Delphi Automotive PLC Earnings Call Insights: CV Falloff and Q1 Primary Driver

Delphi Automotive (NYSE:DLPH) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

CV Falloff

Brian Johnson – Barclays Capital: Just want to go into a couple of segments in terms of the margin trends. In Powertrain, how much of a drag was the CV falloff and kind of as you look to the full year given your production forecast are you looking for any recovery there?

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

Brian Johnson – Barclays Capital: On E&S, you warned us last quarter not to extrapolate margins out. Can you give us anymore color, just given the (software intensive) nature in engineering, intensive nature of their business on the seasonal pace of engineering recoveries, and hence margins in that unit or is it just depends when there is no seasonality?

Kevin P. Clark – SVP and CFO: There is a little bit of seasonality in terms of waiting. There tends to be more engineering rebuild recoveries in the fourth quarter versus the balance of the year. However, depending on specific development programs with specific customers, there is variability between, quarter-to-quarter, throughout the year…

Brian Johnson – Barclays Capital: In terms of a range of variability is it plus or minus a couple of hundred basis points or is there…?

Kevin P. Clark – SVP and CFO: Yeah, a couple of hundred basis points is reasonable.

 

Q1 Primary Driver

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

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

Rod Lache – Deutsche Bank: Pricing for the longest time has been ranging from 1.5% to 2%, I think it was 1.8% the fourth quarter but it seems to the moderating. Is there anything unusual here or sustainable about this lower level?

Kevin P. Clark – SVP and CFO: We are still very confident that it’s for us pretty sensible average 1.5% to 2% on an annual basis and there is a little bit of seasonality within any given year based on launch timing of certain programs.

Rod Lache – Deutsche Bank: Just lastly obviously there has been some media reports, suggesting that you guys are maybe in the running for a fairly sizable acquisition in electronics. Could just give us some thoughts on what the vision is there, what would be attractive as far as acquisitions you might be considering and whether or not that might have an effect on your capital deployment plans?

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Kevin P. Clark – SVP and CFO: Well we don’t comment on specific M&A items as you can imagine. However, what we have said is strategically we are interested in areas that are in and around Powertrain Electronics. That if we were to do M&A transactions there, transactions that are accretive to our earnings growth, accretive to our margins and are effectively bolt-on from an integration standpoint. So from a strategy standpoint nothing has changed.

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