TRW Automotive Holdings Corp., Q4 2008 Earnings Call Transcript

Executives

Mark Oswald - Director IR

John Plant - President and CEO

Joe Cantie - EVP and CFO

Analysts

Christopher Ceraso - Credit Suisse

Rahul Chadha - JP Morgan Chase

Rod Lache - Deutsche Bank

Patrick Archambault - Goldman Sachs

Douglas Karson - Banc of America Securities

TRW Automotive Holdings Corp. (TRW) Q4 2008 Earnings Call February 20, 2009 8:30 AM ET

Operator

Good morning and welcome to the TRW Conference Call. All lines have been placed on listen-only mode. As a reminder, this conference call is being recorded. Presentation material for today's call was posted to the company's website this morning at trw.com/results. Please download the material now if you have not already done so. After the speakers' remarks there will be a question and answer period. Due to today's limitation on time, the company requests that participants limit follow-up questions to one per caller. (Operator Instructions)

I would now like to introduce your host for today's conference call, Mark Oswald, Director of Investor Relations. Sir, you may begin.

Mark Oswald

Thank you, Mandy. I would like to welcome everyone to our fourth quarter and full year 2008 financial results conference call.

Joining me today as usual are John Plant, our President and Chief Executive Officer, and Joe Cantie, our Chief Financial Officer. On today's call, John will provide an overview of the current automotive environment, its impact on TRW and what's being done to mitigate the challenges in front of us.

John will also provide a brief summary of the financial results and discuss other related business matters. After John's comment, Joe will provide an expanded review of our financial information. And then we will open the call to your questions.

There are a few items I would like to cover before getting started. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call.

Please refer to slide 3 of the presentation for our complete Safe Harbor statement. The Risk Factors section of our 2007 Form 10-K and our second quarter and third quarter 2008 Form 10-Q contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2007 10-K and 2008 quarterly SEC filings by visiting the Investors section on our website at trw.com or through the SEC's website at sec.gov.

On a related matter, we expect to file our 2008 Form 10-K within the next day or so. Once filed, the 10-K can also be accessed through either websites. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.

Reconciliations to these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials which are posted at the Investor Information section on our website at trw.com.

And finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call.

This concludes my comments. I will now turn the call over to John Plant.

John Plant

Thank you, Mark and good morning to everyone. In the December pre-earnings announcements, we indicated that the second half of 2008 was an extremely stressed period for the automotive industry.

In addition to the sudden and dramatic drop in vehicle production levels in all regions, most notably in North America and Western Europe. The fallout surrounding the financial markets continues to loom over the industry.

Consumers' ability to obtain financing to purchase new cars is limited. Certain customers have effectively run through or exceeded their financing ability. Certain suppliers have very stressed balance sheets.

The North American industry did receive some good news in December when the US Government agreed to provide a $17.4 billion temporary bridge loan to General Motors and Chrysler.

However, based upon submissions to the US Treasury this week, more money is needed. Governments in many other countries have or are in the process of providing support to the industry in the form of either direct loans, scrappage schemes, tax reductions or other plans aimed at stimulating car sales and the economy.

This good news will take sometime to translate into vehicle production, and is being overshadowed by the wide economic malaise in the fourth quarter and continuing into 2009. As you can see from TRW's results posted this morning, the challenges facing the global economy and the automotive industry impacted TRW's fourth quarter performance.

While we took quick and decisive steps to reduce costs, the magnitude of the impact relating to the sales reduction, well mitigated, did result in a modest operating loss despite deflecting of all plants divisional and corporate overhead.

Since our last teleconference call three months ago, the environment has deteriorated faster than our original forecasts. New vehicle sales have fallen to levels not seen in decades. Every manufacturer in every part of the world has been impacted by the steep sales decline. Certain customers are in a very fragile condition and require government support to survive. In order to align supply with the significantly lower demand, both the actual un-forecasted levels of vehicle production in the global automotive markets have been reduced beyond previously forecasted levels. Production declines in Western Europe and the North America have changed rapidly in the fourth quarter, especially the speed and short notice of production cuts. Every forecast was superseded by further cuts and production reductions.

Inventory levels remain overstocked at year-end, primarily cars which is contributing to lower production levels in the first half of 2009. And finally concerns have increased over the health of an already fragile supply base as certain suppliers struggle to maintain an adequate level of liquidity and working capital during this prolonged period of low production.

As we stated during our last conference call, we have and will continue to take aggressive actions that you would expect in this environment to mitigate these events. Significant restructuring actions were implemented in the fourth quarter with more expected in the first quarter of 2009. In addition, significant non-cash impairment expenses like the write-off of goodwill were taken in the fourth quarter. I'll discuss those in more detail in just a minute.

Despite the difficult environment and the fourth quarter losses, most of which were non-cash, we ended the year with positive cash flow and a reduced level of net debt. Of course, we're quite pleased about that.

In an environment where cash is king, I'm pleased with these accomplishments. Having this foundation to build from the service level as we navigate through 2009, in addition to the cash flow and capital structure accomplishments just mentioned, I want to point out that we made significant progress on advancing our strategic priorities during the last year.

Quality improves again year-over-year and remains world class. We continue to strengthen our leading product and customer diversification. We introduced several new products highlighting innovative technology. And as I just mentioned, the cost base has been reduced significantly. Before discussing specifics on advancing our priorities and the challenges facing the industry, let me provide you with a brief financial overview of where we finished the quarter and 2008.

Fourth quarter sales of $2.8 billion were down 27.6% compared with the prior year period. Adjusting for currency, our reduction in sales is less than the decline in early production schedules, and this demonstrates that safety products are still increasing their penetration in vehicles.

Excluding special items which included restructuring charges on impairments of intangible and fixed assets, the company reported a fourth quarter loss of $74 million, or $0.73 per diluted share. The results primarily reflect a decline in core sales attributed to the low vehicle production levels and the negative effects of currency movements during the quarter.

In the past, we have excluded restructuring charges and fixed asset impairments in our results, given the extraordinary environment and the magnitude of mostly non-cash charges, we thought it appropriate to call out these special items.

The results are clearly disappointing and reflects the extraordinary challenges faced during the quarter and from the broader end global economy. TRW remains determined to continue with the business strategies that will improve the long-term competitiveness of the company.

In the fourth quarter, compared to the prior year, vehicle production was down significantly in North America and Western Europe. In North America, overall vehicle production was down some 26% with the Detroit Three down 28%.

One other important production statistic was that light truck production declined by some 38%, while cars declined 10%. As you can imagine, the magnitude of the vehicle production decline and the mix shift has had a significant impact on TRW.

Europe sales and production have dropped faster and deeper than our original expectation. In Western Europe, production was down a staggering 29% in the quarter compared to the same period a year ago.

As mentioned on our third quarter call, Europe continues to experience a shift to sales from large and mid-sized passenger cars to smaller cars. Also during the quarter, sharp production declines were experienced in the growth markets of the world such as China, which was down 13%, India down 11%, Russia 11% and South America down over 27%.

Clearly, production in the fourth quarter was the worst the industry has experienced for some time. Unfortunately, we see this continuing and even worsening during the first quarter of 2009.

With respect to the full year results, we finished the year with a record sales of $15 billion, an increase of 2% compared to the prior year. The increase is primarily driven by the positive effects of foreign currency movements during the first nine months of the year and increased sales of our lower margin module business.

Excluding these factors, underlying manufactured sales volume was reduced by some $1.2 billion from 2007. Excluding special items, full year net earnings were $1.50 per share, compared to $2.68 per share in the prior year. Full year North American production at 12.6 million units was the lowest level of production in 16 years. The Detroit Three experienced a decline in excess of 21% compared to 2007.

Production fared slightly better in Western Europe, thanks to the relatively strong start in the first half of the year. In the second half, significant production declines resulted in full year production being down some 9%.

Turning now to the progress we made on advancing our strategic priorities. I would spend a lot of time talking about them, but I think it's important to point out these priorities as they help us navigate through the challenging times.

First of all, providing world-class quality is critical in this environment. Improving quality and reduced large expenses is an important factor that impacts the bottom line. Even as we increased the level of restructuring actions during the year, including facility closures, significant reductions to our global staff, we continue to make year-over-year improvement in our quality. TRW's quality is world-class.

During the year or during the quarter, in fact, we had a high level of vehicle, also products launches on new vehicles, which continued to strengthen the leading product and customer diversification. A few examples include the Volvo XC60 in Europe, the Audi A4 in Asia Pacific, and the Ford Fusion enhancements in North America.

The diversification in product launches throughout the year enables to increase our sales mix to markets outside of Europe and North America. The Ford Fusion, equipped with electronically power-steering also demonstrates our innovative technology and our commitment to offering customers the products they demand.

This was the first Ford platform in North America to use this technology, which offers fuel savings of up to 3.5% compared with the standard hydraulic power steering, as well as increased functionality when compared with advanced brake and driver assist systems.

Our innovative technologies are being recognized around the world. During the fourth quarter, Italy's Automotive Technical Association presented TRW the best Automotive Innovation Award for 2008. And this saw the integration of our intelligence safety systems which combined Lane Departure Warning, Electrically Powered Steering and Electronic Stability Control. These technologies were launched on the Lancia Delta in June. We are proud to have received this award and realize technology is critical to our product leadership and long-term growth.

With regard to the cost structure, this is one area that has received considerable attention as a result of the significant production declines. Building on the actions initiated earlier in the year, detailed plans were developed to further restructure the business to ensure TRW’s competitiveness. Beginning with facility closures, we announced plans to close our Warrenton casting center in Georgia. Closure is expected to take place by the end of the first quarter in 2009.

We also announced plans to close our break actuation engineering center in Spain by the end of the first quarter of 2009. Excluding the facilities, plant for closure during Q1, we consolidated or closed four manufacturing and engineering centers during 2008. In addition, to facility closures, we also expanded the number of headcount reduction programs across several locations in both North America and Europe.

In total, by December 31st, we had reduced our global workforce by approximately 10,000 employees or 13%. Our salaried positions were reduced by some 13.5%, and further reductions are being made in the first quarter of 2009. In addition to employee’s separations, our sites in Europe are taking advantage of government assistance programs in a significant manner that allow us to implement short week working programs whereby we partially reduced our labor cost and avoid cost determinations.

At this point, we have now burned through our temporary layer of employment and have used short time working where possible in addition to the permanent layoffs. Other personnel actions included freezing salaries and hiring of new employees as well as several benefit program changes including the suspension of the company's 401-K match.

Clearly these are extraordinary actions, and they have been taken during an unprecedented period. We continue to look at other potential programs that may be necessary, as we advance our work on addressing the cost base and to better understand our customers' future vehicle plans.

As I have mentioned in previous calls, we continue to focus on six sigma and business excellence programs to insure that efficiency is part of our day-to-day operations and cost management is ingrained in the actions of all our employees. In addition to the extraordinary actions we are also focused on the basics. We take monthly reviews focused on reducing working capital. We have processes and procedures in place to reduce or eliminate discretionary spending. And we have extremely tight controls over capital spending and indeed, all capital projects now require executive level approval.

The improvements we have made with our cost structure in 2008 will help us partially mitigate the difficult industry conditions that has continued into 2009. In 2009, unfortunately the environment has not improved to the start of the year. Actual and forecasted production volumes are worst than the dismal levels the industry experienced in the fourth quarter of 2008.

In North America, we expect first quarter production to be 1.8 million units, a decline of some 50% compared to the prior year. Within this estimate the Detroit Three production is expected to be about 1 million units, a 52% reduction compared to 2007. Truck production is expected to decline with a 51% level.

For the full-year, our best estimate at this time is for North American production to be about 9.3 million units, a decline of some 27% compared to 2008. You have to go back to 1982 to find a period where production was less than 10 million units. And if this production was population adjusted, then this industry recession is clearly far worse than that.

As you are aware, full year forecast have been difficult to predict. We plan to monitor the production plans of our customers and make necessary adjustments to our operations sooner rather than later. Vehicle production in Europe is also forecasted to significantly decline in 2009 compared with 2008 especially in Western Europe.

During the first quarter, vehicle production in Western Europe is forecasted to decline to 2.5 million units or some 40% compared to the same period a year ago. Total European production is forecasted to be at 3.6 million units.

For the full year, our forecast for production is 16.5 million units for the total of Europe and within these estimates Western European production is at 11.4 million units, a decline of about 21% compared to the prior year.

This forecast assumes low level production at the start of the year and a moderate improvement in the later half of the year. Beyond North America and Western Europe, sales and production levels in the high growth countries of the world such as Russia, China, India and South America have also slowed. In fact every major region within the automotive industry is forecasted to have a lower vehicle production in 2009 compared to 2008.

Reflecting on the full production outlook I just described, the impact on TRW for 2009 will only be partially mitigated by our restructuring and other efforts to raise our cost base. The decreases in vehicle production in all regions and our uncertainties surrounding the global financial markets are reflected in our 2009 planning assumptions.

Based on the forecasted production levels, we expect our sales to be between approximately $10.9 billion to $11.3 billion. Sales in the first quarter are expected to be approximately $2.4 billion or 40% lower than the previous year.

Our management will remain focused on improving working capital, protecting cash flow and further reducing our cost base. As you can see, we are not providing earnings guidance for 2009 at this point. There remains too much uncertainty surrounding future forecasts, financial markets and other variables.

In summary, I wish I had a better near-term outlook to discuss with you today. As I said at the beginning of my comments, it is truly an extraordinary period in the world and the automotive industry. It is important for our current and perspective stakeholders to recognize that TRW is a strong global franchise that is well diversified with strong technology and leading market positions. We benefit from having adequate liquidity and are highly focused on our cash preservation during this time period.

We will prevail to the short-term challenges and remain a leading supplier to the world's car manufacturers. And with that, I will now hand across to Joe to discuss our financial results in further detail.

Joe Cantie

Thank you John and good morning everyone. As John stated, our results for the quarter and full-year reflect the broad challenges facing the global economy and the automotive industry.

Several factors contributed to the weak quarter, the most significant of course, was the steep decline in the global production numbers. I wish I could say that this year will be better unfortunately 2009 production is forecasted to be lower in the major markets compared with the 2008 levels.

Fortunately for TRW, we have a solid capital structure with good liquidity and no material near term debt maturity which places us in a good position to weather this downturn. I will expand on our capital structure and planning assumptions for 2009 in a few minutes.

First let me review with you in more detail our fourth quarter and full year financials. Our fourth quarter results contain a number of one-off non-cash expenses. These charges primarily relate to the unwinding of intangible assets that were established at the time of the Blackstone acquisition in 2003. It's important for you to understand that these are non-cash and do not affect our capital structure or operations of the company in any way.

For the fourth quarter, we reported sales of $2.8 billion, a decrease of about $1.1 billion or 28% when compared to the same period a year ago. The sales decline resulted directly from the lower production volumes discussed earlier. In addition, unlike every quarter for the last few years, currency translations also reduced sales by $276 million. The euro to dollar exchange rate averaged 1.32 this year about 9% lower than last year. The negative sales factors were only partially offset by an increase in module sales of about $116 million compared to last year. On a GAAP basis, operating income in the quarter was a loss of $892 million, which compares to income of $149 million in 2007. As I mentioned a few minutes ago, the company recorded significant asset impairments and separately restructuring charges for the quarter.

In the terms of the asset impairments, the accounting standards require the company to periodically perform a detailed analysis to determine if the carrying value, or certain long-lived assets is appropriate.

Our fourth quarter analysis concluded that as a result of the negative economic and automotive industry conditions, demand for the company's products has declined substantially, which require the impairment of certain of the company's long-lived assets.

The assets impaired were goodwill, customer relationships, and certain fixed assets totaling $854 million. Separate from the impairments, restructuring charges primarily related to employee separations, totaled $14 million.

Excluding these special items, operating income in the quarter was a loss of $24 million which compares to income excluding restructuring charges of $168 million in 2007. There were a number of factors that contributed to this decline. By far, the most significant driver was the reduction in sales.

Net currency losses were also negative in the quarter. The positive effects of higher module sales as well as the benefits of cost reductions and restructuring programs could not offset profits lost on the declining core revenues.

However, if you look at a typical contribution margin for us, say 25% plus, our operating income was better than you would expect as a result of the downturn management actions discussed by John earlier.

Below operating income, net interest expense was $48 million which is below last year's level of $56 million due to the lower interest rate environment. Tax expense for the fourth quarter was zero, which compares to a $39 million expense in 2007. The 2008 period included a one-off net tax expense of $4 million, while 2007 included a benefit of $14 million, also pertaining to one-off tax matter.

At the bottom line, we posted a GAAP net loss of $9.35 per share, compared with earnings of $0.55 per diluted share in the 2007 period. Excluding the special items, we recorded a net loss of $0.73 per share, compared with earnings of $0.59 per share in the prior year.

And finally, in terms of EBITDA, we had $101 million for the quarter excluding the special items, compared with $319 million in the prior year measured on the same basis. Quickly, for full year 2008, we reported sales of $15 billion, which is an increase of about $293 million, or 2% compared with 2007.

Currency translation accounted for $730 million of the increase, and a higher levels of modules sold, totaled $858 million. Excluding these two items, sales were lower by about 9%, reflecting the steep decline in our customer's production and vehicles in the second half of the year.

For the full year, the company incurred asset impairments and restructuring charges totaling $932 million, again most of which were non-cash, compared to $51 million in 2007. Excluding these special items, our operating income for 2008 was $464 million, which compares to $675 million in 2007.

A number of factors led to this decline, the most significant of which was the decrease in core sales during the second half of the year, and a full year impact of higher commodity costs.

Below operating income, interest related expense was a $184 million compared $233 million last year. The debt restructuring that took place in 2007 and lower interest rates between the two periods drove the decline. Tax expense was a $126 million, compared to $155 million in the prior year, excluding one-off tax items recorded in both years, tax was a $126 million in 2008 compared to $175 million in 2007. And at the bottom line, we reported GAAP net loss of $7.71 per share, which compares to net earnings of $0.88 per share in the previous year.

Excluding special items, we recorded net earnings of a $1.50 per share this year, which compares to net earnings of $2.68 per share in the previous year. And finally in terms of EBITDA, we had $1.39 billion this year excluding the special items, compared to $1.241 billion in the prior year measured on the same basis. As difficult as the falloff in the sales, impairment charges and operating losses were in the fourth quarter, we are very pleased to report an outstanding cash flow outcome for the both the quarter and the year. First for the quarter, operating cash flow was $769 million, which compares to $826 million in 2007. Cash flow after capital expenditures was $625 million in the 2008 fourth quarter, compared to $652 million last year. Although lower compared to last year, there were number of timing issues, and ultimately the ability to generate positive cash flow in this environment where profits are lower was clearly an accomplishment. For the year, net cash flow from operating activities after CapEx was $291 million, this compares to $224 million in 2007.

Generating $291 million of free cash flow in 2008 allowed us to reduce our net debt position by $189 million at year-end. We have now reduced our net debt for three consecutive years and five of the last six years. For all of 2008, capital expenditures were $482 million, which is lower than the $513 million invested last year. On a like-for-like currency basis, CapEx declined 10% between the two years.

Obviously, with the steep decline in volumes, we are constraining our capital expenditures wherever possible. Our planning assumption for 2009 calls for CapEx to be about $350 million. Regarding our capital structure, overall we continue to be in good shape. At December 31, our total debt and net debt outstanding were both below the levels of the previous year by $322 million and $189 million, respectively. We have no significant maturities until 2012 and have liquidity available to us in excess of $1.5 billion. One of our main sources of liquidity continues to be our revolver under our credit facilities, which has a broad underwriting bank group.

It's important to note that at December 31, 2008 we were in compliance with our key financial covenants and expect that we will continue to be in compliance in the near-term. However, based on our current forecast our ability to remain in compliance throughout all of 2009 is not assured. At the appropriate time, and if necessary we will work with our banking group, to amend our facilities in a fair manner. As usual, we will continue to monitor the economic, credit and automotive production environments and adjust our capital structure accordingly.

Switching subjects now to our expectations for 2009. As John indicated, we are not providing earnings guidance today which changes to production schedules another economic assumptions happening on a daily basis, providing an accurate and meaningful forecast is difficult in this environment.

John discussed our expectations for production in North America and Western Europe for 2008, down 27% and 21%, respectively which should translate to full-year sales for us in the range of $10.9 billion to $11.3 billion.

At the mid point of that range, our sales will be down 26% from 2008 or $3.9 billion. About $0.5 billion of that decline is expected to come from currency movements. As you can imagine, the contribution margin loss on the 3 billion plus of sales decline is significant. We expect the sales declines to be more significant for us in the first half of 2009 than the second.

At this point, we are expecting first quarter sales of about $2.4 billion which is actually 42% below last years level, and 15% lower than the record low fourth quarter 2008 sales which we reported today. By the way, the positive variances relating to our module sales that occurred throughout all of 2008 will no longer occur in 2009.

With the forecasted levels of sales, you can be assured that every costs and cash flow item is being challenged and managed to optimize our cost structure and cash flow in this environment. As I mentioned before, capital spending will be about $350 million in 2009 as we align our spending with the product plans of our customers.

Also as John referred to in his comments, of course, working capital, labor and discretionary spending are all being contained. Despite these efforts, at the sales volume currently forecast, at this point we expect to have a free cash outflow in 2009. With regards to restructuring charges we are continuing to look at other actions that will be necessary in reaction to the current environment. Again at this point we would expect to have a level closer to approximately $50 million for the year with about half of that occurring in the first quarter.

As you can tell from our comments today, the challenges that intensified over the second half of 2008 are expected to continue into 2009. We continue to work hard to mitigate those challenges as we navigate through this unprecedented time period in the automotive industry.

I am confident we are executing the right strategy to ensure long-term success for the company.

We will now move to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. (Operator Instructions). We will take our first question from Chris Ceraso with Credit Suisse.

Christopher Ceraso - Credit Suisse

Hey, thanks. Good morning.

John Plant

Good morning.

Christopher Ceraso - Credit Suisse

Just a few items here, on the restructuring that you are expecting for 2009, are you going to go back to the old policy of absorbing that or is that going to be called out?

John Plant

Yes, I think Chris in this time period we are going to call it out, just because it's getting so difficult. Normally, we included it because it was normal times. But now these are not normal times and it's very difficult to focus on what is normal versus the unusual related to these times. So we will be calling it out on a go-forward basis until from this point forward until things get back to normal, we will reassess that.

Christopher Ceraso - Credit Suisse

Okay, you mentioned that the contribution margin on the lost revenue was probably better than we would have expected, I would agree with that. As you look forward, does that get worse because you kind of burn through the temps and you have done some of the cost reduction and you start to run out of things to cut?

John Plant

I do not see why it gets worse, because the profile, the savings that we have done are the same, basically, our view is, it's our response that reflects inline with volume and so when we use contribution that assumes that we are going to flex of all our cost structure clearly materials, labor, (inaudible) and then we are seeking to achieve flex fixed costs as much if not more than the changes, because that's what we have to do. And I think we have done it so far and I do not really see why it should get worst. I'm hoping that with the effects of all of the cost reduction actions which have been taken and of course those which are yet to come, then that should be a good condition for us.

Christopher Ceraso - Credit Suisse

Okay so just to clarify, I think Joe mentioned is his comments that 25% was sort of typical for TRW, are you saying that you will outperform relative to that 25% or you should be able to achieve the 25%?

Joe Cantie

Tough to call, but I would say that as the sales go down, approximately 25% is a good rule of thumb to use and hopefully we can hit that and possibly better.

Christopher Ceraso - Credit Suisse

Okay, can you give us an update on the pension, Joe what's the expectation for the change in expense from '08 to '09 and any funding requirements that you anticipate on a cash basis.

Joe Cantie

Sure, I think overall pension, we continue to be in reasonable and good shape moreso because of the actions that we have taken and when we talk pensions I will include pension and OPEB. And we have taken a lot of actions to minimize that. I think that our funding for 2009 on a pure cash basis will be lower than what it was in 2008. So 2008, we are somewhere around $180 million on the cash funding that should be lower in 2009.

In terms of the P&L, I would expect our net expense to go down, between 2008 and 2009 as well, actually we are in the net income position because of the over-funded UK pension plans. So the net income will increase slightly in 2009 versus 2008.

Christopher Ceraso - Credit Suisse

Even despite what had to have been bad asset performance in '08?

Joe Cantie

Yeah, no question about it, but the way FAS 87, it's the smoothing effect that gets triggered into that Chris. So, what goes to the P&L is buffered. I will say that our UK plan which is the big plan actually had some; I think is decent performance in 2008. The investment returns were down about 10% which are pretty good in this environment.

Christopher Ceraso - Credit Suisse

Yeah okay, thank you very much.

Operator

Our next question is from Himanshu Patel with JP Morgan.

Rahul Chadha - JP Morgan Chase

Hi this Rahul Chadha for Himanshu Patel. So I had a couple of questions. First of all, on the federal aid what's your sense on, and in what form is it likely to come through and how confident are you to be a beneficiary of that?

John Plant

You are talking about the federal aid to GM and Chrysler.

Rahul Chadha - JP Morgan Chase

No, the supply of the $18.5 billion talked about.

John Plant

Okay. At this point, we are not clear on whether there will be any federal aid to the supplier industry. I look at the three strands which were suggested by NEMA OSEA to the treasury. The first one was surrounding the US Government providing a guarantee on the payable of the Detroit Three. I think that would be a good thing. I think a lot of the supply bases lost would be able to securitize on those and we, TRW had never taken advantage of our receivable securitization.

So, in one sense, we sort of understand it, but we think it will be a good thing, but mainly because a lot of the supply base lost that to securitize and the general fragility of the overall supply base and therefore the knock-on effect this would be interconnected us. We would think it is a good thing to have that done and also some of our sub-suppliers have probably securitized on previously on those receivables.

And so I think that it's something necessary, but I do not think it provides a real solution, because it just gets the supply industry back to where it was in the summer of 2008 really. And the second item was one of a quick pay, or reducing the terms of, I would say 60 days, plus or minus in terms of the payments from some of the Detroit Three manufacturers.

I think that's a more sensible program and should be looked at seriously. But, again I have no input to whether it's going to happen or not. And finally, I may have seen it, third item is the direct support for some of the supply base. And quite frankly, I just don't see that at all.

I think it's too difficult for the government to manage, and any lead I just don't see being done. So, I think, if there is anything at all, it's going to be done, it would surround the securitization of debt payable, the guarantee on the payable.

And I think, the thing which really under the circumstances is the best route through this is, as the supply base is shrunk, it has to be shrunk, and as the Detroit Three seek to have some of that part tooled to provide guarantees for them of continuity supply, because, clearly some supplier will be making it.

Then for the tooling and the capital needs to be deployed to enable that to be done is I just don't see many suppliers willing to step up and say yes, we will do it. Until they know certainty of outcome regarding the government support.

And secondly, clearly some guarantees around it. So, I think in a circumstances is that the Detroit Three also have to consider stepping up to do some, it helps facilitate some of those things to get ourselves to the other side and the continuity is supply, because clearly the supply base is distressed and we have our supply which are distressed at TRW.

The good news for us is that we never previously had securitized on anything, and so we don't see that as the solution to get it back in the way it looks, we never used it anyway.

Rahul Chadha - JP Morgan Chase

Okay. My second question would be, it seems that there will be some sort of a productions snapback in the second half. So working capital, which seems to be upfront right now, do you expect any significant drain from that in the second half?

And I know you guys took down CapEx, and is there any other lever you guys could pull to sort of help cash flows in the second half if production snaps back.

John Plant

Well, let me deal with capital spending first. Clearly, that's going to be much lower in 2009 than previously envisaged, and that will provide us source of funds to us. Regarding working capital, that is more difficult to call at this point in time.

I mean even despite the fact that we also I think managed our working capital well, I think we do that generally well, we are still disappointed in our inventory levels that we had at the end of 2008, and that's essentially because we had a stream of incoming pods towards us that we had scheduled during let's say October, November and December, and those reports were coming in, and bigger manufacturers both in North America and Europe were cutting their schedules and taking down weeks in quite a violent manner at very short notice, which left us in an over stock position.

And so some of that inventory, I think is going to be unwound during 2009, and so at the moment it's very difficult to really estimate, we know that we will pull on production in the second half. But given the fact I see that we were overstocked in inventory at the end of 2008, I am not willing yet to say that we will require any form of additional inventory to cope with the upswing as we exit 2009. And so I mean I think there's too many variables to be able to call at this point in time.

Joe Cantie

Although, I will just add that we look forward to when that production snaps back and having the problem of worrying about working capital, I think all of us would feel a lot better when that actually does occur.

Rahul Chadha - JP Morgan Chase

Yup, and just short one in the end. Did you guys have any receivables exposure to Saab.

Joe Cantie

Deminimis, as you know Saab doesn't produce a lot of vehicles, clearly immaterial to us.

Rahul Chadha - JP Morgan Chase

All right, thanks guys.

John Plant

Thank you.

Operator

Our next question is from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank

Good morning, everyone.

John Plant

Good morning Rod.

Rod Lache - Deutsche Bank

Can you just help us drill into this decremented margin again which looks like around 20% in the quarter, just on the quarter sales changes, what happened in terms of raw materials, restructuring savings and were things like goodwill amortization down significantly, it is a pretty impressive number on its own.

John Plant

Well, thank you for the compliment there, Rod. I think the most important thing is to recognize is that we did flex everything in the company and probably more than that is that we actually started moving, I think really earlier as you know, I think we always have been fairly conscious on cost anyway, but we actually were executing headcount reductions of major significance back in the early October timeframe. And so we didn’t tell people what we were going to do, we just did it. And we have taken through successive waves since then. So, I think the flexing that we have done is, which was very speedy and you can see from the results at a very healthy level. Beyond that in terms of goodwill amortization, I will leave that to Joe to cover, I am not clear that was a big thing at all.

Joe Cantie

Rod, in the quarter our amortization, just given all the write-offs, was down about $5 million. So, yes, there was a lower amount of amortization in there, but it was diminimus, 5 million was the number. When I look at being able to hold that margin, again John mentioned flexing everything. When we file our 10-K, you will see that the exact number of heads that we literally reduced by 12/31/08 was about 10,000 for the year, and most of that obviously in the second half, within that number something like 2600 was the salaried. So, we are looking at every cost trying to drive it down as much as we can.

Rod Lache - Deutsche Bank

What would you use as an average cost per person, roughly, when you look at that? Do you have an estimate for 2009?

John Plant

Are you talking about exist cost?

Rod Lache - Deutsche Bank

No, cost savings. Do you have, just based on what you have accomplished looks like towards the end of the year, what would your restructuring cost savings be just based on personnel reduction '09 versus '08?

John Plant

Do you want to give that number, Joe.

Joe Cantie

Well first of all I don't have it off the top of my head, Rod, but typically when we get people out, it's clearly less than a year payback and some of them are real quick. Obviously, as we watch cash here as we take our headcount down we are trying to do the ones that are most economical for us meaning lowest cost as quickly as possible. But again I don't have a number to give you off the top of my head.

John Plant

So I think the thing to look for Rod, is if you look at the headcount reduction compared to the cost restructuring taken. And if you think about also 2009, the cash restructuring that we have contemplated, then I think the scale of the restructuring compared to the cost thereof. And again you can see that we are managing it in a very lean way and also the cash effect thereof. And that's done [vaguely], so we are not going voluntary or anything like this. We have been very targeted, very quick, and really to provide the maximum protection to the company.

Rod Lache - Deutsche Bank

Just looking at some other suppliers who have used numbers like $50,000, [posted] something like that on average, it would be $0.5 billion. So it will be helpful, if I get some color.

John Plant

So maybe we have to get in a follow-up call, but when we move into the staff areas on a average then that must be higher than that.

Rod Lache - Deutsche Bank

Okay. And just lastly, did you have anything on raw materials, your expectations for 2009 versus 2008 and can you also clarify, it looks like your North American sales performance obviously far exceeding what production is doing, and there is a bigger spread between those numbers. So, is there something large or lumpy in those numbers and is that something you expect would continue?

John Plant

First of all let me deal with the production and I will go in reverse order. I mean the difference in the Delta between the production declines and our sales decline was a function of the increase in some modules and so that won’t be repeated as we go into 2009. So, it will be more inline with production.

On the first question, which was surrounding, I will say commodities, we haven’t called out a number for 2009 in our guidance. The thing I would point you towards is the fact that in the fourth quarter of last year, commodities were declining. As always there is a lag effect, but we are very focused on returning any payments that we have made for increased metals, so as an example, resins or chemicals across the whole part of our supply base to move back to where the relevant industries might be at that time. Some of it will of course will be on the index, some of it won’t be, but something which we are extremely focused on, and therefore I expect to see benefits of that and hopefully significant benefits of that as we go into 2009. But again we are not calling that out at this point in time and we're not providing the profit guidance either.

Rod Lache - Deutsche Bank

Okay, thank you.

Operator

Our next question is from Patrick Archambault with Goldman Sachs.