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Delphi Automotive PLC (NYSE:DLPH)

Q3 2012 Earnings Call

November 01, 2012 9:00 am ET

Executives

Jack Monti - Analyst

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

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

Analysts

Brian Arthur Johnson - Barclays Capital, Research Division

Rod Lache - Deutsche Bank AG, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Itay Michaeli - Citigroup Inc, Research Division

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

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

John Murphy - BofA Merrill Lynch, Research Division

Richard J. Hilgert - Morningstar Inc., Research Division

Operator

Good morning. My name is Tracy, and I will be your conference facilitator. At this time, I would like to welcome everyone to Delphi's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Jack Monti from Delphi's Investor Relations Group. Sir, you may begin your conference.

Jack Monti

Thanks, Tracy. And thanks so much, everyone, for joining Delphi's Third Quarter Earnings Call. Please see Slide 2 for the 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 President and CEO; and Kevin Clark, our CFO. As seen on Slide 3, Rod O'Neal will begin the call with an overview of our third quarter, followed by Kevin Clark, who will review our financial performance in greater detail and provide an update to our guidance. After Rod's closing remarks, we'll open the line for Q&A.

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

Rodney O'Neal

Good morning, everyone, and thanks for joining us. I'd first like to extend our deepest thoughts to those along the East Coast, who've been affected by Hurricane Sandy. And we do appreciate everyone's flexibility in the rescheduling of this call. So let me just quickly summarize our quarter, and then we'll get into the details.

We had a very solid quarter in a pretty challenging environment. We saw increased softening in Europe beginning in late August, and we were able to rapidly respond by adjusting our cost structure. We are on track to expand our EBITDA margins 40 to 50 basis points in 2012 on a reduction in reported revenues. And with this positive operating momentum, we are well positioned as we move into 2013. So let's turn to the quarter and if you could move to Slide 5, please.

So while our revenue growth was flat, adjusted EBITDA margins increased to 13.7%, and earnings per share increased just under 13%. And as I've mentioned in my opening remarks, we've taken and we will continue to take aggressive actions to increase the flexibility of our cost structure and better position us for margin expansion. We've initiated restructuring plans as we continue to rotate our footprint, optimize our cost structure and proactively address a much softer market. And at the same time, we continued to invest in strategic growth initiatives. Production is up and running at 2 new plants in China, and we've broke ground on another in this quarter. We've introduced 7 new technologies. And as you know, we also completed the acquisition of MVL, all of which has us well positioned for top and bottom line growth in 2013 and beyond.

Turning to Slide 6. Kevin and I just returned from China, where we held the grand opening for one of our electrical architecture line plants in Chongqing. Demand has been so strong at this plant that we expect to double our capacity next year. Throughout our visit, the customer responses could not have been more positive. We met with senior leadership from SIIC for China in SBW. I came away from those meetings more optimistic than ever about our growth prospects in China. We will continue to significantly outgrow the underlying market there. And we are on track to double the slide (sic) [size] of our China business over the next 4 years. We also held a groundbreaking ceremony for our new diesel facility in Yantai. The start of production is expected late next year. And recently, we also opened a wire facility in Chengdu. So these 3 plants: Chengdu, Chongqing and Yantai, are great examples of our success in China's rapidly growing market.

Let's move to Slide 7 and discuss some of our technology. We had a great portfolio of high-tech products, and we plan to continue to shape the market with our innovation. I know many of you have seen comments as recently as last week from the U.S. government regarding automated vehicles being the next evolutionary step of innovation in automotive transportation safety. Well, Delphi is already part of the Department of Transportation's pilot program, which is putting 2,800 vehicles on the road for a year of testing of vehicle-to-vehicle and vehicle-to-infrastructure communication. There are 8 leading OEMs that are participating, and it's the largest field test ever, and they're all using Delphi's advanced software and systems integration capability on these vehicles. The objective is to reduce collisions and improve traffic flow by having these vehicles literally talk to each other and surrounding infrastructure. So we're working with the government, and we're working with our customers, and this is a great example of Delphi's stand on the leading-edge of connectivity and active safety technologies.

Let's move to Slide 8. Another significant investment in 2012 has been the acquisition of MVL, as I mentioned. And as I told you back in May, when we originally announced the transaction, that I was really thrilled about this acquisition. MVL has been at the very top of our list of potential acquisitions for years, and it really does fit us like a glove. It significantly strengthens our high-growth, high-margin connector business and from a product portfolio of customer and Asia footprint perspective. So when you look at MVL's performance to date, it has actually performed better than we originally planned. And as we sit here today, we are even more confident in our ability to deliver those significant synergies that will expand margins and accelerate earnings growth. We are highly confident in our ability to fully achieve run rate synergies of $80 million by 2015. And we expect 40 to 50 basis points of margin enhancement and $0.24 of accretion in 2013, excluding the integration of onetime costs. Bottom line, it's a great acquisition, and we're happy to welcome MVL to Delphi.

Move to Slide 9. As many of you know, the Automotive News PACE Award is the pinnacle of technology achievements among automotive suppliers. The selection of 3 Delphi products and 1 manufacturing process as finalists for this prestigious award is validation once again that our technology investments are hitting the mark. Our nominations illustrate the type of innovative work being done by Delphi's technical experts all around world. The first product is Delphi's MyFi radio. It's a feature-rich embedded infotainment system that, when coupled with our active safety products, provides seamless integration of safety and connectivity. The second product, we call vehicle proximity alert, and this is designed so that pedestrians can better detect nearly silent hybrid and electric vehicles, and this is a feature increasingly required by the European governments. The third product is what we call F2e, and this is a diesel fuel injection pump system that will help OEs be the more strident emission standards that governments require for heavy-duty trucks in the future. And finally, in the manufacturing processing category, we were nominated for processing of our Gen 4 manifold air pressure sensor, which is a product that goes into engine management systems. This manufacturing process is highly efficient and significantly reduces the required amount of production floor space.

Let's move to Slide 10, which is our customer awards. We continue to receive accolades from our customers across the globe for exceeding their expectations on quality, on delivery and on launch. So when you look at the chart, you can see a sampling of a few of the awards that we've won in the last quarter. It is continued validation of our operational excellence, which is key to our top line expansion that I'm going to cover now.

Slide 11. Year-to-date on our bookings, we booked over $21 billion in new business, and we are on track to exceed last year's record of $24 billion. In Q3, we booked $5.5 billion, which includes an award from BMW for radar application, an award from Toyota in North America for vehicle electrical systems. And in China, we received an award from SGM that relates to our gas fuel systems there. We've generated almost $64 billion in new business since 2010. And as the right side of this slide shows, we continue to increase the geographical diversification of our business, with Asia bookings representing almost 35% of the total. These numbers validate the strong revenue growth that I've always talked about with you.

Let's move to Slide 12. We don't talk a lot about our enterprise operating system, but as we presented at our Investor Day in April, it truly is how we run the company. It's the reason we have performed so well, and it's the discipline that drives our operating performance and our industry-leading margins across the entire enterprise. I'm confident that the discipline of our operating systems will help us to continue to drive solid operating performance in the future.

Our restructuring actions will further optimize our cost structure and rotate our footprint to lower cost regions. And our continued focus on improving our operational excellence will keep us on track towards our longer-term EBITDA margin targets even in this slow growth environment. And we continue to perform at the highest levels to ensure that we delight our customers. And our focus, as always, will be on increasing shareholder value.

With that, I'll turn it over to Kevin, who's going to cover our [indicernible].

Kevin P. Clark

Thanks, Rod. Good morning, everyone. I'll begin by covering our third quarter results, then provide some additional background on the restructuring initiatives that Rod touched on, and then wrap up with an update on our fourth quarter and full year guidance.

So let me begin on Slide 14 with a snapshot of our third quarter results. As Rod mentioned, our overall financial performance this quarter was very solid considering the challenging operating environment. We delivered strong EBITDA margins and earnings per share growth, offsetting headwinds related to the slowdown in European light vehicle production, foreign exchange translation and the mark-to-market accounting requirement of our Long-Term Incentive Plan.

Our revenue totaled almost $3.7 billion. That's essentially flat versus the prior year when you adjust for FX, commodities and divestitures. We held 13.1% EBITDA margins, reflecting flexibility of our cost structure and continued strong operational execution. Net income totaled $269 million. Earnings per share increased by $0.05 or 6% to $0.84. And then lastly, we generated strong cash flow during the quarter of $254 million.

Now if you move to Slide 15, I'll review revenue in greater detail. Reported revenue declined 6.8%. Foreign exchange, commodity prices and divestitures created a 6.5-point headwind to revenue growth. Volume-related growth was $62 million or 1.6%, partially offsetting price down to $72 million or 1.8%. As I already mentioned, excluding foreign exchange, commodity prices and divestitures, revenue was basically flat.

If you look at it by region, in Asia, we had almost 12% growth, significantly over market. Within the Asia region, we had 13% growth in China, 7 points better than the underlying market. In North America, we had just under 3% growth, really reflecting our limited exposure to the Japanese transplants. In South America, we reported a revenue decline of 5%, primarily due to customer mix. And then lastly, in Europe, we saw a 6% revenue decline, which is about 2 points better than the market, to result a favorable customer mix, offset by a further reduction in customer schedules, both in the light vehicle and commercial vehicle segments that began, as Rod mentioned, in late August.

Slide 16 really underscores the flexibility of our cost structure and our ability to expand margins in a low-growth environment. EBITDA totaled $480 million. That's down $36 million from the prior year. This is reflective of the impact of price-downs, foreign exchange and the accounting for the Long-Term Incentive Program, partially offset by roughly 30% flow-through on revenue growth, strong manufacturing and material performance and the benefit of lower warranty expense. EBITDA margins remained unchanged at 13.1%. And although our European revenues were down 6%, as I mentioned, we maintained very solid double-digit margins in this region. They actually increased slightly on a year-over-year basis. I also think it's important to note that if you adjust for the variable accounting associated with the Long-Term Incentive Plan, consolidated EBITDA margins actually increased 60 basis points to 13.7%. That's on flat revenues, really reflecting the resiliency of our cost structure.

Slide 17 include our segment financial results. Electrical Architecture's revenue increased about 4%. That was driven by almost 14% growth in North America and over 9% growth in Asia. This was partially offset by a 2% decline in revenues in South America and an 8% decline in revenues in Europe. Segment EBITDA totaled $219 million, representing 13.6% EBITDA margin. That's down from the prior year, really reflecting the impact of increased launch costs, primarily in Mexico and in China, and continued investments in advanced engineering to support future growth initiatives.

Powertrain segment revenue was down 2%. This is reflective of 23% growth in Asia, offset by a 1% reduction in European revenues, affected by the late quarter slowdown in light duty and commercial vehicle schedules, as well as the lower mix of diesel fuel injection systems that Rod and I have touched on, a 14% reduction in revenues in North America and the 10% reduction in South American revenues. Both of these regions were affected by customer mix and continued softness in the automotive aftermarket channel. Despite the lower revenues, EBITDA increased to $175 million, and EBITDA margins expanded to 16.1%. These results reflect solid operating performance in the benefit of lower warranty expense, partially offset by increased advanced engineering expense and lower engineering rebuilds.

In our Electronics and Safety segment, revenue declined a little under 5%, primarily the result of a 4% increase in revenues in Asia and flat revenues in South America, offset by an 8% decline in European revenues and just under a 3% decline in revenues in North America. In this segment, the growth rate across all regions continued to be affected by the ongoing pruning of our lower margin business and our mechatronic and receiver product lines. Overall, the improved product mix resulted in an increase in EBITDA to $82 million, and expansion of our EBITDA margins to 12.7%.

Thermal segment revenues declined a little under 4%. That's primarily the result of the 10% growth in North America and the 8% growth in Asia. These results were offset by a 15% decline in European revenues and a 10% reduction in South American revenues. Adjusted EBITDA declined to $25 million, and EBITDA margins contracted to 6.7% due to lower volumes, as well as the impact of foreign exchange.

Turning to Slide 18. Earnings per share increased $0.05 or 6% to $0.84, reflecting strong operating performance, a lower tax rate, flow-through and volume growth and the benefit of share repurchases, partially offset by the impact of price-downs, FX and the accounting associated for the Long-Term Incentive Program. However, if you exclude the accounting for the Long-Term Incentive Plan, earnings per share actually increased $0.10 to $0.89. That's up 13%. And again, that's on reported revenues, which were down 6.8%, really reflecting our underscoring the leverage in the Delphi business model.

Moving to year-to-date cash flow in Slide 19. We continue to do a terrific job converting earnings into cash flow. Strong year-to-date EBITDA has more than offset the capital spending, cash interest and taxes. We've generated $642 million in cash before financing. That's up 20% over last year, which we've used to partially fund the purchase of MVL, as well as repurchased $312 million of stock during the last 2 quarters. It's worth noting that we've repurchased almost $0.5 billion of stock over the last 12 months.

Looking at our balance sheet on Slide 20. We ended the quarter with over $1.6 billion of cash on hand, just under $2.1 billion of debt and $445 million of net debt, representing very solid investment-grade credit metrics. The MVL transaction, which we closed on October 26, will slightly increase our pro forma credit statistics by less than half a turn. And lastly, the combination of our strong earnings growth and disciplined deployment of capital has generated an 8-point increase in return on net assets to 38%.

Moving to Slide 21. As Rod has already mentioned, we implemented a restructuring program targeted at further optimizing our cost structure and expanding our margin. The program includes several initiatives, but it's primarily focused on streamlining our European cost structure and includes continued rotation of our manufacturing and engineering footprint to lower-cost regions, further streamlining of administrative activities, as well as the integration of the MVL operations into our Electrical Architecture segment. Although we continue to perform very well relative to the market, we firmly believe there's always more that can be done to reduce our cost structure and increase our operating efficiency. The recent slowdown in Europe provides an opportunity to further address a portion of our cost structure, which is difficult to deal with in a higher-volume environment.

Total cost of the program will be approximately $250 million, with about $175 million to be recognized in the fourth quarter of 2012, and the balance will be booked throughout 2013. Approximately 75% of the total spend relates to our European operations, and about $80 million of the total is associated with the integration of the MVL operations into our Electrical Architecture segment. Approximately $240 million of the total restructuring charge will be cash, with about $35 million to $40 million to be spent in 2012, roughly $140 million to $150 million in 2013 and the balance in 2014. We expect the restructuring program to generate roughly $70 million to $80 million in total benefits in 2013, which includes about $40 million to $50 million of synergies related to the MVL acquisition.

Slide 22 details some of the assumptions underlying our updated guidance. We've provided the current production forecast from IHS for your reference only. We've highlighted that the deterioration in their Q4 forecast in Europe. It is very important to note that our guidance is based on current customer production schedules, which includes lower production levels in Europe than are reflected in this latest IHS forecast. We're expecting fourth quarter global production of 20.6 million units. That's down 1.5% versus the prior year. And that assumption includes production of 4.4 million units in Europe, just down roughly 15% from the same period last year.

Turning to Slide 23 to discuss our fourth quarter guidance. Our current outlook looks like a repeat of Q3, which reflects the lower European production schedule I just highlighted and a slightly lower mix of diesel fuel injection systems to the softer sales in the commercial vehicle and light duty markets, partially offset by a stronger euro. We expect revenues of $3.725 billion to $3.825 billion, including $125 million of revenue from MVL, which is net of roughly $15 million of intercompany sales.

Our EBITDA and earnings per share guidance excludes the fourth quarter restructuring charge of roughly $175 million, as well as $11 million of MVL transaction-related expenses. We expect EBITDA to be in the range of $460 million to $500 million, reflecting a less favorable flow-through effect on lower revenue and product mix, slightly offset by the translational effect of a stronger euro and approximately $22 million of EBITDA from MVL.

Earnings per share will be in the range of $0.80 to $0.90, assuming the 318 million shares outstanding and the 10% tax rate. Including the restructuring and MVL transaction-related expenses, earnings per share will be $0.30 to $0.40.

Turning to Slide 24 to review our updated full year guidance. Based on the year-to-date actual results in fourth quarter outlook, we now expect full year revenues of $15.475 billion to $15.575 billion, which again includes approximately $125 million of MVL revenues, net of intercompany sales. Excluding a fourth quarter restructuring charge and MVL transaction-related expenses, EBITDA will be in the range of $2.1 billion to $2.14 billion. And we've tightened our earnings per share guidance to the lower end of our previous guidance range. Our current outlook is $3.68 to $3.78 per share. Our earnings per share guidance assumes 324 million shares outstanding and a 17% full year effective tax rate. Including restructuring and MVL-related transaction costs, earnings per share will be in the range of $3.18 to $3.28.

We're now guiding to free cash flow of approximately $800 million, primarily reflecting lower EBITDA, cash restructuring expense and transaction-related fees and expenses associated with MVL.

And with that, I'd like to turn it back over to Rod.

Rodney O'Neal

Thanks, Kevin. And before we move into Q&A, I just want to remind everyone that Delphi had a very strong Q3 despite the macroeconomic headwinds. And as always, we remain focused on outstanding execution and then balancing disciplined investment in growth initiatives with actions to further reduce our cost structure. Our strong cash flow will continue to be deployed to enhance shareholder value, as demonstrated by our MVL acquisition and the $312 million of stock we repurchased over the last 2 quarters.

Now looking forward, even on a low-growth environment, we are well positioned for solid organic margin expansion and earnings per share growth. We remain committed to creating shareholder value and achieving our long-term objectives for the business, which we believe will further strengthen our position as the premier global automotive supplier. So, operator, we'll now open the call up for 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

I just want to go to I think this part of your culture for what I see as a soft spot here in the quarter, which we overall agree was good, Thermal. Could you talk a little bit more? Last quarter, you flagged Brazil behind the soft margins. But in general, it seems to be a more competitive, less margin-risked business than Powertrain and Electronics. We saw it hollow this morning around 8% below where your other segments are. So can you talk maybe just both short term and then mid-term about Thermal and what kind of actions you've got the division on to bring margins up back into the low teens, or if we should not be thinking that?

Rodney O'Neal

No, I think you should be thinking that because that's exactly what we're thinking, double-digit margins is our goal. Look, we've been working very hard on it. And James is doing an outstanding job of offsetting some very dramatic volume declines in Europe and in South America. And so the value prop of Thermal has been and will continue to be its -- the margins, I agree, are lower than some of the other businesses in Delphi. But then, an outstanding return on invested capital doesn't require a lot of our CapEx to invest in our engineering, and not a lot of time and resources from the business perspective. So it's a contributor to the company, has been and will be going forward. I think here -- the key here is just a shift that we saw in August and September from the volumes, particularly in Europe. So it is what it is in terms of the volume downturn. And the industry characteristics are slightly different than some of our other businesses, but it creates outstanding value.

Kevin P. Clark

Can I interject?

Brian Arthur Johnson - Barclays Capital, Research Division

Some of these restructuring targeted at this unit?

Kevin P. Clark

Brian I was going to -- it's Kevin Clark. I was going to touch on it. I wouldn't say -- through the first 2 months of the last quarter, we're in a solid trajectory. I think as we communicated to you on our last call, our target was 10%-plus EBITDA margins in that segment beginning in this quarter. And we're on a trajectory to achieve that level. And then we saw volume fall off late in the quarter in Europe. And secondly, yes, a part of the overall restructuring plan includes their activities, both in -- well, actually in North America, Europe, as well as South America. So we're focused on further reducing the cost structure, adjusting the cost structure in light of lower volume or particularly lower volume outlook.

Brian Arthur Johnson - Barclays Capital, Research Division

Just a broader question. During the quarter, you announced the share buyback program upsizing. Could you maybe share some of your and the board's thinking around cash share buyback strategy, mid-term? And I guess a question we get from investors is, is this kind of a one-time somewhat grudging, we've got some excess cash, take it back, or are you thinking about a kind of continual buyback program in the auto sector? You see AutoNation and AutoZone historically doing that, that we can kind of think about modeling in to continually reduce the share count?

Kevin P. Clark

Yes, listen, we've talked about this previously. We look at the Delphi business model and our cost structure and our ability to expand margins and, importantly, generate significant cash flow. And we think one of our strong strategic advantages is the ability to generate that cash flow, deploy it in ways to generate shareholder value, whether they'd be strategic acquisitions like MVL that are accretive to margins or -- and EPS, as well as return cash to shareholders. And on a go-forward basis, we think one of the staples that we have and we'll consistently use to drive shareholder value is to repurchase stock near term and then a little bit, medium to longer term, probably a balance of some amount of the dividend, as well as share repurchase.

Operator

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

Rod Lache - Deutsche Bank AG, Research Division

I was hoping you can maybe talk about your outlook for organic growth. Up until now, you've had some headwinds relative to the overall industry production. The GM year-over-year production changes were less, yet the South America issue. Could you just talk about how you expect that to look going forward, maybe the comparison start to change here with the Japanese on a year-over-year basis are not driving as much the year-over-year change, and maybe start with that, the fourth quarter you're looking for a 1.5% decline in production.

Kevin P. Clark

Yes, to make sure I understand the question, Rod, your question is with respect to our growth rate relative to the Delphi markets we serve?

Rod Lache - Deutsche Bank AG, Research Division

Correct. Your role to them.

Kevin P. Clark

I would say in the fourth quarter, given our outlook for Europe and given our customer mix, we would expect to grow roughly at market on a global basis. And we would expect that to improve, growth rate over market as we head into 2013.

Rod Lache - Deutsche Bank AG, Research Division

Okay. So basically, the declines from some of the Germans now are looking in Europe like the overall market. Is that how I can read your statement?

Kevin P. Clark

I wouldn't say they look like the overall market. But in the past, where they were growing on a year-over-year basis in a shrinking market, we have a slightly different dynamic today and are expecting that dynamic to continue in the fourth quarter.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And your comments on the margin expansion that you're anticipating for next year, is that basically a function of MVL, the long-term comp, and the restructuring? Or is there anything else that you see mix-wise or productivity-wise that could drive your margins next year?

Kevin P. Clark

Yes, depending on the outlook for volume growth and then standard operational performance, those are the 2 other levers. And we'll give guidance as we release our outlook for revenue growth in -- for 2013 when we announce our fourth quarter earnings.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And then just lastly, I was hoping you might be able to explain the FX impact on your business. It looks like I think it's a bit higher than it's been running. In terms of conversion, you'd a $212 million impact on sales, and it looks like a $45 million impact on EBITDA. What actually is happening there, and how should we be thinking about how FX affects your earnings going forward?

Kevin P. Clark

Yes, I think as you look at it longer term, Rod, in reality, the FX effect, whether it be a plus or a minus, should flow through slightly less than what our EBITDA margins are. That's for sure the way we look at it. This quarter, I would say we had an incremental amount of transaction-related expense that affected our number.

Rod Lache - Deutsche Bank AG, Research Division

You see that as a onetime kind of thing, not...

Kevin P. Clark

I see it as a onetime kind of thing.

Operator

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

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Maybe we can just pick up there on the walk to 2013, if you could just quantify a little bit and repeat some of the numbers that you said. What's the magnitude of the step-down that you anticipate in stock comp, if you could remind us of that? And then, Rod, if you could repeat, or Kevin, the contribution you're expecting from MVL. And then the restructuring, I think, you said was $80 million to $90 million. Just trying to think about all of the built-in tailwinds that you have in '13 that are going to help offset the industry headwinds?

Kevin P. Clark

I think let's go through, and we'll tick off one by one. So the restructuring benefit associated with this plan would be roughly $70 million to $80 million, I believe is what I said. $40 million to $50 million of that related to the MVL transaction. Yes, roughly $80 million to $100 million -- $80 million to $90 million of incentive comp reduction. And then you have the, I guess, 10-month contribution versus 12-month contribution of the MVL transaction at roughly a 16% EBITDA margin on a business that has, on a consolidated basis, roughly $1 billion of consolidated revenues. All right. And then what you would overlay on that would be assumptions as it relates to price, performance, volume, product mix.

Rodney O'Neal

Yes. And, Chris, we -- when we come back on the next quarter call, we'll be able to have greater clarity in terms of our assumptions for 2013. But the tailwinds are -- well, that's basically just math, but we really haven't locked in yet what we think the '13 volumes are going to be, so we need a little bit more clarity on that.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

One more item on '13, while you're at it. What is the tax rate that you expect for '13? Is that going to be migrating higher?

Kevin P. Clark

We would expect a 17%, about where we are today, about 17% effective tax rate.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then just the last item. You mentioned a few times in your walk through the quarter, it sounded like some help from lower warranty expense. Can you add all that up and quantify what kind of a help that was and if that's something that you anticipate continuing to be a tailwind in the fourth quarter and into next year?

Kevin P. Clark

Yes, I would -- I wouldn't expect it to be a tailwind on a go-forward basis. I'd say it's roughly $20 million in the quarter primarily -- $20 million to $25 million, primarily in the Powertrain side.

Operator

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

Itay Michaeli - Citigroup Inc, Research Division

I just want to -- was going to talk in the cash flow guidance, looks like it came down maybe $225 million pre-CapEx. Kevin, I think you mentioned a couple items, including cash restructuring. I was hoping you can give us a more detailed walk between those 2 items?

Kevin P. Clark

Yes, here's how I would look at the cash flow guide -- or change in the cash flow guidance. Roughly -- based on our current guidance for the fourth quarter, roughly $100 million left in EBITDA, $35 million of restructuring-related spend, $10 million of fees associated with the MVL transaction. And then our presumption now going forward is that we're going to pay the VCP -- make the VCP payment on 12/31 of this year, which is a headwind of about $200 million.

Itay Michaeli - Citigroup Inc, Research Division

Great. That's helpful. And then just with the macro conditions being what they are, are you seeing any change in launch schedules. Seems like your bookings are still very strong. Is there any change or shift in timing of actual launch that it may affect next year, particularly relative to the backlog you disclosed lasts for -- up to 2013? And are you seeing any change in commercial, settlement agreements or other type of activity with the OEMs?

Rodney O'Neal

Not really. I think the biggest change has been in the area of what I would call the electrification of the vehicle, which isn't really like the volume issues. But definitely, you're seeing delays or, in some cases, even cancellation on EV's and, in some cases, even on the hybrids. But in general, the launch cadence has been pretty consistent across the globe and not a lot of delays there. Some customers have had some issues with just launch. I wouldn't go to the specifics, but they had a little slowing in terms of making sure that the vehicles launched were in great quality. But overall, not a lot of movement in that area. And in terms of pricing, it's always the same, as you better have something that matters or you're going to be under siege. We have something that matters.

Operator

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

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

Just a couple housekeeping items here to start. Kevin, you talked about $70 million to $80 million of savings in 2013. But with the size of that, there's probably some carryover savings in '14. Can you quantify that?

Kevin P. Clark

Yes, the restructuring plan would generate $70 million to $80 million in 2013. We'd expect 2014 for those numbers to effectively be a little bit more than twice that amount, so $150 million to $180 million of EBITDA.

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

And that's a cumulative number, not incremental?

Kevin P. Clark

That is a cumulative number, yes.

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

That's great. And then on the Powertrain warranty, I don't think you've quantified what the impact of that was on the comps. In Powertrain, you said, it was mostly due to the warranty -- absence of the warranty.

Kevin P. Clark

I think it's roughly $20 million to $25 million.

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

$20 million to $ 25 million? Okay. That's great. And then the last little number item here. If we look at the long-term incentive comp, where is that running year-to-date, and what do you think the Q4 impact is?

Kevin P. Clark

The Q4 impact from a run rate standpoint will be roughly the same as what we had here in Q3. From a full year standpoint, it's about $100 million of expense.

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

Okay. And then on the European restructuring, can you give us some sense of the buckets across the businesses?

Kevin P. Clark

Just given where we are in the process, we'd rather not. And it's a mix of, again, manufacturing and engineering footprint, as well as administrative activities.

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

Maybe if we look at this way, as you rotate that manufacturing and engineering footprint, where are you today in terms of high-class Europe locations versus low-cost and where you want that to end up at the end of this restructuring?

Rodney O'Neal

I'd say in general, in Europe, we probably -- we've got about 30% of our workforce is temporary. It's falling a little bit because of the volume shifts we've taken as probably in the mid-20s now in terms of the contract. That mix was more or less 75% to 80% low-cost footprint in Europe. The remaining was primarily in the higher-capital ends of our business. And then what we're doing now is just taking advantage of some of the noise that's in the environment and moving some of that footprint eastward. So ultimately, the goal is to get Europe as in line as the rest of the world, but there's a time and there's a cost for everything. And so we've got our margins in Europe, a double digit, with some very smart execution of rotation. And this is just another one of those examples where we're taking advantage of the situation and moving forward. So it's around 80% today, 75% to 80%.

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

Okay. And then lastly here, as we look at China with the new business awards that you're getting there, is there a way that you could characterize how much of that is the manufacturers in China adopting your technology as opposed to market share gains versus folks who are already there?

Rodney O'Neal

Well, if you look at the characteristics of the Chinese market, it's very Western, like from a consumer preference standpoint. They really like the heavily contented vehicles. And so today, we have about 20 of our 33 product lines in China. And so when you look at what the recent additions of the portfolio has been, status-symbol electronics, more sophisticated infotainment, safety aspects, emission aspects. That's why we're pretty confident we're going to continue to outgrow the underlying markets there because of the market shifting in our direction from a portfolio perspective. And then also, we're pretty diversified, where around 60% of our business is multinational, and around 40% is with the winning locals. So we feel the market is rotating perfectly into Delphi's Safe, Green and Connected sweet spot.

Operator

[Operator Instructions] Your next question comes from the line of Matt Stover with Guggenheim.

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

You may have addressed this in your comments, I apologize, I was just interrupted. But could you put some meat on the bones of the margin performance on a year-over-year basis in the Powertrain business and in the E/EA sector? And I have a follow-up question.

Kevin P. Clark

To make sure I understand your question, you're looking for more color on the margin performance year-over-year in E/EA and Powertrain?

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

Yes. Could you provide some details? You saw nice margin improvements in Powertrain and deterioration in E/EA.

Kevin P. Clark

Yes. Deterioration in E/EA, you're right, on a year-to-year basis, we saw a reduction in margins from 14.1% last year to, if you adjust out the variable accounting for the VCP, 13.6% this year, so a 50-basis-point decline. So we saw strong flow-through on volume growth of about 30%. However, from a manufacturing performance standpoint, we didn't see strong manufacturing performance primarily related to the fact as Rod mentioned, the new facilities that we're launching in China and in Mexico. Both of those affected the manufacturing productivity, as well as we made a conscious decision and we have been all year quite frankly to invest incremental dollars in advanced engineering for new product development. As it relates to Powertrain, you see margins increasing 200 basis points, so 14.1% to 16.1%. And what's driving growth there, you basically have revenues that are flat. So you have a slight degradation in margin. That's slightly lower revenues. Manufacturing performance was very strong. So to offset some of that, we continue to invest in -- again, in that area, in advanced engineering, both on the gas side of the business, gas fuel injection systems, as well as diesel fuel injection systems. And then we got the benefit of the $20 million, $25 million of lower warranty expense.

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

Okay. And then the last question is, so you've taken restructuring actions. The market outlook for Europe remains fairly uncertain, and it's a possibility that will muddle along, get weaker here for a while. Should we expect that this is sort of the big bulk of action that gets taken in Europe, or would we anticipate something similar to these elevated charges in 2013?

Rodney O'Neal

Kevin, you want to go [indiscernible].

Kevin P. Clark

[indiscernible] just a math to make sure. So of the $250 million of restructuring charges, as I told you, some of that is -- $175 million can be booked this year, with the balance booked next year, so you'll see a proportion of this program. I would say based on what we see today in terms of volume in our underlying assumptions, we would not expect there to be incremental restructuring plans. But it's something that we always watch, and we're always focused on reducing and optimizing our cost structure. And if the opportunity presented itself and the returns made sense, that's something we would do.

Rodney O'Neal

This is an experienced management team. When we constructed this new company, one of the things that we made sure of when we put it together is that it was flexible and it was nimble because we got a great strategy that produces a lot of opportunity, and the team executes flawlessly, and we seize that opportunity. We know where we are, we know where we want to go, we know how we're going to get there. But even as good as we are and what I just described, the world has a way of putting bumps in the road, always has, always will. And the way we look at it, the way my philosophy is, we wake up in the morning, we look at what the world has put in front of us, and we just deal with it. And so right now, I don't expect us to be doing anything significant in Europe based on assumptions we have. But if the environment changes, we'll react to it because we've got a company that we think we can continue to produce superior results even when the volume isn't there, and then when the volume is there, where we can leverage it up. And so philosophically, we'll just deal with whatever is in front of us. And so I think when we come back and -- at the end of Q4 and do the call, we'll be able to outline exactly here is what we think the world is going to handle, deal to us in terms of the hand, and then we would just -- we'd tell you quite clearly what we're going to do to deal with it.

Operator

Your next question comes from the line of John Lovallo with Bank of America Merrill Lynch.

John Murphy - BofA Merrill Lynch, Research Division

It's actually John Murphy. Just one of the themes that seems to be coming across here -- a lot of detailed questions have been asked here, but one of the themes that's coming across is there's a little bit of margin compression hear in the short term as you're investing. I'm just more curious less so about the margin and more just on return targets because one of the great parts of your story is that you have this -- your return on invested capital is in, depending on how you're calculating in the mid- to high-20s, really strong. It's really I think what attracts people to the Delphi story. I'm just trying to understand, as you're putting these incremental dollars into the ground and the investment in growth in the future, if you think you'd be able to maintain those, and how we should think about that going forward.

Kevin P. Clark

Well, John, I think our point is we look at it, and I think we're highly confident that over the medium and long term, we'll be able to increase them. Volume affects us. Volume swings on a quarter-to-quarter basis may affect us. But every decision we make is made with the overlay and the intention that we're going to increase cash flow efficiency and we're going to drive higher returns. So that's the way we look at, whether it's an M&A opportunity, whether it's an organic investment in a specific customer program or development of the new products or the launch of a new facility.

John Murphy - BofA Merrill Lynch, Research Division

Okay. That's incredibly helpful. And just one other question I -- and I apologize, I may have missed this part of the call. As we think about the movement in Europe to maybe more LCC sourcing there, and where you are around the rest of the world, and it's currency just swinging around a little bit more than it has in -- historically, more recently. Is there any more risk to ForEx going forward that would be more economic and less just translational or a lot of your contracts priced in the same certain currency that they're being produced?

Kevin P. Clark

I wouldn't say that our risk profile, in light of the current macro environment, foreign exchange rate hasn't -- it's no different than what it was early this year or last year. There's no change.

Rodney O'Neal

Yes, I think it's the beauty of the model, where our pricing and our cost tend to be in the same currencies, so it would minimize the -- a massive amount of risk in that area.

Operator

The next question comes from the line of Richard Hilgert with Morningstar.

Richard J. Hilgert - Morningstar Inc., Research Division

A couple of questions here. We saw just recently one of the Japanese luxury guys announced that they were going to be doing drive-by-wire launching within the next 12 months. We've been hearing about drive-by-wire and break-by-wire for, geez, the last 15 years or so. Are we now going to start seeing -- actually seeing these products showing up in vehicles? Or is that particular manufacturer just kind of one that's kind of a prime mover, and everybody's going to take a wait-and-see approach and see what happens with lawsuits or anything that might come from having the technology?

Rodney O'Neal

Well, I'm not sure I'm totally tracking, but drive-by-wire and break-by-wire are pretty prevalent across the entire industry in the more upscale cars. Are you talking about automated vehicles or just the technology?

Richard J. Hilgert - Morningstar Inc., Research Division

No, this is not like a hybrid, where you've got electrics driving a mechanical connection. This is purely electrical with a mechanical backup that actuates in the event that 3 redundant systems actually fail. So this is purely and completely electrical, and this is the first time that it's in mass-produced -- it's the first time as being in a mass-produced vehicle so...

Rodney O'Neal

Here's the way I look at it. It's a cost-versus-benefit issue. And I think you just described a little bit of the cost when you got a system, and then you got 3 backups. So it's going to go on a very special kind of car, one high end. It's not a technology at this stage that will be democratized across the entire vehicle fleet. So it's not that revolutionary. It can be done. It's not that -- it's always -- the issue is the benefit, and does the consumer -- is the consumer willing to pay for it. And so nothing new there, all right?

Richard J. Hilgert - Morningstar Inc., Research Division

Yes. Okay, good. With a lot of your business being in the Asian region and given the dynamics there of the Japanese and the Chinese market, is there any impact there for you guys?

Rodney O'Neal

Well, we're not -- we don't have a lot of -- in China, we don't have a lot of Japanese business, so we're not negatively impacted there. And to be honest, it's still early. We haven't seen a dramatic shift, where I would call the consumer has fled the Japanese players and moved over to either the multinational or to local, haven't seen that shift. But there's a lot of prediction that it will occur. I think it remains to be seen how permanent this is versus just a temporary emotional aspect. But right now, we don't see a big move in consumer preferences yet in terms of impacting sales of vehicles, other than like the Japanese aren't selling. But there hasn't been a lot of rotation yet on the -- to the Chinese locals or multinational.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay. And then last. We've talked a little bit about Europe on the call here. Getting inventory levels or read-on inventory over there is a really difficult thing to do, to say the least. But I was curious, if you've gotten a sense from your customers as to whether or not this is the amount that we're seeing production schedules dropping for the fourth quarter and the likelihood that there's still going to be pretty low, obviously, in the first quarter. Have we corrected or will we correct the inventory given these new production schedules? Or is there a sense that inventories are still pretty high and this is going to be an extended production low that we're seeing?

Rodney O'Neal

I don't know. I mean, we don't have a really good look into 2013 yet, so we will provide clarity to that in our next call. I guess, I look at it from a positive standpoint that the behavior of the OEs in this environment is one where they're matching their production to demand. And historically if you look back in the past, that wasn't always there. So I'm extremely encouraged with the actions. And while we never want to see volumes taken down, this is really -- it's important to take these kind of actions just to keep the industry in line, such that we can stay healthy through this period. So first of all, I'm encouraged and applaud the actions of the OEs. And so all of us are making the adjustments. The premise of this, we'll have to come back to you, but right now, we don't see anything that says that things are going to get dramatically worse. The question is how is it flat or slightly up. But we got to come back to you with clarity.

Operator

There are no further questions at this time.

Rodney O'Neal

Hey, I appreciate all of you joining. Thanks a lot. We'll see you in the next quarter. Stay safe.

Operator

That concludes Delphi's Third Quarter 2012 Earnings Release Conference Call. Thank you for joining. You may now disconnect.

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