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Delphi Automotive PLC  (NYSE:DLPH)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Demetrius, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Delphi Technologies Fourth Quarter and Full Year 2018 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. Following the opening remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded and simultaneously webcast.

I would now like to turn the call over the Sherief Bakr, Vice President of Investor Relations. Sherief, you may please go ahead.

Sherief Bakr -- Vice President, Investor Relations

Thank you, Demetrius, and good morning, and good afternoon to everyone. Welcome to Delphi Technologies fourth quarter 2018 earnings call. With me today in London is our Chief Executive Officer, Rick Dauch; and our Chief Financial Officer, Vivid Sehgal.

This call will include a discussion of our fourth quarter and full year 2018 financial results as disclosed in today's press release, as well as our outlook for 2019. And in order to follow along with today's presentation, you can find an accompanying set of slides on our Investor Relations website at ir.delphi.com. Please note that our discussion includes references to non-GAAP financial measures, which are reconciled to their corresponding GAAP measures in the tables within our press release.

Now before we begin, I would like to remind you that certain statements made on this call may constitute forward-looking statements. Forward-looking 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 Form 10-Q, as well as other filings with the SEC. I would encourage all of you to review these risk factors listed in these documents.

And with that, I'd like to turn the call over to Rick.

Richard F. Dauch -- Chief Executive Officer

Thank you, Sherief, and good morning, and good afternoon to everyone on the call. I'm delighted to be speaking to you on my first earnings call here at Delphi Technologies. And I look forward to sharing some initial thoughts after my first seven weeks on the job and how I think about the value creation opportunity here for our shareholders. I'll start with some high-level comments on the progress we made in 2018 as a new company; highlighting some of the shorter-term headwinds impacting us; and why I'm extremely confident in our long-term future. Vivid will then take you through the details of our fourth quarter performance and our outlook for 2019 before we take your questions.

In many ways 2018 was a milestone year for Delphi Technologies, as we completed our first full year as a stand-alone public company. We continue to have great momentum with our customers driven by our industry-leading propulsion technologies and product offerings. We recorded gross bookings of almost $10 billion in 2018, which will drive our long-term profit growth at a pace higher than the industry growth trends. We also made strong progress in executing the separation from our former parent and we are on track to exit key transition service agreements over the course of 2019, which will allow us to further optimize our operating model and our overall cost structure.

We ended 2018 with a strong cash flow performance and a solid balance sheet. At the same time, we faced a number of challenges throughout the year that falls short of our initial pre-spin expectations. The executive leadership team and I are committed to delivering on our commitments for 2019, ensuring we have a strong focus on cost reduction, stabilizing and improving key processes and driving cash flow during a period of softer growth, while continuing to invest to support our longer-term profitable growth opportunities, especially in our GDi and electrification businesses.

I have made it my priority to visit many of our major global locations and have solicited feedback from our leadership teams and workforce during those visits, as well as from some of our key customers over the last two weeks to better understand some of these shorter-term market and business dynamics we face here at Delphi. I have already visited one-third of our operating sites with plans to visit 90% of all of our locations by 4/01/19. These visits are extremely helpful to me as the new CEO. At each stop, I learn more about our people, our products, our processes, our business partners, and about the overall operating and financial performance of the business. The good news is that most of the challenges I see are either transitory in nature or can be addressed with additional organizational focus, greater operational discipline and more leadership accountability, which I aim to instill in the way we do business here going forward at Delphi Technologies.

Looking back at 2018, many of the headwinds we face were driven by the unexpected acceleration of certain market-driven transitions. For example, we were impacted by: one, the pace of the program roll-off and declining penetration of European passenger car diesel towards GDi and Power Electronics; second, the economic slowdown and the evolution of our mix of customers in China; and three, our ability to scale our business in new technologies to meet customer demand, which includes building three brand-new plans for our rapidly growing electrification business in three different countries of the world. While I expect these transitions to continue into 2019, it is clear to me that we will ultimately benefit here at Delphi over the long-term, as we will be in a stronger position to better serve our customers, accelerate our growth and create value for our shareholders. We have some hard tough work ahead of us over the next 12 months to 18 months to get through these transitions.

At the same time, I was pleased to see our strong customer momentum and revenue growth in key technologies over the course of 2018. Specifically, Power Electronics saw more than 40% revenue growth and commercial vehicles delivered approximately 20% year-on-year top line growth, those are boxcar numbers. And while our GDi growth and operating performance fell short of our expectations, primarily driven by industry and customer dynamics in China and some self-inflicted launch challenges, we are set to see significant growth and improved performance over the coming years.

Let me turn to Slide two. Having spent the last month-and-a-half immersing myself in the business, let me tell you why I'm even more bullish today about the opportunity ahead of us here at Delphi Technologies, than I was when I took over on January 7th. First, we have a rock-solid business strategy to profitably grow Delphi Technologies. It starts with our industry-leading portfolio of technologies and operating capabilities that sit at the crossroad and heart of the propulsion revolution. Our technology leadership truly differentiates us from our peers and will allow us to outpace the industry from a growth perspective.

Second, our customers are relying on us to help them meet increasingly stringent regulatory targets focused on cleaner and more efficient vehicles for both passenger cars, light commercial vehicles and large commercial vehicles, which plays to our strengths and gives us tremendous opportunities to drive long-term growth with existing customers and the potential to expand our presence in market share especially with commercial vehicle OEMs on a global basis.

Third, we have great, smart, dedicated and innovative people, who come from a culture and heritage of product and process innovation. We have a great global operating footprint that is well aligned with our customers and market opportunities and yet has the potential to be further optimized in the future.

Fourth, we have a profitable and growing aftermarket business that not only provides balance to our overall revenue mix, but is on the right path to deliver additional margin and cash flow improvements. The Delphi Technologies brand has great value with aftermarket customers and end-users and it's one of the good surprises I've seen in my first seven weeks here.

And finally, we have a financial model and a balance sheet that gives us the flexibility to deliver profitable long-term growth, while investing for the future and returning cash to our shareholders. However, it's equally clear that we need to do a better job of executing consistently and operating with a greater sense of urgency and discipline to deal with our ongoing challenges which will ultimately support our growth once the transitional headwinds I outlined earlier moderate.

Related to this, and as you can see on Slide three, my immediate priorities are largely focused on improving our execution and driving operational cost efficiencies throughout the company. I will provide further comments during our next earnings call in May and update you on the progress we have made. It's important to remember that as part of the spin, significant parts of our operations entered into transition and contract manufacturing service agreements with our former parent. While they were designed to ensure continuity and stability to the first two years after the spin, we will be exiting a number of transition service agreements over the course of 2019 in line with our original time lines and we'll create our own stand-alone functions in areas such as IT, Finance and HR. This gives us the opportunity to take a clean sheet approach to both improve the efficiency and responsiveness of our organization, as well as lowering our overall costs.

I've already started digging deeper into our organizational and cost structures to ensure that as we complete our full transition to a stand-alone company, we are right-sized to support our longer-term growth plans. My initial observations and benchmarking suggest we have some significant opportunities for improvement in several areas of the business. In addition, one of my immediate priorities will be ensuring we properly plan, build, staff and launch our new plants, our new programs and our new processes flawlessly. We can, and we will get much better in these critically important process areas.

While I’ve been pleased to see some of the actions taken over the course of 2018, I've already spent a good amount of time with Vivid and the teams on identifying ways we can drive some of these initiatives, most notably to explore options to accelerate the path to profitability in GDi and Power Electronics, ensuring we are able to meet the stronger demand we are seeing from customers across the globe. If appropriate, I will review our organizational structure or bring in new talent to support these initiatives.

More broadly, as part of my initial assessment, I will also focus on ensuring our investments are in areas that have the most attractive long-term potential, while aggressively reducing spend in areas that do not, and there's some or both. Those of you who I've met with or have heard me talk or know me from my background know I have a strong operational and manufacturing history. That is a deep-rooted passion and skills that I have owned and refined over the last 25 years. And I think quite frankly one of the key reasons that I was chosen for my new role.

To be honest, we talk lean here at Delphi, but we are far from being a lean company in the way we do business. There is real upside for us across our manufacturing footprint, our supply base and our back offices, including admin and technical offices. While it's still too early to go into specifics, we clearly have opportunities to implement advanced lean manufacturing processes across our global footprint, reducing our cost and improving our cash conversion cycle.

So I've covered a lot of grounds since I started in January, and as I'm sure you could tell, I'm excited about the opportunity ahead of us. We have the right strategy based on differentiated portfolio of technologies and capabilities that are squarely positioned to benefit from the strong secular tailwinds that will drive our growth over the long-term. And we have great momentum with our customers, who rely on our ability and our technical know-how to help them meet regulatory targets and deliver values to their customers.

However, my first weeks as CEO also confirm the nature and scale of the challenges we face, given the pace of transitions in our industry and the operational improvements we need to make here at Delphi Technologies. That process is already under way and we will move with the needed urgency to ensure we execute towards our long-term goals of margin expansion, revenue growth and improving our return on invested capital, while creating long-term shareholder value. I look forward to sharing more with you on our first quarter earnings call in three months time.

And with that, I'll turn the call over to Vivid.

Vivid Sehgal -- Chief Financial Officer

Thank you, Rick. Good morning and good afternoon to everyone on the call. My remarks will focus on our fourth quarter and full year 2018 performance; our outlook for 2019 and the changes since we provided our preliminary outlook as well as providing additional commentary on how we see our phasing over the course of this year.

Starting with a high-level recap of our Q4 and full year financials, which you can see on Slide four. Relative to the outlook we provided three months ago, our Q4 revenue and operating income performance came in essentially in line with our expectations. While adjusted EPS of $1.06 benefited from a lower tax rate, I was pleased with our cash flow performance in the quarter. And on a full year basis, we generated well over $400 million of operating cash flow, which exceeded the top end of our prior outlook range. As Rick mentioned, 2018 was a record year for us in terms of new business wins, with almost $10 billion of awards across our internal combustion engine and our electronics portfolio.

Turning to Slide five. We ended 2018 with a record $9.8 billion of awards compared to $7.1 billion in 2017. Our strong momentum in the marketplace over the last couple of years not only underscores our increasing relevance with customers, but is also a reflection of the investments we have made in key long-term growth technologies for both internal combustion and electrified systems. These gross bookings will over time more than offset certain headwinds, impacting our current adjusted revenue growth such as our shift away from legacy programs such as passenger car diesel, the evolution of our customer mix in China, as well as ongoing program attrition.

Internal combustion engine technologies accounted for approximately half of our new business wins in 2018, which included our largest ever GDi program with a major European OEM for our industry-leading 350 Bar System. In addition, we secured our largest GDi booking in North America with a major OEM. The other half wins were driven by electronics and electrification portfolio where our differentiated technologies, including systems and software expertise continue to help us win in the marketplace. Over the course of 2018, we secured more than $3 billion of Power Electronics wins balanced across customers and regions, including multiple wins for our inverter and our combined inverter and DC-to-DC converter solutions. We expect 2019 to be another year of strong new business wins.

Turning to Slide six. Looking at our Q4 performance in a bit more detail. Revenue of just below $1.2 billion in the quarter declined by 4.7% year-on-year versus an overall market decline of approximately 6%. Driving the revenue performance in Q4 was strong growth in Power Electronics and commercial vehicle, which was offset by lower GDi sales in China and to a lesser extent by impacts related to passenger car diesel and WLTP in Europe. Adjusted operating income of $125 million, or 10.7% margin, declined by 30 basis points year-on-year. EPS of $1.06 benefited from a lower-than-expected tax rate which resulted in an approximate $0.10 uplift in EPS for the quarter. The lower tax expense primarily related to the timing of ongoing tax optimization initiatives. During the fourth quarter, we took actions to offset some of the incremental softness we saw most notably in China and I was pleased with our cash flow performance. Operating cash flow of $126 million in the quarter was helped by improvement in our working capital performance as we ended the year with a strengthened balance sheet.

Turning to Slide seven, which provides more detail on our revenue progression in the quarter. As I mentioned earlier, we continue to see strong growth in two key areas of the portfolio: Power Electronics revenues increased by approximately 30% in Q4 versus prior year; and in commercial vehicle, revenues increased by approximately 25%. GDi revenues declined by approximately 10% in the quarter primarily related to low revenues in China, the impact of WLTP in Europe and a high year-on-year comparison from the prior year quarter when GDi revenues grew by more than 40%.

As you can see on the right-hand side of the slide, from a total company perspective we outgrew the market in all regions with the exception of China. Revenue in Europe increased by 3% as growth in commercial vehicle and GDi was offset by the ongoing decline in passenger car diesel revenues. In North America, revenue growth of 6% was primarily driven by higher sales to commercial vehicle customers as well as new program launches. Finally, our sales in China declined by 24% driven by the combination of incremental market softness as well as our own customer mix.

Slide eight, walks you through our operating income growth for Q4. Adjusted operating income was $125 million, down from $140 million in the prior year quarter. This was primarily driven by contractual price-downs, unfavorable mix, lower industry production, higher engineering spend to support future growth and to a lesser extent, higher commodity and tariff-related costs. This was partially offset by ongoing improvements in material performance, lower incentive accruals and overall cost control, including lower spin-related costs. In addition, adjusted operating income included the forfeiture of stock-based compensation related to our former CEO, which we had incorporated into our previous outlook.

Turning to our segment performance on the next Slide. Year-on-year basis Powertrain Systems adjusted revenue declined by 6% in the quarter as strong growth in Power Electronics and commercial vehicle was offset by lower revenues in passenger car diesel, softness in GDi China and the impact of WLTP. Adjusted operating margin of 9.7% was down 140 basis points year-on-year, primarily due to unfavorable mix and incremental engineering spend to support long-term growth. In addition, margin was impacted by higher commodity and tariff-related costs, which were partially offset by ongoing improvement in operational performance as well as overall cost control.

Turning to our aftermarket segment on Slide 10. Our Q4 aftermarket performance continued the trend we have seen throughout the year. Revenue of $225 million increased by 3% on an adjusted basis as higher sales to independent aftermarket customers more than offset lower sales through the OES channel. Adjusted operating margin expanded by 480 basis points year-on-year, driven by our commercial strategy and operational performance. In addition, the aftermarket segment has continued to deliver improved operating cash flow through the combination of higher earnings and our focus on improving working capital.

Now let's move on to our outlook for 2019. Slide 11 outlines our outlook for the year. At a high level, we expect 2019 to be a transitional year, with an acceleration of our own mix dynamics as well as continued macro industry headwinds. Starting with revenue. For the full year, we expect revenue to be between $4.65 billion and $4.75 billion, or a 1% to 3% decline in the adjusted growth rate compared to 2018. This assumes an approximate 2% decline in global production in 2019. Full year adjusted operating margin is expected to be approximately 9%, with earnings per share in the range of $3 per share to $3.20 per share. Note that our EPS outlook does not reflect any impact from share repurchases. On the right-hand side of the slide, we have laid out other important outlook metrics. Restructuring charges are expected to be in the $25 million to $35 million range; one-time separation cost in the range of $45 million to $50 million and we've assumed an adjusted tax rate of approximately 18%.

Turning to cash flow. Operating cash flow is expected to be in the range of $320 million to $350 million and Slide 18 in the appendix provides a more detailed look of our expected year-on-year performance. On our previous call, I referenced our plan to review over future pension provision to our UK workforce. Since then, we have made good progress. And our cash contribution in 2019 is expected to increase by approximately $30 million to $35 million to both mitigate the future pension liabilities and address current funding requirements. Total pension cash contributions are therefore expected to be approximately $80 million for the year, given the $30 million to $35 million of incremental cost. Turning to CapEx, which we expect to be in the range of $310 million to $330 million. This includes approximately $30 million of one-time separation CapEx, as we complete our full transition to becoming a stand-alone company.

Slide 12 takes you through some of the key functions behind our revenue outlook for the year. Starting on the left-hand side of the slide, you can see the assumptions that bridge our 2018 revenues to the preliminary outlook for 2019 I provided last quarter. At a high-level, the 1% to 2% revenue growth assumed approximately 6% underlying performance. This was offset by an approximate 300 basis point headwind from the decline in passenger car diesel revenue and an approximate 150 basis point headwind from price-downs. Global production was assumed to be approximately flat.

Moving to the right-hand bars on the slide, we now assume that global production will decline by approximately 2%. In addition, we have adjusted our assumptions on certain programs and launches in China and North America based on revised customer schedules and our own more conservative view on our launches, particularly on the ramp of GDi in China. On the right-hand side of the slide we have provided some of the key drivers behind our revenue growth expectations for 2019. As mentioned, we continue to expect strong growth in our key technologies. Specifically, we expect to see another year of accelerated growth in Power Electronics with more than 50% growth in 2019. For GDi, we expect more than 10% growth driven by new 350 Bar launches and ramps in Europe and China, and high single-digit growth in commercial vehicles. On China, we expect our revenue growth to decline in the mid-single-digit range in 2019, a significant change from our preliminary outlook. Our revised China outlook assumes a continuation of the weakness with local OEM customers particularly in the first half of the year offset by new GDi and Power Electronics launches which were expected to accelerate in the back half of the year.

Turning to the next Slide. As I mentioned on last quarter's call, we expect the headwinds we saw in the second half of 2018 to continue into 2019.

Slide 13 walks through the drivers of our operating margin outlook. Relative to the 11.3% for full year 2018, you can see the major puts and takes that gets you to the approximate 9% margin in 2019. Starting from the left you can see the impact from lower volumes and unfavorable mix, which is primarily due to the combination of accelerated declines in the higher-margin passenger car diesel revenues and the expected acceleration in growth from the lower-margin Power Electronics and GDi revenues I referenced earlier. Price-downs were expected again to be in the 150 basis points range. Offsetting this is an expected 300 basis points of margin improvement driven by material and manufacturing performance, the continued margin expansion from the aftermarket business, as well as ongoing SG&A initiatives. Depreciation and amortization is expected to be approximately a 60 basis point year-on-year headwind, driven by the elevated levels of CapEx in 2018 versus the prior year.

Finally, there is an expected 60 basis point impact from the combination of FX headwinds and the impact of high commodity and tariff costs. While our expected margin performance in 2019 is clearly not at the levels we are happy with, this bridge does highlight the magnitude of some of the key transitional headwinds, particularly in our mix that we expect to lessen as we look out beyond this year. While we are not providing a specific quarterly EPS outlook for 2019, I wanted to spend a few minutes to provide some color on how we see our phasing through the year.

Slide 14 outlines some of the key dynamics for the first quarter. From a year-on-year adjusted revenue growth and EPS perspective, we expect Q1 to be the lightest quarter of the year. Starting with revenues, we expect mid- to high-single digit year-on-year adjusted revenue decline, primarily driven by the combination of global production softness as well as inventory reductions with some of our customers in China. We expect year-on-year global production to decline by approximately 5% in Q1 and approximately 2% sequentially.

Turning to the adjusted operating margin which you can see on Slide 14. For Q1, in addition to the lower seasonal revenues there are a couple of specific drivers that I wanted to call out that are expected to result in a stronger sequential decline in our margin performance relative to the fourth quarter of 2018. First, there is the absence of the benefit we saw in Q4 from the forfeiture of our former CEO's compensation and lower incentive accruals. And second, the timing impact from annual contractual price-downs which predominantly take effect on January the 1st. The combined impact of these two drivers is expected to be more than 300 basis point sequential headwind to margin.

Layering in a couple of smaller drivers related to commodities, foreign exchange and tariffs, we expect our Q1 adjusted operating margin to be approximately 7%. For the balance of 2019 and consistent with our full year outlook, we expect our adjusted operating margin performance to improve particularly in the second half of the year. And on Slide 15, you can see why?

Our first half outlook assumes an adjusted operating margin in the 7% to 8% range building off the Q1 base. And while we expect to see some sequential margin improvement in Q2, there are a number of drivers behind the stronger margin performance we expect to deliver in the second half of the year. From a volume perspective we expect to see stronger growth in the second half of the year given the phasing of our launch activity, which we expect will more than offset seasonally lower production levels. Specifically for GDi and Power Electronics, we have a number of new launches that are expected to accelerate into the second half. This is also expected to support their improved profitability in the back half of the year as we see and gain greater scale and start to realize some of the operational benefits, particularly for GDi from the actions we are taking. In addition, we expect aftermarket business to show stronger margin progression in the second half.

From a cost perspective, we have a couple of important dynamics to support our H2 margin improvement. First, the phasing of our engineering spend is more first-half weighted. And second, we expect to see lower spin-related costs, as we exit a number of our transition service agreements starting in Q2 and eliminate duplicate costs. This is expected to more than offset higher second half depreciation charges. So in closing and before we take your questions, our Q4 performance was essentially in line with our outlook and we ended the year with a strengthened balance sheet. Given the softer growth we see in 2019, my focus, which is aligned with Rick, will remain on cost control and operating cash generation, while continuing to invest to support our longer-term growth.

With that, I'll turn the call back to the operator for your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Rick Kwas with Wells Fargo Securities. You may proceed.

Richard Kwas -- Wells Fargo Securities -- Analyst

Hi, good morning, everyone.

Richard F. Dauch -- Chief Executive Officer

Good morning, Rick.

Richard Kwas -- Wells Fargo Securities -- Analyst

Welcome (Multiple Speakers) Rick.

Richard F. Dauch -- Chief Executive Officer

Hi, there. I appreciate it.

Richard Kwas -- Wells Fargo Securities -- Analyst

Yes, sure thanks. So just on China, just a little more granularity. So you've got it down 8% overall. Within -- do you have a number with regards to your top local customers or your top 10 platforms there that we can reference as we think about the year?

Vivid Sehgal -- Chief Financial Officer

Yeah. Hi, it's Vivid here. So the way to think about it is in a couple of ways. If I provide you some granular detail, the existing business that we have in China is down about 8% -- about 20% in total and the launches are going to be generating around about a 15% driver. That's how we sort of get to our own mid-single-digit driver on this. I think the key color is that the local OEMs where we saw, particularly second half softness in 2018, we expect them to be down about 20% again in 2019. The good news is that the launches that we have in the 350 Bar in the Power Electronics are mostly with the Tier 1 and the global JVs, which we are definitely seeing a mix toward and that gives us some comfort that the transitional headwinds in 2019 will start moderating out into the future.

Richard Kwas -- Wells Fargo Securities -- Analyst

Right. Okay. Thanks, Vivid. And then just on the launch. So as the programs that you are -- either have launched here recently or about to launch, what's the assumption around profitability for this? Because obviously the second half implies a pretty hefty ramp in the margin and the launch activity is helping that. Usually, in the first year of a launch there's typically some start-up cost that sits. You don't get the full volume out for a couple of quarters. How should we think about what's embedded in terms of contingency around the launch profitability?

Vivid Sehgal -- Chief Financial Officer

So we expect -- I mean, if you think about our margin expansion into the second half of the year, it's fundamentally coming from a number of areas. And I'll touch upon the margin of GDi and Power Electronics in a minute. But fundamentally our margins, as we progress through the year, are going to come from performance. We do have some decent manufacturing material performance uplift in the second half. We certainly see engineering spend in the second half being lower. We definitely see aftermarket expansion in the second half. You've already seen 490 basis points. We expect some very decent margin expansion in the second half. And that will offset a lot of these sort of expected higher depreciation charges. I think the way we're looking at it right now is that we've baked in some assumptions. A lot of the capacity and the depreciation that we put in place right now, we did see some of the impacts of that already in the second half of 2018. And we're going to see some downside in 2019. So we're pretty confident right now that through two areas, and I think Rick sort of touched upon one of them, is the margin expansion is going to come from factory margin improvement, also reduction in the premium freight that we talked about previously, but also some reduction in the just general installed base capacity and the tos and fros that we've seen recently from China and Europe. So there is going to be a ramp in factory but there's going to be also a ramp from -- in margin from the sort of what I call the operational issues that we faced in 2018.

Richard F. Dauch -- Chief Executive Officer

Yeah. Rich, this is Rick. I've only been to two or three of the GDi plants so far. I guess I've been in three of them. So they are going -- the equipment's installed. They're going to the typical launch debugging in terms of rolled throughput, first time quality and scrap. We have a couple of operations that are causing us some heartaches. And so one of the things is -- its a good learning for me to find out, if we have common processes across these three plants, for an example an injector, are we having these same issues on a welding process? If not, why not? If we are, what are we doing to fix those kind of things? So those are all operating -- opportunities to improve the business. One of our plants, our first time quality is only around 80%. That means we're repairing 20% or scrapping 20%. So that's low-hanging fruit to go after, okay? The second is we're spending a lot of money right now to tool up and build these three plants. We've built the buildings. We’ve bought the equipment. The equipment is being run off. That supply is going to be installed here in the first half of the year for Reynosa, for Bologna, for Poland and over in China, I think it's Suzhou. We've already had to hire the people to go through the training. We had to travel -- people traveled to our existing sites to learn how to make these kind of parts. So those are kind of abnormal one-time costs to get the business ready to go on launch. And we're in the process of consolidating the plant in Sudbury, UK and it's being split into half, or actually being split onto a third. A part of it is going to Izmir, Turkey. Part of it's going to Iasi, Romania. And part of it's going to Stonehouse, England. So those are costs to move equipment and tool up and train people as well. So we have a lot of that going on as part of the one, the spin; and two, part of the consolidation of our footprint.

Richard Kwas -- Wells Fargo Securities -- Analyst

Okay, thanks. I'll pass it on. Appreciate it.

Richard F. Dauch -- Chief Executive Officer

Great question.

Operator

And our next question comes from John Murphy with Bank of America Merrill Lynch. You may proceed.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning guys.

Richard F. Dauch -- Chief Executive Officer

Hi, John.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Just wanted to sort of follow up on the slide on the regional breakout. And I'm just curious, as you look at China, is there anything changing in the way that the bid process is going on with the locals and in the international? Because it seems like the underperformance there was somewhat explained. But it just seems like there might be something else going on. And also, as we think about the backlog ramping up, I'm just curious if you can give us, a sort of a better understanding of the regional breakout of that backlog and maybe the customers are in that backlog. I know you sort of said 50-50 ICE, EV, but just wanted to understand the customers as well as geography in that backlog?

Vivid Sehgal -- Chief Financial Officer

Yeah. Hi, John, Vivid here. Maybe I'll take that first. I mean, certainly from the local OEM customers, I mean, the key thing to remember is a lot of the local OEMs is some of the older GDi technology and component sales and the 200 bar. And a lot of these customers we have not taken any incremental new business wins over the last couple of years at least. Our focus in China has been predominantly within the Tier 1 and the global JV. So what we're seeing is the acceleration and the regulatory tightening in CN 5, CN 6 is coming. But some of the older PFI, GDi and component sales are naturally falling away. What's fundamentally happened is that the market softness, which has made that acceleration a lot quicker than we expected. So nothing fundamentally is going on there. Just on the business wins that we have in place, we continue to have a very rigorous approach to looking at this and working with management, working with the board. We look very carefully at the haircuts on volumes. And if we do take China volumes we will take haircuts appropriately given some of the softness. We do look at our ROIC, return on invested capitals pretty much and we do actually have regional variations to some of the discount rates that we take. So nothing fundamentally is going on in the Chinese local OEMs. We always expected them to transition off. It's just happened a lot quicker than we expected. In terms of the business wins, just to try and give you a bit more color, yes, certainly, if you look at it all together, even more specifics, Power Electronics in 2018 was about one-third of the business wins. GDi was about 40%, and the remainder was some commercial vehicle and other businesses that we have. And in terms of sort of more geographic mix there around Europe and Asia we're pretty much even at about 35% to 40% of the wins and North America was in the 20% to 25% of the new business wins. So hopefully, that's given you some color on the booking side of our business.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Any customer concentration there, or is it fairly diverse?

Vivid Sehgal -- Chief Financial Officer

It's pretty diverse. I mean, we are -- in the China side it is predominately, like I said in the Tier 1 and the global JVs. The rest of it across Europe and in North America is diverse. There's no specific customer, but we did talk about one customer in Europe, particularly a new customer. We're not going to get into the details right now, but it's pretty diverse.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Yeah. It sounds good.

Richard F. Dauch -- Chief Executive Officer

Well, John, it's Rick. I haven't been over to Asia yet. I'm going there in early March. But obviously there's going to be some -- the downturn over in China for the last eight months is going to shake out some of the weaker players. I think that the Chinese government probably wants that to happen. There's too many players over there in the regional, so we'll see what we do. I've asked our team to kind of show me where we're exposed and where we're not exposed in there. I was pleasantly surprised that we have a very strong relation on our commercial vehicle business with the Volvo group which includes Volvo, Mack, and the Renault buses. And now we're going to grow with Dongfeng as part of their joint venture with Volvo to start bringing some of our products over there as well, so that's good. That truck market, as you know, is one million trucks over in China. We have barely a small piece of it right now. So that's good. Right

John Murphy -- Bank of America Merrill Lynch -- Analyst

Rick, and if I could sneak one more in here. Just -- as we think about your review here I understand that you're still working through the details and visiting plants. But in your early days and obviously your long experience in the industry, do you think there is ultimately the need for greater consolidation in scale in the powertrain business, both existing on ICE and EVs over time? And is that sort of part of the thought process here is to what the shape and size and scale of Delphi ultimately will be over time and there might be M&A, there might be other kind of combinations to come down in the line that might make sense?

Vivid Sehgal -- Chief Financial Officer

Let me answer that question a couple of ways. I would say before I joined the company I took a broad look at the industry and I do feel there'll be some consolidation of the supply base down the road. How that's going to play out I don't know. Since I've taken over I’ve put that in the back burner right now. I told the board let me focus 100% of my time on learning my team, like I said, our people, our products, our processes and that's what I'm focused on right now. I'm sure there's opportunities out there down the road, but we need to drive the value of this company up where it needs to be. And I see all kinds of low-hanging fruit to get after here in our company, right? Two things I'd say. I'm a little bit surprised for a company that's been around for well over 100 years and been part of the Delphi Automotive group that there's some fundamental missing pieces in the way we do our business. specifically on program launches and lean manufacturing. We are far from world-class in that area, okay? So that's not bad news to me. That's good news to me, that means we can improve because we already have a good business. We can make it much better, right? So I've got a -- we got to teach people a few things here and probably make a few changes from a structure standpoint or some specific people to bring in to help us, teach that stuff that we can get after pretty quick. And it takes 18 months, 24 months to get that job done. So, okay.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Great. We're looking forward to it. Thank you very much.

Vivid Sehgal -- Chief Financial Officer

Great, John. Thanks.

Operator

And our next question comes from Emmanuel Rosner with Deutsche Bank. You may proceed.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Hello. Hi, everybody.

Richard F. Dauch -- Chief Executive Officer

Hi, Emmanuel.

Vivid Sehgal -- Chief Financial Officer

Hi, Emmanuel.

Emmanuel Rosner -- Deutsche Bank -- Analyst

So first question is on your Slide 15 and the expectation of material improvement in margin profile second half versus first half. So you detailed some of the drivers on the side. And so if I had to summarize them it seems like some of them are sort of timing-related so either launches in the second half or extra cost in the first half and some of them are operational improvements and performance-related. And any way you can sort of dimension that for us? And what essentially needs to happen on the operational side specifically between now and then for you to be able to achieve that? Because you obviously started the call saying that you have hard tough work ahead of you. So maybe just as related to 2019 what needs to happen for the second half margin to be delivered?

Richard F. Dauch -- Chief Executive Officer

Let me make a few comments and I'll let Vivid get into more detail. So first of all, we have -- right now we have four launches under way for our GDi product: one in France for injectors; one in Bologna that's been going on for about six months on injectors; one in China on injectors and fuel pumps; and then one in Romania on fuel pumps. None of those launches are at the levels of performance that we expect them to be and that's just hard-core manufacturing 101 and supply chain management 101. So whenever you launch that kind of sophisticated equipment it's always difficult to work out the bugs. You're talking a lot of automation, some very tight tolerances and very tight tooling. But when you couple that with the industry's panics on the move from diesel to gas to maybe even more products, well then now you're running six days or seven days a week, all right? And that causes inefficiency both in your plants and you have no recovery time. And whatever you lose then you lose in your supply base as well. And so that's some of the inefficiencies. We have to get our hands on top of that and get all of our operations running well and make sure our supply chains too. We have these discussions all the way back to the customers who didn't tool the supply base or our suppliers fast enough to make this shift, and so there have been some good discussions around that. That's number one. Two, as I said earlier, building a plant from the ground up, staffing them, training them, putting the equipment in, making the mistake to do that, that's on the electronic side of the business we got to get that behind us too. That's going to take us a full 2019 and into 2020. Well, those plants are just starting up basically in the late first half, early second half of this year, okay? So that's a couple of things there. Okay? Is that fair?

Emmanuel Rosner -- Deutsche Bank -- Analyst

Yeah, absolutely. Would love some color from Vivid around okay, if you had to put some numbers on it going from 7%, 8% to 10%, 11% margin. How much is sort of like timing versus operational improvement?

Vivid Sehgal -- Chief Financial Officer

Sure. Well, Emmanuel, if I look at the -- let me give you sort of maybe the bucket list of the highest sort of priorities in terms of what really drives it and then I can add some color around sort of timing issues. Probably and I think the most top two important ones are really around the SG&A and stand-alone cost opportunities we have and the improvements in the material and manufacturing processes that we have. The first thing to think about really is that we are exiting a lot of our TSAs with our platform of parent company in the second half of this year. And as part of that there's going to be a natural reduction in the transition service agreements, you're aware that we have the markups right now. You're aware that we've been incurring duplicate costs in the company. And in the second half of the year, which is pretty visible to us right now, that will naturally roll off. So we're pretty confident on that one. The next one, I'd sort of brings to your attention is around the performance on manufacturing and materials. Again, last year certainly materials we proved to be in good shape, in terms of the opportunities and manufacturing was certainly an area that we did not hit our targets on. So again I think we will naturally have improvements in manufacturing as Rick said, he's been to the plants and we are definitely scaling out. So I think that's the next one to think about. I think the next one after that is to think about is the aftermarket expansion. The aftermarket team has done an absolutely superb job in relation to their margin improvement profile particularly on the supply chain, looking at pricing across the organization. And we see that as a continued benefit to the company in the second half. And again, we have very detailed plans of how to get that. Then I'll probably bring in the incremental GDi and Power Electronics margins as the next component of that. I think as Rick said, the good news for us is we have opportunities. What we're not doing is betting our house right now on GDi and Power Electronics as being the major drivers of second half operating performance. That's certainly not what we're doing at this point in time. We have enough in our tank on cost engineering spend and other areas that we think we can basically take out of this business to drive our performance. I hope that's given you some color.

Richard F. Dauch -- Chief Executive Officer

Yeah. Let me give a follow-up there, too. I spent last week with the aftermarket team. First and foremost I was surprised at the diversity of the team and the newness of the team. Majority of the senior leadership of our aftermarket team have only been here two years or less. So they're still gelling as a team and the job they did in the back half of last year was tremendous. The amount of money they collected from a cash flow basis in the fourth quarter was great, both from an AR standpoint and from an inventory reduction standpoint. And after two days of working with them, I think we grow that business even faster than we think we can right now, right? That's an upside opportunity for sure.

I didn't really quite understand all the 71 different spin combinations we have going on at TSAs. The good news is we're on track. The bad news is some of them are a little bit over. And once they're done though we'll get rid of those costs. You've got extra consultants in here helping us. You got -- as Vivid said, we have to stand up our own IT office in Hungary -- Romania, right? We're standing up our own back office area in Poland. And so all that takes time and money to go recruit people and that kind of stuff. So it will be great to get completely stood up 100% on our own and we can control our own destiny. We still have some operational issues that –were disrupting us, tied to the spin, and we're on track to get that behind us by the end of the year as well. So getting to be a true stand-alone company where we have control over all of our destiny going forward is a good thing. And I think I told you guys when I was in Vegas if you were there, at American Axle when we left General Motors we had three years before we became a publicly traded company. All that ugly work to stand up a company from nothing was done in private. Here we've been doing it since day one on December 4 as a publicly traded company and we paid for that dearly last year, okay? So...

Emmanuel Rosner -- Deutsche Bank -- Analyst

Yes, it’s great color. And then I guess my follow-up then is still on the margin side. To what extent is your second half margin a good run rate as you look beyond this year? So is 10%, 11% a sort of like sustainable level to build upon, or should we think about it differently?

Vivid Sehgal -- Chief Financial Officer

I think it's -- that's a good question. I think if you look at the drivers of margin, the way that I've looked at this Emmanuel is that, if you look at the second half of 2018, you can pretty much begin to proxy the first half of 2019. As we start exiting the TSA, so looking at the second half of 2019 should set some degree, the momentum and the direction of how 2020 should look. So we're not going to give 2020 any type of medium-term framework. But if I was to give you some financial guardrails right now, certainly, as we come off the TSAs, as we see GDi Power Electronics improvements, as we see some of the performance coming through, and I think with Rick being on board that's going to give us even greater opportunities to expand our opportunities right now. Certainly, the second half, I think as we exit the year will put us in a -- certainly a better position in the first half, undoubtedly.

Richard F. Dauch -- Chief Executive Officer

Yeah. So there we're on a very tight leash, Emmanuel, right? So -- but I'd say after seven weeks, as I said in my opening comments, I'm extremely bullish about the opportunities here, okay? There are things we can get out there, it'll take some time to do so, but I think we can do quite well. That's all I'd say. How is that?

Emmanuel Rosner -- Deutsche Bank -- Analyst

Perfect.

Richard F. Dauch -- Chief Executive Officer

You just got me on a tight string, I can't give you any numbers, all right. So...

Emmanuel Rosner -- Deutsche Bank -- Analyst

Okay. Thank you.

Richard F. Dauch -- Chief Executive Officer

Okay.

Operator

And our next question comes from Colin Langan with UBS. You may proceed.

Colin Langan -- UBS -- Analyst

Yes, great. Thanks for taking my question. Just firstly, can you just remind us about the tariff headwinds from China that you incurred in 2018? And what sort of baked in, let's say, on the 40 basis points for commodity and tariffs? Is that all pretty much tariff? I'm trying to gauge if the things actually got better, what maybe is that going to be?

Vivid Sehgal -- Chief Financial Officer

Hey, Colin, so let me start with 2019. So for 2019, the combination of tariffs and commodities are round about $20 million in total and that's split pretty evenly between tariff and commodity exposure. Off the tariff, we have assumed a List 3. It does come into play, starting in March of 2019. If -- and if List 3 does not come in at the 25% and comes in more in the 10% range, we think that the total exposure will be more, like $5 million rather than the $10 million we are seeing right now.

Colin Langan -- UBS -- Analyst

Got it. And was there any hit this year there, or...?

Vivid Sehgal -- Chief Financial Officer

Yes, there was. So the combination. I've sort of given ranges in the past. So the combination on the tariff side was predominantly the second half performance was in the $3 million to $4 million range.

Colin Langan -- UBS -- Analyst

Okay. Got it. And then just secondly, CapEx guidance, up quite dramatically from where you were in 2016. I mean, is that I think you're like $170 million then and is now in the $300 million. I mean is that related to some of the issues you have on things like GDi that maybe you didn't invest early enough. I mean and is that causing some of the capacity constraints, some overtime pay, or is that a misunderstanding, or is this all just for the future EV launches?

Vivid Sehgal -- Chief Financial Officer

No. I think the way to think about it. I think you're right to a degree. The first and probably most important thing that there is going to be in the region of about $80 million to $100 million of one-time CapEx that is going to be part of 2018 and 2019. As Rick said, we're building our plants. We're standing up our IT facilities. And I've always given the guidance of about $80 million to $100 million. So if you take that number I talked about one-time CapEx in 2019, that's like 0.5 point in relation to our CapEx percentage of sales, quite significant for us. The second one is definitely to do with your point, which is about future revenue generation and the bookings momentum that we have in place right now. We have actually increased new business wins to a good material degree up sort of 35% in 2018 versus 2017. We're relatively confident that we can carry on. So I think if you look at our CapEx, it is broken down and probably into three parts. Number one is capacity for growth which represent about 70% of our normalized CapEx. The second portion of that will be the onetime nature of the $80 million to $100 million. And then the third element is definitely to a lesser degree what you talked about which is a catchup in relation to pretty more installed capacity, particularly into Europe to deal with our potential GDi issues.

Richard F. Dauch -- Chief Executive Officer

Yeah. Three plants we’re building, that's not normal. GDi's capacities, it's one customer alone that asked us to go from capacity of 10,000 engines a week to 30,000 engines a week. That drives capital. That's growth capital. The plant closure of Sudbury, we have to move that equipment for replace older equipment and then put some of the basic infrastructure in place from an IT standpoint. So normal Tier 1 automotive companies, if there's steady-state are somewhere between 3.5%, 4% of CapEx and that will be back to your $180 million, $200 million CapEx number on a $5 billion company. And we're spending a little bit higher than that right now because of all the growth we have going on in the transition.

Vivid Sehgal -- Chief Financial Officer

Yeah. And to be fair, I think Rick made a great point. I think, if you strip out one-time CapEx out of 2017, our CapEx number is more sort of in the region of about 4.5% again. Certainly, this year it's elevated, but that's largely driven by the coming off of the factory builds and the IT cost that we're building out right now and the capacity required for our revenue expansion in new bookings wins. So it's certainly elevated but the reason behind it is growth.

Richard F. Dauch -- Chief Executive Officer

And Colin, I'd say, I'm still getting my hands around that here as the new CEO. And one of the dynamics, it's not often you're in a business that's growing at a CAGR of 30% to 40%. And that's really being driven by the hybridization electrification of the industry across the board. VW is spending $25 billion on x number of platforms for electric vehicles. General Motors is spending multi-billion dollars for electric vehicles. So, if you want to be a player you've got to put the capacity in place, right? And so those are kind of the things we're doing right now, whether that's an inverter, a converter, capacitors, chargers, and that kind of stuff like that. So that's the big driver of our capital right now as well.

Colin Langan -- UBS -- Analyst

Great. Thanks for taking my question.

Richard F. Dauch -- Chief Executive Officer

Thanks, Colin.

Vivid Sehgal -- Chief Financial Officer

Thank you.

Operator

And our next question comes from James Picariello with KeyBanc Capital Markets. You may proceed.

James Picariello -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. Can we just get the breakdown in the quarter related to bookings? Previously, obviously, you've provided the breakout between commercial vehicle, GDi, Power Electronics. You obviously talked about the qualitative color on GDi win in Europe, demand for Power Electronics. But yes, can you -- are you willing to quantify that breakout?

Vivid Sehgal -- Chief Financial Officer

Yeah. We normally give that number by the year. So we have provided that which the trends are pretty consistent throughout the year, so about 30% Power Electronics for the year about 40% GDi and the remainder a combination of commercial vehicle and other businesses. So we can sort of -- bookings can be up and down, but that's the sort of target that we normally give is an annualized number which we're very pleased with because I think that what -- that does show is that the growth in our key technologies where we’re putting most of our engineering and our CapEx right now and where we think this business is going to go forward is exactly in the right places and with quality customers as well. I don't know Rick if you want to add anything more.

Richard F. Dauch -- Chief Executive Officer

Yeah. I've been able to have meetings face-to-face with four of our largest customers, three of them on the passenger car side, and one of them on the truck side. The real positive thing is one said to us, we need you, Delphi Technologies. One of the European-based companies said we didn't have a plan to shift this quickly from diesel to gas and we need you to come with us as fast as you can. The second one said to me, the move to hybrids and electrics is faster than we thought. And we aren't experts on the electronic side of the house. You guys are. You're one of the leaders in the industry. What can you do to help us? So that's positive. On the truck side, as you know the North American truck market is still super-hot. The capacities are very constrained. We're running basically flat out seven days a week. The good news I found out when I got here is one of our big customers authorized us late last year to put in about $16 million of CapEx for more capacity. That capacity is supposed to come online in the second quarter. They recently asked me if we can pull that ahead into the first quarter. We're going to do everything we can to, but that tells you how the demand is. The customers are pulling Delphi Technologies products to them. We're not having to push our technologies onto them. That's a great position to be as a supplier.

James Picariello -- KeyBanc Capital Markets -- Analyst

And that's very helpful. Just on the separation cost, the additional separation cost for 2019, was that quantified at $31 million? Did I hear that correctly? And how does that compare to your prior 2019 guidance? Thanks.

Vivid Sehgal -- Chief Financial Officer

So there's two separations cost that we incurred. The first one is the CapEx cost which will be in the number that I just quoted there. But there's also some OpEx that's in there and that will be significantly lower than 2018. So I gave a number of 2018, the separation OpEx cost would be in that sort of $70 million to $80 million and you can expect that number to be relatively halved in terms of 2019. So there is CapEx which is significantly lower from around about $50 million to $60 million in 2018 to the $30-odd million that I've spoken about now. And OpEx separation one-time is coming down from $70 million to $80 million and it's about half of that in 2019.

Richard F. Dauch -- Chief Executive Officer

Yeah. And I gave a -- two weeks ago I gave our leader of our electronics business a task. I said, hey, come back to me and Vivid and tell me what you need from us to pull everything ahead by a quarter or two if you can. Can you get your equipment sooner? Can you finish the construction of your plant sooner? That means I've got to pay some premiums on Saturdays and Sundays to have a supplier build equipment or build -- or have a construction guy build the plant because the sooner we can have our own plant stand up and we're not tied to our x parent company from a supplier standpoint the better off we are. That's an irritant for us right now. So...

James Picariello -- KeyBanc Capital Markets -- Analyst

Thanks guys.

Richard F. Dauch -- Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, this now concludes our Q&A portion of today's call. I would now like to turn the conference over to Rick Dauch for any closing remarks.

Richard F. Dauch -- Chief Executive Officer

Thank you very much. Well, thank you everybody for joining us today on the call. I look forward to updating you again in the future after our earnings call in the -- after the first quarter. And I'm going to leave here tonight to head down to the aftermarket meeting in Spain, and then I'm off back to North America next week to see all of our plants in US and Mexico. And so my orientation continues. Thanks for your investment and thanks for your interest in Delphi Technologies. Have a good day.

Operator

Ladies and gentlemen, thank you for attending today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 63 minutes

Call participants:

Sherief Bakr -- Vice President, Investor Relations

Richard F. Dauch -- Chief Executive Officer

Vivid Sehgal -- Chief Financial Officer

Richard Kwas -- Wells Fargo Securities -- Analyst

John Murphy -- Bank of America Merrill Lynch -- Analyst

Emmanuel Rosner -- Deutsche Bank -- Analyst

Colin Langan -- UBS -- Analyst

James Picariello -- KeyBanc Capital Markets -- Analyst

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