TRW Automotive Holdings Corp. (NYSE:TRW)
March 27, 2013 9:40 am ET
Joseph S. Cantie - Chief Financial Officer, Executive Vice President and Treasurer
We can start getting being settled, and if everybody from the outside can come in. We're very excited next to have TRW. Just one point before I introduce the company. Last year, the market capital around this time was about $5.8 billion. Now it's just about $7 billion. So that's about $1.2 billion of equity creation over the last year, and that's from a very strong operating performance of the company. So this is a name I think you should pay attention to. Hopefully, you paid attention to it last year.
TRW is a top 10 supplier. It's a leader in automotive safety, both passive and active. The company has been great over time in methodically really restructuring slowly, no big bang restructuring like we've seen in other -- a lot of other companies. It's really driven great operational performance.
In addition to that, that's driven a much stronger balance sheet that they're now using to be very friendly to shareholders at this point with $1 billion buyback. It's been launched. I think that goes through the end of next year if it's not executed a lot sooner. Given where the stock is, maybe it will be. And we think there's a lot more room to go way above and beyond the $1 billion buyback.
So we're excited to have TRW here. We're very excited to have Joe Cantie. He's an Executive -- he's the Executive Vice President and the CFO of the company. He's the guy that's got his hands on the reins of the capital. So if you'll want to chime in, he's the guy to talk to. Joe is a great friend over the years. He's been in the industry for a long time. He knows this stuff inside and out. So we're really excited to have Joe here today.
With that, I'll turn it over to Joe.
Joseph S. Cantie
Thank you. Thank you for the kind words of introduction. Good morning to everybody. Thank you for your early morning attendance and spending time with TRW today. I have a brief presentation to introduce you to the TRW story. My guess is a lot of you in the room know the TRW story. For those that are new to the name, I'll provide a brief overview during the course of the slides, and then I'll make sure that I leave some time at the end for some questions.
Before I get going, of course, just wanted to highlight and bring to your attention the Safe Harbor statement that you see on the screen, especially as it pertains to the forward-looking statements that are part of the presentation and/or might be discussed with you this morning.
I'll first start out with a quick business summary. For those of you who know the story, you know that 10 years ago, we were part of a leveraged buyout transaction separating from the wider TRW Inc. Group with our friends at Blackstone. We actually celebrated our 10-year anniversary just a few weeks ago. Basically, over that 10-year span, we went from being a $10.4 billion global business with a highly levered balance sheet, I think our net debt-to-EBITDA was somewhere around 3.8x back then, to where we ended the year in 2012, where we are now a $16.4 billion global company and our net debt-to-EBITDA was 0.2x. So it's been really fascinating to watch the progress over the last 10 years, going from this highly levered company, maturing through its phases, getting the debt down, growing the business to where we are today. And oh, by the way, in those 10 years, we had the 2008, 2009 recession. We had the extreme spike of commodity inflation and a bunch of other headwinds along the way. And I think we've proved as a company the defensive nature and characteristics we're able to manage through those headwinds just fine.
So 2012, you can see up on the slide here, really a good year for us, $16.4 billion in sales, over $6 of earnings per share, free cash flow of over $300 million. And that's after everything, including a lot of investments that we're making in the future of the company, primarily in our emerging markets and some of our newer technologies. And we also returned $268 million in 2012 in the form of share repurchases that were mentioned in the introduction. And we will continue to be redeploying cash back to our shareholders through primarily the share repurchase tool, if you will, as we move through 2013 as well.
So why have we been able to be successful both in 2012 and, quite frankly, the years before that? It's that second-to-last bullet that you see on there. We are a company that has and is focused on innovative technologies. We feel that we have the broadest array of both active and passive safety products for the automobile. Over time, there is convergence between the active and passive. And there's certainly integration within the active products, and I'll refer to that a little bit more in a coming slide.
We -- part of our strategy is to remain diversified because it is a cyclical industry. So I'll speak to you about our diversification either by product, customer, geography. And the wonderful thing about us is you can back test that. We now have a 10-year history, and we've had some events occur in that 10 years, and you can see how we performed in those difficult periods as a result of the diversification that we have within the company. And of course, the auto industry, you have to watch your costs. You have to have the appropriate cost base, strong balance sheet and the ability to generate cash. So I think it's -- those are the primary drivers and reasons why we've been successful in '12 and beforehand. But it's also the very same reasons that we think we will continue to be successful as we go through the next 5, 10 years and beyond.
Just real quick. This slide just says that we're big, we're global. We have over 65,000 employees around the world. There is usually not a platform or a car that you can name where we don't have some kind of content on. And we serve just about all of the major OEs around the world.
On the right-hand side, you see probably our 4 largest product areas, that being Braking, Steering, Occupant Safety and Electronics. The competitive strengths that we have, some of which I mentioned on those first 2 slides, again, a very broad active and passive safety portfolio. We are usually a top 3 player in most territories in the products that we offer, and the diversification point I mentioned, you'll see that Volkswagen is our largest customer at about 23%. And the largest platform for us is about 5% of our sales, and there's multiple products.
So the point I'm trying to make here is there's no one leading -- there's no one platform, no one product, no one customer that is hugely material to the company, and that speaks to the defensive nature of our business. We've had a pretty good delivery of our results over the last 10 years. I think we tend to be a company that does what we say we're going to do, and I think that's an important point when you think about us mentioning the $1 billion share repurchase program. We will do that.
Great technology innovation, our products continue to evolve. They continue to integrate with other products within the car, and that's really good and important from a pricing perspective and ability to hold our price as we go through the evolution of some of the products on the vehicle. And of cost -- of course, cost competitiveness and streamlining, we are usually doing some kind of restructuring every single year. We typically run in the restructuring charges somewhere around $30 million to $40 million. There are years where that's elevated. For example, last year, we had $95 million as we're starting to react to what's going on in Europe and do a little bit more on that restructuring side in that year.
On this page, you'll see our customer mix on the left-hand side, regional mix on the right-hand side. You can look at this page and say, "Well, that's a negative about TRW, that they're highly exposed to Europe." Yes, we are. You'll see that we were about 50% of our sales in 2011 were in Europe. That's down to about 43% in 2012. That's not a good thing. That means that Europe, obviously, has been declining in vehicle build, and our sales have been corresponding to that decline.
I guess I'd like to turn that around and say, it could also be a positive because Europe, in our estimation, has been below normalized trend level for a number of years. We do feel that there's pent-up demand building in Europe. We do think that the normalized level is something more in the 20.5 million to 21 million zone. Remember, in 2004, 2005, we were doing 22 million, 23 million in that -- in Europe, and we do think it will gradually move back to that trend level. At some point, irregardless of what the greater economy's doing in Europe, because of that pent-up demand, the car parts are getting older, the cars are needing maintenance, and at some point, the vehicle build will respond and move up. And at that point, it's going to be good to have the large exposure that TRW has in Europe.
On the left-hand side, our customer mix. You couldn't ask for a better mix right now. We think Volkswagen is just doing an outstanding job, as well as Ford, GM, Chrysler. We do sell to just about everybody. So you do see the PSAs, Fiats, Renaults on there. You do see Toyota, Honda. But obviously, it would be great if we had more Japanese content on that pie chart. That said, you couldn't ask for a better customer mix in the current market that we're seeing right now.
On the product side, this is a pie chart of the different safety-related products that we sell. On the right-hand side of it is what we call our active safety, our chassis products. And there's some great up-and-coming products in this segment. A couple to highlight is electric steering, which is a product that continues to get great penetration and makes all the sense in the world versus the older hydraulic-type systems. And electronic systems are outstanding because they provide better fuel mileage. You draw your power from the electric system rather than the engine. That allows the engine to work easier and provide better fuel mileage, if you will. It packages better. It's environmentally more safer. So this is what I call a no-brainer product for the OEs to put into their vehicles over time.
Another one that we're excited about is the Electronic Park Brake. If you think of the emergency park brake that you have in some of the older cars, you're either pulling a lever up in the middle of the car or you're using your foot to depress a pedal to put your emergency brake on. That all gets replaced with a button, and that Electronic Park Brake has added features besides just taking out the weight and the wires and the freeing up space in the cockpit. It also provides a number of safety features like hill hold and will integrate with some of the other products on the car to turn itself on in time of need. So great safety product for us that's doing quite well.
And then after that, we have a great foundation brake business; actuation calipers; vehicle stability controls, another good product for us; good group of product offerings on that chassis side.
On the left-hand side, I'll start with the smallest one in the lower left, electronics. It's probably the one that's going to grow the fastest for TRW. We have some wonderful products in there, including our driver assist systems, cameras, sensors, crash sensors, products like that, that we see a bright future for.
Our passive safety, this is when you're in an accident, you need things to protect you. So this would be airbags, seatbelts, steering wheels. And it continued to see good penetration of those products, maturing a bit in the Western world, but emerging markets still has another leg to go. And there's good regulation that's starting to come into some of the countries, like Brazil, that we feel is going to help and give a little bit of a wind behind our sales in this area to help the penetration of some of those products.
And then we have our automotive components group, which legacy businesses for us aren't directly related to the safety theme, but they're good businesses, profitable, cash flow positive, and we're happy to have them in the TRW family.
This slide, just very quickly want to just talk to you about how we often time the mass [ph], how do we go to market, why should people -- why should our customers buy from us? And these are the 4 strategic priorities we have within our company. They've been the same ones over the last 10 years. And it's basically we go to our customers and we demonstrate to them the quality of our products. We do deal in the safety world, so you have very little tolerance for error or poor quality. So quality does matter in the types of products that we sell. So we clearly strive to be the best quality.
Global reach. There is clearly a move to global platforms, and the large automotive suppliers need to be everywhere in the world in order to supply those global platforms on an efficient basis.
The innovative technology, I've referred to, and I'll expand on that on the next slide. And then, of course, lowest cost. We're relentless about managing our footprint, our cost base, our -- how we work with labor and the indirect spend that we have around the company. And again, you can back test that over the last 10 years and see that we're pretty prudent with how we plan out our cost base.
This is the slide that I referred to on the last slide in terms of technology evolution. If you will, if you start to the lower left of this, and I think in the history of our company, we would sell products just as components, and then over time, you start moving and selling to your customers the systems of that product, and then eventually through to integration of other parts within a car. Best way is probably to give you an example. When you think of brakes, many, many years ago, 10 years ago, you'd sell a drum brake, you'd sell a caliper. And then over time, it evolves to selling a brake system or part of the ABS, Anti-Lock Brake System, on the car. And then eventually, it moves to the integration or vehicle dynamics, where you're integrating the brake system with the steering system, with the sensors and the different information inputs that come into the car so that you have an integration product, integrated systems offering on its way to a cognitive -- what we call Cognitive Safety System. So it's meant to pictorially demonstrate to you how the -- over many years, it's gone from a component base to a systems base to an integration. It's a very long road to travel. We still do sell just components to a lot of our customers. But each year that goes by, we see more and more of the movement up this blue arrow. And we clearly see over the next 10, 15 years a greater amount of integration, specifically through electronics, to how we approach our customers and sell our products to the end markets.
Now TRW, the story is, for investors, clearly, we have a great balance sheet story. We have a return of capital story. We do have a growth story as well. We think that we will be able to outgrow underlying vehicle build over the long term. And why are we comfortable in saying that? There's 4 things that get us excited about our future over the next 5, 10 and even the years beyond that.
Clearly, in the upper left-hand corner, safety sells within vehicles. We've done a lot of studies that show that the world population is aging. When people age, they tend to worry about health and safety. People today, when they go in and buy a car, they typically are looking at the safety features of the car. And we've tested that versus 10, 15 years ago, people perhaps didn't care too much about whether ABS or VSC is on a car. I don't know that people would buy a car today without ABS. 15, 20 years ago, maybe they'd make sure there was a driver airbag, and they wouldn't necessarily care about whether there was side curtain airbags or a passenger airbag.
I can tell you, as I've aged, when I go in and buy a car, give me every bag that you -- that's available. It's a small cost for the safety of you and your family and your kids.
So clearly, the safety theme has worked wonderfully for us. We've tested that, we've proven that and we think that it will continue to play well, again, as the world's population ages and more and more demand for safety will be there.
On the right-hand side, just real quickly, the overall industry recovery. That's my point about Europe, where we believe trend is 20.5 to 21. We believe that we're below that trend, and we'll get to that over the years. We believe the trend in China, obviously, is up. North America is doing very well and near its trend level. But given it's under trend over the years, there's probably a year or 2 where they might actually be above what we think is normalized trend. So you have the industry recovery piece.
And then lower left, the technology portfolio, things like electric steering, Electric Park Brake, electronic integration and some of the other great products that we have will continue to support and help our growth.
And then the one on the lower right-hand corner, which is a plus/minus story. The plus story is the growth in emerging markets is compelling. There's no question about it. When you look at the demographics in China, they're producing maybe 19 million vehicles this year. There is clearly a path that can be seen to doubling and even tripling over the coming decades. That is compelling growth. That's the good news. The bad news is you have to invest and you have to make sure that you have a franchise, you have a seasoned business there that can place you in good stead to be able to capture that growth when it comes. And we are certainly going through that investment phase now, and we believe that it's the right thing to do as we look at the -- our franchise and our business over the coming 5, 10 years and beyond.
But when you step back from this slide, there's 4 good pockets of areas of -- that are going to contribute to the growth of our business over the long term. So there is, in addition to what we think a strong cash flow story, a strong deployment of our cash back to shareholders. We believe there's a bit of growth in the company. We believe there's a good defensive nature to our business. So overall, it's a very good, nice package that has a number of good attributes as to why we think investors should invest in TRW shares.
Just a couple of quick minutes on the industry. What you have here are the charts -- are IHS' latest view of what they think '13, '14 is going to be. So upper right-hand corner, you can see North America going very well, and we're very comfortable with what we see there. Most compelling as to why we think it's going to be in good shape is look to 2009, 2008, 2010, clearly way below normalized levels, and that has created this pent-up demand that will take many years to correct itself, so there is an underpin to what's going on there.
China, Brazil, will be somewhere around 19 million vehicles in China this year, and you can see that going to 21 million next year and 23 million the year after that. So that's a bit of the -- what I call the dynamic growth that I was talking to in the previous slide. And then, of course, lower right, Europe. You can see it's been a number of years where it's been below that trend level, and the optimist in this lower-right chart would say that there's going to be an underpin to the future there given the pent-up demand that's occurring.
I'll just run through some financial slides quickly, and then we'll leave some time for your questions. Just again, the scorecard for 2012, exiting '12, I think I've mentioned most of these: over $6 return cash to shareholders, both our gross debt and our net debt at all-time lows. And we've ultimately said that, that's not a goal of ours, to reduce that any further. In fact, it wasn't our goal to reduce it in 2012. We had a bit of a better year than we had thought, and it wound up reducing our net debt levels a little bit lower again in 2012. That's not our goal, to reduce that. And as we indicated, we have a target of $500 million to repurchase in shares this year in 2013, and that should cause that net debt to move up slightly.
Here's our full year results -- GAAP results in '12 versus '11. We then have a number of adjusting items that we -- that are one-off in their nature, and then we get to the blue-shaded, which is what we consider to be the -- what should be looked at for trend levels, if you will. You can see that my margin depressed from 7.9% to 7.5%. Of course, the 2 key drivers to that, we are investing in our emerging markets. So we do have a, be it quality people, program managers, engineers. We're building or expanding 11 plants. So there is some investment that's being made that's a key driver of that, and we also did have some commodity inflation in the early part of 2012 that contributed there.
Our sales were up slightly. There's a big currency translation effect in there, somewhere over $700 million. So excluding currency and the divestitures, our sales were actually up 7%, well above vehicle build.
On the bottom line, $6 -- over $6 of earnings per share. So a pretty good picture up and down the income statement.
Balance sheet, free cash flow, there's the net debt at $239 million. As I said, it moved down slightly from $291 million the year before. We had good positive cash flow, and again, everything looks to be in good shape on the balance sheet side.
This perhaps is one of my favorite slides, the one that I always try to point out. We're a big global company. We go through ups and downs, be it the downturn of '08, '09, the investment phase that we're going through now, commodity spikes. But at the end of it, we always generate cash. We always manage the company to a generation of cash. This is -- you can see year-by-year our free cash flow. This is right off our GAAP financials, cash flow from operations less CapEx.
Since the leveraged buyout, 10 years, we've generated $3.2 billion in cash, and that's how we delevered the company, by generating that $3.2 billion of cash. $3.2 billion divided by 10 years, average of $320 million. Some years we're above it, some years we're below it. Two worst years in the history of the auto industry, '08, '09, we generated $545 million in those 2 years. And this is something that we highly focus on in the company, and we'll continue to grow and make our investments within the free cash flow of the company.
Our capital structure, it's very good shape. We do have some maturities coming. You can see on this chart, in 2014, we have $533 million of maturities that are due on March 1 of next year. There is also a bond in there, the 2017 8 7/8 that has a call feature in December of this year. That's pretty clear that we'll be calling those bonds. So together with the $533 million and the, call it, $220 million of the call feature that we have, we have somewhere close to $800 million of bond maturities.
So you saw us -- only a couple of weeks ago, we did issue a bond, that $400 million bond you see out there in 2021. I am going to be probably having a little bit of negative carry, but the conditions were right. So we issued that bond. So right now, we're very cash-heavy, and a lot of that is in anticipation of what we're going to be doing with the maturities towards the end of the year, couple that with our $500 million that we're going to be spending to repurchase our shares. You can see that our cap structure is in excellent shape. We can handle the maturity of those bonds with no further capital transactions if we so choose to do that. It's a good story, and we're coming at it from strength, and we're in good shape.
My last slide, and then I'll take some questions. People always say to me, "Joe, you have 5 minutes. Tell me why I should invest in your company." And here's my 3 bullets: We have an element of growth. We are a cash generating company no matter what. We invest within the means of the cash flows of the company. And even after that, we have excess cash flows that we intend to return to our shareholders over time. And then last bullet, I would say we have great market position. We're $16.4 billion. We're a global business. Our leading businesses are usually first, second or third in market share. We have few -- relatively few competitors in our key market areas. It's a great franchise that's been around for a long time. Look at the 10 years that we've had and run the business. You can back test just about anything you want to back test, and it's a good overall story. And please invest in TRW. That's my 3 bullets on the investing to TRW.
With that, I think that wraps up my prepared comments, and I guess I'll hand it back to you for questions.
Yes, if you want to queue up questions. I think Doug [ph] was going to kick off.
Yes. I'll just kick off a quick balance sheet question for the fixed-income guys here. We can't complain. The balance sheet has -- essentially has no leverage on it, and as we kind of distribute more cash to shareholders, understandably. Have you had conversations with the rating agencies, where your rating could go? Where do you feel you want to take it? Does it matter to the IG [ph] at this point?
Joseph S. Cantie
Of course, every CEO and CFO would sit here and say, "Yes, of course, we'd love to be investment grade." It's -- would we like to have it? Yes. But there is -- we do not operate our company -- make our decisions contingent on wanting to be investment grade. So I don't wake up every day saying, "Oh my God, what do I need to do today to become investment grade?" Over time, we feel that the rating agencies will acknowledge the merits of the company, the strength of the franchise, and we'll get there eventually. But we don't operate the company along that path. We believe that we need to have a sound, good balance sheet because we are in a highly cyclical industry. We have a global franchise. It's very rare that every part of the franchise in every region is hitting on all cylinders at the same time. So therefore, you have to have a good flexible capital structure. That said, our discussions with the rating agencies, they fully acknowledge that our capital structure is well beyond what is needed in terms of the safety of the industry or the liquidity for the industry. So at 0.2x net debt-to-EBITDA, my guess is we'd have to get above the 1 before they start having any concerns regarding the strength of our balance sheet. Further, I think we're not investment grade more because of the struggles of the industry and our exposure to Europe. We do have an antitrust investigation going on. It's really those things that would have to clear themselves that are high on their minds, that are high on our minds too. And I think, again, over time, as we demonstrate the resiliency of the company through any of those issues, be it Europe, be it the antitrust situation, hopefully the rating agencies will acknowledge that and we will be an investment grade company. But to be very clear, we don't make our decisions just to get to investment grade rating.
Okay. Over there.
Taking the other side of that question, you talked about the balance sheet being underlevered. The outlook, I guess, in Europe is not great right now, but the outlook for the next 3, 5 years is pretty positive. Why, as investors, should we wait? I mean, your $1 billion buyback was great, but it's fairly above free cash flow generation. Why are we taking $1 billion today doing a buyback and doing your $1 billion over 2 years? Is that still going to get you a little over 1x net debt-to-EBITDA?
Joseph S. Cantie
Yes. I would say a couple of things. We have clearly said that the $1 billion share repurchase that we're deploying right now is the first step. I do think -- not think there will be a second step and a third step. I would think, as an investor, you would want a management team to be pretty prudent about the risks that the company faces and be prudent about how they deploy the money, how fast they deploy the money back to the shareholders. There are a couple of pretty large uncertainties that face the company right now. The first $1 billion doesn't matter because our balance sheet's in such great shape, but we do have an antitrust investigation going on. We do have a situation in Europe where, in the first quarter, double-digits down vehicle production just about everybody, and we believe that for the year, Europe will be down maybe 5%. But it's going to be down double digits in the first quarter, which means your comps have to get better in the second, third or fourth quarter. And we believe that's going to happen. But if we did everything right now today and then we find out the results of the antitrust investigation and we find out that, that second half doesn't rebound, you put the company at risk, and we don't want to do that. We have $800 million of bond maturities. You want to be able to face that from a balance sheet of strength against those bondholders. You don't want to, tomorrow, put out $2 billion and then need to access the capital markets as you go through those maturities. So there is a bit of patience that, I guess, I would ask for. And my response to you would say, I think you would want a management team that makes sure they are managing the multiple risks of a $16 billion global business and makes sure it's balanced with the speed and how much of the return comes.
Maybe if I can sneak in a really, really quick one here. When you look at the European margins, I mean, are you making money that's close to the corporate average in Europe? Because everybody's freaked out about 43% exposure there. But if you're still making money at current levels, it's not such a bad place to be because, as you pointed out, ultimately it's going to recover, and it's going to be not just an issue but it's going to be a great opportunity. And just curious if you could talk about the profitability in Europe.
Joseph S. Cantie
Yes. We are making money in Europe at these levels. I think at 18.4 million vehicles being produced this year, that's well above our breakeven. You'd have to get down into the 17 million, sub-17 millions before there's any concern or worry. And by the way, if we did get down to 17 million, sub-17 million, we would take actions to try to bolster where we can. So yes, we are making money in Europe today. Of course, it's less than when we were producing 20 million vehicles in Europe. And when you go through a choppiness, a bit of choppiness where you're down double digits production in any given quarter, the decremental margins on that decline are not great. But I guess I'll capture your words. It's not that bad for us in -- if 18.4 million for us starts moving to 19 million, 19.5 million, it'll be a good story because, obviously, we are doing things. We are taking people out, we are addressing our cost base in this time of downturn, I guess, I'll call it in Europe. So we announced a large plant closure in the fourth quarter. We indicated that we'll have a bit of restructuring cost in the first quarter, and clearly, that will position us for when the rebound does come even better than where we were beforehand.
That's great. Well, thank you very much for your time, Joe. I really appreciate it.
Joseph S. Cantie
Thank you, everybody.
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