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Executives

Jacques Esculier – Chief Executive Officer

Ulrich Michel – Chief Financial Officer

Michael Thompson - Vice President, Strategy and Investor Relations

Analysts

Jeff Hammond – Keybanc Capital Markets

Steve Tusa – JP Morgan

Martin Sankey – Neuberger Berman

Michael Coleman – Sterne Agee Group

Unidentified Analyst

WABCO Holdings Inc (WBC) Q3 2008 Earnings Call October 29, 2008 8:00 AM ET

Operator

Good day and welcome to the WABCO third quarter 2008 earnings results conference call. Today’s call is being recorded. At this time, I’d like to turn the conference over to the Michael Thompson. Please go ahead, Sir.

Michael Thompson

Thank you, Michelle. Good everyone and welcome to WABCO’s quarterly conference call. Today we will present our third quarter results as well as our outlook for the remainder of this year. With us this morning is Jacques Esculier, our Chief Executive Officer and Ulrich Michel, our Chief Financial Officer. Jack will start the call of with his perspectives on the quarter, and Ulrich will follow with more detail on our financial performance. We will then open the line for your questions.

Before we begin I would like to remind you of a few things. First this call, webcast, and the presentation that we will be using this morning are available on our website www.wabco-auto.com under the heading WABCO Third Quarter Results. Replay of this call will be available through Thursday, November 6th. Second, as shown on chart two of the presentation, certain forward-looking statements that we will make today are based on management's good faith expectations concerning future developments. As you know, actual results may differ materially from these expectations as a result of many factors, relevant examples of which are set forth in our company’s Form 10-K and quarterly reports. Lastly, some of our remarks contained certain non-GAAP financial measures as defined by the SEC. Reconciliations of the non-GAAP financial measures to the most comparable GAAP measures are attached as an appendix to this presentation and to our press release from this morning, both of which are posted on our website. With that, I will turn the call over to Jacques Esculier.

Jacques Esculier

Thank you for joining us on this call today. Before starting, I wanted to just share with you that it’s going to be probably the strangest quarterly report that I would ever have to make today because we will report and share with you the results of what is our 26th consecutive quarter of growth, both at the top and bottom lines, and then we’re going to immediately shift into major actions that we have taken and are still taking to anticipate the impact of these turbulent times that we will most probably affect most industries across most of the countries around the world.

First, let’s spend a little time reviewing, again, what has been a very good quarter for us, again demonstrating our continued ability to outperform our markets everywhere in the world. Our sales growth of 2% in local currencies or 10% reported at $655 million translated into a performance EBIT of 11% in local currencies, or 27% reported, resulting in $0.94 of EPS at 45%, and then an EPS reported of $0.97. I think it’s noteworthy to also describe the fairly exceptional conversion rate of 123% for free cash flow of $78.4 million for the quarter. We continue to repurchase shares, and we actually repurchased $1.3 million of those during the quarter, but suspended the program in early October momentarily given the obvious circumstances we had to face at that time.

Now looking ahead, our fourth quarter looks significantly less attractive than what we had anticipated, and it leads us to adjust our performance EPS projections from the prior guidance of $4.12 to $4.26 to $3.90 to $4.00 at equal exchange rate and anticipating obviously an impact of the exchange rate down to $1.3 per euro, it would go down to $3.85 to $3.95. To just put things in perspective, when we last reviewed our guidance, we had forecasted a drop in revenues or in growth more exactly for the second half of the year between +4% to +10% coming out of our first half of the year at +14%. After revision, we are right now seeing second half of the year to be a -5% to -1% decrease in our revenue base.

Turning to page 4, I would say that in these turbulent times and for the last three years, we have refocused on two things that we will keep focusing on actually as we move ahead. One is our ability to anticipate any downturn, any trend, or any change of trend in the industry. Obviously, we’re talking about right now negative trends, but I think it’s going to be very important moving forward that we also fully anticipate a reverse in trend that will lead to a recovery in our industry because we certainly want to fully take advantage of future recovery in the overall business environment.

The second area of focus is definitely to maintain the essence of our intent, which is to continue our passion for growth across these turbulent times. Now, looking at what happened around the first area of focus in the third quarter, just after we turned the page and actually reported to you all an outstanding second quarter result, and I think it’s going to stay probably as one of the best quarters in terms of growth, as we had reported at that 16% growth and still admitting that the second half was again not as strong as what we had seen during the first two quarters. Shortly after that, we received some first signals of a potential slowdown even, again, beyond the forecasted slowdown that we had shared with you, and we immediately triggered actions to mitigate the challenges that were identified on the horizon, so we launched a program to decrease costs and progressively along the last 2 to 2-1/2 months approximately, we ended up with a program that was actually identifying $20 million of savings during the last 5 months of the year, $4 million of which actually kind of positively affected the third quarter, the remaining $16 million being affecting the fourth quarter.

A few weeks ago and I would say even a few days ago, we realized that because of this unprecedented financial crisis that would obviously lead to a likely recession across the industrial world leading to a much lower need of transportation that would obviously impact the need for new trucks and trailers. We then realized again that we had to trigger another wave of reflection and actions to further adapt our cost structure to a much larger downturn in our industry and specifically in our business at WABCO.

We went back and revisited again all sources of expenses across the company and found still some further areas of opportunities that we rapidly realized again in the last few days that we needed to go beyond that and decisively adapt the structure of WABCO to again a slower demand, so we triggered a process with the intent to reduce our workforce by about 1000 positions, half of them covering temporary workers or open positions that were left vacant by people who left the company in the last months of 2008. Obviously, this process calls for the involvement of unions and work councils in all affected countries as we will fully respect the local labor laws and practices, and this is what we did starting this morning.

The second area of focus and passion is for us to continue to position our company to fully advantage of any growth opportunity, and I would like to take this opportunity to report what I think is an outstanding and very successful presence of WABCO at the IAA 2008 which is the largest trade show for commercial vehicles in the world that is held in Hanover every two years, and it was exceptional for different reasons, but I would say the most important one is it was a platform for us to launch 14 new products and technologies, two of them that I would qualify as breakthrough technologies. The first one is what we call OnGuardMax. It is a revolutionary technology that allows a truck to decelerate all the way to a full stop automatically in case of collision is identified with a vehicle either moving or stopped.

I presented this breakthrough technology to a panel of 500 industrial leaders, European country representatives, local transport authorities, and industry analysts who definitely showed a lot of interest, and it was even further emphasized by the fact that outside of the room, we physically demonstrated this system on a truck that was heading full speed towards a stopped vehicle. I have to mention that one of the senior executives of a leading commercial vehicle brand was on board the truck, and I can report to you that actually everything went fine, and it was kind of warm to get a round of applause from, again, a very broad panel of representatives of our industry.

The second thing is our continued success in globalizing our reach in growing our presence across the world. We just signed a letter of intent with Fuwa which is a company from southern China which happens to be the largest manufacturer of commercial trailer axles, and the purpose of this joint venture is to manufacture air disk brakes to equip these axles with an ambition in the next few years to equip up to 250,000 axles or 500,000 air disk brakes, and it is also for us a great opportunity to establish a footprint in China and localize the production of air disk brakes that will meet the future needs in the local market.

As you see in this kind of periods and challenges and exceptional stress across the world, the temptation is to only focus on cost-cutting measures, talking about recession, downtrends and all those things which are fundamental to ensure obviously and secure the integrity of a business like WABCO and many other businesses, but again we don’t want to lose focus on growth, and what will make our company not only successful as we weather this storm but more importantly position it as an agile, rapid, efficient company to fully take advantage of any future growth opportunity on the horizon.

Let’s turn to page 5 where we are going to give you some more information again on the third quarter, starting with this growth structure. 2% in local currency, 10% reported, and reviewing the three main channels that feed that growth, one is our sales to OEMs that still went up 3%, and in spite of a very sharp drop in the trailer market. The trailer market has grown fairly nicely, 16% in the first half of the year, but in the third quarter, it suddenly decreased with a -17% year-over-year decrease. We are by the way expecting a further decrease in the fourth quarter of 27%, so that overall for the year, it’s going to be a decrease of about 3% in 2008 versus 2007. More than compensating again this decrease in trailers, we have benefited from the continued growth in truck and bus manufacturers. When you look at it in Europe, for example, it’s an 8% growth overall.

The second channel is aftermarket, and for the first time in many quarters, we have seen a slowdown in the growth. We ended the quarter with only 3% of growth driven by the slowdown of maintenance activities across the world, mostly actually in Europe and the US, driven by the fact that obviously fleets had to face the reality of having less business to deal with as well as obviously an incredibly strong pressure on costs driven by the very fast increase of fuel price. WABDO has again been able to still generate positive growth whereas some other companies involved in the aftermarket have seen already a negative growth for the quarter, and when you look at the two channels that feed that aftermarket revenues, we have still seen a 9% increase in the independent aftermarket channel, unfortunately affected by 8% drop in the revenues generated through the OES channel.

The third channel is for us is sales to our JVs, which represent mostly the sales through Meritor WABCO joint venture covering our activities in North America, and again this has seen another drop in revenues with a continued decline in the North American truck and bus market with a 7% drop in demand, but also actually a continuous drop in the trailer market. The first half has a seen a drop of more than 40%. The third quarter has continued to see a drop of 34% year over year in the trailer bus.

On the right side of the page region by region how we were able to perform in our truck and bus sales versus the local regional production. Again in Europe, there was still a fairly good strong increase in the number of trucks manufactured, 8%, and we were able to outperform by 1% through out continuous increased content per vehicle. North America again continued erosion of demand, -7%, but we were able to outperform by 5%, most driven by the continued success of Cummins to increase its market penetration, and as you know, we have a joint venture with them, and we equip each one of their engines with one of our compressors. South America continues to be a very strong source of growth for us, even though we started seeing a slowdown, even maybe an erosion of demand actually in the latter parts of this year.

For the first time in many years, we are seeing a decrease in demand for Asia Pacific, driven by actually a fairly sharp decrease in China of -8%, but we again outperformed that by 4%, and that is due to the pre-buy that we have gone through in the first half of the year during which we actually benefited from a growth of over 70% at the revenue level for WABCO and an overall growth of demand of 28% in the number of trucks. So, 28% for the first half because it was a pre-buy ahead of the introduction of the Euro-III emission control regulations in the third quarter, and we will continue in Q4 to see weakness in this market. We think that progressively it’s going to recover obviously as move ahead next year.

Again, overall demand was surprisingly weak in Asia. It was still fairly strong in Europe, but WABCO was able to fully leverage the growth everywhere and actually outperform every one of these markets. With this, I will ask Ulrich to give you some more detail around the third quarter.

Ulrich Michel

I will quickly walk you through the results of Q3 and September year to date, then we will turn the outlook for the remainder of the year and talk about actions we are taking to address the current slowdown in our markets. Turning to chart 6, we’ll walk through the details from sales to earnings before interest and taxes for the quarter, looking at both reported and performance numbers. Performance numbers for 2008 are adjusted to remove operational streamlining and separation costs. In addition comparisons to 2007 are adjusted for currency translation effects.

As Jacques mentioned, sales growth for the quarter was 1.8% in local currencies, which is several percentage points lower than we would have expected the last time we talked to you. The impact of pricing pressure was 2.2% for the quarter, once again at the low end of the range we typically see for our business, which reflects our continued efforts to manage price decreases and pass on material increases to our customers. Gross profit grew at a 2.1% rate, with adjusted gross profit margins expanding 9 basis points compared to last year. Operating expenses expanded at a rate of 2.9%, which was an increase as a percentage of sales of 16 basis points versus last year. Operating income therefore increased over 1.1% for the quarter, with adjusted operating margins increasing by 7 basis points versus last year.

As you can see, this was the result of a positive volume mix and productivity benefit of nearly $18 million being offset by a nearly $19 million impact of price erosion, labor inflation, operating expense, investments, and transaction of foreign exchange. Let me add some context. As we entered into the quarter, our industry was still bullish. In the guidance we gave, we had already added a fair degree of conservatism from what our customers told us at the time. As the quarter developed, we started seeing more signs of a potential slowdown in our industry and took immediate actions to anticipate the impact. We developed a $20 million profit improvement plan for the second half of the year of which $4 million was realized in the third quarter. The remainder will be in the fourth quarter. Without these timely actions, the income for the second half of 2008 would be significantly lower.

Performance EBIT was nearly $75 million for the quarter with margins expanding by 97 basis points in local currencies. EBIT alone benefited by an increase in equity income of over $6 million in local currently from Q3 2007 due mainly to our Indian joint venture In summary, it was another quarter of growth, and our results show that we continue to perform markets throughout the world.

Turning to chart 7, let’s review our financial details from earnings before interest and taxes to performance earnings per share. As you can see, EBIT was impacted by streamlining and separation related expenses of $8.9 million for the quarter, down from $9.8 million in the same quarter last year. Net interest income was $1.8 million as interest income more than offset $1.6 million in expenses. We have maintained the performance tax rate of 21% that we projected last quarter which excludes separation, streamlining, discrete tax items. As a result, our reported net income for Q3 was $63.7, up a loss of $300,000 last year. Removing separation, streamlining, and one-time and discrete items, performance net income was $61.3 million versus $45 million a year ago, an increase of 36%. Updated estimations of separation, tax, and indemnification liabilities resulted in a benefit of approximately $10 million this quarter.

Furthermore, earnings per share on a reported basis was $0.97, while performance earnings per share for the quarter was $0.94 versus $0.65 a year ago, an increase of 45%.

Turning to chart eight, let's go through our cash flow for the quarter. As you can see, working capital decreased by approximately $36 million. This was driven by a reduction in accounts receivables due to lower business volumes and improvements in day sales outstanding, partially offset though by decreases in payables due to lower business volumes and timing of our payment cycle.

Next, you can see that the net cash provided by operating activities was $103.9 million and net cash used in investing activities was $25.5 million, resulting in record free cash flow of $78 million for the quarter. This yields a free cash flow conversion rate of 123% for the third quarter, and combined with the first half of 2008, 97% for the nine months ended September 30, 2008. In addition, we spent approximately $54 million repurchasing 1.3 million shares of our stock during the quarter. Accounting for transaction settlement timing in Q3 and Q2, we paid out $57 million relating to our share buyback program during the quarter. In total, since our spin-off in August last year, we have repurchased 6 million shares or 8.8% of our initial diluted outstanding shares. As in previous quarters, we paid dividends to shareholders in the amount of $4.5 million yielding a total of approximately $62 million of cash returned to shareholders for the quarter. Due to current conditions of the financial markets and the economic development in our industry, we have decided to suspend purchases under our stock buyback program for the time being.

Turning to chart nine, you can see year to date 2008 performance versus same period a year ago. While I understand that this is not everybody’s principal focus today, I would still like to draw your attention to it for a brief moment. Sales have increased by 10% in local currencies. Performance operating incomes has improved by 32%, and operating margin has expanded by 83 basis points. Excluding transactional effects, margins have expanded by 139 basis points, which demonstrates the operational improvements we have made by continuing to deploy our WABCO operating system. Finally, performance earnings per share have increased by 56% for the nine months ended September 30, 2008. By all measures, this has been an outstanding first nine months for 2008.

Now let’s shift gears from looking backward to looking forward. Turning to chart 10, we will now review an update of our financial projections for the year. These projections reflect our current view of the fourth quarter given recent developments in the global vehicle industry as well as the current situation in the global macro economy. They incorporate various improvements that we have made since our last projections, impact of the strengthening US dollar, as well as the degradation in demand for commercial vehicles we are now seeing in Europe. As usual, they do not include the potential impact of an EC fine.

Based on our solid progress for the first three quarters of 2008 and the slowdown we are seeing thus far in the fourth quarter, we are projecting sales growth for 2008 to be between 5.5% and 6.5% in local currencies. This reflects an anticipated sales contraction during Q4 of between 7% and 3%. Using the exchange rate as per our prior guidance, this would lead to a performance earnings per share estimate of between $3.90 and $4.00, down our prior estimate of $4.12 to $4.26. Adjusting these to the Q3 actual exchange rate and using $1.30 per euro exchange rate for Q4 leads us to an updated projection of between $3.85 and $3.95 for performance earnings per share which is $0.27 and $0.31 than the low and high end of our previous guidance respectively. This implies a Q4 performance earnings per share estimate between $0.74 and $0.84. This decrease in the range includes $0.49 to $0.53 due to lower sales volume from the slowing market conditions, $0.05 from the impact of a weaker euro versus the US dollar, partially offset by an additional $0.24 coming from our profit improvement plans implemented for Q3 and Q4, as well as $0.03 coming from the lower share count expected for the full year.

As the industry continues to change rapidly, we feel continuing to provide a range at this point in the year is still appropriate. We are committed to take all necessary actions to align our capacity with market demand and adjust our cost structure as necessary, while maintaining excellent service levels for our customers and continue to advance our superb technology base. Today, we have initiated actions to reduce 1000 positions, with about half of these related to permanent employees. We estimate these actions to cost us between $45 and $55 million and to deliver between $40 and $45 million in annualized savings. We believe these measures are appropriate to align with the range of market declines that are currently being discussed in the industry for the next year.

Now, I will turn it back over to Jacques for his summary.

Jacques Esculier

Thank you, Ulrich. I’m not going to spend more time recapping all those things that made Q3 a decent quarter. Actually, I just want to emphasize the efforts that we had to through in a very short period of time shifting from an operational mindset fed by growth that we had again experienced for 7 years to a rapidly degrading situation and having to, again, as rapidly and even faster react and implement timely and appropriate measures across the business to mitigate the challenges ahead. That’s what we have done so far. That’s what we are committed to and continue to do, and again right now we’re talking a lot about cost-cutting measures because, again, we’re talking about the integrity of our performance, but we don’t want to forget during these difficult times to maintain and preserve the integrity of our business as one of the most powerful creative companies in this industry that has and will continue to experience enormous amount of success in the business. Thank you, and now we’re opening the lines for questions.

Question-And-Answer Session

Operator

(Operator Instructions). Our first question comes from Jeff Hammond with Keybanc Capital Markets.

Jeff Hammond – Keybanc Capital Markets

Clearly a lot of dramatic change in the industry and the pace of orders and activity, and I just wanted to get a sense and I know you’re not giving ’09 guidance today, but if you can give us a sense of what you’re hearing from your customers, people in the industry about what we can see for a potential truck production decline in ’09 in Europe?

Jacques Esculier

As you said, things are changing I would not say daily but certainly weekly. We have, like you have, gotten good information or some information from our customers as they are presenting themselves their Q3 earnings performance and then some additional information we gather obviously within the industry. It’s very complicated to really be in a position today to anticipate what will and what would happen in 2009, but I will say one thing. We have taken obviously a hypothesis with a certain level of probability and a certain range, and I would say on an average, we would anticipate a market slowdown in Europe of about 20%. That’s the basis of our reflection right now. And then across the world, I would say maybe continued slight erosion or slight increase in the US given the fact that the US market has already hopefully bottomed down this year with significant drop again compared to 2007 that itself was already almost 40% down compared to 2006. We anticipate China to may be less affected by this crisis given the microeconomics reaction expected from the government that will push internal consumption and invest themselves a lot of their reserves to trigger business activity that could actually favor the truck market. We don’t have much of a clue for Korea and Japan. It could go either way. We think there will be a slowdown in South America as well at one point. Overall, Jeff, when you look at it from WABCO’s perspective, we would see between 12% to maybe potentially 15% decrease in overall revenue. Again, this is the status as of today, and you can appreciate that things can evolve one way or another as we gather more information and get even closer to the year end and to the beginning of 2009.

Jeff Hammond – Keybanc Capital Markets

Just as you think of that kind of decline and taking into account the restructuring actions, what should we think of a decremental on the operating line on that kind of a revenue decline?

Jacques Esculier

Unfortunately, I can’t go any further than just sharing with you our assumptions at the top level because we are not in a position to just identify for ourselves a commitment or at least a target for the bottomline. There are too many things right now that are still unknown, and I think it’s extremely premature. Our objective is obviously to minimize the impact on the bottomline, and that’s why we are taking the measures we are taking, adapting the company to the proper level of demand, but it will have an impact. There is no way we will maintain the same level of profitability as what we had in 2008, but I’m not in a position at all to tell you to what extent it would be affected at this point.

Jeff Hammond – Keybanc Capital Markets

If you look at past downturns within your business, how did your aftermarket business react from a growth perspective versus that double digit target, and then as you look at optional adds where people can choose whether to add A&P or not, what happens in downturns? Do people materially change their adding options, etc.? Just maybe talk about sensitivity in those two areas.

Jacques Esculier

Unfortunately I don’t have very accurate information related to those two questions. One is aftermarket, as you may remember or not remember, Jeff, was really not an area of focus at the time of the last significant downturn that we could kind of try to compare this one to. It was just more of an afterthought, so it was not like we were in double digits and suddenly slowed down. At that point, we never were at least that I know of. We were not even close to double digit growth at that time, so I don’t think the amplitude would be that dramatic. I think actually we are resisting fairly well in the aftermarket. I read a few days ago that one of the major tire manufacturers in Europe which is supporting the truck business had seen overall in 2008 a 6.5% decrease in their revenues in the truck business. They certainly support OEMs, but I think the most dramatic decrease that they have probably seen so far is in the aftermarket. So, what I’m saying is compared to this kind of information that we gather, we are not in that bad of a position. Now in terms of options, again, I’m sorry, I just don’t have this analysis available and handy at this time. A lot of things that we are selling actually are more and more standardized at least in our countries. To the contrary, what we are looking at right now are opportunities to really export more and more technologies to emerging markets, so I would not be overly concerned about a strong erosion of demand for options in developed countries. I would be more focused on trying to maximize our ability to again transfer fairly important technologies to emerging markets. I would just mention this automated manual transmission, the second breakthrough that I didn’t elaborate on. Actually it is for us a breakthrough because we built a modular concept specifically targeted to emerging markets because in the automated manual transmission concept, we are still the only one to sell in the market, powered compressed air. This was very complicated to develop for each transmission. This modular concept is actually enabling us to rapidly adapt it to any transmission in the world, and I can tell you that we had a lot of interest around that concept at IAA. Not only by the way from the emerging markets, but I would say from the US, we had some good interest and even from some players in Europe. So, again, our focus is more to expand our technologies as fast as we can in the emerging world.

Operator

Our next question comes from Steve Tusa with JP Morgan.

Steve Tusa – JP Morgan

I just wanted to commend you for taking a very standup approach to this uncertain market environment. There are a lot of companies out there that aren’t even talking about 2009, and given you guys have only been a public company for about a year, giving any comment on 2009 and taking the cost actions you’re taking I think reflect very well on the way you run your company early on as a CEO there, so kudos to you guys on that front. On the cost side, I think you’re cutting 12% of your workforce. Is that right?

Jacques Esculier

Yes. That’s about it, Steve.

Steve Tusa – JP Morgan

That had to have been something that was at least planned or in the works over time and accelerated. That just seems like a pretty hefty cut to do on the back of an unusually quick market transition. Could you just talk about how you guys came together with those numbers?

Jacques Esculier

First, thanks for your comments. We appreciate it. Actually no, we had never really thought so far about this kind of program. As I said, we were really focusing mostly at reducing the overall expenditures beyond just labor costs. It’s really within the last weeks that we have spent a huge amount of time and effort at the leadership level and across the organization to reflect on how we could maximize our savings and realizing then that there was no other way. Obviously, not only the direct work force. There is no need for too much of a planning for this. That’s a natural evolution of things unfortunately. More to just also address the structure and the way we were supporting our business through indirect people, and that’s obviously the one that are a little bit more complicated to identify, and it’s only after these days of meetings and reflection and reanalysis of the whole thing that we came up with the program that we have today, that again has not been put together but in the last few days, and it’s again an intent for us to now negotiate with the local work councils because as you know we are in Europe, and we have to bring them on board to obviously identify the exact lines of the final project in terms of names and all that. That’s what we are facing right now.

Steve Tusa – JP Morgan

You talked about the structure of the organization. I guess it’s a lot of these indirect heads, so that’s really not a reflection on how you feel the structural growth outlook for this market, and if that really is not a reflection on how you guys view the longer term potential of Europe truck industry. This would imply that you’re peak profitability for the next cycle with the workforce reduced by 12% should be better than it was this cycle.

Jacques Esculier

Let me first address one point. When I said the structure of our business, I would first refer to something we have just implemented. I combined two business units at my level and asked one of my direct report to leave the company because we have combine trailers enough to market in one single business unit under one single leader, as they are the two closest business units in terms of the logic of their market, they have a very fragmented market, a very dispersed market with a lot of smaller companies, smaller businesses, they need fluidity and agility in the market, so there are a lot of attributes in common to those business units, and again, it’s not only having one leader over two. It’s also a lot of synergies that we are right now implementing cross the board, so that’s the kind of initiatives that I would refer to as adaptation of this structure. The second part…

Steve Tusa – JP Morgan

It was essentially could you support the growth when you rebound with less heads. You would seem to have a better margin opportunity if the growth returns over the next couple of years.

Jacques Esculier

Obviously, Steve, number one, we are spending a significant amount of efforts and certainly resources as well to streamline our company and adapt it to a lower level of demand. We will not come back fast to the number of people we have right now because I think there are still a lot of opportunities to address as much demand as what we had in the past with the lower cost structure, so our target and ambition is obviously to come out of this crisis with a lighter, more agile structure to our company as well as again with our full power in terms of growth creation, especially around technology, around global expansion, those are things that we will maintain or try to maintain as much as we can across these turbulences.

Operator

Our next question comes from Martin Sankey with Neuberger Berman.

Martin Sankey – Neuberger Berman

As a followup to Steve’s question, could you speak to us regarding how much of the result in charges will be people driven versus facilities and asset writedowns, and do you expect to be able to accrue most of this in 2008 or will we see a drag-through into 2009?

Ulrich Michel

It’s all people driven. So far, the expenses you see are all related to severance. We don’t know the exact timing, but we think the bulk of the expenses will be recorded in Q1 and Q2 next year. It you look at the schedule that comes with our earnings release, under the GAAP numbers, we have included a little bit in total of $13 or $14 million for the fourth quarter of this year. This is at this time an estimate of what we think we will have completed or ready to expense by the end of this quarter, but the bulk will be the first and a little bit in the second quarter of next year.

Martin Sankey – Neuberger Berman

Now conceptually WABCO has already been moving a lot of production from Germany into your Eastern Europe facilities. Do see this process being accelerated or is it largely completed already?

Jacques Esculier

This is obviously something that right now we are reviewing as part of the overall program that we just mentioned to you. Obviously we have continued to do it mostly basically forced by the logic of the market and prices as you know, and we are looking for ways to just obviously drive all those different initiatives at the same time, and sometimes there are some conflicting things. One thing though that we are right now triggering is a very significant effort to bring the lean concepts into Western companies and into Germany specifically to just kind of significantly gain in productivity and make obviously those factories certainly more competitive than before.

Martin Sankey – Neuberger Berman

Shifting to a different topic, the suspension of the share purchase program. Given that the balance sheet is pretty robust and you are generating significant cash which should continue as production winds down, give us the thinking behind the decision, particularly given the stock price decline, and what might motivate you to resume share repurchases?

Ulrich Michel

We struggled hard with this decision because we really think our share is at a very attractive price at the moment, but looking at the financial markets, the economic downturn in our industry, and the things we will be going through most likely over the next few quarters, we just think at this time it is more important for the health of our company to secure liquidity and maintain liquidity within the business. You might think it is overly prudent, but this is what’s behind our thought process.

Martin Sankey – Neuberger Berman

Was there any input from your lending facilities that share repurchases at this time would be frowned upon?

Ulrich Michel

No. We did not get any input from them or any request.

Martin Sankey – Neuberger Berman

Now the second part of my question was what would inspire you to reinitiate share repurchases.

Ulrich Michel

I would say once we know what the fine is and we can calculate a little better what the capital requirements are, then we should be back in business again.

Martin Sankey – Neuberger Berman

That leads to the next question, any update from when we might be hearing from the EU regarding a decision?

Jacques Esculier

Well, we haven’t heard anything in addition to what we shared with you yet; Martin, however, you can read in the papers that the commission is very busy around these kind of combination of banks that are currently happening in Europe because all of these have obviously a pretty interesting kind of dimension that is of interest to this part of commission. So, we think that we reasonably have to wait a little bit more, and we don’t anticipate anything before the end of the year. It is going to take a few months, I guess.

Operator

Our final question comes from Michael Coleman with Sterne Agee Group.

Michael Coleman – Sterne Agee Group

I just want a point of clarification. The 12% to 15% decrease in overall revenue, that does not include FX?

Ulrich Michel

No. That’s in no concurrency.

Michael Coleman – Sterne Agee Group

And the $40- to $45-million in annual savings since it is mostly people driven, would you expect to realize the majority of that in 2009 on a performance basis?

Ulrich Michel

Yes. It may take probably 2 to 3 months to, I would say, realize the majority of the saving. Again, we are near our peers so it takes a little more work and more efforts and more time actually than it would in some other areas of the world.

Michael Coleman – Sterne Agee Group

Okay. Back to an earlier question regarding the potential decremental margin in 2009, if you could maybe characterize what a decremental margin would look like with that type of 12% to 15% decline in an abrupt manner and how much of that could be perhaps lessened by the potential for cost savings from your actions.

Jacques Esculier

First, I wish I would be in a position to answer your question with accuracy, but I’m not, and very frankly I think it would not be fair to you or to us to even try to throw numbers because we just don’t have yet enough thinking about it, enough planning behind it, to be able to articulate anything of any level of intelligence, so I’m just asking you to wait a little longer until probably early 2009 where we will be definitely in a better position to describe what we are committing to and what we are seeing in terms of overall trends and impact of all those programs.

Michael Coleman – Sterne Agee Group

On the China JV, what would be your expected magnitude of impact on the growth rate in 2009 from the JV?

Jacques Esculier

First, it is a letter of intent, so we are planning to finalize the JV commitment and agreement towards the end of the year. What we are contemplating right now is something around 10000-15000 brakes in the latter part of 2009 that could potentially add, and I would say maybe $1 million or $2 million of additional revenues. The bulk of the revenues coming out of this JV will certainly start in 2010.

Michael Coleman – Sterne Agee Group

You may have touched on this earlier, but is this type of JV in emerging market something where you are likely to do additional JVs where you have the technology to partner with a local company?

Jacques Esculier

Well. I’m not running after JVs because there is certain complexity of putting 2 teams, 2 cultures, and aligning them on the same objectives and what not. First this one, we will hold 70% of it, so we will manage the joint venture, the operation, but the amplitude of the agreement and partnership that we are sealing through a JV is fairly broad, and I think it is justifying the complexity of the structure. It’s a long-term commitment. It’s really a partnership on something that is extremely ambitious, and we are following Fuwa on their ambition to not only to continue to grow in China, but also for Fuwa to obviously significantly increase their success on the export business so that’s why we looked into it. Just to have a multiyear sales program would not really be at the level of strategic intent and commitment that would be appropriate in this situation, so I think the joint venture is extremely justified at this point.

Operator

Our next question comes from [inaudible] with CRM.

Unidentified Analyst

Can you go back to Martin’s question about the suspension of share repurchase? Is it more based on the fact that you are going to have the cash charges from the severance? Because even in a stress scenario for next year, you remain cash flow positive. You don’t have any debt, and you have the committed credit lines, so just like you are thinking on, I agree prudence is key here, but it could be a real opportunity too to continue to prudently and not wholeheartedly and aggressively step up and buy shares but maybe continue to use your free cash flow.

Jacques Esculier

Again, very frankly believe me, there is a debate here, and there has been a debate around this decision which is important to us, but well it happens actually very frankly and you’re right. When you look at it the money we just preserved, I would not say we saved because we haven’t called that savings, it still would be such a good deal, but the money that we preserve by momentarily suspending the program is about equivalent to the cash we will need to support this other program. Now altogether the position that we are taking is to really understand ahead what’s going to happen in the financial markets, what’s going to happen in our business, what’s going to happen at WABCO. Because if we wouldn’t have a fine on the horizon, I think the decision would be definitely much easier to take, and we would rush to take advantage of this extremely attractive price for our share, but we have this uncertainty, and again we have to guarantee a very prudent and appropriate management of cash in these times, and that’s the reason why we have forced ourselves to make this decision because, believe me again, it was not an easy one to take. Ulrich, do you want to add anything?

Ulrich Michel

No. I think we said it between the last answer and this one.

Operator

At this time there are no more questions, then I would like to turn the conference back to Jacques Esculier.

Jacques Esculier

Again, thank you for attending this conference call, and I’m looking forward to discussing with you individually or during our next report which will take place early next year. Thanks.

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Source: WABCO Holdings Inc. Q3 2008 Earnings Call Transcript
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