, we're encouraged by the outlook for vehicle electrification. We're seeing accelerated quote activity and revenue growth driven by the success of the hybrid vehicle technologies like 48-volt, where content is more than four times our standard powertrain content.

Our capital allocation strategy, outlined on slide 10, remains an important lever to enhance shareholder value. We expect CapEx to total roughly $800 million in 2016, supporting new program launches in North America, Europe, and China; investments in information systems that increased efficiency and productivity; and supporting our ongoing footprint rotation to best cost countries.

We also believe an attractive dividend is another means of enhancing shareholder returns. As a reflection of our confidence in our underlying business, last month we increased our dividend 16% to $1.16 per share, representing a dividend yield of 1.9%.

And lastly, we remain focused on executing value enhancing portfolio modifications. As such we intend to deploy roughly half of our operating cash flow towards value accretive strategic acquisitions and investments as well as share repurchases.

On the M&A front we hope to acquire and make investments in businesses and technologies that further strengthen our competitive position, drive profitable growth, and are accretive to shareholder value.

To the extent we have excess cash we have a track record of returning it to shareholders via share repurchases, as evidenced by the roughly $1.2 billion of repurchases we did last year. Our current 2016 guidance assumes $400 million of share repurchases. However, we have the flexibility to take advantage of dislocations in the market to ramp up the pace of our repurchase activity.

As shown on slide 11 we believe we are well-positioned to deliver shareholder value in 2016. We will continue to optimize our cost structure by rotating our footprint to best cost countries, increase the flexibility of our workforce, optimize our regional service model, and further integrate the enterprise operating system to ensure flawless execution, both organically and through acquisitions, investing in safe, green, and connected technologies that address our customers' challenges and drive accelerated revenue growth, margin expansion, and enhanced returns.

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

Mark J. Murphy - Chief Financial Officer & Executive Vice President

Thanks, Kevin, and good morning, everyone. I'll begin by covering our fourth quarter and full year 2015 performance and then discuss our 2016 guidance. Consistent with prior calls today's review of our actual and forecasted financials excludes restructuring and other special items and will address the continuing operations of Delphi. The reconciliation between GAAP and non-GAAP is included at the back of this presentation and the press release.

Let me start on slide 13 with a snapshot of our fourth quarter financial performance. As Kevin mentioned we were pleased with our quarter results, which reflected robust revenue growth and record earnings.

Revenue was up 3%, or 11% adjusted for currency and commodity effects. Operating income grew 1%, or 12% excluding currency. Operating margin was down 20 basis points from prior year, including a negative 40 basis point impact from foreign currency and the sales of the reception systems business. Additionally as Kevin mentioned, our margin rate for the quarter was impacted by the 40% sequential increase in China volumes, as well as higher manufacturing and engineering spend to support major new growth program launches across all segments.

Earnings per share grew 7%. However, adjusting for the effects of currency and commodities, EPS grew 19%.

Slide 14 provides greater detail on revenue in the quarter. As you can see currency and commodity effects were significant headwinds. However, organic growth was very strong at 11% and 8% over market, delivering on our growth outlook from early 2015. Regionally, Europe and Asia were exceptionally strong at 8 points and 10 points over market respectively. North America remained solid at 7% and 5 points over market. Though our business performed better than the market in South America, the underlying market there remains weak.

Turning to profit. Slide 15 walks the fourth quarter year-over-year change in operating income, highlighting the previously mentioned foreign exchange effects. The cost impact of the China volume recovery, as well as the investment to support new program launches, is captured in net performance. These items are expected to remain a headwind to our normal margin flow through in the first half of 2016. And accordingly were included in our previously communicated guidance. We are confident in our ability to expand overall margins by roughly 50 basis points in 2016.

Moving to slide 16. Let's look at the performance by segment. With sales growth and operating performance Electrical Architecture and Powertrain expanded margins 60 basis points year over year, despite additional costs resulting from the sharp recovery in China volumes.

As expected Electronics and Safety growth accelerated in the quarter on new program launches. The reported E&S margin rate of 10.4% was negatively impacted 260 basis points by unfavorable foreign exchange, the impact of the reception systems divestiture, and prior year nonrecurring items. When adjusted for these items E&S margins for the quarter were down 100 basis points on costs associated with support of new program launches.

As it relates to 2016 we expect continued strong growth from launches. Margins will expand over the course of the year with lower volume flow through in the first half.

Turning to slide 17. Increased earnings and lower share count drove EPS growth of 7% for the period. Excluding the effects of currency and commodities earnings per share grew 19%. Taxes came in as expected in the quarter at 14% on an adjusted basis; 16% adjusted for the year. On a year-over-year basis we were favorable by $0.01. However, that was offset by higher minority interest and versus our guidance, HellermannTyton financing, which we completed in the quarter.

Moving to slide 18, our full year results. We delivered record earnings in a challenging macro environment. In 2015 our results included unfavorable currency and commodity effects of $1.3 billion on revenue and $178 million on operating income. Organically, revenue was up 6% with our growth over market increasing through the year. Despite the previously mentioned headwinds, in 2015 we delivered more operating income, expanded margins 60 basis points, and grew earnings per share 16%, excluding currency and commodities.

Looking at the segments on slide 19. We delivered solid growth across all segments with growth over market strengthening through the year. Our overall margin expansion came in as expected. And going forward we project margin expansion to continue in line with our guidance and longer term financial targets.

Turning to 2016. Slide 20 highlights our full year guidance assumptions; no change from last month. We expect growth in global vehicle production of roughly 2%, reflecting 3% growth in North America, growth in Europe of 2%, a 4% increase in China, and a decline in South America of 10%. Our 2016 guidance maintains a $1.10/€1 rate.

On slide 21 we reaffirm our 2016 guidance. Revenue is driven by accelerating organic growth and the full year effect of the HellermannTyton acquisition. Operating income growth for the year is 14% at the midpoint, expanding margins roughly 50 basis points. 2016 EPS is expected to be in the range of $5.80 to $6.10; no change from our prior outlook. We forecast first quarter revenue growth of 5% to 8% adjusted, with margins up slightly versus the prior year at midpoint. And we expect first quarter EPS in the range of $1.28 to $1.38, up 10% at the midpoint.

As Kevin mentioned our guidance assumes $400 million of share buybacks in the year. We intend to be opportunistic, while remaining committed to executing a balanced and disciplined capital allocation framework.

In summary Delphi overcame a number of headwinds and still delivered a great year. Our 2016 outlook is balanced and reflects our continued ability to adjust to changing market conditions.

I'll now turn it over to Kevin for some final thoughts before Q&A.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Sure. Thanks, Mark. Now summarizing on slide 22. 2015 was a record year, as Mark just said. Once again, we demonstrated our ability to deliver on our commitments, even against the backdrop of a more challenging and volatile environment.

While capital markets are reflecting uncertainty in the underlying macro conditions, we aren't seeing anything today that would change our assessment of the market or the guidance that we provided last month. And while we're counting on a slight lift from global production in the year, if you look at the numbers, the bulk of our growth is driven by our planned new launches and increased content opportunities.

Now having said that, we continue to actively monitor the dynamics in the industry and plan our investments prudently. In the event conditions deteriorate, we've demonstrated several times the ability to respond quickly and surgically. The European slowdown in 2012 as an example, where revenues declined 6% and our operating margins actually increased by 50 basis points. And the China slowdown in the third quarter of 2015, where revenues actually declined $175 million, but we were able to offset that revenue shortfall with productivity initiatives. Those are a few of the examples. We continue to increase our flexibility and reduce our operating costs to ensure that we're positioned to mitigate unplanned headwinds.

Further, our strategy for value creation remains intact. We're supporting growth where we see opportunities and we remain disciplined in our allocation of capital. We continue to execute on the relevant breakthrough technologies that are driving incremental growth and margin expansion in 2016 and beyond, enabling us to outperform over the long term. You can expect to see and hear more about these innovations and our long term roadmap at our investor day coming up in London on April 13.

So with that, I'll turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Rod Lache of Deutsche Bank.

Rod A. Lache - Deutsche Bank Securities, Inc.

Good morning, everybody.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Good morning.

Rod A. Lache - Deutsche Bank Securities, Inc.

Had a couple questions. One is your overall performance in Q4 was in line, but the E&S margin specifically looked a little bit light in the fourth quarter. And you mentioned FX headwinds; I was hoping you can elaborate on that. And also how we should be thinking about the net performance in 2016? It sounded like it could be – get a little bit better over the course of the year.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Well, Mark, why don't I start at a high level and then I can turn it over to you, and you can go through the numbers in more detail. I think – first, Rod, I think to Mark's point with respect to the year-over-year at E&S, there's a lot of noise in the numbers that you need to make adjustments for, including the divestiture of our reception systems business, right? As well as foreign exchange, as well as a one-time item in the fourth quarter last year. And I think those amounts total roughly 250 to 260 basis points. The balance relates really to the launch activity – the significant ramp-up in launch activity that's reflected in the underlying growth rate at E&S.

As you roll out for the full year, both at E&S as well as for Delphi in total, you're going to continue to see some ongoing costs related to the China inefficiencies, as well as ramp costs into Q1, although at a much lower rate than what we have in the fourth quarter, and then continue to dissipate through Q2 and be largely gone in Q3 and Q4. So, as you look at margin expansion throughout the year both for Delphi as well as E&S, you'll see a gradual margin expansion on a sequential basis.

As it relates to the FX exposure, Mark, do you want to talk about that?

Mark J. Murphy - Chief Financial Officer & Executive Vice President

Yeah, Rod. We did have in the quarter, particularly around euro, renminbi, we had some transactional exposure, some balance sheet re-vals, which contributed several million beyond the normal operating margin flow-through rate we see in the business on FX.

And then as Kevin mentioned, there's some elevated costs around launches, which we expect to have peaked in the fourth quarter, remain elevated in the first and then begin to trail off through 2016 as that business returns to more normal margins.

Rod A. Lache - Deutsche Bank Securities, Inc.

Okay. And then just secondly, I was hoping you can give us a couple of the elements of the bridge just to – not for E&S specifically – but for the overall company as we look out at Q1. Does the acquisition revenue roll through at something like a 15% margin? And how should we be thinking about the FX/commodities performance as we look at Q1?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. On the acquisition – so acquisition revenues for the quarter – it's $800 million for the full year. It's about...

Mark J. Murphy - Chief Financial Officer & Executive Vice President

$190 million.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

$190 million for the quarter at an OI rate that's consistent with our current corporate OI rate. You need to offset that to some extent, Rod, with the divestiture of the reception systems business. So that reduces the number by about $20 million or $25 million in the quarter and has a small effect on OI.

Mark J. Murphy - Chief Financial Officer & Executive Vice President

Yeah. So I think, Rod, we – just walking from the $472 million last year – we've got volume/price of about $30 million flowing through at normal rates. I'm talking OI.

As Kevin mentioned we've got the HellermannTyton revenue flowing through, but offset by some divestments and stranded costs there. Little bit lower flow-through than it will on a run rate basis. We have very little FX effect in the first quarter; low, mid-single digits impact. Unfavorable, but mid-single digits.

And then, we have what we talked about, some of these launch costs in China, inefficiencies on production persisting, but down from the fourth quarter. So we ran – we'll be down about $20 million lower versus what we ran in the fourth on that bucket of costs. Net performance will be close to $0.

Rod A. Lache - Deutsche Bank Securities, Inc.

Okay. So just to clarify what you just – the way you bridged it, it's like $18 million to $48 million of year-over-year EBIT growth, you said 30% incremental on the organic of around $300 million. So that gives you about $90 million, pricing consistent, net organic growth minus pricing might be around $20 million positive. The acquisition adds $25 million. And then did you say that the performance and commodities is kind of a push?

Mark J. Murphy - Chief Financial Officer & Executive Vice President

Yeah. Commodities and FX is roughly mid-single digits. Price is roughly in line with last year. I'm doing the walk your way at $76 million. Volume at 30% flow through. And then the net performance numbers we talked about.

Rod A. Lache - Deutsche Bank Securities, Inc.

Okay. Great. Thank you.

Operator

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

John J. Murphy - Bank of America Merrill Lynch

Good morning, guys.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Good morning.

John J. Murphy - Bank of America Merrill Lynch

Just a first question. I mean obviously leverage stepped up a little bit with the HT acquisition as expected. It looks like it was about 1.6 times on a gross basis on trailing EBITDA. For both you, Kevin and Mark, I mean if you think of that number, I mean it was a step up. But it's certainly not anything that's alarming.

Would you be willing to maybe take that up somewhat significantly to get a lot more aggressive on share buybacks, just given where the stock is right now? I'm just trying to understand, given opportunities to acquire your own shares or maybe other strategic acquisitions, how far you might push that leverage ratio?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Listen, I don't – I couldn't give you an exact number with respect to the leverage ratio. As we've told you over the – it's our objective to remain an investment grade company.

Having said that when you look at where our balance sheet is, you look at the cash flow generation forecast for 2016, there certainly is an opportunity to be more aggressive on a – from a share repurchase standpoint. And as I said in my prepared comments, to the extent there's dislocation in value we're going to certainly accelerate share repurchases in a meaningful way.

John J. Murphy - Bank of America Merrill Lynch

Okay. That's helpful. Then just a second question. Could you just remind us what your commercial vehicle exposure is? It sounds like you're highlighting that as a risk. But I think it's relatively small in the grand scheme of the company.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. It's about 10% of total revenues. And our outlook for the commercial vehicle market this year is flat to down a point or 2 points, depending on markets.

John J. Murphy - Bank of America Merrill Lynch

And profitability would be roughly close to the corporate average? Or a little bit above?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. Yeah. No, profitability is in line with the corporate average.

John J. Murphy - Bank of America Merrill Lynch

Okay. And then just lastly, if you could just talk about sort of bids that are in process right now as we look at the potential for new business bookings in 2016? And how you think that may shape up? Is there sort of increased activity? Or is there a little bit of leveling out?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

No. The actual – the pool of opportunities is actually higher. So the amount of activity that remains out there is actually higher than what it was in 2015, which is certainly a positive sign. So we would expect from a booking standpoint to come in roughly in line with what we booked in 2015 from a total new business bookings standpoint.

The big opportunities tend to be around, as you can guess, active safety. We're seeing a big ramp-up in demand – off of a small number obviously – on vehicle electrification, including things like 48-volt, as well as a fair amount of activity on our traditional powertrain products like GDi, Gas Direct Injection. So very good. Great deal of opportunity out there.

John J. Murphy - Bank of America Merrill Lynch

Great. Thank you very much.

Operator

Our next question comes from the line of Brian Johnson of Barclays.

Brian A. Johnson - Barclays Capital, Inc.

Yes. Good morning. I wanted to talk a bit about the Powertrain unit. A couple questions. The organic growth of 4% in 4Q. Was this expected? Was there commercial vehicle headwinds there?

Secondly, what's the bridge to get to 8% growth in 2016? Does it have to do with take rates? Does it have to do with program launches?

And just thirdly, how are the dialogues vis-à-vis timing of customer programs going? Given both where oil prices are and the sort of views about the cycle, which I know are more intense on Wall Street than perhaps in OEM headquarters.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. Well let's start with your last question first. We've seen no shifting in schedules from a Powertrain quite frankly or any of our other businesses. We've seen absolutely none.

With respect to the growth rate of the Powertrain business. In the fourth quarter and in the first quarter of this year Powertrain segment growth will be a bit slower, primarily the result of a challenging comp in our aftermarket business. So if you remember, Brian, last year we launched a major program with a U.S. independent aftermarket retailer that had very strong revenue. So that affects the year-over-year comp in the Powertrain segment. So that's one.

Two, what you will see is consistent in reality with the balance of our businesses. Based on the timing of the ramp-up of all these launches, growth is going to be stronger in the second half of the calendar year than it is in the first half of the calendar year, consistent with the margin explanation that Mark talked about. So we're still very optimistic about the Powertrain segment.

The other thing to underscore though is – we've talked about it in the past, and I mentioned it again in my comments. We're starting to see more demand, more of a ramp-up in vehicle electrification, including things like 48-volt. Those are very good for us. So 48-volt hybrid content is four times to five times the content that we have on a traditional car. Full EV is seven times the content. 48-volt is an area that – quite frankly a product that we'll be talking more with folks like yourself about at our investor conference in April. But the great thing about it is it's 70% of the benefit at 30% of the cost for the OEs. So we think it's a great value proposition.

Brian A. Johnson - Barclays Capital, Inc.

And also on Powertrain, just to finish up. Margins expanded in the quarter even though revenue ticked – on a headline basis was down, on an adjusted basis was the slowest of your three segments. Is that because of the lack of launch activity? And I guess in general how should we be thinking about the cadence of margin in that segment?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Well launch – I mean launch activity was a little slower. But there's still – relative to the other businesses I think it's really the benefit of – as you recall we've done a fair amount of footprint rotation in our Powertrain business. And it's the benefit related to that footprint rotation.

Brian A. Johnson - Barclays Capital, Inc.

Okay. And just one final strategic Powertrain question. Are you getting more software work around Powertrain? Just given sort of what went on with a major European manufacturer and their diesel issues, which centered around software? Is there any kind of desire of OEMs to have a second set of eyes on the software, even if they could do it themselves internally?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. That's an interesting question. I don't think we've seen it as a result of that. However, as you know there's more electrification. There's more software going into the Powertrain. So that is certainly an overall trend that we're seeing. I don't believe it's a result of the event that you're talking about.

Brian A. Johnson - Barclays Capital, Inc.

Okay. Thanks.

Operator

Our next question comes from the line of Pat Archambault of Goldman Sachs.

David Tamberrino - Goldman Sachs & Co.

Thank you. Good morning. This is actually Dave Tamberrino on for Pat. Our first question really relates to price downs. Just looking at the last four quarters, we've seen them accelerate from the 1.5% range to really exiting the year at 2%. One, what's driving that? And secondly as we get a little bit longer here in the cycle at least in North America, do you anticipate further pressure here?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. That's a good question. We get asked it a lot. We've always said price downs will be in the range of 1.5% to 2%. Last year I think we ended the year at 1.4%. This year we're at about 1.8%.

The primary driver of that quite frankly is faster growth in the E&S business, where price downs tend to be 2% to 3%, versus our Powertrain business and E/EA businesses that have lower price downs.

With respect to added pricing pressure our response is, our customers always challenge us for price downs. It goes on when times are good. It goes on when times aren't quite as good. So we would tell you we haven't really noticed the environment changing.

David Tamberrino - Goldman Sachs & Co.

Okay. That's helpful. And then we're about six months removed now from the onset from the VW emissions scandal. Just thinking about your business within Europe, have you seen any shift really in production? Or any of the take rates that are going on within the region?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

No. No, nothing out of the ordinary. No. Have not seen any change.

David Tamberrino - Goldman Sachs & Co.

Okay. And then lastly in the U.S. Looking at January numbers at least for a couple of the OEMs, it looks like there was some excess inventory exiting January. We're really wondering if you've seen any changes in your OEM partners in terms of what production schedules look like in the short term?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

No. I'm – listen we've – again we understand the concern that people in the investment community have with respect to where we are in the cycle and what production schedules look like. We see none. I mean we've seen absolutely no change in production schedules from when we gave guidance originally a month ago, as well as what our outlook was in the fourth quarter of last year as it relates to 2016. So we've seen no change.

I think if you go back and you track SAAR in retail sales, January does tend to be a lower month relative to the other months in the year.

David Tamberrino - Goldman Sachs & Co.

All right. Thank you very much, guys.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Thank you.

Operator

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

Ryan J. Brinkman - JPMorgan Securities LLC

Hi. Thanks a lot for taking my question.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Ryan.

Ryan J. Brinkman - JPMorgan Securities LLC

Good morning. Just looking at the 1Q margin guidance, 12.3% to 12.7% [operating margin]. Can you quantify at all what the impact is in dollars or in margin from the China production inefficiencies? Just to help us kind of better gauge the underlying rate. And then on the efficiencies can you remind us of the cadence of them? And whether you expect any sort of lingering impact as late as 2Q, for example?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. Listen, the China piece in Q4 was roughly call it $20 million – $15 million to $20 million. Q1 we expect it to basically decline to roughly $5 million. So there will be a lingering effect in Q1, and then it'll fall away in Q2.

However, given launch activity there'll still be some of that incremental launch cost carry-on from Q4 into Q1. Call it another – I don't know – $25 million roughly of launch costs in Q1 relative to a higher number. Call it roughly $60 million in Q4.

Ryan J. Brinkman - JPMorgan Securities LLC

Okay. Thanks. That's very helpful. And then just last question is a macro one. I see on slide 20 that your industry assumption for China is plus 4% in 2016. That's reasonable; of course, I don't think anybody really knows, right? So, but I see that IHS is using plus 6%. So I'm just curious about your decision to forecast less than them? Whether that's due to something that you're seeing on the ground over there? Or is there a different view as to when the current strength in China pulls from? Does it pull from second half 2016 instead of 2017 after the incentives expire, as their forecast seems to imply? I just thought to ask your thoughts on the market since you have...

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Sure.

Ryan J. Brinkman - JPMorgan Securities LLC

...a bigger exposure and you've been there longer than most.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Sure. No. Listen, we – I mean the first thing – when you look at HIS, I think you need to make sure when we talk about market assumptions we include commercial vehicle. So that does have an effect. And given the fact that we're flat to slightly down in commercial vehicle versus past car growth, that will have some effect.

I think in addition to that there may be a little bit of conservatism built into our numbers. We still remain optimistic about the China market. Q4 growth was very strong; was quite frankly, as we said before, a bit of a surprise. Our outlook for the balance of the year is solid growth. And if the market ends up being stronger I think that is an upside to our overall outlook for the business.

Ryan J. Brinkman - JPMorgan Securities LLC

Okay. Very helpful. Thank you.

Operator

Our next question comes from the line of Adam Jonas, Morgan Stanley.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Hey, everybody.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Adam.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Just one question. Hi. It's on the startup costs. And the question is kind of, is it unreasonable to assume that given the huge growth in very different technologies and sometimes untested technologies – or let's say uncommercialized, let's say – in the E&S business that you're going to see over the next couple years, that some of the startup costs and launch costs, I should call them, are just regularly recurring for a while and can reasonably be assumed to weigh down on margins? And I ask that because I think everyone on the – at least on the sell side I've seen – has margins in E&S just going up inexorably each year. And I'm just wondering if there's like a scenario where the startup costs are – we should have them running recurring basically.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. I...

Adam Michael Jonas - Morgan Stanley & Co. LLC

Or if not larger. Yeah.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. No, listen. I – relative to where we are today and the amount of launch activity at E&S – I'd say no. I think significant amount of launch activity, Adam, in Q4 or Q1 and ramping down in Q2 at E&S. So I think you have some normalization.

I think long term margins for E&S, from my perspective, remain in line with what our longer term outlook was. And I think the question is – the question I would ask myself is – how aggressive in terms of investment in new technologies do we – how aggressive do we want to be? How aggressive do we want to be in pursuit of those technologies as well as that business? And I think that's something that we have the ability to calibrate on or off. And to the extent we decide to be more aggressive from an investment standpoint, it's something that makes sense financially, and we're able to communicate to folks like yourself.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Okay.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

And you'd agree with the opportunity.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Thank you, Kevin. Can I just ask a follow-up, please?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Sure.

Adam Michael Jonas - Morgan Stanley & Co. LLC

We're seeing a lot of, say, nontraditional players getting involved in the software part of the car, whether it's safety or even in Powertrain. I couldn't help but notice the Chevy Volt, just it seems like LG Corp. like basically made two-thirds of the purchase bill of materials of that car. I'm sure you saw that too. Is that factoring into your longer term views of where the margins of say E&S or Powertrain could be? Is the pace of let's say nontraditional crowding progressing as you'd expect? Or is that something that – is that a variable, a vector to think about?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. No, it's – listen, it's something that we always think about. To date, it's not as direct a competition in terms of space or places that we compete. So it hasn't had an effect. And it's something we watch closely. I mean the Chevy Volt is a great example. I mean, that's a car where we have close to $400 of content. So we have a pretty good position from a vehicle standpoint. But it's something we monitor very closely.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Thanks, Kevin. Thanks, guys.

Operator

Our next question comes from the line of Joe Spak of RBC Capital Markets.

Joseph R. Spak - RBC Capital Markets LLC

Hi. Good morning, everyone. Actually just wanted to follow up on Adam's line of questioning a little bit. So, obviously there will always be launch costs. It sounds like they'll be a little bit lower. I guess, though, what I was wondering is how – I mean it seems like there's also going to be a period of time when you take on this new business until it gets to a right normal run rate of profitability to wring out the most – most of the efficiencies you can. So, as we get all this new business coming on, can you give us some indication as how long it takes to actually get to the proper run rate margin for the new business versus the core or the base business if you will?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. No, two to three quarters. And I – it depends what the product is. But two to three quarters, Joe. Not any longer than three quarters.

Joseph R. Spak - RBC Capital Markets LLC

Okay. And then within E&S – sorry if I missed this, but is – any breakdown between Infotainment or active safety? Or what really sort of drove that big backlog launch in the quarter?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

What drove the big – it's really – it's both. So, active safety growth in the fourth quarter for Delphi was 66%. For a full year, we're well north of 50%. And we're launching new Infotainment programs where our growth in Infotainment in 2016 is going to be roughly 25%. So, those are two very active product lines.

And then the last is, again, I mentioned vehicle electrification. Our revenue growth in vehicle electrification product line is going to be well north of 50% in 2016. So, those are all the big drivers at E&S.

Joseph R. Spak - RBC Capital Markets LLC

Okay. One more housekeeping. And maybe I'm wrong here, but I think you still didn't get the proceeds from the Thermal China JV. Is that accurate? And when do you expect to get that?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. We'd expect second quarter of this year. But you're correct.

Joseph R. Spak - RBC Capital Markets LLC

Okay.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

We have not, but we expect it to actually receive them in the second quarter.

Joseph R. Spak - RBC Capital Markets LLC

And that's roughly $200 million or so?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

No. No. It's about $90 million.

Joseph R. Spak - RBC Capital Markets LLC

$90 million? Okay.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. Remember, we own half of it. So your $200 million is probably the view on the total value.

Joseph R. Spak - RBC Capital Markets LLC

Okay. Thanks a lot.

Operator

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

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Hi. Good morning. This is Joe Vruwink in for David.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Hey, Joe.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

If I consider the quarterly cadence of what might be likely in China from a production standpoint, it would seem that growth rates probably decelerate as the year goes on. And we might even hit a negative comp by Q4. I'm just wondering does your guidance then imply that you're going to see net-net negative performance out of China maybe by Q4 in anticipation of needing to make either head count changes or line rate reductions for the production decline?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. I don't – I think you look at it mathematically it'd be much slower growth to a slight decline in Q4 as you look at the number. I don't think it'd be a significant head count reduction if we had to do it, nor would it be costly. I mean that's a region where we can change up head count very, very quickly.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

I guess the question is given what you saw in – with the layoffs happening during summer, needing to build staff back up Q3, and then incurring these costs Q4 and Q1, is there any lessons learned? Where you might've – you could've done something different? Where as we get into the back half and things might be softening or slowing, maybe the incrementals or the decrementals are better this time around?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. Well listen. I think once we normalize I think the incrementals would be the same, maybe a bit better. Listen, I would – we obviously follow the markets very, very closely. The China market, the decline happened very rapidly.

I think our view as a management team here is we'd rather be in front of the cost reductions versus behind it. So I think it would be fair to ask the question would you act as aggressively in hindsight without knowing that schedules were going to rebound as much as they had in the fourth quarter? Would you react as quickly and aggressively? And I think we'd tell you we would, because we'd rather be in front of a slowdown versus behind it.

And that's a part of the cultural DNA here – we have here. We talk a lot about growth. We talk a lot about opportunities from an innovation and technology standpoint. At the same time over the last two years we've closed close to 15 manufacturing facilities globally. So we're always focused on how do we manage the business, how do we increase the flexibility of the cost structure under the realization that we operate in a cyclical industry.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Great. I'll leave it there. Thank you.

Operator

Our next question comes from the line of David Lim of Wells Fargo Securities.

David H. Lim - Wells Fargo Securities LLC

Hi. Good morning.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

David.

David H. Lim - Wells Fargo Securities LLC

Several questions here. You added back more employees than you laid off in China if I heard you correctly. Is that due to...

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah.

David H. Lim - Wells Fargo Securities LLC

Is that more due to surge production – a surge in production? Or are you thinking that there's just maybe an incrementally better outlook for you guys in 2016 in China than what you guided to?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

No. It's what we needed to deal with to deal with the production. Right?

David H. Lim - Wells Fargo Securities LLC

Got you.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

In reality you're – not only was the production ramp-up significant. But it's you have a new employee who is going to be less efficient or productive than a historical employee. Therefore you need more of them.

David H. Lim - Wells Fargo Securities LLC

Got you. And then on the restructuring side, I saw an uptick in Powertrain. Can you give us a little bit more color there? Was it more in Asia, Europe? And in theory wouldn't that yield stronger margins in the coming quarters or the flow through from the restructuring activity?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. Yeah. It would be primarily in Europe.

David H. Lim - Wells Fargo Securities LLC

Okay. And finally, and a little bit more of a housekeeping item. How should we think about operating income and revenue cadence from Q versus – one half versus the second half? Thank you.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Well revenue growth will be a couple points higher second half versus first half. And then margin expansion with the exception of – you'll see sequential increase in margin expansion with the exception of the third quarter, which as you know, David, with the shutdowns in Europe and North America tends to be the lowest margin quarter.

David H. Lim - Wells Fargo Securities LLC

Great. Thank you so much.

Operator

Our next question comes from the line of Emmanuel Rosner of CLSA.

Emmanuel Rosner - CLSA Americas LLC

Hi. Good morning, everybody.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Morning, Emmanuel.

Emmanuel Rosner - CLSA Americas LLC

I wanted to ask you a little more detail on the content opportunity for you guys on the vehicle electrification. So you have been talking about really impressive numbers, four times, five times on the 48-volt and up to seven times on electrical vehicles. Can you maybe unpack a little bit what goes into these calculations? Is that pure electrical content increase? Or does that net out also what you would potentially lose in terms of Powertrain – traditional Powertrain content?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah.

Emmanuel Rosner - CLSA Americas LLC

And does that assume any level of autonomous driving in there?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

It doesn't assume anything on autonomous driving. And it is a net number. So to the extent we're losing content on a fully electric vehicle, it doesn't include the content of an internal combustion engine. But it's things like an electrical architecture, it's the wiring and connectors associated with EVs or hybrids. At E&S it's inverters, converters, hybrid control units, it's battery pack, and controllers, not the battery. It's chargers. Powertrain, it's the supervisory controller. So it really affects each one of our segments.

Emmanuel Rosner - CLSA Americas LLC

So ultimately in the fully electrified world you would have massive segments in E&S and E/EA.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah.

Emmanuel Rosner - CLSA Americas LLC

And then a strong – much more than offsetting a strong segment in Powertrain.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. I think that's a – depending on the size of the engine, if it's a hybrid. But I think in a simplistic and a basic way to look at it, you're absolutely right. Very good growth at E&S and E/EA with potentially lower growth or a decline in Powertrain revenue.

Emmanuel Rosner - CLSA Americas LLC

Okay. And then one question on China. So we've been seeing through this past year a bit of a mix shift towards smaller engines, largely due to the tax cut on those engines. But also I think the growth coming from lower tiered cities and maybe the lower end of the market. Is that an opportunity for you, because essentially you could sort of like sell your GDis on these smaller engines? Or is that a negative mix implication, because we're talking about customers that may be a little bit more price sensitive? Or segments of the market that are more price sensitive?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

No. We would say it's an opportunity. At the end of the day it's an opportunity.

So first to give you a perspective. 80% of our revenue in China is on platforms where the vehicles have a 1.6-liter engine or less. So just to put that in perspective. With respect to the Powertrain technology needed to hit the CO2 targets in China, they always need things like GDi. Those are important aspects to have them hit their fuel economy standards. So they're areas of opportunity for us. They're definitely areas of opportunity.

Emmanuel Rosner - CLSA Americas LLC

Great. Thank you.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Thanks.

Operator

Our next question comes from the line of Anthony Deem of KeyBanc.

Anthony J. Deem - KeyBanc Capital Markets, Inc.

Hi. Good morning. Thanks for taking my questions.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Morning.

Anthony J. Deem - KeyBanc Capital Markets, Inc.

Does your current share price impact your view of M&A? And by that I mean are you more inclined to take advantage of the market dislocation we're seeing? Or is M&A the more attractive alternative, based on the visibility you have in your current pipeline? And are any deals maybe in advanced negotiations that might impact your share repurchase rate near term?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Nothing to announce today. Listen, I – at the end of the day we always try to be active and look what's out there from a technology and M&A opportunity. We have a pipeline of opportunities that we continue to evaluate.

But we always look at M&A from a strategic and financial return standpoint. And we look at it through the lens of where the current value of our stock is. And yeah. The reality is it does affect our view. Right? It can't help but affect our view.

But to the extent we could find a very compelling M&A transaction with really great synergies that we looked at. And relative to share repurchase it looked more attractive to driving long term shareholder value, that's something that we would certainly do. To the extent there isn't something out there like that, we would certainly ramp up the pace of our share repurchase activity.

Anthony J. Deem - KeyBanc Capital Markets, Inc.

Okay. Then just one extra question from me please. Within your 2016 guidance can you share any outlook you have for the light duty diesel mix? You mentioned there's nothing really out of the ordinary you're seeing. So maybe I should assume your outlook is similar to before? Maybe diesel trending a shade below production rate?

And then just curious to get your latest thoughts on CO2 standards, the role of diesel? And if anything has changed in your mind over the medium to long term to hit fuel economy standards? Thank you.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. Yeah. So our view, light duty diesel – light duty diesel – our view on light duty diesel penetration rates hasn't changed. And it's basically there'll be some growth, but albeit slow. And penetration rates will actually decline in Western Europe.

Having said that based on our discussions with all our OEs, all of them view diesel as absolutely critical to meeting the CO2 regulations that are out there. They have to have it. So it'll continue to be a Powertrain solution, although it'll grow at a slower rate.

Anthony J. Deem - KeyBanc Capital Markets, Inc.

Thank you.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Hopefully that answers your question. But no change in view. I mean we had that view a year ago.

Anthony J. Deem - KeyBanc Capital Markets, Inc.

All right. Thank you.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Thank you.

Operator

Our last question comes from the line of Matthew Stover of SIG.

Matthew Stover - Susquehanna Financial Group LLLP

Hello. Thanks for taking the question. Two things, one a housekeeping item. Could you just illuminate the acquisition-related expenses that were in the one-timers?

And then two. If you could comment, Kevin, about the increased quoting activity. Is that primarily on HEV activity? Or are you seeing an increase in activity relative to fully electrified Powertrains?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. I would say more on the high – I'd say – I'll answer the last question, and then Mark can respond to the first one. When you think about it, we're seeing an overall increase in quote activity in general across all of our segments. When you look at it with respect to alternatives to traditional internal combustion engine, more on the hybrid/electric side that on the EV side.

Matthew Stover - Susquehanna Financial Group LLLP

Okay.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

So that has been the net change. With respect to the one time.

Mark J. Murphy - Chief Financial Officer & Executive Vice President

Yeah. Matt, just to hopefully answer your question here. There were about $25 million of fees associated with HellermannTyton, but it was adjusted out of OI. Of course it hit cash flow in the quarter. And then what hit operating income was about $1 million. It was immaterial.

Matthew Stover - Susquehanna Financial Group LLLP

So that was the banking and legal fees?

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Yeah. The $25 million would – yeah.

Mark J. Murphy - Chief Financial Officer & Executive Vice President

Yeah. Yes.

Matthew Stover - Susquehanna Financial Group LLLP

Yeah. Okay. Okay. Thank you very much.

Kevin P. Clark - President, CEO, Chief Operating Officer & Director

Thanks, Matt.

Operator

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

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