Delphi Automotive PLC Earnings Call Nuggets: Margin Outliers and the New Business Backlog
Delphi Automotive PLC (NYSE:DLPH) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Brian Johnson – Barclays Capital: Just wanted to explore a couple of margin outliers just to make sure we understand the underlying run rate. Just first on the positive side, Electronics and Safety, you have had what looks to me to be a two year low — near two-year low in revenue. You had a record margin number. What went on there on the good side? Then can we think about that going forward? Second, sort of the opposite a year ago, Powertrain had a very high 18%. What in hindsight was there that hasn’t been there in subsequent quarters and how should we think about that segment going forward?
Kevin P. Clark – SVP and CFO: E&S as I said in my statements Brian, from a year-over-year standpoint, like all of our businesses was certainly affected by revenue or weak market in Europe. So that’s the largest explanation as it relates to changing year-over-year growth. As it relates to margin expansion, our E&S business has done exception job putting together performance initiatives where they’ve more than offset economics, one. Then two, we’ve talked about over the last few quarterly conference calls our initiative to rotate our business out of some lower margin mechatronic and receiver product lines and maintain benefits. On a go forward basis for the full year we’d expect our E&S business to expand margins on a year-over-year basis. I’d tell you there will be some volatility when you look at it sequentially because it is a business where reimbursement for certain engineering activities, where we partner with our customers it’s not evenly allocated across each quarter of a calendar year. So, that will be my explanation on E&S. As it relates to Powertrain, if you recall in the fourth quarter last year our Powertrain business truly operated at an optimal level. They had 18% EBITDA margins, revenue growth was extremely strong, product mix was significantly weighted towards diesel fuel injection systems and the end very solid operating performance. I think we told people at that point in time that they should not assume that the business operating on a go-forward basis at that sort of level. So, I would start with the products to re-comp, as it relates to this quarter our Powertrain business, obviously, was significantly affected by what’s going on in Europe, as you know our diesel business is a little over half of our total Powertrain business and as a result it was affected by the European downturn from a volume standpoint, one. Then two, consistent with what we talked about on the third quarter call, we saw a slight deterioration in mix in terms of diesel fuel injection systems in Europe in the fourth quarter for our Powertrain business. So, that’s how I would explain the two periods.
Brian Johnson – Barclays Capital: And on E&S is there a difference between electronics, safety, profitability or it’s going to be a bit variable given, I think you discussed this earlier, the software model that’s evolving and getting paid upfront in the engineering?
Kevin P. Clark – SVP and CFO: I mean getting paid for the engineering is something that we’ve done consistently in the past, is very lumpy in terms of payment. I think it’s really a mix of two things. It’s a mix of more software business which is higher margin that tends to be in the safety arena and we’ve been talking about the rotation out of some of that lower margin business.
The New Business Backlog
Rod Lache – Deutsche Bank: Couple of questions; first, the new business backlog declined from 900 million or so this year to 500 million and it seems like that’s more than would be explained by production and I believe that your 2014 increase was only about 100 million. So, it seems like that wouldn’t be fully explained by the push out as well. Can you give us a little bit more on what was behind that?
Rodney O’Neal – CEO and President: Sure. It’s really a couple of things at the end of the day, Rod. It’s a mix of volume reduction which is industry volume reduction, primarily in South America and in Europe. Mix change so we’ve seen or are assuming lower take rates on some of the higher content options, principally in the area of Electronics and Electronics and Safety. It’s the push out of electrical vehicles where we had a fairly significant or assuming fairly significant growth in our prior guidance. Those are the largest changes.
Rod Lache – Deutsche Bank: I was hoping you can maybe flush out a little bit more on this earnings bridge till 2013; if we use the midpoint of your guidance you are showing EBITDA increasing by about $233 million. I think you’ve previously said that the decline in variable comp or that stock comp expenses like $90 million, so the underlying performance would be like $143 million, if you subtracted that in MVL based on what you’ve said previously about EBITDA margins, I would think as it maybe $110 million. So, underlying that might be something like $33 million of EBITDA improvement and is that reasonable expectation. And then on the revenue side, I am assuming that we would subtract maybe $670 million related to MVL, so about $230 million of revenue growth?
Kevin P. Clark – SVP and CFO: So, let me touch on. I understand what you trying to get to. So, why don’t I take a shot at it. Let me start with we would recommend based on where we see industry volume return to the market. As people look at earnings it really look at earnings on a sequential basis versus a year-over-year basis, so from the fourth quarter of last year to the first quarter of this year. We think it actually – it is a better comp to come-off of, so I would start with that sitting in (indiscernible). Second, as you look at those tailwinds there are two there is the long-term incentive comp plan you are right that goes away that’s tailwind of $80 million on an EBITDA basis. And there is a benefit of the MVL acquisition, which really is broken down into two pieces; one, to your point $100 million to $110 million of base MVL and then roughly $30 million or $50 million of synergies associated with the MVL business. So call it year-over-year roughly a $150 million coming from MVL. So that’s both of the two pieces. Three you get volume growth year-over-year and on a year-over-year basis but that volume growth is partially offset by mix.
Rod Lache – Deutsche Bank: So based on that bridge the underlying performance is pretty neutral on a year-over-year basis?
Kevin P. Clark – SVP and CFO: I’d say it’s up slightly.
Rod Lache – Deutsche Bank: Lastly normally for Delphi and I think most suppliers the profitability is typically stronger in the first half than the second half because of production days and your guidance implies a pretty meaningful uptick. Could you just tell us broadly what you are expecting will happen sequentially like from the first half to the second half, is there a drag that moderates maybe in Thermal or in some other area?
Kevin P. Clark – SVP and CFO: You are right. In this industry we would typically see from a unit production standpoint kind of 51-49 mix first half versus second half. As we look at 2013 or really we believe it’s going to be closer to 49-51, 50-50 somewhere in that range. Where you will see the improvement is a slight improvement in sequential volumes in Europe but with a slight strong improvement on a sequential basis in China, and some improvements although not significant on a sequential basis in North America.
Rod Lache – Deutsche Bank: There’s just an unusual timing of production, I guess is what you are saying?
Kevin P. Clark – SVP and CFO: Relative to historical trends, it would be – it would be less typical. Yes.