Executives
John Plant - Chief Executive Officer, President
Joseph S. Cantie - Chief Financial Officer
Mark Oswald - Director of Investor Relations
Analysts
Himanshu Patel - J.P. Morgan
Christopher Ceraso - Credit Suisse
Dan Giles - Deutsche Bank
Brett Hoselton - Keybanc Capital Markets
Kirk Ludtke - CRT Capital Group
TRW Automotive Holdings Corp. (TRW) Q1 2009 Earnings Call May 6, 2009 8:30 AM ET
Operator
Good morning and welcome to the TRW conference call. All lines have been placed on a listen-only mode, and 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
www.trw.com/results. Please download the material now if you have not already done so. After the speaker’s remarks, there will be a question-and-answer period. Due to today's limitation on time, the company requests that participants limit followup 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.
Mark Oswald
I'd like to welcome everyone to our first quarter 2009 financial results conference call. Joining me this morning are John Plant our President and Chief Executive Officer and Joe Cantie our Chief Financial Officer. Today's call will follow our usual format; 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 comments, Joe will provide an expanded review of the financial information, at the conclusion of Joe’s comments we'll open the call to your questions.
There are a few items I’d 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 a complete Safe Harbor Statement.
The risk factor section of our 2008 Form 10-K contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2008 10-K and other SEC filings by visiting the investors section on our website at www.trw.com or through the SEC's website at www.sec.gov. On a related matter, we expect to file our first quarter 10-Q within the next day or so. Once filed, the 10-Q can also be accessed through either website.
In addition to the financial results presented on a GAAP basis, we will also discuss non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found on the conference call materials which are posted to the investors section on our website at www.trw.com.
Finally, a replay of this call can be accessed via dial-in or through our 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'll now turn the call over to John Plant.
John Plant
Good morning everyone. The first quarter of 2009 is certainly a quarter to put behind us. Vehicle production volumes across the world fell precipitously from an already extremely depressed quarter 4 of 2008. These last six months will be a scar upon all of our memories especially for those people in the automotive industry, for example, in quarter 1, North America production fell 51% year-on-year and some 37% from the fourth quarter of 2008 which in itself was down 9% compared to the third quarter of 2008.
The fall-out surrounding the global financial markets continues to loom over the industry. Increasing unemployment shattered consumer confidence and tight credit are other major factors contributing to the very low levels of vehicle sales and production. GDP in North America fell by 6.1% in the first quarter of 2009 and this is on top of a 6.3% reduction in the fourth quarter of 2008, the combined reduction in GDP in a six-month period which has not been seen since the 1950s.
Vehicle manufactures around the world have sought various forms of governmental support during this extraordinary period. It is clear that without support, companies with stress balance sheets or inadequate liquidity will not survive. As you are aware, in North America, the US Government has provided temporary low cost loans to General Motors and Chrysler starting in December of 2008 as those companies attempted to restructure their businesses. In late March the administration on the automotive task force made it clear that additional restructuring actions are necessary to ensure long-time viability for both GM and Chrysler and are a prerequisite to further government money.
As announced last week, Chrysler was unsuccessful at restructuring outside of bankruptcy and will now attempt to finalize a speedy restructuring plan on a partnership agreement with Fiat. Shape of the future automotive industry in North America as well as Chrysler and GM’s role within it is being determined right now. At TRW, we have focused on mitigating our risks to the possible outcomes for Chrysler and GM to the extent that is possible.
In addition to direct aid to the manufacturers, the US Government announced the order suppliers support program. This program will provide $5 billion of financing in government back protection of General Motors and Chrysler receivables for certain suppliers in the US. TRW is participating in this program for both Chrysler and GM. In addition, TRW is also participating in the Canadian receivable guarantee program for Chrysler. Of course, TRW’s diversification will service well if there is a sudden or further shift of sales and production within or from the Detroit Three.
We will continue to monitor the situation at Chrysler and GM and react accordingly, but at this point, we feel we are well prepared for the possible outcomes.
Looking forward on the demand side, sales should get a boost; thanks to recent efforts to increase the availability of credits, allowances for sales and excise tax deductions, and new marketing programs aimed at boosting confidence in certain vehicle brands. In addition to actions taken by the US Government, countries around the world have also provided supports to the automotive industry in the form of direct loans, scrappage games, tax reductions are all the plans aimed at stimulating car sales; examples of scrappage games in Germany, France, Italy, Spain and the UK, all of which have had demonstrable effects. In certain European countries where legislation was enacted quickly, manufactures are counseling previously scheduled down weeks in the second quarter as demand for small cars have increased. This is welcome news during this difficult period.
As you can see from TRW’s results posted this morning, the intense challenges facing the global economy and the automotive industry have a significant impact on TRW’s first quarter performance. While we continue to take quick and decisive steps to reduce our costs, the magnitude of the impact relating to the sales reduction could only be partially offset.
During the first quarter the environment continued to deteriorate. New vehicle sales continued to fall to unimaginable levels. Every manufacturer in every part of the world has been impacted by steep sales declines. As a result, inventory levels remain in an overstock position, most notably in North America. Manufacturers are aggressively managing inventory levels with significant production cuts. For example, just two weeks ago General Motors announced 190,000 vehicle reductions to the second quarter production schedule, and of course, Chrysler halted production of all of its North American operations following their bankruptcy filing last week.
The production forecast should stabilize once supply is brought in line with demand. It appears that this convergence of supply-demand will occur later this year and may indeed have already occurred in Europe for certain vehicle segments.
And finally, despite government assistance, concerns remain heightened for 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. In fact, further strengths may be exposed as production increases. During this period, we remained focused on preserving liquidity and further reducing the cost base by expanding initiatives already underway and looking for additional actions to help mitigate these events. The restructuring actions taken to-date along with TRW’s core competitive strengths which is our leading portfolio of active and passive safety products, industry leading diversification, and ample liquidity, will enable us to prevail during these difficult times.
I am convinced that the first half of 2009 will mark the bottom for production of vehicles during this deep recession. The average age of passenger cars on the road in North America is 9.4 years, a new record while the average pick-up truck or sports utility vehicle is 7-1/2 years, older than its any time in the past decade. These data points support the fact that pent-up demand is building.
Before going into further detail, on the intensified challenges and the program to mitigate those challenges, let me provide you with a brief financial overview of where we finished the quarter.
First quarter sales of $2.4 billion were down 42% compared with the prior year period reflecting the extraordinary decline in global vehicle production during the quarter. Excluding the special one-time items which Joe will discuss in more detail in just a few minutes, the company reported a first quarter net loss of $115 million or $1.14 per diluted share. Within this number, our operating loss was $71 million. This is the second consecutive quarterly loss for TRW. The results primarily reflect a declining core sales attributed to the steep decline in vehicle production levels and the negative effects of currency movements during the quarter.
Against the backdrop of the challenges facing the industry, the results demonstrate TRW’s cost reduction efforts are taking cold and that we are improving the long-term competitiveness of the company. This can be seen when looking at the change in operating income as a percentage of the change in sales. For the quarter, this percentage was 15%, which is well below a normal level of loss contribution on a sales decline of 25%. This is due to the speed of action on the depth of cost cutting.
In the first quarter as compared to the prior year, vehicle production was down significantly in North America and Western Europe, our two primary markets. In North America, vehicle production was down 51% with the Detroit Three down 55%. Sales and production in Europe held up slightly better in North America as a result of the government’s scrappage games. In Western Europe, production was down 41% for the quarter compared to the same period a year ago.
While the 41% is significant, we are cautiously optimistic and some previously scheduled down weeks are being cancelled and quarter over quarter production is trending upwards in Europe.
The scrappage games helped protect against additional production declines. However, the region is experiencing a value shift as well as the increasing cars produced unsold tend to be small fuel-efficient vehicles.
In addition to our two major markets, production slowed or declined in certain emerging markets such as South America down over 17%, India down 4%, China down 2%, and Russia down a staggering 60%. Clearly, these are dismal production levels around the world; however, quarter over quarter improvements in the global production forecasts are starting to appear, although it is most likely we will not see significant improvement prior to 2010.
In order to adjust the size of our fixed cost base to low production levels and to mitigate the effects of the down-turn in the short-term, TRW has correctively and aggressively focused on operational restructuring and cost containment initiatives and the cost reduction achieved in comparison to the relatively small size of restructuring dollar spend is very notable.
Let me summarize a few steps we have taken. Beginning with personnel reductions, we expounded headcount reduction programs in both North America and Europe. During the first quarter, we reduced our global work force by an additional 4400 employees. When combined with the 10,000 employee reductions achieved last year, mainly in the second half, total employment has been reduced by approximately 19% since the start of 2008.
In addition to employee separations, our sites in Europe continue to work short-week programs in a significant manner. The use of the short-time working is a very cost effective way rather than laying off people. In addition, targeted employee reductions will continue through the next quarter.
With regards to facility closures, we previously announced plans to close the Warrenton Casting plant in Georgia and our break actuation center in Spain. Both of these were completed during the first quarter. In addition, we closed and consolidated one of our facilities in Mexico during the quarter and we recently announced plans to close Ettrick, the Wisconsin facility in the third quarter, although we’re now looking at trying to advance that.
In an environment where we continue to consolidate facilities and further reduce our workforce, we remain committed to our quality, Six Sigma, and business excellence programs to ensure structured processes and efficiency are part of our day-to-day operations. In fact, in terms of quality, TPM across all products and customers reached a new level of 6.1 TPM and is world class.
In addition to the extraordinary actions, we continue to focus on the basics including working capital management, tight controls on indirect spending, and stopping capital spending. You would have seen from our results this morning that our first quarter capital expenditure was limited to only $35 million, which compares to $97 million last year and depreciation and amortization of $117 million.
For the full year, we now expect capital expenditures to be approximately $300 million which is well below normalized levels. Clearly, we have made a significant amount of progress with restructuring the business. Further restructuring actions are being planned in order to bring the company to satisfactory profitability at much lower production levels.
As a result, our guidance for full year 2009 cash restructuring is now approximately $90 million. In addition to spending a great deal of time focusing on restructuring and the cost structure of the business, we continue to run the business for future success. It is important that we remain focused on executing our strategy.
During the quarter, we had a high level of product launches; a few examples include multiple TRW products on the new Mercedes E class in Europe, the BW Polo in Europe, and the Genesis as it is known in the United States.
In addition to the launches underway, despite the current difficult industry conditions, a significant amount of new business has been awarded to TRW; a few examples include, the largest electronic stability controlled break contracts which has ever been one for TRW in Europe which is followed by significant caliper win of the same customer. We enjoyed numerous steering wins in all regions. On the safety front, we continued to win air bag, seatbelt, and steering wheel contracts across the globe, and in our electronics business, we recently won an important electronics award integrating the stability control inertial measurement units in the air bag controlled units with a Japanese customer.
The new business wins and recent launches continue to strengthen TRW’s competitive position. We remain the industry leader and have the broadest portfolio of active and passive safety products, a core strength given the continued imports of safety to drivers everywhere.
Our industry leading diversification continues to be strengthened especially with regards to our customer mix and the platforms supported. And finally, our cost structure continues to be in good shape. I mention these competitive strengths as a reminder of our solid transition. In these extraordinary times, well diversified companies that produce high technology products with a competitive cost structure are best positioned to survive tough times and thrive of course in good times. TRW is an example of such a company.
Before I turn the call over to Joe, let me comment on our expectations for the second quarter and the remainder of 2009.
Overall, the production forecast continues to be revised downwards. However, Q2 production and beyond is expected to be higher than the first quarter, and this allows us to be optimistic that the worst is behind us.
In North America we expect second quarter production to be approximately 1.9 million units, a decline of 45% compared to last year with a 200,000 unit increase over first quarter production. Within this estimate, Detroit Three production is projected to be 1 million units, a 52% reduction compared to last year. For the full year, we now expect North American production to be at 8.2 million units, a decline of 35% compared to 2008 and 1.1 million units lower than earlier expectations.
During the second quarter, vehicle production in Western Europe is forecasted at 3 million units, down 28% compared to the same period a year ago but up over 500,000 units compared to the first quarter. Total production in Europe is forecasted at 4.2 million units. For the full year, our total European production estimate is now 15.9 million units. Within this estimate, Western European production is approximately 11.2 million, a decline of about 21% compared to last year. This forecast assumes Western European production will stabilize between 2.8 and 3 million units each quarter for the remainder of the year.
Beyond North America and Western Europe, vehicle production levels in high growth countries in the world such as Russia, China, India, and South America are also expected to decline compared to 2008 or significantly slow compared to prior double-digit growth rates.
As we have done throughout this crisis, we plan to monitor the production plants of the vehicle manufacturers closely and make adjustments to our operation sooner rather than later. The year-over-year decreases in vehicle production in all regions albeit with Q2 increasing versus Q1 of 2009 and with the uncertain surroundings in the global financial markets, they’re all reflected in our revised 2009 forecast.
Based on the revised production estimates, we now expect full year sales of approximately $10.1 billion to $10.5 billion, down from earlier expectations. Sales in the second quarter are expected to be approximately $2.5 billion or 44% lower than the prior year, but up 4% compared to the first quarter. As far as restructuring, as mentioned, we are now expecting, full year cash restructuring to be approximately $90 million.
At TRW, we’re going to remain focused on improving working capital, protecting cash flow, and further reducing the cost base. We remain confident that we are executing the right strategy and building on our solid foundation. We look forward to a stable and sustainable level of vehicle production.
With that, I’ll now hand the call across to Joe to discuss our financial results in further detail.
Joseph S. Cantie
Good morning everyone. No doubt these are trying times for everyone involved in our industry. The challenges associated with unsustainably low production levels and the velocity of change and challenges at certain of our customers has caused us to proactively restructure and protect our businesses in these difficult times.
Our results for the first quarter reflect the broad challenges facing the industry demonstrated by the 42% decline in our sales. Despite the difficult first quarter results, we’re encouraged by recent signs of stabilization and even sequential growth in vehicle demand in certain areas and pleased with the results of our restructuring and cost containment actions which we can see building in our financial results. We are hopeful that the stimulus programs implemented around the world will continue to improve demand and ultimately lead to a sustainable improved vehicle production environment.
In the meantime, TRW has a solid capital structure with good liquidity and no material near-term debt maturities which places us in a good position to weather this downturn.
I’ll expand on our liquidity and capital structure in a few minutes. First, let me review in more detail with you our results issued this morning.
For the first quarter, we reported sales of $2.4 billion, a decrease of $1.8 billion or 42.3% when compared to the same period a year ago. The sales decline resulted primarily from the lower production volumes discussed earlier. In addition, currency translation also reduced sales by $444 million. The euro to dollar exchange rate averaged 1.3 this quarter which was about 13% lower than the same period a year ago.
Our sales declined in all regions with North America down 48%, Europe down 27% and rest of the world down 29% excluding the effects of currency. Our sales declines in North America and Europe were less than the declines in the underlying vehicle production levels demonstrating content growth for TRW.
For the quarter, we had an operating loss of $125 million which compares to income of $188 million in the prior year. Included in this quarter’s operating loss were restructuring and fixed asset impairment charges totaling $24 million, the prior year included $8 million. The current quarter also included an intangible asset impairment of $30 million relating to trademarks. The impairment which is a non-cash expense was driven by further declines in forecasted revenues.
Excluding these special items, operating income in the quarter was a loss of $71 million which compares to income of $196 million in 2008. There were number of factors that contributed to this decline, by far the most significant driver was the reduction in sales. Net currency losses were also a negative in the quarter.
Although the loss was significant, the operating results demonstrated that our cost reduction and restructuring programs are taking hold. Had we not implemented the downturn management actions discussed earlier, you would have seen an operating loss well in excess of $71 million of the $71 million that we reported assuming our typical 25% plus contribution margin.
On the operating income, net interest expense was $42 million which is slightly lower compared to last year’s expense of $49 million given lower interest rates on our variable debt. In addition, a gain on retirement of debt was also recognized during the quarter. We re-purchased a limited amount of our bonds with a retired face value of $47 million at approximately $0.30 to $1 of face amount. Cash required to repurchase the bonds was just under $14 million which resulted in a gain during the quarter of $34 million. Subsequent to the first quarter we also purchased a further $10 million face value of bonds.
Finally, with regards to taxes, a $5 million tax benefit was recognized during our first quarter which compares to $47 million of expense last year. At the bottom line, we posted a GAAP net loss of $1.30 per share compared with earnings of $0.92 per diluted share in the 2008 period. However, when you exclude the special items that I just discussed, we had a net loss of $1.14 per share compared with earnings of $1 per share in the prior year.
In terms of EBITDA, we had $43 million for the quarter excluding special items compared with $345 million in the prior year measured on the same basis. Provided that production levels move north from the levels experienced in the first quarter as we currently forecast, we expect that our first quarter sales, operating losses, and EBITDA results were at their trough levels.
Moving on now to our liquidity and capital structure: For the quarter, operating cash flow was a use of $254 million which compares to a use of $115 million in 2008. Cash flow used after capital expenditures was $289 million compared to a use of $212 million last year. The cash flow outcome for the quarter was well managed. In this environment where every dollar counts, we are very pleased with our ability to protect cash especially considering the steep decline in operating earnings. Also worth noting was our ability to limit our capital expenditures. For the quarter, CapEx was $35 million which was significantly lower than the $97 million invested last year.
As I discussed earlier, we did use about $14 million in cash to repurchase a limited amount of bonds during the quarter. The pricing provided a good opportunity to reduce that at an attractive price. Our net debt position of $2.423 billion at quarter end is up $267 million from the balance at year end 2008 but down $176 million compared with the balance at the end of the first quarter of last year, again, another positive outcome for us considering the environment. As you know, we have no significant debt maturities until 2012, and have liquidity available to us of approximately $1.5 billion.
Subsequent to the quarter end, we have drawn down our revolver fully given the uncertainty in the financial markets and more specifically in the automotive industry. It’s important to note that at the end of the first quarter, we were in compliance with our key financial covenants; however, based on our current forecasts, it’s unlikely that we’ll remain in compliance throughout the remainder of 2009. At the appropriate time we will work with our bank group to amend our facilities in a fair manner. We feel confident in our ability to reach an agreed amendment with our banks.
Switching subjects now, to our expectations for the second quarter and the remainder of 2009, similar to our last earnings call we are not providing earnings guidance today. With changes to production schedules and other economic assumptions happening on a daily basis, providing an accurate and meaningful forecast remains difficult in this environment.
John discussed our revised full year expectations for production in North America and Western Europe down 35% and 21% respectively which should translate the full year sales for us in the range of $10.1 billion to $10.5 billion. Assuming the mid-point of that range, our sales will be down 31% from 2008 or $4.7 billion. A portion of that decline will come from currency movements. For the second quarter, we expect sales of approximately $2.5 billion which will be about 44% lower compared to the second quarter of 2008.
Lowering our cost and protecting our liquidity remain our top priorities in light of the forecasted level of sales. Every costing cash flow item is being challenged and managed to optimize our cost structure and cash flow in this environment. As John indicated earlier, we expect capital spending to be approximately $300 million which is less than our earlier projections.
With regards to restructuring charges, we are continuing to look at other actions that will be necessary in reaction to the current environment. At this point, we expect our full year cash restructuring to be approximately $90 million, up $40 million from our previous guidance. Second quarter restructuring is forecasted at approximately $25 million.
As you can tell from our comments today, the industry continues to face significant challenges. We continue to work hard to mitigate those challenges as we navigate through this unprecedented time period in the auto industry. We remain cautiously optimistic regarding global vehicle production and are encouraged by the success of our restructuring and cost containment actions already implement. I’m confident we’re executing the right strategy to manage through the current downturn and ensure long-term success for our company.
One last item before moving to your questions, as Mark indicated earlier, we expect to file our 10-Q for this quarter within the next day or so. Included in the operating segment portion of the filing you’ll notice that the company has begun to manage and therefore report our electronics business separately from our other segments.
Thank you, we’ll now move to the question-and-answer portion of the call.
Question-and-Answer Session
Operator
(Operator Instructions). We will take our first question from Himanshu Patel - J.P. Morgan.
Himanshu Patel - J.P. Morgan
Can I get the EBIT impact from foreign exchange?
Joseph S. Cantie
Yes, it was $444 million on the sales line, and it was roughly around 8% on the P&L side.
Himanshu Patel - J.P. Morgan
8% down versus a year ago?
Joseph S. Cantie
No, 8% on the $444 million; so, roughly speaking it was about $35 million to $36 million.
Himanshu Patel - J.P. Morgan
Joe, how should we think about these decremental margins going forward, the 15% rate or even if it’s a little higher, cleaned up for FX; it’s still much better than what you would have expected in most of 2008; should we model this sort of level in Q2 and the rest of 2009?
Joseph S. Cantie
Yes, you often hear me say that our contribution margin is somewhere at 25% plus. I think it’s great that we’ve been able to achieve something like the 15% you saw in the first quarter. There were a number of things that went into that; first of all, there is the effect of the currency. Secondly, we are really containing just about every cost you can imagine and we’ll continue to attempt to do that, but you have to wonder if that’s sustainable over the future. It is way of saying that I don’t think you can model in the 15% every quarter, I think it needs to be something higher than that, perhaps not as high as the 25% given the cost containment or restructuring we’re doing, but it’s probably somewhere in between those.
Himanshu Patel - J.P. Morgan
You mentioned your European sales excluding FX were down 27% and I think you mentioned the industry was down 41%; what’s driving the content growth and should that continue going forward?
Joseph S. Cantie
I think mix plays a big part of it, Himanshu; the reporting of production by folks like CSM and JD Power sometimes moves from quarter to quarter. I think that gap between the 41% and our 28% decline, I wouldn’t expect that to continue, and quite frankly there are certain quarters where it might move the other way. Recall that we do have an aftermarket group and we do have some commercial business out in Europe. So, there are a number of those things that sort of quell that comparison, but again there are certain quarters where it flips the other way. So I wouldn’t expect that to continue at this point.
Himanshu Patel - J.P. Morgan
The electronics business, by breaking it out, does that indicate that that could be a divesture candidate?
John Plant
Absolutely not.
Joseph S. Cantie
Let me add that it’s just the importance of electronics going forward in the vehicle and we felt that managing our business with more focus and having that direct interface with the customers is very important for the long-term future of that electronics business.
John Plant
That the focus that we are giving it are mentioned in fact in my might sort of the part of the call this morning, the advancements we’ve made in terms of the integration of the Crash center and the Zurich center; that was just one example with one of the Japanese vehicle manufacturers. We’ve also, with the increased focus we’ve been putting out over the last year or two, made major strides forward in our short-range radars and with several development contracts. So, it’s something which I think we want to try to nurture.
Himanshu Patel - J.P. Morgan
Lastly Joe, for your debt covenant calculations, are cash restructuring costs included in the EBITDA number that’s used?
Joseph S. Cantie
Covenant compliance; first $50 million of cash is not counted towards covenants, anything over $50 million is.
Himanshu Patel - J.P. Morgan
So, is there anything to read here by the fact that you’re increasing your restructuring spend? Is it as simple as saying that you need to restructure more and that’s why you’re doing it given industry volumes or does it also indicate that you’re getting more comfortable that the banks will give you some sort of pass on that?
John Plant
I think the way you should interpret it Himanshu is we have driven, I think, cost out to a very high degree because you can see from what we’ve done; we flexed every variable cost commensurate with production or sales, and on top of that then we flexed fixed costs to give us the level of contribution that we talked about earlier, and so having done it so much, what we’re trying to do is really position ourselves for the upturn. We’ve taken a cautious view of vehicle production in the shorter term. So, we’ve given you the assumptions for this year and we want to right-size the organization such that we can be profitable at much lower levels of production. So, come the day when volume does increase, then we expect to be, I’ll use the word pleasantly profitable, without giving you the exact calibration of that. So, we’ve seen the opportunities for further restructuring. I tried to say to you during my part of the call that if you look at the, I’ll say, the level of cost flex we’ve achieved with a very modest level of restructuring if you look over the last two quarters. I just see the opportunity for doing that again in the second and third quarters and basically trying to drive ourselves to a level of cost flex which gives us the opportunity to earn profit at a much lower level of production, and say one day production will increase and we’re going to feel good at that time. So, it’s nothing that you should read into it relative to bank coverage. It really is good housekeeping, the opportunity of us flexing the organization commensurate with the demand. So, I’ll say we’re doing the right things to the business; same as we continue to do the right things for the business in terms of engineering, winning new contracts, I talked about the biggest stability control contracts that we’ve ever won for the company also happened in the first quarter; of course that will come into production in the next couple of years or it will start and then gradually ramp up, but I think we’re doing the right thing. So, you should look restructuring as doing the right thing in the context of the industry circumstance.
Operator
Our next question comes from Christopher Ceraso - Credit Suisse.
Christopher Ceraso - Credit Suisse
A couple of things; I remember in ’01-’02 and maybe ’04-’05 TRW seemed to be one of the big suppliers that had maybe more issues than most with struggling tier 2s and 3s; can you give us an update on what’s happening now, particularly down the Chrysler supply chain and how it’s impacting you?
John Plant
First of all, I’m not really clear that which you’re referring to in 2001, 2002, or 2004 Chris, and I do happen to have been here for all that period time. I do know that we have referred to it and on each call generally we’ve been saying roughly each quarter there have been two or three suppliers which we had to manage during that previous period of time, and it may have been slightly increased in the 2005 timeframe when you saw a lot of significant bankruptcies even amongst the tier 1s in North America, but really at this point, nothing dramatic. We do have a lot more companies on our radar screen. We have been managing activity through that; in fact what we’ve been trying to do these last few months and in fact we’re going to be doing it even more during the next three months is to try to identify our potential areas of vulnerability before they occur and rather than react when they have occurred. We’re trying to take action such that we’re not left with holding the bag in terms of having our tooling at suppliers which are in financial trouble now. We had some troubled suppliers this quarter, we believe we’re going to have some in quarter two, and will have some in quarter three. We are driving hard to try to minimize that. You’ve seen us talk in previous calls about moving our sourcing footprints to low-cost countries. We’ve been trying to do that in a thoughtful way trying to make sure that the supplier base that we’ve been using has got a robust financial structure as the ability to fund proper program management to give us good launch management, and hence you can see if you look to that incoming supply TPMs at a new low for the company and our overall delivered TPMs at 6. So, I’d say it’s a feature of the landscape. It’s certainly something which we are very conscious about. We’ve probably got double the amount of suppliers on our radar screen at the moment compared to the average that we’ve had over the last couple of years because of the extremely low volume. My real concern is as the industry starts to increase throughout in the next month, I will say to you because I think if suppliers had been paid particularly here in North America, then they should be okay for the next month or so, which when volume increase, I think it is a major problem coming, and we’re trying to move in advance of that. So, I would say it’s a problem, it’s an ongoing problem, and it’ll be just nice to get to maybe next year when hopefully it’s less of a problem.
Christopher Ceraso - Credit Suisse
The topic that you just brought up John is something I also wanted to talk about; I remember that folks were worried in December that as production started to ramp up in Q1 that would cause a working capital outflow. It seems like maybe that has been pushed to Q2; is that going to have an effect on your own cash flow? Q2 is generally a better cash flow quarter in terms of working capital if I remember correct, is it going to be a little bit less healthy this time because of the timing of the production ramp?
John Plant
I would say within our forecast I’m not sure that I can comment on it quarter by quarter, but clearly when you look at on the year basis, it very much depends upon the rate of climb. If there is a rate of climb in the fourth quarter, in terms of the year-on-year movement, I’d say to you at the moment we are trying to manage our cash very carefully. The most notable way we’re doing it to be on the normal good housekeeping, is trying to contain our capital expenditure. You’ve seen the levels we’ve talked about. So, in a very broad sweep, if you think about it, we’ve tried to contain ourselves. We’ve incurred operating losses in the last two quarters, in Q4 of ‘08 and in this quarter, and if you look at the change in spend of CapEx compared to D&A, we are trying to match those two off such that we don’t use cash. I think Joe referred to the fact that at the end of this quarter, in fact our net debt is lower than the equivalent quarter in 2008. I am hopeful that we’re able to do that in the next quarter and the quarter after that, and for the end of the year at this point, it’s too difficult to call because things change so rapidly. Yesterday, we were reading about the government-sponsored scrappage plan; that will be fantastic if that comes onboard, it will be nice to see something in North America, and obviously especially for the US, and then the question is what production does that respond to? Quite honestly, the best problem I’d like to respond to right now would be the problem of increasing production to like I said 20% increase in North America, I’d welcome that. So, please give me that problem, Chris.
Christopher Ceraso - Credit Suisse
Just the last one on the scrap program; I think you mentioned this in your comments about the effect that that’s having on the mix of vehicles that are being sold; is that having any particular effect on TRW as far as your platform exposure? Is there an issue with the vehicles where you have stronger content that aren’t really responding to the program?
John Plant
No, I don’t think it’s a particular problem for us. I think you’d have to get right down to some very specific product areas; where we’re up or where we’re down, again as a broad sweep through we have, I’ll say, good content on both the small and medium car platforms. I wouldn’t like to say that it’s helped mixing the first quarter because I think an early question was about that. I would say we just nicely balanced across the spectrum and say, “yes, please” to see those small cars coming through. Now at some stage when I’ve been reading about, if you look at Germany for example, there’s been a lot of newly used cars which have been sold as well that’s created a lot of inventory out of those vehicles in the C and D segments. I am hoping that that inventory problem is now being cleaned out because you could buy a car up to one year old in that particular scrappage scheme. Then, we’ll begin to see some additional momentum in the back half of this year behind those, let’s say, particularly in the middle-sized vehicles.
Operator
Our next question comes from Dan Giles - Deutsche Bank.
Dan Giles - Deutsche Bank
The debt restructuring gain, is that something that will stay in your LTM EBITDA calculation for the covenant?
Joseph S. Cantie
No, it’s not included.
Dan Giles - Deutsche Bank
Can you just give us the progression of the revolver; I think maybe at the end of the quarter you had possibly like $300 million utilized and then drew up to $1.3 billion, and is that the full capacity right now?
Joseph S. Cantie
It is. Our revolver is just slightly under $1.4 billion, we lost some capacity when Lehman went bankrupt. So, approximately $1.3 billion or probably a little bit above the $1.3 billion, and so we’re fully drawn on it.
Dan Giles - Deutsche Bank
My last question is, in terms of the shortened work weeks in Europe, can you talk a little bit about how short they are at this point and in terms of the government subsidies that help out with that to make the workers somewhat whole on their pay, when do those subsidies end and what would be the plan at that point?
John Plant
We’ve had plants that have been on 4-day weeks, 3-day weeks, and a couple of them 2-day weeks, during the first quarter. I think short-time working will clearly be lower in the second quarter in Europe because if the production increases, it commences to maintain efficiencies. If you look at the country by country, you end up anywhere between paying, let’s say, 30% through 50% approximately of the pay on the short-time days. So, you don’t pay the whole pay during that day and then the governments provide the subsidies for the employees and takes them back up, not totally, but let’s say fairly close to the original pay. So, those things are in place. It varies differently in Spain, France, Germany, and the UK, as examples, and really nothing in Eastern Europe, and then in terms of duration, there have been several governments which have increased the duration of these plans out through 2010 right now. So they’ll remain available to us during the balance of this year and into next year should we need them.
Operator
Our next question comes from Brett Hoselton - Keybanc Capital Markets.
Brett Hoselton - Keybanc Capital Markets
Joe, credit facilities; your expectations on timing, is that something that you hope to get resolved here in the second quarter or is it something you could push back out into the third quarter?
Joseph S. Cantie
I am not sure Brett. We have constant dialogues with our banks; we keep them apprised of our situation. We have had discussions with them about the possibility that we may need an amendment, but we’re not in the heart of the process yet and don’t know what the timing will be. The good news is that we have time yet.
Brett Hoselton - Keybanc Capital Markets
Commodities cost; some of the suppliers are seeing some improvement in commodities cost as a result of lower steel prices, etc. You didn’t necessarily mention commodities cost; is there an expectation that lower commodities cost might be a tailwind for you?
John Plant
I would say in this first quarter not much of anything; essentially because during 2008 where we provided increases to certain supplier, then there is a carryover effect into 2009 of those. At the same time, there have been commodities which have fallen, and again, depending upon different commodities, different indices, that we’ve also seen commodities fall. If you took the carryover inflation and the deflation we’ve incurred in the first quarter, I’d say not much of anything. If I look forward based upon today’s commodity indices, then I would hope that that’s a beneficial thing for us as we go through the balance of the year, but I’m not will to quote at this point.
Joseph S. Cantie
I would say you need to actually produce and sell some vehicles to take advantage of the lower commodity costs.
Brett Hoselton - Keybanc Capital Markets
If you were to produce and sell some vehicles and you would be able to take advantage of that, is that something that is probably going to take a quarter or two, would it be a back half of the year event because of some lag effect or is that something that would affect you relatively?
John Plant
I think you should consider it that way, Brett. Think of it more in the second half, the beneficial thing, if production increases and also the carryover; the carryover inflation obviously falls away, and then the deflation comes in, I think you should think of it more in the second half.
Brett Hoselton - Keybanc Capital Markets
As you think about the new business, some suppliers are seeing some opportunities for near-term market share gains, let’s say takeover from distressed competitors and so forth; are you seeing anything along those lines?
John Plant
Yes, we have. We are either examining or we are actually transacting some of that right now, but I would there are not really big areas, like let’s say like air bags or something, let’s say breaks; we’ve got a pretty stable competitor base, all generally big guys; so, I don’t think there’s anything massive, but at the same time there are things which are happening where there is a weakened supply base and certain vehicle manufacturers would like to, I’ll say, fly to quality, and they believe TRW is a quality name.
Brett Hoselton - Keybanc Capital Markets
John and Joe, this is just a conceptual question and I’m not exactly sure how you can answer this, but substantial production shutdowns here at GM and Chrysler in the second quarter; obviously the supply base is under distress. There’s a potential with the bankruptcy at Chrysler and the potential for a bankruptcy of GM for this to stand out, but yet we’ve all been thinking about this for at least six months now. As you look at your supply base and as you think about conceptually the supply base for the entire industry, do you think that the supply base is prepared to deal with these kinds of shutdowns without some sort of a material production disruption occurring; how confident would you say you are that that they’re able to deal with this?
John Plant
I guess the guys who got to be really worried about that at the moment is going to be people like Ford. They’re not in the two names you’ve mentioned. So, it’ll probably be easier for them to answer that question than TRW because they have had a broader view of the things which can impact them immediately across in terms of vehicle bills or maybe you can ask Toyota or Honda. I am sure they’ve met with the Automotive Task Force and discussed this very point, but I’ve already given a pretty comprehensive answer, Brett, in terms of our sub-supplier exposure, and we certainly are dealing with some problems; we have some on our radar screen with heightened amounts that so far we’ve managed through them, and we’re trying to be more proactive rather than reactive in this situation, but for sure, we’re going to have others to deal within the next say six months.
Operator
Your final question comes from Kirk Ludtke - CRT Capital Group.
Kirk Ludtke - CRT Capital Group
I am on slide #19 and I was hoping to think about a pro forma liquidity calculation because you’ve got a couple things happening here, you got a couple of the accounts receivables facilities terminating and that would reduce liquidity, and on the other hand you’ve got the government-supported accounts receivable programs that are being introduced, and I am just curious how might those two adjustments affect the total liquidity?
John Plant
First of all on the government ones I’ll comment first on those Kirk, and then pass this question across to Joe. We said we’re using the UST program. We view it as insurance and that’s all we’re using it for because we don’t want to lose our receivable, and therefore damage our liquidity that way. Albeit we’ve noticed that the, I’ll say, the presiding judge in the Chrysler bankruptcy house has agreed for pre-petition payments to the supply base. So, I still think it was good insurance to take out. Basically, it’s a program we wish we didn’t have to use and didn’t want to use because of its cost, and I guess the sooner we can find a more stable position where we can exit using that program, the better really, because it will be a sign of a healthier industry, healthier costumers, and we don’t need to pay the cost basically of insuring against bankruptcy of a couple of customers because that wasn’t in; however, we bid those projects out in the first place. So, UST, I think assuming it stays, is a temporary nature, and hopefully it will come and it will go very quickly for us. We don’t want to use it. I’ll pass it across to Joe.
Joseph S. Cantie
Kirk, to answer your question, we did have to end our US AR facility in order to allow us to go into the UST Program, and the funding under the UST program is probably equal to or better than what we would have had the AR facility. We have the ability to put a new AR facility in place. So when we decide to get off the UST program or when the UST Program ends for us, we’ll quickly move to replace that. The same thing with some of the other comments that you’ll see about some of our other facilities around the world, a lot of that is us maneuvering to change our programs or working with our banks to change the programs. So when I look at going forward I don’t envision us actually having less AR facility liquidity; if anything, it will be equal or more once we move to swap and move it, if I can say it that way.
Kirk Ludtke - CRT Capital Group
Yes. That’s where I was headed, I would think this would be higher, wouldn’t it?
Joseph S. Cantie
Yes; again, since they’re not in place today, but of course we will work to make sure that we can maximize that liquidity and what you see us doing is a lot of short-term actions to use the UST Program and other programs and better maneuver our receivable liquidities, and I would hope in the feature that we would be higher rather than lower.
Kirk Ludtke - CRT Capital Group
With respect to the amendment process, I suspect that there’ll be negotiations surrounding pricing and the size of the revolver, and probably a lot of other things, as well as the covenants, but you mentioned earlier that liquidity was a priority, and I was just curious if there is anything else you could add to how you would view that trade-off between all those variables in the upcoming negotiations?
Joseph S. Cantie
We like liquidity obviously, but as I said we’re going to try do negotiate a fair amendment if in fact we need to, and I think at this stage, Kirk, I can’t really say much more; certainly I don’t want to prejudice the discussions we are going to have.
Kirk Ludtke - CRT Capital Group
I’ve got an even tougher question which is more for John, but is there anything you want to throw up there regarding the potential impact of the Fiat, Chrysler, Opel, Voxel; any kind of thought?
John Plant
What I think is if you look at our diversity, then I mean basically 60% of our sales in the first quarter was from Europe. If you were to look at within that, we’re probably slightly overrepresented at Fiat, we have a good relationship; so in all likelihood it wouldn’t be overrepresented relative to vehicle production, and we’re hoping that that’s therefore a net positive. Seeing Fiat with the opportunity of bringing vehicles to North America and if some of that technology is going to possibly be used at Chrysler in the future, then we would say that’s probably a net good thing for us just because of the, I’ll say, appropriately provided interim, and the breadth of the product offering with Fiat. Regarding Opel at this stage, I wouldn’t know what to say
Operator
Thank you. This does conclude today’s teleconference. We appreciate your participation. You may now disconnect at this time.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!