Q3 2019 Earnings Call
Good morning, My name is here again, and I will be your conference for student teacher at this time I would like to welcome everyone to the Delphi technologies third quarter 2019 earnings Conference call.
During the opening remarks, all participants will be in listen only mode.
Following the opening remarks, we will conduct a question answer session.
As a reminder, this conference call this being recorded and simultaneously webcast.
I would know likes during the call over to Sharif back row, Vice President of Investor Relations for me. Please go ahead.
Thank you you're getting a good morning, good afternoon, everyone welcome to Delphi technologies third quarter 2019 earnings call.
With me today in Rochester is our Chief Executive Officer, ripped out and our Chief Financial Officer vivid Cisco.
This call will include the discussion about third quarter 2019 financial results as disclosed in today's press release as one of our updated outlook for 2019.
In order to follow along with today's presentation, you can find an accompanying set of slides on our investor Relations website at <unk> Dot Delphi Dot com.
Please note that our discussion increase references to non-GAAP financial measures, which are reconciled to the corresponding GAAP measures in the tables within a press release.
In addition references to changes in revenue are on an adjusted basis, excluding the impact of foreign exchange movements.
Now before we begin I'd like to remind you that certain statements made on this call may constitute forward looking statements forward looking statements statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's Form 10-K , and 10-Q as what is other filings with the FCC I'd encourage all the future.
These risk factors listed in these documents and with that I'd like to turn the call over to Rick.
Thank you Sharif and good morning, and good afternoon, everyone on the call over the last three quarters, you've heard me talk about the tremendous opportunity we have here Delphi technologies to create value for our shareholders.
Despite the near term challenges our industry is facing I remain confident and passionate about the opportunity to create a stronger and more probable Delphi technologies over the next two to three years.
Just becoming a C. O here you heard me talk about the process have gone through to fully understand both our strengths and our weaknesses as a company.
As you will see in today's press release, we're taking the necessary actions to address one of our weaknesses in order to reshape and refocus our company into the industry's propulsion technology leader.
We will become a leaner and more flexible organization.
Now that we are truly independent company, we had the freedom to do just that.
Doing so allow us to significantly improve our profitability and our cash flow profile, enabling us to invest for profitable future growth.
I'll come back this in a few minutes and take you through our key operational initiatives and our restructuring plans in more detail.
Like many of you on the call today are working assumption is that our industry. Both in the passenger car and commercial vehicle side well continues he solve this through 2020, albeit with some areas of strong growth in our advanced technologies, specifically higher pressure fuel injection systems and power electronics.
The good news for Delphi technologies is that we have industry, leading technology in both in a large profile supported by booked business that is set to deliver significant growth in 2020 and beyond in these two key areas of our portfolio.
What steps, we're taking to address our cost structure and the improvements we are making their operational performance or program launch execution capabilities. We are fully committed to deliver on our vision to be the pioneers of propulsion and create significant significant value for all stakeholders.
Turning to our third quarter performance on slide two.
At a macro level, our 8% year on year drop revenue to decline was a couple of points lower than the outlook, we gave last quarter.
Primarily driven by softer global production, primarily in China, India in Europe .
Adjusted operating margin of 6.9% was negatively impacted by lower volumes incremental FX headwinds internal operating issues as well as a strike at general Motors.
Despite this operating cash flow was a relatively robust 59 million.
You may highly focused on improving our cash flow performance in 2020 and beyond.
Then we'll talk more about this in more detail during his remarks.
From an operational and commercial perspective, we had another quarter of strong progress who the number of important milestones as wells moving quickly on our critically important lean systems implementation initiatives.
We actually to our final transition service agreement with our former parent on August 31st which for the first time since our separation gives us the ability to drive structural efficiencies and improvements, particularly in the area of I T.
Finally, we secured approximately 1 billion of new gross bookings in the quarter across our fuel injection and powertrain parks portfolios.
Moving to slide three.
Addition to weaker than expected global production in Q3, we continue to be impacted by number of industry wide technology transitions as well as macroeconomic and customer headwinds.
And as I mentioned on last quarter's call. We expect this choppiness and uncertainty to continue over the coming quarters.
These dynamics include the accelerated transition from passenger car diesel gasoline engines, especially in Europe .
The near term projected growth and timing of electrification, mostly in China, and Europe , which has happened slower than originally forecast this year.
We expect to cyclical decline heavy duty trucks, especially North America.
And shorter term demand softness in the aftermarket space largely from some destocking by certain customers in Europe , which we expect to continue in Q4.
As well as the ongoing political trade and tariff dynamics across the globe.
In addition, you've also seen the strike actually a general motors, which has impacted production and supply chain in late Q3 in early Q4.
And we're happy to see this issue resolved and we are ready to get back to supplying CGM facilities in North America.
At a high level, we now expect global light vehicle production declined by approximately 7% in 2019 and this is an update to our prior view of an approximately 5% decline.
Looking forward, we expect the challenging industry in macro dynamics to continue into two throughout 2020.
We need to become a far leaner and more agile to adapt to these market pressures as well as overcome our own near term transitional and business mix headwinds.
At the same time, it's also clear that the long term secular growth drivers of our business remain intact and the long term structural shift to more efficient powertrain is accelerating.
This presents a tremendous content per vehicle and revenue growth opportunity for us.
We have strong relationships with customers across the globe, which is reflected in the business wins, we have secured in power electronics GDP.
In commercial vehicle fuel injection systems over the last couple of years.
Let's move to the next slide.
Building on our commercial successes, we remain committed to delivering pioneering technology to our customers.
From groundbreaking higher pressure internal combustion engine systems to our next generation inverter technology for electrified vehicles.
No the subject of breaking ground, we were delighted to cut the ribbon on our new electronics electrification plant and blown you Poland in early September .
This new World Class facility is one of the five dedicated electrification.
Over the last two years, we have invested approximately $50 million to establish our global.
Manufacturing presence in preparation for the electronic propulsion systems growth, we see in the future.
We are working to train our people and qualified our new process equipment at these new sites in order to complete the final operational separation from our form 10 repair by Q1 2020.
At the eye a motor show in Frankfurt, we showcase our industry, leading 500 bar Judy I system.
Well as our 800 volt silicon carbide inverter.
Which helps the significant extend range and reduce charging times relative today state of the arc systems.
We also announced that we are partnering with Cree and we'll use their wolfspeed silicon carbide based mosfets for our future generation of Inverters.
Feedback from our customers was terrific and we will continue to be highly selective on future pursue opportunities it hearing to our robust profitability and ROI see hurdles.
Our focus on improving profitability and returns is a good segue into the transformational plan, we announced this morning, which will fundamentally realigned and reshape Delphi technologies into a leaner and more competitive propulsion system supplier.
Slide five takes you through some of those details.
On last quarter's call I commented that we have a legacy overhead cost structure and engineering footprint.
And when benchmark to both our industry peers and the future needs of our company, we identified it to be a target rich opportunity to meaningfully improve our cost structure and profitability.
Today's announcement underscores that view.
Then we will take you through financial details in the expected benefits to our operating income and cash flow performance, but at a high level. Our board of directors have proved a comprehensive restructuring plan, which is expected to reduce our cost by more than $150 million in 2022.
Eliminate nine injuring sites and more than 2000 positions more than 10% of our total workforce and improve our free cash flow by $300 million over the course of the plan.
We've been very thrown our analysis, taking a methodical and phased approach to give us the flexibility to adapt to market changing market conditions without disrupting more than 160 ongoing new product development and customer programs that will launch in 2020 to 2023.
These actions while difficult for those affected are necessary and we will work with urgency and focus to ensure we deliver on our targets.
I strongly believe that these actions combined with our aftermarket 2020 initiative and our focus on lean capabilities will accelerate our return to profitable growth.
We estimate the average payback on a restructuring is only slightly over one year and with a bulk of the savings expected they realize in 2021 and 2022.
So to slide six starting with our engineering footprint.
We currently up 23 engineering sites in 13 countries, many of which are underutilized or simply not in the right location.
A function of our heritage and legacy structure as well as our evolving customer and powertrain technology mix.
You see on slide six we plan to close nine of our sites for in Europe to in North America to in Asia Pacific and one in South America.
This will transform our injuring footprint and cost structure, making us more focus on our future growth technologies power electronics fuel injection systems, both Judy and commercial vehicle diesel as well as select powertrain components, where we are market leaders.
Really well positioned to meet our customers changing technology needs and all three of our major operating regions.
Following the completion of the plan our engineering footprint will be focused on six global engineering centers of excellence.
Three for electrification one in each region, one for advanced gasoline fuel injection systems.
One for select gasoline powertrain products and one for high pressure diesel systems for commercial vehicles.
In total we expect to reduce our engineering headcount by more than 1500 or close to 30% of our total injury workforce and also reduce our total injury and footprint by more than 40%.
From a product perspective, approximately two thirds of the engine head count reductions are in diesel and legacy powertrain products, which result in a more efficient and growth oriented injuring base.
The balance of the cost savings are expected to come from reductions related to our S. You ne and operations some of which are tied to our geographically dispersed engineering footprint.
Ultimately these actions will make us a stronger and more profitable company.
One that is better positioned to meet the changing needs of our customers or provide us with a more capital allocation optionality in the future.
Let's move to slide seven.
Before turning the call over to vivid I wanted to update you on the operational progress we've made over the last three months as well as sharing some of our key priorities as we look forward into 2020.
Overall, we continue to make solid progress while laying the foundation to generate sustainable improvements in a number of key areas.
That said, given our financial performance and that really industry headwinds. We are facing we have to work with even greater speed and urgency to improve our performance first as I mentioned, we continue to be on track to becoming a truly standalone company.
This presents a major opportunity for us to remove moved a common systems and business processes over the next few years.
Second I remain pleased with the progress we have made with our Judy I business and continue to expect breakeven profitability for Judy I by the end of 2020.
Between now and then we have a number of key launches that must be executed flawlessly, both internally by our team and the also by our supply chain partners.
Third crucially, we are continuing to prioritize technology investments that deliver real value to our customers, allowing them to meet increasingly stringent regulatory standards and highlight our technology led strategy across the range of advanced propulsion systems.
The restructuring program, we have announced today will allow us to selectively increase our investments to further differentiate our technology leadership in areas such as our next generation inverter for power electronics 500, Bard above GDP I for passenger cars in our 3000 biodiesel system for commercial vehicles, all aligned with future regulatory timelines and standards occur.
Across the globe.
Fourth we're continuing to build on the foundational work our leadership team has done to improve the profitability and position our aftermarket business for accelerated global growth the aftermarket business as a nice business for us here at Delphi.
Fifth last quarter I referenced some of the new leadership talent, we have brought into the organization to address some of our key challenges.
Specifically in our manufacturing quality and program management launch systems.
These are critically important areas for us to address given our recent business wins and upcoming launch activities.
Our multiyear journey to become a true lean systems company is well underway with significant opportunities already identified to improve our cash flow conversion cycle.
We have added two new executive to new executives, both experts and lean systems, who have worked at me a prior companies together, we have implemented a multi step process implement lean operating systems at over 50 sites around the world.
Read about 50 50, 20, if you want to understand the processes. We are implementing here at Delphi technologies.
We will focus our efforts on improving the overall value streams and cash conversion cycles of the company today, we have over 40 days of inventory on hand.
World Class tier one automotive suppliers operate with 20 to 25 days of told inventory, that's a huge target rich environment for us to address.
We also quickly identified several operational issues at specific sites or suppliers that can be improved in the areas of capacity utilization machine uptime first time quality and scrap.
These are fundamental operating issues that can and will be addressed with training improved process discipline and minimal investments and machinery and tooling.
Our teams are already hard at work attacking these opportunities for improvement.
And of course, we are now operating at full speed to implement our transformation plan and take the necessary steps to improve our financial performance.
During the third quarter, we initiated an S. You they focus restructuring, which will eliminate 200 positions by early 2020.
This will help kickstart our cost savings momentum started in Q4 this year.
Moving to slide eight.
So the coming to see of Delphi technologies, we have faced a number of incremental macro and industry headwinds that we need to absorb and overcome.
No doubt we have a lot of work ahead of us, but my confidence the motivation to lead Delphi technologies through his journey into becoming a great company in the pioneers or propulsion technology solutions and services has never been stronger.
It all starts with our technology and compelling value proposition to our customers that is not in question.
But it's also not in question is that we havent uncompetitive legacy overhead cost structure and footprint, which we will transform over the next two to three years.
Due to actions, we have announced today, we will soon be a more focused leaner and more agile company.
Ultimately, we are focused on delivering margin expansion and significantly higher level, the free cash flow over the long term, which we believe provides a compelling value creation opportunities.
Our call today has been held here at Rochester, New York.
One of the impact that R&D sites in the restructuring while we will treat every impacted employ with irrespective is there my presence here today shows the urgency I placed on enacted in delivering on our restructuring commitments.
Our leadership teams around the World are also working within there to see that gives me confidence in the tremendous potential of Delphi technologies with that I'll turn the call over to visit.
Thank you Rick good morning, and good afternoon, everyone on the call My remarks will focus on our Q3 performance revised full year outlook, taking you through the details and phasing of a three year transformation plan, which we expect to will deliver significant cost savings and support margin expansion from next year and providing.
Some commentary on 2020, and I'm confident we can generate significantly higher free cash flow next year.
Looking at our Q3 performance in more detailed on slide nine.
Revenue of 1.03 billion in the quarter declined by 8% year on year, driven by growth in July and our aftermarket business, which was more than offset by decline in passenger car diesel revenues in Europe , lower sales in China, and India lower overall global production on the impact of the GM strike.
Adjusted operating income of $71 million or 6.9% margin declined year on year and came in slightly below our prior outlook.
Excluding the impact of the GM strike as well as the incremental foreign exchange headwinds adjusted operating margin would've been 20 basis points higher at 7.1%.
Adjusted EPS came in at 56 cents, while operating cash flow a $59 million increased by 5 million versus 2018.
As we look out to 2020 and beyond cash flow performance remains a key priority for us.
Turning to slide 10, which provides more detail on our revenue progression in the quarter.
We estimate a global light vehicle production declined by close to 4% team.
Three percentage points lower than we assumed three months ago.
In addition, we saw an incremental softness in global commercial vehicle production, particularly in North America Europe in India.
This is a trend we see continuing as we look ahead into Q4 and into next year.
Importantly, gd revenue growth accelerated in Q3, given our launch activity in Europe , and China, and we remain confident that we will see strong revenue growth from Threefifty bar, Judy technologies and 2020 .
As expected power electronics revenue declined by approximately 15% in the quarter given the ongoing changes in government regulations and incentives in China.
Well, we expect this to resulting continued choppiness in our quarterly performance, we anticipate power electronics, returning to revenue growth in Q4, and beyond driven by our technology leadership commercial wins and the increasing global shift towards electrified vehicles.
On the right hand side of the slight you can see our regional revenue performance in Q3.
Revenue in Europe declined by 6% as growth in commercial vehicle and Judy I was again offset by the ongoing decline in passenger car diesel revenues revenue in China declined by 15% as new Threefifty bar Gd launches will offset by overall market softness as well as our own customer mix.
Finally, I was held in North America declined by 7% driven by the ongoing eat OEM customer decisions to exit certain segments in the region and to a lesser extent by the GM strike.
Slide 11 walks through our operating income performance for Q3.
Adjusted operating income was $71 million down from $108 million in the prior year quarter.
This was primarily driven by unfavorable mix, primarily gd I versus passenger car diesel lower industry production, particularly in China as well as higher depreciation expense.
This was partially offset by ongoing improvements immaterial in manufacturing performance planned low engineering spend as well as overall cost control.
Turning to our segment performance on the next slide.
On a year on year basis powertrain systems adjusted revenue declined by 10% in the quarter as growth in GDP I was more than offset by lower revenues in passenger car diesel in Europe , and India OEM decisions to exit certain segments in North America, lower power electronics revenues and to a lesser extent the GM.
Right.
Adjusted operating margin of 5.5% was down primarily due to the fact is I've just described most notably unfavorable mix and lower overall global volumes, particularly in China.
Turning to our aftermarket segment on slide 13.
On a year on year basis aftermarket revenues increased by 2% in Q3 as high as sales to independent aftermarket customers more than offset planned low Oh, yes revenues and some market softness in Europe .
Adjusted operating margin of 10.3% increased by 290 basis points, primarily due to continued improvements in operational performance is consistent with a focus on driving sustainable profitable growth.
These were partially offset by higher year on year tariff costs.
Now, let's move onto our updated outlook for 2019.
In addition, we've also incorporate to be impacted the GM strike through to the last week of October , which equates to approximately $20 million in revenue.
We now expect full year revenues to be in the range of 4.3 to $4.3 billion to $5 billion, which on an adjusted basis represents a seven and a half 8% year on year decline.
Roughly two thirds of this change in outlook is related to lower diesel revenue assumptions for passenger car and commercial vehicle.
Adjusted operating income margin is now expected to be between seven and 7.2% with an adjusted tax rate of approximately 19% or around one point higher.
Operating cash flow is now expected to be between 235 and $250 million, primarily due to the high cash restructuring costs, which we now anticipate being between 60 to 70 million.
Importantly, we see capex as a percentage of sales declining significantly next year. This is expected to be a key driver of our free cash flow improvement in 2020 and I'll come back to this in a couple of slides.
And as I mentioned earlier, we expect to see power electronics returned to year on year revenue growth driven by new launch activity.
Turning to slide 15.
Our prior adjusted operating margin outlook of approximately 8% for the full year implied a second half adjusted margin improvement approximately 100 basis points compared to the first half.
This assumed to come but combination of Delphi technologies initiatives, partially offset by market and macro headwinds.
Well the expected benefit from the Delphi technology specific initiatives are largely unchanged the market and macro headwinds have increased such as lower global production for both light and commercial vehicles, particularly in India, the GM strike as well as unfavorable FX dynamics.
In total we now see approximately 200 basis points of additional market and macro headwinds in the second half the year predominantly in Q4.
Given these market an industry wide challenges and as Rick highlighted in his comments, we simply have to become a leaner and more flexible organization.
Slide 16 outlines the estimated cost and savings related to our three year plan as well if the expected phasing over the period.
At high level, we are targeting more than $150 million of cost savings in 2020 to.
The total cost reduction, we expect approximately 80% to come from engineering savings with the balance split between SGN, a and operations.
Did you can see on slide 16, we expect to achieve roughly one third of the savings in the first year or approximately $50 million in 2020 .
In addition, we expect to see a significant free cash flow improvement over the course of the plan generating approximately $300 million of cash flow benefit through the end of 2020 three.
Well, we're not providing a specific 2020 outlook at this stage of the year I want to shed some directional color on slide 17 on how we see next year shaping up and some of the expected key drivers in terms of the trends in headwinds that are impacting us in the second half of the year a base case assumption is that those trends.
Continue into 2020 with an accelerated decline in commercial vehicles.
Starting with revenue.
Where our initial view is that both light and commercial vehicle production could decline next year.
From a more Delphi technologies perspective, we expect that trend in passenger diesel revenues to continue with lower sales of our legacy powertrain products offset by growth in GDP and power electronics and to a lesser extent by aftermarket.
Moving to adjusted operating margin positive drivers include the benefits of restructuring lower year on year spin related costs and the expected improvement in profitability for both gas and power electronics.
Setting this we see the mix headwinds in our business accelerating related to the shift from passenger car diesel revenues towards DDIY on pilot Tronics as well as the expected cyclical downturn in commercial vehicles.
Slide 18 highlights some of the cash flow Tailwinds importantly, they are all independent of revenue all our within areas that we control.
In total we have identified up to $200 million of free cash flow benefits in 2020 , which are the combination of four drivers first capex, which we see declining by $90 million to $100 million relative to 2019. This reduction is a combination of the absence of approximately $40 million of spin related.
Could we see a $35 million to $40 million a year on year benefit due to the absence of onetime separation cost incurred in 2019 for lower year on year pension cash contributions falling the elevated levels of cash in 2019.
In addition, and as Rick mentioned, we see further opportunities to improve our working capital efficiency through the implementation of lean initiatives focused on reducing our days on inventory on hand.
So while we continue to expect uncertainty related to the volume and mix impacts on our cash flow performance in 2020 , we see a very clear pathway to deliver higher year on year cash flow with that I'll turn the call back to the operator for your questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
It's a question that's been answered or you wish to move yourself from the Q. Please press the pound key.
John Murphy from Bank of America.
Your line is open.
Great question John .
We do have some redundant capabilities our sites.
Sample is we have nine materials laboratories around the world, We don't need nine so we can move that worked very quickly and move forward there.
There are certain test equipment. We have an example, we have over 80 dinos around the world there's different sizes of Dinos as I've come to learn here. So we can move some of the dyno work around.
Have like Bombproof type facilities, and we got to make some small adjustments in two of our facilities do that so does that answer your question.
Yes, yes, it does it I mean, I guess maybe simplistically.
Joe John just actually before that I, just want to sort of raise another point that Rick was touching upon I think one of the important things that we have not factored in.
Our restructuring plans right now is any type of asset sale.
That could actually allow also a very significant contribution to cash flow and mitigate any type of.
Requirements for moving Capex or any other type of engineer.
We sit on some.
Pretty good sites at this point in time and that will provide certain benefits. If we move forward with that but that's not in cased within our current assumptions right now.
But I think just overall if I look at the engineering, what's clear is that we've already made some pretty good strides in this if you look in the first half of this year engineering was north of 9% and even I think you know with rig sort of focusing very hard right now on cost control, we're going to end the year in h. to closer to 8%.
And and sequentially you can actually see that in Q3, we went down close to sort of 20 million less than in Q2. So we've already made some pretty good strides right now in terms of engineering. So I think longer term, we'll have to of course depend on revenue, but I think recalled it out before there's at least 200 basis points at a minimum of opportunity.
That engineering, which would largely drive our focus into the long term closer to the 6% range.
Okay. Thank John .
Yeah, we've done it take we've taken a deep dive into the public powertrain companies. The drive train companies in the driveline companies all right and the type of technology changes between as you move from the engine back to drive change the drive line and said, but we know where we stand versus our publicly traded powertrain competitors. We think we have an opportunity to get.
Equal to or better them in the next two years, Okay, and we have a very clear plan that we've taken some extra time, we've gone site by site.
Run this just like you run a program you know detailed month by month.
Site by site name by name, who is going out the door who's who's moving to new locations.
What do you see what do you think you can ultimately do there and what are the key levers are drivers of aftermarket growth in how big could this be means that a lot.
Very significant revenue opportunity.
Yes, let me I inherited when I got here a plan called aftermarket 2020, which I've vetted. The first the 30 days with my predecessor, and the team and it's a damn solid plan, we have some strong targets there to grow both revenue and our profitability. There I think this has been an underutilized under focus asset for a long time I think under.
Our Delphi technologies leadership, we're doing a better job.
We have significant opportunities to grow globally.
We have some pockets, where we have some portfolio gaps or we can take a look at doing some things there to fill that and from an efficiency standpoint, Alex Ashbourne. His team are doing a great job one area that I pass them. It is I think we do about three and a half turns in the aftermarket parts right. Now we think the benchmark is somewhere between five and five and a half so we have too much inventory and it was.
A three year plan, which was to bring the focus on operating income margin and cash flow.
Think the aftermarket team has done an extraordinary jolt in both of those Theyve really turn this business into driving operating income margin as well as a very strong cash contribution I think what you're going to see from the company as part of the 2020 plan it becomes too.
Through to 2020, we've always said that the aftermarket business can return to mid single digit revenue growth.
That's still a plan that I think we hold as as a credible option for this company it'll probably be through to the.
End of 2020 that will carry on focusing on the margin in the cash, but there's no reason right now given especially the focus on the independent aftermarket business. This.
This business segment that is doing well should return to that mid single digit revenue growth.
That's very helpful. Thank you very much guys.
Your next question comes from the line of Joe Sixpack from RBC capital markets.
Thanks, Good morning, everyone and thanks for some of the color here.
Burn of 110, you're you're saying about 190 you call it.
Under your control better so that gets you to maybe plus 75, and then I guess.
We've made we can make our own industry assumptions about about what happens.
I guess, the missing piece would be working capital and Rick I heard you sort of talk about initiatives, especially on inventory, but how should we think about that in 2020 is I can be harder to get out and a lower volume environment.
No one thing we're taking a look at is.
Not just the dollars of inventory, but days on hand inventory.
And we did some training at the end of the third quarter two on lean manufacturing systems.
The interesting thing is lot of that training had been done a decade ago.
In inside the four walls of our factory were pretty efficient.
But we've expanded our look at the value stream outside the four walls or factory and what we've discovered is almost incredible to me, okay as an industry veteran here right.
I think we have over 41 days of inventory on hand, right now.
Majority AD inventories in the raw materials.
We are now in the process of mapping from every single supplier to every warehouse. We've identified that we didn't know about maybe before and there's a significant opportunity get after that right now that doesn't take the industry downturn or upturn, we've got to get more efficient okay.
We have a couple of sites, where I've identified our teams identified we bring parts into an outside warehouse, we off loaded we start for a week or two weeks then we take it to our own warehouse, we store for another week and then we use it that's just like asked backwards.
Averaged almost 4.6% of sales and freight logistics and that's also not benchmark in the industry. So it's a target rich environment. It's one we've identified our plants are pretty good shape like I said, there's a few operating issues. We get there you get better and we got to get a better handle on our scheduling systems across our factories I think we've inherited 67 different.
I think your question is a very potent because I think we're going to see some natural inventory improvements next year and that's going to come from the fact that as we exit this year, we are holding some buffer stock at this stage. So there are two main buffer stocks that are in place. The first one is around as we come off the final.
Days on hand anyway, and I think you know the hold organization is running at pace to implement lean and you know, it's a cultural shift for US right now and that and it's being embedded pretty quickly and Joe My experience that axle. An actor enactment is this kind of process now that we have the maps being done we'll get afterwards it takes a good 18.
24 months to really see some significant improvement, but we have some low hanging fruit here, we get after quickly in 2020 for sure okay, but they're really get a robust system, where you go to runners repeaters and strangers and you get rid of some of the dogs and you put the right inventory the right location have the right buffers that takes some hard work and math to get that but it's something we were beef.
The team to do that right now.
Okay. So just just to summarize than I mean, it sounded like based on what you feel confident you can control. We're looking at a base of 75 million or free cash flow and then we got to layer and maybe some benefit from working capital and then whatever we think from the industry that those are the buckets so think about.
Yeah, I mean, I'm going to get into this sort of obviously the macros are there I mean, yes, I think I think yes, you're absolutely right I think right now we have a lot of opportunities that are within our control that are related to current spin and related to the fact that we're not going to be doing certain activities coming off some of the buffer inventory, yes, so you're right.
Okay, just just one housekeeping.
Maybe I missed it I didn't see a total bookings number in the quarter I saw a year to date power electronics booking is that something you could disclose or are we seeing a slow down enough and I think I mentioned that we were able to slide here, but it's about a billion dollars of bookings in the in the core it was in rigs. So yes, okay, sorry, I missed it. Thank you.
Great. Thanks, Joe.
From Evercore.
Your line is open.
Hey, guys and good morning.
Good morning for us.
I wanted to spend just a little time on the 2020 walk no. It's it's early.
And we can't give too much on a on a quantitative basis, but of two of the items that you highlighted in the graphic on.
17 and 18.
For the separation costs specifically.
In the the free cash flow walk well that also be.
Similar benefit in that kind of $35 million to $40 million range on a income statement basis between 19 and 20.
No that's adjusted out great. So, it's a cash benefit but not an adjusted number benefit.
What should we get anything in terms of the cost benefit that you've already done from a separation at perspective on top of obviously that the cost transformation that you highlighted right now that could be maybe 40 to 45 million and in 23.
So I think the the element that we are certainly going to see an improvement on in 2020 is the absence of the spin cost the Ts say mock ups. The CMS say markets that we currently have all of that will be coming through I think the numbers will not be at the level of 35.
Million dollars, a 40 million, but I think it's going to be a good uptick to ROI margins going forward and we will provide that color on the Q4 cool, but that will be a benefit into 2020 .
Okay, perfect and then to the other side or on the negative I.
I think the one area that surprised me was you highlight mix does that mean, China.
I think really the its commercial vehicle is the is the main sort of mix headwind right now if you look at it.
The sort of decremental margins of the company certainly out some of our highest margin.
Mix impacts next year, we see right now our own estimate is that commercial vehicle from a global perspective will be sort of down mid single digit with sort of North America being sort of 20% plus Europe being sort of low single digit as well as China being mid single digit at this stage. So I think the new news in terms of the mix.
Okay that makes sense and then one real quick one just high level in terms of the if we go to the topline and think about.
The inflection on on content per vehicle right. It seems like forever ago. When you you know you laid out some of the the positive drivers because it's it's been.
And issue from light vehicle production, but can you just talk about when we could really see that big inflection coming.
From power Electronics, I mean, I think it was into 2020.
Step us in some of the programs. We went out into 2022, we launch and we do a lot of pilot do a lot of engineering and testing and 20 and we do some pilot in 21, you'll start seeing production the back half of 20 122. So yes, we certainly will I think to Rick's point, I think what you're going to see or we expect at this stage is to see a return to.
Material growth in power electronics in 2020 , one I think certainly what happened in China, given the any be credit situation and the the mix shift of CN five to see in fixed.
Definitely impacted our power electronics performance this year.
But right now most of that inventory adjustment and noise is beginning to dispose on I think what's really good news for US is that our launch profile starts moving towards the full BV not just the P.H. TV, which most of our platforms around today, So I think rates, what you're going to see from us as an expectation of some pretty.
Chris. This is took me about to understand how all the systems work here Delphi technologies from a product standpoint, but we talk about the downturn in light duty diesel that's not just in the fuel injectors SSD controllers that go on those light duty diesel vehicles as well that was something that is kind of a double whammy for us both on our our fuel injection system business and our electronics.
Business, Okay. So that lost stabilizes, we get through the transition then we'll we'll start launching more so Judy is going to pick up significantly next year. We've got a couple of tranches of new capacity going in we have two additional launches for new OEM customers. So we're really busy on the Gi side that will help us get across that fixed cost structure that we added put in place the last few years.
And then power electronics were the guys are working feverously to get things qualified equipments are now in place, we're going to slow down our capital spend that some of our sites you know it when I first got here people were talking about we're going to be out of capacity, hey, hold on saying lets fill up the capacity and floor space. We have first and then we'll talk about future down the road. So I think we get the first on the capital that was an Irish.
Original plan out a couple of years 20 526.
Helpful detail much appreciated.
Great. Thanks, good questions.
Your next question comes from your line of Emmanuel Rosner from Deutsche Bank.
Hi.
Good morning.
Good morning Me manual.
First question on the on the transformation plan.
I'm, a little bit surprised that.
It takes.
Three years to sort of like reap some of the savings here to the extent of decent.
Chunk of them come from headcount reduction, where usually the savings basically happened as soon as.
Figuring out that's you don't want to fund all the costs in one year or is there any particular operational impediment to making these savings happen faster.
Good question. So you know as you know we support.
Our revenue base.
Is very diverse we have no customers more than 10% of our sales.
So that also means we have a bunch of programs that are being designed developed and tested for a bunch of customers and it's one of the reason we took a little longer to go forward on a restructuring plan as we had to go through every single program, we're working with a customer whether it's currently in the calibration stays where we got to finish the contract we have until it finishes or to development.
And test Asia relaunch in 20 120 to 23.
Yet we feel comfortable to what we have right now and after our last board meeting, we're going back to see if we can pull ahead some of those restructuring okay.
I think Emanuel following on from that I think though the other area look I think from our perspective, I think close to a one year payback is a is it is a good return given everything that's going on I would also highlight on Rick mentioned in his prepared remarks that.
Much of the work we're doing is in western Europe .
Now what's really important as this is a fundamentally important move from the company given our footprint and looking for best cost locations now we're going to do everything in the right way, we're going to do it with speed, but obviously working in western Europe has its own.
You know issues that we will deal with and we have a very clear pathway how to get these restructuring activities done efficiently quickly, but when you're dealing with certain countries you have to fall in line with the regulations that are underway in way. If we have a very clear plan of how we're going to do that and we're very confident that we'll get through them very fast man.
Before we had this call today over in Europe , our team met with the European works councils that represent the workers at our Tech centers just follow up site Council meetings. This week and so we'll go through and worked with US here in North America, you go little faster in Mexico, United States in South America, and Asia, but you've got to work.
On the students and regarding the puts and takes.
2020 .
Operating margin on slide 17, I wanted to see if you can help us little bits Mondo the mix headwinds, which I feel have the potential to sort of be material is there any sort of rule of thumb you can give on what sort of decremental margin you could experience when you.
She decline into commercial vehicle business and or the light vehicle diesel business, obviously not another all your businesses are.
Starting from the same points, so and anything that you know if we make own assumptions on the magnitude of the topline decline what sort of like a detrimental impact on margin.
Yeah I.
I think I think where what we've said in the past among UL I'm still holds true today I think the decremental margins of the company are in that sort of 30% range 30, and if you look at CV and passenger car diesel.
You are looking more and 30% to 35% range in terms of Decrementals.
Obviously as we go forward I did call out that we see the CV market at this stage on a global production level.
Being close to.
Mid single digit decline, so obviously that will have a mix headwind.
Opportunity however to be very clear. We also have a series of very good opportunities in terms of margin expansion. We have the restructuring plan in place, we've been very clear and rigs being clear that gd on pallet tronics, all well on that way so the growth potential in margin that we expect them to be ins get to.
Breakeven and again aftermarket you've just seen today again, another 290 basis points of margin expansion in the quarter and the team is doing an outstanding job in driving margin expansion. So CV will be a headwind and weve called that out but I also want to focus.
Sorry hard on the margin expansion opportunities that we also happened this business, yes, I'd say, we're not happy that we have degradation margins of 30% to 40% that's unacceptable quite honestly, we should be no more than 2025. So we have to address some of the overhead cost structure, we've got to move a little quicker when the downturns come right our guys have that message.
And hopefully they learn you know.
Lot of intent here, you know grow the business put the plants in and guess what the market turned interface lecture electronics has not come as fast as we thought Gd Ais a tougher launch and we thought so we've got some work to do the guys I understand that so we don't we understands what I said, we have some internal operating issues, we understand where they're at now we're going to address.
So we had the fix some equipment, we got to fix some suppliers and so we'll get out of that quickly. So.
Understood. Thanks for the color.
Great. Thanks, Thanks Manny.
Your next question comes from the line of.
From credit Suisse.
Hi.
Hi, good morning.
Thank you for taking the questions.
One I'll just touch on bookings you mentioned it was a billion dollars in the quarter. So if I'm correct you guys have call it.
Like six and a half billion in bookings year to date Threethree Q.
Fully recognize that bookings are very lumpy, but to be flat with the 9 billion of bookings you put up in 2018, you need something like two and a half billion in the fourth quarter, which which really is a lot based on what you've done in prior quarters.
As it were sort of nearing the end of 2019, how do we interpret what may end up being a lower year over year for bookings. It is it's just simply that it's it's lumpy and we shouldn't read too much into it or is there some indication that.
At the moment commercially maybe you're a little less focused on.
Securing new business.
And rather it really the focus.
Right now that the key priority is just trying to support the business that you currently have.
Secured.
We haven't given up on our targets for 2000 2090, we're still in negotiations on some fairly large programs in both on.
You asked and in Europe , right now and in Asia.
We're going to take profitable business.
You know.
I won't say when we got this business. There's a few things that we're taking prior to Vivien I joined the company, where we took some business that you know now we're going to back and fix whether that's with price increases or we have to.
Redo some prices from our suppliers. So we want we have a very clear return on invested capital targets profitability targets for this business, we aren't going to take business that doesn't make money doesn't do you any good okay spend a hell of a lot of money on engineering and tooling that you'll make money that was six or seven year payback that doesn't make sense for us okay.
So, let's see how the fourth quarter shakes out how's that.
Were 100% bogus I'm, 100% focus on growing the business.
Okay, but growing in a profitable way.
And we've also trying to put some discipline. This company that you know we have to get these commercial negotiations done in a way where you give the engineering team and the manufacturing supply chain teams the opportunity to execute those program successfully you don't take him at the Larry last minute and then you don't have time to get your equipment installed at launch and then you get into a disastrous launch right more than five.
Through some of those the last couple of years I would also just died down that I think the focus of the business on power electronics GDR Bye.
You saw last quarter at 2.7 billion dollar when our largest ever win in terms of Delphi technologies, but obviously given what we're talking about in commercial vehicle right now should we expect to see some lumpiness within the CV business that has been very strong bookings for us in the past. The answer is yes, given where we are in the site.
At this stage, however that doesn't mean, we're not going up to business and we've got some great sort of opportunities ahead, but there is going to be some.
CV softness as we go into 2020 , but that's not unusual and we don't think thats a anytime concerned because power electronics, we have some very large wins already banked on we're going after some pretty big wins going into next year, maybe a little bit few more comments were gaining market share in GDP and we're gaining market share that's profitable.
We are winning are more than our fair share of the electronics side of the house because of our advanced technologies on Viper technologies, and how we can fit a smaller.
Control or into the into the engine side.
On the powertrain product side of the house, which is our non fuel injection system, because I think that wasn't there that we probably didn't focus on enough. We've got the sales team now going after big targets. There, we have smoke capacity and on the aftermarket side I think theres certain regions of the world were under representative so we're going in four different ways to grow the business as well.
Great and then just to just to be clear the transformation plan that Youve unveiled. This morning. This has this is not in any way a comment on what your future sort of a commercial endeavors. Maybe this is purely we should just interpret this as your push to be more more efficient with what.
Do you have the that the commercial push is still on changed is that correct.
That's exactly right.
Give you. An example, I have four sites in the world at work on ignition.
Ignition business is around 200 million dollar business for us I don't need for injuring sites, where can only mission, maybe one or two right.
All right, we don't need nine materials labs, we just have a legacy structure that grew up under two previous owners that needs to be addressed and re size. Okay. So the focus really down at the moment is if you know two thirds of the engineering will be in legacy programs, including passenger car diesel in some of.
The legacy PTP programs, if you actually look at the engineering that we have in power electronics, it's very very little touch that in terms of change and I think what you're going to see from us and we called this out a number of times. It will actually allow us to have the optionality of further investments in advanced Tech.
Please.
So I actually believe that what we're doing its freeing up cash flow in legacy areas of the businesses to actually give us some optionality to actually invest more in and be selective in what we do so we look at that has a very positive trend within within our investment profile.
Great. Thank you very much.
Question.
Last question comes from your line of no okay.
Yeah.
Hi, Thanks, So first just to level set with all this discussion around.
Decremental.
Well I am I reading this slide right that your initial bias for next year as towards flattish operating margins.
The what we're saying is the way we are really subject to the market at this point in time. So we felt we clearly see the opportunities of margin expansion opportunity within our business that includes the restructuring the absence of spin costs on an improvement within the Guy and power electronics property.
Let's see obviously this year the market going backwards and when now calling it 7% down on a global basis much of our margin profile will be subject to how volumes in light vehicle and commercial vehicle actually trend out into Q4 and into next year, what we all calling out as the we have margin expansion opportunities.
Understood and Matt I think you've given us some idea that you're you're initially thinking about mid single digits need decline next year continued LPP softness. So I guess just to clarify is sort of.
This slide contemplating got order of magnitude and when you talk about the mix headwind in other words is this.
That what's your sort of baking into your initial outlook.
No, we're not giving outlook right now I think in Q4, we will provide much deeper color I think we want to get through you know the Brexit issues, we want to understand Q4 of where we actually end up what we are saying is that we have a number of opportunities given the mix headwinds that we see within commercial vehicle to offset that and the restructuring should actually provide.
Let us with optionality to try and longer term to grow but we're going to provide very clear color in terms of 2020 . What we are saying is we got some very controlled and good opportunities to expand margins next year, we all going to wait for the macros defined that where they actually goes.
The understood and that's very helpful. I guess, just you know around the comments for expectation or more bookings and growth in power electronics, you know it really looks like you're pulling a lot of technology levers here does support a more robust power electronics architecture.
I got the Cree partnership announcement, the poly charge investment I guess just to understand how quickly do you see your customers' needs evolving with respect to power electronics and again you know in light of this transformational plan and the investments you've made standing up your P.E. capacity, just what kind of flexibility Rick do you see that you have to do.
Incremental product engineering, any changes to product launches and just kind of keep pushing down the technology curve.
Yes, Great goes are great questions first of all I'd say that technology changes demands happened almost every single day.
There's been big bets by some of the largest Oems in the world on electrification.
They don't have the experience inside their own company to do some of the work and so they've taken as soon as partners I think this one OEM we worked for over two years, where they funded our engineering to help them get both the hardware in terms the technology.
And the systems that control that technology across a very complex infrastructure that vehicle right. So that's number one and we have a legacy of over three decades of being electronic leaders back to the GM original volte and stuff like that or you want I think it was called.
The fact that we've won electronics business with some of the largest Oems in China the Oems in Europe .
Is really critical for US we got there second I think we have asked our team and take a look at what we installed at each one of our five any sites around the world does it make sense of the 100% integrator do we should move some of that work out to reduce our capital is there any capital. It's only running one shift right now or only two shifts and I can differ some of that capital or.
It does not new location, where we had to put in a capital. So it's a very fluid situation is what I'd tell you and I think no. It just I mean the one.
Can be no doubt and I don't think that anybody thinks any other way I mean electrification is going to get more important in every region of the world whether youre looking at China right now.
If you were looking at Europe North America.
As we move towards the next range of regulatory targets that come out for example, 2025 in Europe .
We passionately believe that high voltage solutions.
Are going to be the way forward that the majority of our customers today are going to hit those Seo two and regulatory targets. There I don't think they have a choice and the Matt and I think what we're really.
Looking out right now is obviously the pace of that change, but as I said, we think that we're going to return some pretty decent growth on powder 2020 , but moving towards the BB platforms as on the high voltage basis. So we have not changed our strategy on power electronics whatsoever, we see ourselves as a market leader on that we see.
The market in every region evolving towards that and we think we're going to be a key player in actually the pathway to electrification.
So I know one thing I want you know one thing it.
I understand when I'm here now is that we have 10 plants inside the Delphi system out of our 24 sites that are in some kind of launch mode or re sizing mode.
We have three brand new greenfield or brownfield sites in any that were built for the time we spun.
And we're going through qualifications with multiple customers are blown your plan right now is hosting one or two customers a week to get certified to get the approved to become a supplier because that work still gets done for us adaptive and so that will be done by first quarter, it's easy to put that on a powerpoint the actually have the people prepared to have the customers come in and do all the audits.
Line by line machine by machine takes a lot of work and I give the team and blown your great credit forgetting the plant built on time equipment installed we've gone from zero people when I got here to over 200 people now plant now, making parks will begin in source that were okay, Hello job by Jama pins Guinness team. There. So we have six gd I sites around the world too.
Two in China very stable to in Eastern Europe , there are still going through the last part of their launched bugs and one in Western Europe , and we're launching a new site next year in Mexico, six plants, putting the brand new technology brand new equipment brand new designs and it's going to last us for 20 years, we Gotta go through the growing pains. There and then we're in the process of consolidate one of our UK.
Class a movie that equipment to three different locations in the world. So we still got about 12 to 18 months of getting that.
Fundamental operations. This company stabilized why we were executing the spin.
And putting a new ITC system. So there's a lot of work going on here and we have much better days ahead of us here Delphi technologies.
All right that's very helpful color, thanks very much.
Alright, great.
I'm showing no further questions at this time I would now like turn the conference.
Yeah.
Well I appreciate every joining the call I know, it's a busy day for all you analysts out there with a lot of announcements and some of the big news in the industry between Oems consolidate or or tier ones in Japan consolidating. So we appreciate your interest Delphi technologies will see on the road. Thanks have a good day.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day.
Ill disconnect.
Oh.
Oh.