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WABCO Holdings Inc. (NYSE:WBC)

Q4 2012 Earnings Call

February 15, 2013, 09:00 pm ET

Executives

Jason Campbell - Financial Reporting & IR Director

Jacques Esculier - Chairman & CEO

Uli Michel - CFO

Analysts

David Leiker - Baird

Robert Kosowsky - Sidoti

Brett Lindsay - KeyBanc Capital Markets

Alex Potter - Piper Jaffray

Tim Denoyer - Wolfe Trahan

Jerry Revich - Goldman Sachs

Ed Wheeler - Buckingham Research

Larry De Maria - William Blair

Operator

Good day, ladies and gentlemen, and welcome to WABCO Q4 2012 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder today's conference is being recorded.

I would now like to introduce your host for today’s conference call, Mr. Jason Campbell, Director of Investor Relations. You may begin.

Jason Campbell

Thank you, Kevin. Good morning, everyone and welcome to WABCO’s quarterly conference call. Today, we will present our fourth quarter and full year 2012 results. With us this morning is Jacques Esculier, our Chairman and CEO; and Uli Michel, our Chief Financial Officer.

As a reminder, this call, webcast and the presentation that we are using this morning are available on our website, wabco-auto.com, under the heading WABCO Q4 2012 Results. A replay of this call will be available through February 22nd.

Also, as shown on chart two of the presentation, certain forward-looking statements that we’ll make today are based on management’s good faith expectations and beliefs concerning future developments. As you know, actual results may differ materially from those expectations as a result of many factors, examples of which can be found in our company’s Form 10-K which was filed this morning with the SEC and our quarterly reports.

Lastly, some of our remarks contain 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.

I’ll now turn the call over to Jacques.

Jacques Esculier

Well, thank you Jason. Good morning, good afternoon everyone and Happy New Year to you all. Thanks for joining us today. But before we jump into reviewing our Q4 and full year 2012 numbers, let me kind of frame these results into a context within the dynamics of our markets.

I would say first that the global economy is still in what I would call the holding pattern with some ups and downs. We are waiting for the US and Europe to decisively rebuild their economical strength which will lead them to growth in their industrial activities. However, when we look at this point, I believe the political environment in Europe had not yet really made the progress that I think is necessary to us for any kind of economical rebalance. However, I feel optimistic that things are progressing in the right direction there and that should ultimately lead to an improvement in industrial activities in Europe.

Now when you look at 2012 market evolution, the truck demand in this part of the world has dropped around 10% versus the level of 2011. Now when you look at the US, the market has experienced a very strong and sudden turn during the first half of 2012, but unfortunately, this led to a collapse in major slowdown in the second half of 2012, which was around 16% lower in production versus H1. In the meantime, those emerging markets have actually all suffered in 2013, particularly in the second half and so altogether, the global market has seen an erosion of 10% in production rate year-over-year for commercial vehicles.

Now in our view, this year 2013 should basically be more of the same, except maybe in Brazil after a disastrous 35% drop in the number of trucks built in 2012, obviously driven by the pre-buying that happen in the later part of 2011. So now what does that means for, what’s going? Well, it means that we continue to do what we do best, continuing to flex our capacity up and down, continuing to adapt and to optimize our organization and also continuing to invest and develop differentiation through innovation, technology, globalization, service level to our customers while obviously staying well positioned and ready to jump up on all opportunities that markets will offer.

So now looking back on 2012 our performance and achievements reflect exactly the strategy that I just described. As I mentioned before, during that year the market lost significant momentum, but we were able to continuously adapt and flex our capacity and cost structure to secure the best results for our shareholders and we end up actually delivering a new record in performance operating margins.

Looking at slide three, starting with the topline. For the fourth quarter, our sales ended up close to $600 million, down almost 8% year-over-year, I think with exchange rates, and down 1% sequentially versus sales in Q3. Performance operating income reached $75 million down from $90.5 million a year ago which led to a operating margin of 12.6% leading to a performance earnings per share of $1.08 per share versus $1.21 last year, generating a healthy free cash flow of $49 million of which actually we returned $51 million back to shareholders with repurchase of about 800,000 shares.

Now looking at the full year 2012, we ended up with sales close to $2.5 billion which is close to 5% less of where it was in 2011. Our performance operating income at $335.6 million versus $375 million a year ago leading to again new record level of operating margin of 13.5%. Performance EPS was $4.46 per share versus the $4.73 we had reached a year before and we generated a very strong free cash flow of $274 million which led to a strong 94% conversion rate, so again even though we had to deal with a market that was very challenging across all regions of the globe, we ended up delivering strong result even actually breaking the new record in operating margin.

Going to page four, as we do every quarter, we are kind of framing the revenue evolution of WABCO versus the evolution of our markets in all channels and regions of the world. So again, our performance revenues went down 7.9% versus a year ago. Looking at the channels, the OE channel actually has seen a decrease of sales of 12% which is consistent with a very strong slow down in that quarter in all markets globally, and it’s also seasonally 1% down versus Q3, 2012.

We had a solid performance in aftermarket with a growth year-over-year of 9% breaking a new record in quarterly revenue and also seeing consistent growth across all regions of the world. We continue also to actually replace some of our competitor’s air disc brakes through a campaign launch by one of the key European OE manufacturers.

Sales to our JVs which represent mostly our relationship with Meritor WABCO in the US, a part distribution of our products in that part of the world went down 17% which accompanied actually that strong slow down we have seen in the second part of the year for the US market that obviously leads to destocking of past (inaudible).

Then looking at evolution of WABCO revenues per region versus the evolution of the rate of production starting with Europe both went down 15%, so again a strong slowdown in the European level of yields. It’s a further 3.5% down versus Q3 2012 which is kind of unusual because Q3 always marks a very low point seasonally in the year because that's vacation time for Europeans. So it’s extremely unusual that the fourth quarter be below the third quarter in production.

Now North America down 8% and actually when you look at H2 the second half of the year versus the first half of 16% down. We were able to still outperform by 3% supported by good strong outperformance at [Cummins].

South America was down 31% in production but you have to remember that Q4 2011 was very strong because that was the heart of the pre-buy effect at that time. So actually the level of production is at almost 20% of already working H1 of 2012 and we are able to nicely outperform due to two things. We are shedding some market share away from competitors and we also benefit obviously from the build up of inventory to support the growth in production.

Japan/Korea was 2% up continuing to see some growth there. However, as we shared with you in the last quarters of 2012 reporting, the mix is unfavorable, first because they built more medium duty truck than heavy trucks and second because they have significantly grown their exports both of them having a lower content per vehicle related to WABCO products and systems.

China was down 7% year-over-year in the fourth quarter but here which actually a better demo than we had anticipated at 270,000 trucks and that has to be put in perspective of the full year ending up at about 1,050,000 trucks. So we are a little bit of both the kind of average run rates of 2012 and we outperformed by 7% because we continue to gain some market share and content per vehicle.

In India, we are down a very surprisingly 26% year-over-year but also actually 26% versus the third quarter. So it was a sudden drop and its about 65,000 trucks builds where we are kind of more used to 85,000 to 90,000 before and obviously by this very strong slowdown, destocking and what not we underperformed the market, but overall for Q4, we continue to outperform the market that itself have rolled for the world actually [growing] by 12%.

Going through the same chart by summarizing the year 2012, we went down 4.8% in revenues at constant exchange rates. OE channel went down 9% following the overall slowdown of the markets globally. Active market was at 5% breaking another record revenue for the year with growth in our regions; sales to our JV again mostly Meritor WABCO was up, consistent with the evolution of the overall market.

Now when you look at by region, European market was down 9%, WABCO’s revenue was down 10%. North America was up 11% we are 13%, we have actually in the US benefited from continuous improvement in the penetration of our automated manual transmission technology as well as our OnGuard Collision Mitigation system. South America was down significantly at 34%, we're down 25%. That takes into account some gaining market share but also the fact that in the later part of the year, inventories have been round up to support a strong rebound of demand.

Japan and Korea were up 16%. We stayed flat because of an unfavorable mix, both export versus domestic and medium versus heavy duty truck. China was down a significant 18% for the full year and we were outperforming by 30% and then India overall was down 12% but again it was significant slowdown in the later part of the year and we're down 14%. So again for the full year, WABCO outperformed the market that overall declined 10% across all regions.

Then I am going to let Uli go through the financial results in more detail. Uli?

Uli Michel

Thanks, Jacques. Good morning everyone and thank you for joining us today. I will take you through our financial results for the fourth quarter and full year of 2012. Turning to chart six, I will walk you through the details from sales to earnings per share for the fourth quarter, looking at both our recorded and performance numbers.

Performance numbers are adjusted to remove operational streamlining and separation cost as well as discreet and other tax items. In addition, comparisons to 2011 had been adjusted for currency translation effect. Our sales in the quarter declined 7.9% in local currency last year and declined 1% sequentially from the third quarter whereas our order book has increased by 1% compared to September 2012.

The decrease in sales versus last year includes price reductions to customers of 0.9% which continues at very low levels for our business. Although, our gross profit declined 3.4%; our gross profit margin improved by a 139 basis points compared to last year. Excluding the negative impact from transaction of foreign exchange, gross profit margin even improved to 162 basis points. This is a remarkable achievement in an environment where our revenues declined 8% and yet another example of the effectiveness of our WABCO operating system.

Our productivity initiative keeps delivering at high levels and we made good progress on the quality of our product and the efficiency of our supply chain. Material productivity project delivered 5.4% which was partially offset by commodity inflation resulting in net materials productivity of 4.7% for the quarter and a reduction of material cost by $11 million.

Conversion cost productivity was 5.9% for the quarter, saving $5.3 million in costs. Inflation and labor and other factory costs added $4 million to our cost of sales. This resulted in a performance gross profit margin of 29.7% this quarter.

In operating expenses, we continue to invest in research and development activities and in globalization which led to an increase in spending of $3.4 million, labor and cost inflation added another $2 million.

Transaction of foreign exchange affected the margins unfavorably by $1.4 million versus Q4, 2011. So all together we generated operating income of $75 million or 12.6% of sales on the performance basis which is a drop of 83 basis points in March. Excluding all foreign exchange impact, this represents a 20% margin on the 8% sales decline.

Continuing down the income statement, you can see that this quarter equity income was $4.4 million slightly up from a year ago. The expense to minority shareholders amounted to $2.3 million this quarter compared to an expense of $3.3 million a year ago. We spent $9.6 million for separation and streamlining related activities in Q4, 2012. Excluding these items, our performance EBIT was $77.8 million or a margin of 13%.

Moving to taxes, you will see that our reported US GAAP tax expense for the quarter was $8.1 million. Excluding one-time tax items; our performance tax expense was $7.8 million. As you can see on the chart, we were ready to use our full year performance tax rate to 14.6% lower than our previous estimate of 16%. About half of this improvement is due to the US tax legislation as in January 2013 was (inaudible) effect to 2012, and the other half is due to the accelerated implementation of certain tax planning actions. The true-up drove the fourth quarter tax rate down to 10.1%. After excluding the non-performance items, net income attributable to the company was $69.6 million. With regard to earnings per share this translates to $1.08 on the performance basis versus $1.21 last year. In summary we are pleased with the operational performance and levels of profitability for the quarter.

Turning to chart seven, I will walk through the details from earnings per share for the full year of 2012. Our sales for the year declined 4.8% in local currencies versus last year driven by the declines in our markets that Jacques has just explained. The decrease in sales versus last year includes annual price reductions to customers of 0.6%, which represent a record low for our business. Although our gross profit declined just under 1%, our gross profit margin improved by 120 basis points compared to last year. Excluding transactional FX impacts it still improved 65 basis points. Again a remarkable achievement in an environment where sales dropped 5%, offered activity initiative kept delivering at high levels all year, and as mentioned before our product quality and logistical efficiency has improved significantly in 2012.

Material productivity project delivered 5.3% which was partially offset by commodity inflation resulting in net materials productivity of 4.4% for the year and a reduction of material costs by $43 million. Conversion productivity was 6.2% for the year saving $23.6 million in conversion costs. Inflation and labor and other factory costs added approximately $40 million to our cost of sales. This resulted in a performance for profit margin of 30.1% for 2012.

Excluding inflation, operating expenses decreased by $7 million year-over-year, despite continued investments in product development and globalization. This decrease was helped by significant reductions in incentive compensation expense and certain payroll tax accrual reversals. However these low levels of incentive compensation and payroll taxes are not sustainable. The return to normal levels of intended compensation and payroll taxes will lead to an increase in operating expenses of approximately $10 million next year. You’ll see these amounts highlighted again on our full year 2013 guidance [speech] that Jacques will take you through shortly.

For operating income you can see that we generated $335.6 million or 13.5% of sales on a performance basis, representing an improvement of 28 basis points in margins. This 13.5% achievement is a record full year results for WABCO. Continuing down the income statement you can see that equity income was $18.1 million which is up from $16.5 million a year ago driven by our North American joint venture Meritor WABCO. The expense to minority shareholders amounted to $10.5 million this year, compared to an expense of $11.2 million a year ago. This brought our performance EBIT to $343 million for the year representing a margin of 13.8%.

Moving to Texas, you will see that our reported US debt tax expense for the year was $23.6 million, the GAAP tax expense benefited from favorable discreet tax items, mainly associated with the foreign earnings repatriated at the end of 2011, as well as the findings of our 2011 tax return in Q3 of 2012.

Excluding these one-time tax items, our performance tax expense was $49.9 million, resulting in a full-year performance tax rate of 14.6%. After excluding the non-performance items, net income attributable to the company was $291.6 million. With regard to earnings per share, this translates to $4.46 on a performance basis versus $4.73 in 2011.

Now I would like to remind you that currently our tax rate benefit significantly from the use of fully reserve net operating losses in Europe. Should our business continue in 2013, as anticipated in our guidance, our outlook beyond 2013 remain positive and should tax loss not change, then we anticipate to release the valuation allowance on these net operating losses at the end of Q4 2013. This will generate a one-time discrete tax benefit in the magnitude of approximately $200 million.

Going forward, however, the usage of the deferred tax assets will increase our book tax expense. Assuming no changes in tax laws and (inaudible) distribution of our taxable income, we estimate that everything else being equal, our tax rate will increase by about five percentage points in 2014, when we will start amortizing these deferred tax assets.

The tax rate increase resulting from the utilization of these NOLs will have no impact on cash taxes paid. Based on currently protected income levels and existing tax laws, we estimate that we will not pay taxes in the jurisdiction concern before 2018.

Turning to chart eight, I will now take you through our cash flow for 2012. Working capital had a negative impact on our cash flow in demand of $23.5 million, driven by reductions in payables and increases in receivables partially offset by reductions in inventory. The increase in payables was due to the timing of payment runs.

Receivables were unfavorably impacted among other things by the late payment of one of our key customers in Europe, who did not make payment until the beginning of January. Inventory was reduced in line with low business activity, net cash used for the purchases of property, plant and equipment and computer software totals just over 100 million for 2012.

In local currencies this is estimated levels at last year and had continue to support the growing regions and new business we had won with increase investments. Our free cash flow result was 257.8 million or $274.3 million when excluding the streamlining and separation payments made throughout the year, resulting in a conversion rate of 94% on our performance net income attributable to the company of 291.6 million. This is a healthy conversion rate.

Under the share buyback plan that we implemented back in June of 2011, we finished 2012 repurchasing approximately 3.5 million shares at a cost of about $200 million, bringing the total shares repurchased since June 2011 to 7.1 million at a total cost of just under $380 million. Overall we are pleased that in these uncertain market conditions we continue to generate very strong free cash flow. For the time being, we will continue to return cash to our shareholders for buying back our stock. Under our current authorization we can repurchase another $420 million through the end of 2014.

I will now like to turn it back over to Jacques who will highlight the current market dynamics, Jacques.

Jacques Esculier

Thanks, Uli. So turning to page 9, as we do every quarter, we would like to give you a snapshot of the market dynamics at the end of 2012 and our current best estimate of where those markets would lead us in 2013. Starting with Europe, new registration of heavy trucks were down 10% year-over-year in Q4 overall at the end of 2012, we will see the production level down year-over-year by 9%, which sets the level of production in 2012 where it was back in 2003, 2004 which is about 30% down versus the peak, we had reached back in 2008.

Now looking at 2013, we believe that the market will stay flat to down 5% and the low end of this stanch meaning market staying flat versus 2012; this is an assumption that the rate of production which stays constant with what we have seen in Q4, 2012 to which we add about 10,000 trucks driven by the pre-buy that we predict to take place in the later part of our years.

North America as I said, we have a sudden reversal in trends at the beginning of the second half of the year, and actually Q4 was down 8% versus last year and still down sequentially versus Q3. Overall for the year, we still end up with a strong 11% improvement versus 2011 levels and we are still about 25% down versus the peak reached back in 2006.

Looking ahead on 2013, we see the market continuing to erode at a rate of 3% to 8% and again the low end of that range meaning down 3% would assume that the real production stabilizes where it was but in the last quarter of last year.

China, Q4 down strong 23% sequentially and down 7% year-over-year, but still reaching a good level of 270,000 trucks compared to an overall production level of 1,050,000 trucks for the year, so above the run rate of average of the year. On 2012, production for the full year was down 18% with an even stronger decline in heavy truck and we are back to the level we have seen in 2009 which is about 30% down the maximum level reached back in 2010. Looking ahead, best estimate we can give on this incredibly competitive market to forecast is flat to down 5% and again the low end which is flat, would assume that the production level stays where it has been in the second half of 2012.

Moving to India, production rate was down a significant 26% year-over-year and 21% versus Q3, so again we are 65,000 trucks which is a very low level and we haven't experienced this for meanwhile. 2012 overall was down 12%. Now looking ahead, we believe that there will be a strong demand recovery in the second part of the year to compensate for what we believe to still be a very low start of the year and overall we see actually the market flat to down 5% that's it.

And then moving to next phase continuing our trip around the world; in Japan, Korea, we are seeing a production in the fourth quarter being up 6% sequentially versus Q3 and up 2% year-over-year. Overall for the year, we are going to end up with a healthy growth of 16%, driven again mostly by medium sized truck and exports from Japan and when we look ahead we believe this market will kind of stabilize to maybe down you know 5% because it seems that exports to the region could actually take slowdown.

Brazil, Q4 ended up actually a very strong 8% up versus Q3 sequentially, so we see again a reverse of trend that has started to materialize, but still 31% below this fairly unusual Q4, 2011, that was obviously kind of influenced by the buyback. 2012 overall is down 34% and we see this year ending up with a strong 12% to 17% improvement in the production level.

Aftermarket, again weighted up Q4, 9% up versus last year; overall for the year at 5% up and we think we can continue to support a 5% overall growth in a market that is obviously still very kind of sluggish and eroded.

Trailer, Q4 was down 5% sequentially and down 12% versus Q4, and I remind you there is a very strong correlation between the world of trucks and the world of trailers. So overall for the year, trailer production was down 8% and now when we look ahead for 2013, we see the market flat down 5% again, kind of consistent with our overall prediction of the truck and bus. So overall, you know a lot of uncertainty and, you know, complication to predicting in the global market.

Turning to page 11; glancing through the three pillar of our strategy as we do every quarter. In the globalization, we have made some good wins in orders from truck manufacturers in Brazil and that represents six trailer makers covering 45% of the market. In WABCO India continue to push the ABS retrofit sales and we sold around 2,500 last quarter.

In the new technology we have actually started to sell our brake chambers to Daimler, North America, with production actually started in the later part of the year. We also saw a very strong sale to the Schneider fleet of 2,500 unit of this OnGuard collision mitigation system, just for the fun of it, so far we have sold 30,000 of the system, it’s a far leading world anchor technology in the market and altogether the fleet have driven about 8 billion kilometers which represents 40 round trips to Mars.

Execution wise, we won again a very strong suite of supplier awards from the key Chinese manufacturers. We also received for the fifth time in a row which is very unusual, actually it’s unique from Wabash a very strong award, platinum award in 2012 and really went through it and we continue to generate very healthy levels of productivity to our supply chain.

Now turning to page 12 and we are going to review our initial guidance for 2013. Before we go to the numbers, I would say that this year should be seen basically in the same framework as what 2012 was; it’s another year basically in the same direction with probably a fairly mediocre market at least as we see it today, but there should be again some deals set by our ability to outperform the market, to sustain high level of productivity and overall deliver a sound performance for our shareholders and obviously keeping up a very powerful potential to flex up if the market would ever come up, maximum favorably than what we assume at this point.

So that means that overall for the year we see sales going up 2% to 7% at equal exchange rates and if we look at an exchange rate of $1.35 per Euro, it would mean €2.6 billion to €2.75 billion. Performance operating margin between 12.3% to 13.3%, I’ll go through this in a little bit more in detail later and then that we drive an EPS performance of $4.03 to $4.08 per share with a continuous free cash flow conversion rate in the 80% to 90% rate.

Now on the right of the page, I want to kind of frame this 12.3% to 13.3% brackets in light of what we have achieved in 2012. So we started at 13.5% and actually you’ll see that everything being equal which stays, 2012 was in the condition of 2013, we would see an erosion of 0.6% of margin due to foreign exchange. Half of which is kind of driven by the usual euro to US type of movement; the US dollar now is that $1.35, it used to be at around $1.30 and as we have shared, we view this, that didn’t really affect the bottomline in terms of dollars, but it does affect the margin and that affects you know about 0.3% which is half of the 0.6%.

The other 0.3% is new to our world, is new to the world, actually its kind of a sudden drop of the Yen value versus the dollar and the Euro of about 20% in last three months and again that represents a $10 million impact both at the bottomline in dollars and at the margin level. The second one is, as Uli referred to in his presentation, there is an exceptional kind of 0.4% of margin related to lower incentive comp and certain payroll actually things.

And then moving ahead in 2013, we have seen a lower interest rate in discount of future obligations for pensions and that leads to an expense of $5 million per year, again it’s an accounting impact; it has no cash effect but still has to be considered in the P&L. So that would lead us down to 12.3% and now if you look at the lower end of our sales prediction, we are kind of counting on the 2% growth and as we head towards you, you know in that at 3% we would not see any kind of movement in the margin because we would see kind of a 0% incremental, decremental margin, so meaning that we should see that 12.3% at the low end of our sales range.

And then as we see hopefully sales, going up to the upper end of our range to the 7% then you see the margin grow accordingly. Now obviously, the key inputs are important to recognize. We have said that and (inaudible) accelerate these unfortunately unfavorably impacting our income; we assume an annual price erosion to come back to a bracket of 1% to 1.5%. It’s obviously higher than a 0.6%. We have seen in 2012 but it’s still fairly low compared to what WABCO has experienced historically.

Raw material inflation is lower obviously than what we have seen last year. We anticipate half a point to a percent of material costs. We assume productivity levels continuing to be in line with what the high level we have seen last year, tax rate of 15% and then a number of shares taking into account as we said the continuous buybacks that we have been authorized to and again its not in those numbers because of (inaudible) performance but we want to again highlight that for the reasons that we explained to you we may have this actually exceptional profit of tax in Europe of $200 million to be taken at the end of the year.

So at the end, we will continue to outperform the market and we are again more than ready to jump up to all opportunities that the market will offer beyond our assumption.

Turning to the last page, I would say that well we are continuing to basically seek and adapt to what I would call a capricious market, that again I would say is in a holding pattern waiting for an upturn in the economy particularly driven by the US and Europe.

Now looking ahead, 2013 continued to outperform the market. We continued to drive productivity to flex efficiently with the ups and downs of this kind of capricious market. We also continue to invest to drive the differentiation of our product systems and services which is really the pillar of the sustaining ability to grow and succeed in our business. And overall as I said, we are I think very well positioned to really capture any kind of upturn that we see in any markets across the world. So after this, this ends our presentation and I'll turn it to you for questions. Kevin?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Leiker with Baird.

David Leiker - Baird

I guess just two things I want to touch on. On the China side, we're hearing some talk that some of the sub-segments, the vocational truck markets doing a little bit better, the freight markets not up ticking, construction is not showing on the uptick? Is that consistent with what you are seeing?

Jacques Esculier

Yeah, actually the market, I would say is very confusing at this point. There is lot of elements that would actually favor or not favor a kind of gross in the market overall. Again, David, as usual, this is an incredibly complicated market to forecast. To tell you the truth, right now we see a flat to slight erosion. I would more than welcome obviously but I would not be completely surprise that we see some may be increase. So the best guess is what we share with you but I am not really kind of very strong on this guess and I don't think it would go further down below the 5% but it could be a little bit more favorable than what we anticipate.

David Leiker - Baird

Are you seeing some of those specific end markets do a little bit better here recently or is it pretty consistent everywhere?

Jacques Esculier

I don’t think we have the details that allow us to kind of drill into the sources of movements at this point, David. The only thing is obviously we have seen a strong upturn, Q3 versus Q4 even though Q3 was drastically low compared to the first two quarters. So at least we came back to that level of 270,000 trucks. We are again kind of at 270 it’s a little bit ahead of the run rate that we all talked about the 1,050,000 for the full year, so that would kind of indicated we continue like this may be we could be (inaudible) flattish market we are right now…

David Leiker - Baird

Okay, great and then the one other item here is on the North America side looks like you have got some nice attraction there growing faster than the market but when we look at your sale 11% percent North America, North America 16% of build what’s the timeline do you think for closing those gaps, closing that gap with your sales mix is closer to what the build mix is?

Jacques Esculier

In the US.

David Leiker - Baird

In North America you show your sales I am looking at slide nine, North America is 11% of your sales but it’s 16% of global production and getting those two closer aligned…

Jacques Esculier

Yeah I am sorry David I had not understood your question. So yes as you know we are putting a lot of focus right now at growing the region and that’s why we sent (inaudible) as the head of this business to kind of separate all the different forces we have and consolidate them and basically plant the WABCO flag in that region and we see already quite a bit of momentum as you have seen we (inaudible) really nicely outperform we want some good business at Navistar which is kind of very new to WABCO and Navistar now. We really keep kind of driving this AMT technology, this OnGuard technology. So I think that and I want to strategically really kind of increase the level of presence of WABCO and you said that we need to have an alignment between the share of the commercial vehicle market and the share of our revenues kind of closing that gap.

Operator

Our next question comes from Robert Kosowsky with Sidoti.

Robert Kosowsky - Sidoti

I was wondering if you can talk a little bit about, it looks like you underperformed in Europe by about 1%, some other factors that of the underperformance and if we do get a little better economy comment on the Europe maybe 2014 or so would you see an acceleration of market outgrowth?

Jacques Esculier

Yeah, couple of things I would list, one that’s some kind of a internal reshuffling of the phase, there were some players extremely ready pay AMT that was sold to Volvo for the US market, actually we are selling them out of Europe and before we are counting them into our European numbers now we have shifted them to the US numbers and that created the gap.

The second thing is that we have seen as we have explained to you earlier in the year, we have seen the introduction of this dual sourcing strategy at one of our key customer that has introduced a second source of braking system this year and that obviously also impact year the overall performance that customer that has basically kind of decided to outsource some of their key elements, and then there is obviously kind of all kinds of mix and (inaudible) but the two pillars is really that kind of shift of how we come for this AMT at Volvo and this loss of revenues because of this outsourcing that we had mentioned in Q2 or Q3.

Robert Kosowsky - Sidoti

And then continuing on the case, do you see any impact to content per vehicle once the Euro 6 comes online.

Jacques Esculier

No. We don't ourselves contribute or participate in that Euro 6 movement. It’s really kind of mostly focused on the engine and the exhaust system and we don't participate in these elements beyond obviously the compressor. So what we will take from the pre- buy this year but unfortunately we did not release the content of the vehicle at least as we see it today.

Robert Kosowsky - Sidoti

Okay, but that was more coming from to more expensive trucks so is that going to Euro at some of the more discretionary items you might have.

Jacques Esculier

I think that overall the you are talking about probably the options right that people select on their prices that there maybe a little bit less encouraged to select options if they have to pay 10,000 more. But I think the products and systems that we bring to the world of commercial vehicles usually have their financial kind of reason and support in terms of payback.

So you are talking about AMP, you are talking about all the kind of trucks compressor, everything that kind of sell through. Usually its pretty sound as a value and then the rest s safety and most of the safety equipment is driven by regulations so there is not much of a choice. I would say Robin I would not at this point take this as a measureable factor overall.

Robert Kosowsky - Sidoti

Then finally as regarding North America how do you see the adoption of disc brakes going and I know you mentioned some AMT adoption as well, and I was wondering if you could maybe give us some numbers or even just some color as to how you see that plan out.

Jacques Esculier

Well, we see really Volvo making some nice inroads on that AMT. I understand about 40% of their production right now seems to be equipped with AMT. I know that Daimler is working very hard with actually us to introduce AMT in the US as well. So I think the market is more and more convinced of the value of AMT overall. The disc brake is little bit less here. There are a lot of debates out there as you know, but it doesn't seem there is yet a regulation on the horizon that would just make it a definite switch from the world of drum brakes.

It’s just a matter of time. Again we said that time and time again, we continue to obviously highlight this with the authorities over there. We have a technology that should allow a truck to stop with a significantly shorter distance and for me it doesn't make sense that we continue like this forever but for whatever reason there is some business delay. Now one thing that is good though it seems that this is really kind of very strong at pushing the stability control regulation and we expect that to happen maybe in the next two years. And that's a good obviously addition to the content per vehicle.

Operator

Our next question comes from Brett Lindsay with KeyBanc Capital Markets.

Brett Lindsay - KeyBanc Capital Markets

Just wanted to circle back on Europe. You guys tightened the outlook range there, could you just talk about what you are seeing or hearing from customers that gave you confidence, and then relative to your prior expectation for flattish to down 10, how much of that is driven by greater confidence in the market versus higher expectation for pre-buy during the year?

Jacques Esculier

Well, from customer spread, I am telling you, it goes a little bit left and right. There are some customers who are [lying] with us, kind of forecasting at these points a further erosion in truck (inaudible). There are couple that are maybe slightly more optimistic, maybe even talking. I think there is one talking about a slight increase, but there is only one. The other one is more flattish type of forecast.

So that’s usual, because it's a very complicated thing to forecast at this level of accuracy. But when I review overall what the customers says, I don’t feel that our forecast is unreasonable. Now where we kind of seen maybe, some kind of positive inputs which led us to maybe be a little bit less negative or less negative on the evolution of things is that the level of orders has shown a little upturn lately in the last quarter of last year.

So the order book also is lower, first quarter, second quarter then the sales we have seen last year in that kind of 10ish% percentage type of thing. So when you look at the order book for Europe, versus the sales of 2012 to Q1, Q2, we are kind of 10ish% lower, but the overall order book for the year, the other order book goes as far as you want but obviously mostly for the year is actually up.

So we kind of see that, we positively will continue to see a weak market in the first half and then the second half should get stronger hopefully supported by the economy but as you said also driven by this pre-buy. Again the pre-buy is viewed from different customers in different ways. We kind of anticipate 10,000 trucks, some people will challenge that it could be a lot more. So people may challenge it’s probably not that important, but that’s the assumption that we took aboard and I am telling you I am more than ready to be proven wrong in the right direction.

Brett Lindsay - KeyBanc Capital Markets

So with the 10,000 trucks for pre-buy what type of base level production are you driving that off of in 2012. So as a rate of growth what’s the contribution?

Jacques Esculier

When you look at overall Western Europe, we are focusing something like 110,000 of trucks a quarter. So it would be 10% more of one quarter kind of thing.

Brett Lindsay - KeyBanc Capital Markets

Last question here, I know you guys don’t give quarterly guidance. But if you could just help us frame how the Euro builds quarterly. I understand that some of the BRIC economies are might be going to develop a little bit better than the developed markets in the front half and just how that impacts both the top line and margins as we progress for the year?

Jacques Esculier

Well I think we are going to have probably a little bit more of a challenging first half in certain regions expect in South America where we are going to see a sound growth, right. But you look in Europe, you look in North America overall, when you look at the number of trucks our assumption is kind of flat across the year. But the number of trucks will be up.

But when you look at the comparison versus last year between 2012, because we have seen a drastic drop in the second half, when you compared H1, 2013 to H1, 2012 you are going to find probably a larger gap then if you look at the H2, H2 maybe actually favorable but H1 make sure gap, the level of production though we are assuming overall for the global production levels as sluggish H1 to H2.

Brett Lindsay - KeyBanc Capital Markets

So should we infer that the two to four points or the two to seven point of total core growth, how much of that is related to your out growth potential within those markets, if you are looking for flattish production globally?

Jacques Esculier

No, I am sorry. I missed, I didn’t express properly. The quarterly production rate or the H1 production rate, H1, 2013 should be fairly consistent with H2, 2013. It’s not like we are seeing a ramp up in the production level of trucks, right next year.

So the production level should be kind of (inaudible) across the year. Now when you compare to 2012 which has been H1 that was stronger than the H2 actually we have lost H1 to H2 I think about 10.5%, 10% trucks, right, so 2012 was a decline in H2 versus H1. 2013 we kind of see flat in production levels meaning that the H1 will be more challenged in terms of year-over-year comparisons in revenues and compensate by a better H2.

Operator

Our next question comes from Alex Potter with Piper Jaffray.

Alex Potter - Piper Jaffray

I was wondering if you could comment a bit on the regional variation within Europe and whether you are seeing Northern and Western Europe starting to struggle a bit and whether or not that might have an impact on your mix from a margin standpoint?

Jacques Esculier

We still see Southern Europe very weak compared to Northern Europe, obviously there is no real change in trend at this point when you look at the 1000 countries, you know, the Italy, Spain, Portugal or Greece. And obviously, the strength still comes from the Northern part of Europe. Now when you look at Eastern Europe, Eastern Europe part of the European Union versus Western Europe and that is a little different you know, this year we see that the production in Western Europe went down about 9.4%, but in Eastern Europe it would have gone down which represents mostly Russia, it represents about 2.5% to 3% down, so Eastern Europe has been holding up better than Western Europe, Russia has been better, and again 2013 we think is going to still be the case. We kind of see Eastern Europe mostly flattish versus 2012 and we see Western Europe declining.

Alex Potter - Piper Jaffray

Okay, thanks. I was wondering also if you can comment a bit on CapEx and R&D; how do you plan to be spending money on those two items?

Jacques Esculier

Well, CapEx we basically continue we think to go in the same kind of past we are going to be in that $100 million plus investment. We are going to this year build a new factory in Eastern Europe. We have already purchased the land and we should open in the first quarter of 2014. We are also building a new factory in India, close to Delhi to support TATA Motors, plus the normal kind of activity to grow our business through new products globally, further globalization. Now when you look at OpEx, we continue to invest, as I told you we are investing about $10 million and inflation counts for another $10 million to $11 million and then as we really has gone through it with you when you look at ’12 to ’13 there is about a kind of $15-ish million at the OpEx level of one timers, but still there's room for a sound $10 million of continuous investment mostly in R&D.

Operator

Our next question comes from Tim Denoyer with Wolfe Trahan.

Tim Denoyer - Wolfe Trahan

A question on just the overall content growth outlook for 2013; it seems like your weighted average end markets are down a few percent and with sales expected to be up 2% to 7%. Is it fair to think about the content growth as sort of 4% or 5% at the low end to maybe 10% at the high end?

Jacques Esculier

No, I would say, Tim, that we count on an outperformance level overall, the way we have defined our performance in this 5%, 6%, region; we're not firing on all cylinders because the market doesn't allow us to fire on all cylinders, because those markets where we outperform more, namely the grids, are not yet and itself kind of really growing the way they should in our model, but we should still be able to reach 5% to 6% and that’s basically going across the range. So if we do say 2% to 7%, we would kind of mirror that with again, a bracket that would kind of characterize the market evolution itself.

Tim Denoyer - Wolfe Trahan

Okay, great. And how about within another sort of aspect of this, with channel destocking, it seems like there has been a decent amount of destocking over the past few quarters and you mentioned Brazil started to restock a little bit. Can you talk about your expectation within the guidance for channel restocking or like thereof in 2013 and specifically with China, what are you seeing there and what that might mean for the Chinese production outlook?

Jacques Esculier

No, I think right now destocking from the customer standpoint, I don't think there is really much movement. I think there is restocking of our parts to support an increased production level. Now to be fair I think the restocking in South America has been really building up already fairly strongly in the last couple of quarters, because right now we are that’s 50,000 trucks per quarter level and we see a mixture at about 200, so we should be close to the runway. I don’t think there is really any destocking or restocking in China except if those guys finally increase the production rates, so I don’t see really a significant impact of those things at this point. Now one thing that I wanted to tell you, the low end of our, just to kind of put some flavor to our guidance, the low end of our guidance would assume that the production level across 2013 is reflective of what we have seen in Q4 2012, that’s the low end. So you take 2012 fourth quarter and you project that run rate to the entire 2013 year and that gives you the low end of our forecast.

Uli Michel

And the high end is the cover.

Jacques Esculier

Yeah the high end would just be kind of an incremental increase of production from that base.

Tim Denoyer - Wolfe Trahan

Okay, great thank you very much. If I could just sneak in one more, quick one, on the price then, I am just wondering why you are expecting the one to one and a 0.5% in 2013 whereas the last year or two you have had a much better performance in that?

Jacques Esculier

That’s a challenge you have when you get an exceptional level of performance, but we told you that it was hardly sustainable. I think 0.6 unfortunately maybe an exceptional EBIT of an operation that is the crossing of all kinds of different things converging this year to some (inaudible) delivery that is again kind of exceptional and we remember in that we used to be in the 2.5% prior 2009 and that was really the pace of the industry at the time because of everything happened since then obviously we have been able to contain that a lot down and also working harder basically to mitigate that pressure. I would anticipate that at this point looking ahead that 1 and 1.5 is still a very challenging level to maintain but probably more reasonable and adequate forecast for us at this point.

Operator

Our next question comes from Jerry Revich from Goldman Sachs.

Jerry Revich - Goldman Sachs

I am wondering if you could talk about which region do you expect to be the biggest drivers to our market outgrowth this year and how big of a contribution now you are expecting from the vacuum pump business, how is that ramp going on ‘13 versus ‘12?

Jacques Esculier

Well, first region wise, there is nothing really drastically different from the kind of model that we have been kind of driving through in the last year’s meeting that, we expect always more outperformance coming from emerging markets from the China, India, Brazil but we also expect probably some continuous good news from the US. As I said before, we are putting a lot of efforts into growing our share and presence in that market…

Uli Michel

And cost should also help.

Jacques Esculier

And cost should also help. Actually, we are cranking up this production to support GM and Chrysler.

Uli Michel

Chrysler in the US.

Jacques Esculier

And we see also an increased penetration of our vacuum pumps in China. So overall, I'll tell you I was disappointed in 2012 because obviously we haven't seen the volumes coming from those guys as we were supposed to, but we still have very strong contracts and very significant share of that market and at the end of the day, we kind of feel like we should see finally some good revenues, healthy revenues coming from that, that would help again as you know outperformance.

Jerry Revich - Goldman Sachs

And just the extended production ramp, can you just help us get a sense you've obviously provided very clear visibility on the multi-year market share targets based on contracts and handed vacuum pumps and I am just wondering how much of that comes in 2013 versus following years?

Jacques Esculier

You want…

Uli Michel

I don't know.

Jacques Esculier

I can tell you that frankly I don't have these numbers, this latest kind of forecast of costs; I know its going up versus late this year. This year it went down actually. I think we are down by 5% or 6% in vacuum pumps and next year it should be I think if I remember about 13% up but again this year it was disappointing hopefully these kind of 13% up for next year will mature that now, where its coming from, what customer, what region, I'm sorry I don't have the data with me.

Jerry Revich - Goldman Sachs

And lastly, can you talk about what's driving inflation in your raw materials guidance and relatively benign inflation environment and how back end loaded is that inflation forecast?

Uli Michel

It’s mostly steel that's driving the inflation and we see a lot of pressure, especially in India and also increasingly in China by our suppliers to part on energy inflation as part of the raw material prices. And you know we have a time lag in negotiating steel between half the year sometimes its annual negotiation once a year, so we carry this year’s prices into the first half of next year.

Operator

Our next question comes from Ed Wheeler with Buckingham Research.

Ed Wheeler - Buckingham Research

I would like to circle back on the production that you talked about in terms of first half, second half because I guess I'm feeling I'm missing something. It looks pretty clear the North American guys are going to be low beginning and much stronger going through the year. my sense is the European OEMs are still kind of producing under the market of correct inventories so it just feels like your customers are going to be making more trucks in the second half, I mean maybe there is some other regional detail I don't have and I would like to get it to square up that first half, second half production comment?

Uli Michel

But I think that's in a nutshell what Jacques described before was the scenario in the low end of our guidance range. So that means if you want to be a bit conservative do you say the markets to only recover very mildly or not and on the higher end of our guidance you could assume that there are higher production levels mostly in the second half of the year. That should close together --- from Jacques and what you might have heard from our customers.

Ed Wheeler - Buckingham Research

And I guess one other question, in terms of just the after market performance was awfully good. I am wondering, are you seeing the same better than 5% after market activity as you look at the first few weeks and months of 2013?

Jacques Esculier

Actually, our current estimate (inaudible). As you might know, the after market is actually fairly strong. I mean, I am looking at relative to what we have seen back in 2012. So I feel kind of good about this 5%. I don't think we are going to much higher than that this year. But you know, the trade in after market is slight increase lately that would at least indicate that there is a good level of utilization of the fleet out there and as I said, would be an indicator. We don't say we don’t think the market will go any further down. That’s why we kind of said the low end of our kind of guidance in the first half of it would be more kind of flat at this level where we are, we had experienced in Q4 but again as we said, potential upside in the second half.

Ed Wheeler - Buckingham Research

I guess I am trying to interpret. I think you (inaudible) after market activity would suggest at least for this second that the low end is maybe not the most likely forecast but it's possible. But I am trying to sort of bracket the low end forecast with what's happening in the after market?

Jacques Esculier

I think that the first half, particularly the first quarter, Ted, I think we would not expect much of an improvement versus what we are seeing I think what we told you is its probably towards the second half of the year that we could expect some potential upsides from our key markets, but when you look what our customers are telling us as I told you the order book for Q1 is kind of 10ish percent down I mean don’t take this as concrete because it's not end of the quarter yet but I think it indicates that there is a slowdown year-over-year, remember it’s not quarter-over-quarter.

So at this point, we don’t expect anywhere a major kind of upturn in any market but there are a lot of ingredients whether from the economy or from this pre-buy in Europe that could kind of lead us to believe that the second half may be better than this current level of production which again would kind of drag you to the upper end of our guidance.

Ed Wheeler - Buckingham Research

And just one other when you brought up the pre-buy, you mentioned the order book year-to-year is slightly up I would assume there is no pre-buy orders in the order book yet is that a fair assumption?

Uli Michel

We don't.

Jacques Esculier

I mean (inaudible) question to us because I think our customers, some customers are again expecting that there would be a pre-buy some customers are right now sharing with you guys results that they don’t expect that much that significant of a pre-buy I think each of them has their own kind of approach to kind of drive this through the order books to their supplies.

Ed Wheeler - Buckingham Research

I wouldn’t expect it to be in the order book today, right?

Uli Michel

In general, we should say although we do get 12 months rolling forecast in some of our OE placed 12 months forward orders with us. The reliability beyond the three month horizon is fairly questionable. They keep switching orders, so I don't think they had pre-buys in the order book at the moment.

Operator

Our next question comes from Larry De Maria with William Blair.

Larry De Maria - William Blair

Few questions you mentioned you have two new factories and that works, are those most that support incremental growth or will you be shifting some of your higher cost production to those maybe lower cost factories which could be better for you overtime?

Jacques Esculier

The Eastern Europe is both, but Eastern Europe production center is obviously driving also support in growth that we see, they are all supporting from that part of the world. This additional factory in India is also kind of helping growth, but the reason the main to be is to be closed to TATA motors factory for operational reason as well as, as know in India there is a complication that if you cross some regional borders you have to pay taxes.

So at a certain level if becomes efficient to position a factory next to your customers and that’s obviously a major center of revenue for us. So we will start putting some manufacturing there as well, but again overall India is right now struggling, but it is not in the long term logic of that region. I think we can very secure a forecast of long term growth and continuous growth in India and continue to increase capacity is probably in line with reasonable approach there.

Larry De Maria - William Blair

Okay, thanks and then just two more. Can you just update us on your thoughts about the age of the fleet in Europe and whether there is actually pent up demands to buy trucks or if it really needs an economic, really strong economic recovery to really move the needle in Europe absent obviously the pre-buy noise. That will be number one and second is, you talked about obviously gaining some share in China and ADS made because of Brazil, how do we think about the out performance over the next year or two down in both of those markets sort of still be solid double digit out performance or is it moderator just any color on that would be very helpful. Thanks.

Jacques Esculier

Yeah, we don't really give any numbers of our performance what we said is probably double digit in those emerging markets, and this is our objective obviously depending on the movements of the markets themselves, because any kind of shrinkage in the demand will lead to rationalization of inventories and all this that we have seen. But I think if you look at our track records and in light of the evolution of markets, you will see that we continue to have a pretty healthy out performance over there, which is obviously a lot higher than what we see historically as well in more mature markets particularly in Europe.

Now in terms of H fleet we kind of see that there is about six years average right now. We would anticipate that there is when we talk to fleets, they have a hesitation to invest at this point. There is a political environment that is not incredibly favorable right now to investments and we probably would postpone the investments like we have seen in the US.

So I think there is a pent up demand that is kind of building up right now for renewal of all the trucks and that's obviously the release of that demand that probably would give us some upturn in case the mood would be a little bit more favorable and more optimistic in the coming months and quarters.

Larry De Maria - William Blair

Is there a number when you are talking to those carriers at six years average that they feel like they can go to seven or eight in that really downturn or is six as high as they want to go and they are obviously just hesitant to take that number down or what's the range on that number.

Jacques Esculier

No, we should qualify a little bit. This is the average age for the European fleet. If you look at it country by country US countries where the average age is eight or nine years and its always been that old and its not under developed countries, its just the way they use their truck and where they might have long for example Sweden with a long haul lock applications we have a high age fleet.

So you cannot look at this as a uniform European market, right. But in general the age is higher. Now again if you look at it, for example, on the southern European fleet, they might have a fairly old age, but if they do not have transportation need they will still keep driving these old trucks and the inflation rate will be lower than the level of purchases five, six years back.

Uli Michel

I think if you look at what happened in the US, obviously those trucks, I mean we are talking about very young trucks, a truck of six years of age is incredibly young. A normal truck in Europe can live 20 plus years. Now it goes with different phases, so it’s not like an eight years or 10 years a truck must be changed. I think it really is like we have seen in the US depending on the overall environmental and what is even more important the used truck market, because remember that when a fleet changes a truck they have to sell their used truck and there are some privileged channels, one of them being obviously eastern Europe, the other one being Middle East, Africa and if those channels are struggling right now, which is again by the way the Middle East, you may see kind of a slowdown.

Like same thing we have seen in the later years in the US. So it's a complicated kind of question mark but my feeling is, if the economy is not favoring a renewal of the fleet, fleets can hold down to their current truck and as we said, by the way, if the trucks are not used to their full potential, they are aging in years but they are not aging in kilometers.

Larry De Maria - William Blair

Thank you very much. I appreciate that answer. So I guess it is safe to assume that the used market is not entirely [cooperative] right now given what's going on. But if that turns, that’s another (inaudible) fact that can help you guys. But thanks very much and good luck to share. Shanks for doing a long call.

Operator

Our next question comes from Tim Denoyer.

Tim Denoyer - Wolfe Trahan

I wanted to focus on the Brazil truck market, if you can for just a second; Brazil trailers in particular. Can you just [asses] the size of the Brazil trailer market and what you think within the ABS regulations. I believe the ABS regulations is for 40% of the trucks this year. Is it the same for trailers?

Uli Michel

I am looking at my sheet as you speak. But we would see the Brazilian trailer market, I have here for the full-year 50,000 to 60,000 trailers magnitude.

Jacques Esculier

We have about 200,000 trucks that would be about a (inaudible).

Uli Michel

So 57, 54 and growing I think in the 8% to 10% next year, the trailer market.

Tim Denoyer - Wolfe Trahan

Okay, in terms of the ABS, content growth, I think you said in the release that you have a roughly 45% share of that. Is that going to go across the entire Brazil trailer production or is it just a fraction?

Uli Michel

That’s a good question I don’t know whether there…

Tim Denoyer - Wolfe Trahan

They will be ultimately.

Uli Michel

Tim I don’t know if they cover all trailer in the first step or whether it’s a phased approach. We can’t cover explain at the top of our head, whether the legislation covers the full park in year one or whether it’s a phased introduction by type of vehicle or by type of units.

Jacques Esculier

Sorry for that we don’t have the answer.

Tim Denoyer - Wolfe Trahan

No problem I think it’s fairly too attractive and probably the same. But thanks very much.

Operator

I am not showing any further questions at this time. I would like to turn the conference back over to our host for closing remarks.

Jacques Esculier

Okay, well thank you guys for attending and I will talk to you in three months for the first quarter results. Thank you.

Operator

Ladies and gentlemen, this does concludes’ today’s presentation you may now disconnect and have a wonderful day.

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