TRW Automotive Holdings Corp. Q2 2009 Earnings Call Transcript

Executives

John Plant - President & Chief Executive Officer

Joe Cantie - Chief Financial Officer

Mark Oswald - Director of Investor Relations

Analysts

Himanshu Patel - JP Morgan

Rod Lache - Deutsche Bank

Chris Ceraso - Credit Suisse

Brett Hoselton - KeyBanc

Patrick Archambault - Goldman Sachs

Derrick Wenger - Jefferies & Company

TRW Automotive Holdings Corp. (TRW) Q2 2009 Earnings Call August 4, 2009 8:00 AM ET

Operator

Good morning and welcome to the TRW conference call. All lines have been placed on 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 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 and good morning. I would like to welcome everyone to our second 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.

On today’s call, John will provide an overview of the current automotive environment and its impact on TRW. John will also provide a brief summary of the financial results for the quarter 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 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 two of the presentation for our complete Safe Harbor statement. The Risk Factors section of our 2008 Form 10-K and our first quarter 10-Q contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2008 10-K and 2009 quarterly 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 second quarter 10-Q within the next day or so. When filed, the 10-Q can also be accessed through either website. 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 for these non-GAAP measures to the closest GAAP equivalent can be found from the conference call materials, which are posted on the Investors section of our website at www.trw.com. Finally, a replay of this call can be accessed via dial-in or through a webcast on our website.

Replay instructions were included in the 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.

John Plant

Thank you, Mark and good morning everybody. The second quarter of 2009 was certainly notable for the automotive industry. We experienced bankruptcy filings at GM and Chrysler and also, hopefully, what we believed was the inflection point in the vehicle production during this devastating recession.

The impact on the industry resulting from the two vehicle manufacturers filing for bankruptcy within 30 days of each other was cushioned by the significant assistance provided to them by the U.S. Government. At TRW, we had focused on limiting our exposure to the bankruptcies occurring at one or both companies.

Based on the events that did transpire our mitigation efforts proved appropriate and allowed us to perform well during the quarter. The short term effect of the bankruptcy filings has had a minimal impact on our business with no losses incurred relating to the Chrysler or GM receivable exposures, albeit TRW did experience the full downdraft of extremely low North American production.

In fact, zero production for two months in the case of Chrysler. The lasting effect of these restructurings will shape the future of the automotive industry in North America for years to come. In addition to the government support provided to GM and Chrysler, the U.S. market for cars is expected to benefit in the second half of 2009 given the Cash for Clunkers legislation that was recently approved and hopefully is re-approved today.

Although the potential benefits maybe limited due to the size and structure of the program, any stimulus to demand will be positive in the short term. Outside of North America, scrappage schemes, tax reductions and other plans aimed at stimulating car sales are continuing to spur demand.

In the U.K. for example, it’s estimated that the scrappage scheme, which was implemented in April, accounted for one in five orders during the first few weeks of the program. Car sales in Germany rose 26% in the first half of the year. “Thanks to their scrappage scheme.” Programs have also been enacted in France, Italy and Spain.

There are positive signs emerging in North America and in Europe and reinforces our belief that the worst is behind us. The road to recovery, however, will be gradual and will span across several quarters with the possibility of a further downdraft to come.

In this slow recovery environment, the actions undertaken by TRW in terms of downturn management have proved to be essential, as demonstrated in our second quarter results issued this morning. In addition to our downturn actions, we amended our bank agreement in light of the extraordinary challenges that the industry and TRW has faced.

The credit amendment that was finalized in late June provides TRW with additional financial flexibility and secures the company’s access to in excess of $1 billion of liquidity. Joe will discuss the amendment in more detail in just a few minutes. As you can see from TRW’s results posted this morning, the restructuring actions implemented over the past three quarters have had a significant impact on TRW’s second quarter performance and have helped offset the dismal, but now improving vehicle production levels.

The benefits realized from our cost reduction programs were bolstered by the improving production schedules that began to appear notably in Europe. Aided by various stimulus programs, vehicle sales appear to have stabilized and are now starting to show month-over-month increases in certain markets.

Stabilization of sales, combined with historically low production levels over the past three quarters have helped the vehicle manufacturers, who have reduced their inventory levels. The ability to clear this excess inventory was essential to stabilizing production going forward. The trend of manufacturers canceling previously scheduled down weeks in Europe has continued through the second quarter. As a result, second quarter production was up significantly compared to the first quarter of the year.

In North America, the magnitude of the Q2 increase was very small due to the Chrysler total shutdown and the extended down weeks and plant closures at General Motors. The initial recovery cannot come soon enough for the fragile supply base. Although limited government assistance was provided to certain suppliers through the Treasury Supplier Support Program, the prolonged period of low production has resulted in bankruptcy filings at several suppliers, including major ones.

As production begins to increase, further strains across the supply base are likely to be exposed. Before going into further detail on the overall environment and our expectations for the remainder of 2009, let me first provide you with a brief financial overview, where we finished the quarter and for the first half.

Second quarter sales of $2.7 billion were down some 39% compared with the prior year, but up 14% compared to our first quarter results. The year-over-year decline continues due to the extraordinary low, but now improving vehicle production levels. I would also mention that the year-over-year comparison is difficult considering that the second quarter of 2008, and indeed our first half last year, were indeed record results for both sales and profits.

Excluding the one time items, which Joe will discuss in more detail, the company reported second quarter net earnings of $8 million, or $0.08 per diluted share. Within this number, our operating income was $70 million. The ability to be profitable at the operating level on sales of some $2.7 billion or the production levels we saw in the second quarter provides clear evidence that our restructuring actions are taking hold.

TRW’s efforts during the last nine months relating to our downturn in management resulted in run rate savings in our second quarter that pertain to the many action programs. In the second quarter compared to the prior year, vehicle production was down in North America and in Western Europe, our two primary markets

In North America, the shutdown at Chrysler and the extended down weeks at GM resulted in a 49% reduction in overall vehicle production. Although, production showed a steep decline compared to the year-ago levels. Overall production in the second quarter was up 6%, compared to the first quarter in North America.

Production in Europe did hold-up better and in Western Europe, production was down 27% for the quarter, compared to the same period a year ago. However, compared to the first quarter, production improved some 23%. In addition to our two major markets, vehicle production was mixed in the emerging markets with key regions for TRW, such as South America being down 10% as an example.

With respect to the first half, excluding special one-time items, we posted a year-to-date net loss of $1.06 per share on sales of $5.1 billion, compared to net earnings of $2.44 per share on sales of $8.6 billion in the prior year. However, we are encouraged to see evidence within our results; the restructuring and cost containment actions are paying dividends.

Our actions in the face of the recession have continued to be focused on revenue generation, variable cost reductions, structural costs and capital management. Several actions with each of those disciplines have resulted to the overall success of our restructuring plan.

Let me update you on our continued progress in a few areas. Beginning with personnel actions, the majority of reductions are now complete. Smaller and targeted reductions will continue in both North America and Europe, but will be largely finished by the end of Q3 2009.

In total, when combined with the 10,000 employee reduction achieved last year and the 5,200 achieved year-to-date in 2009, the global workforce has been reduced by approximately 20% since the middle of 2008. In addition to this, we have continue to avail ourselves of the short-time working programs to the full extent possible in Europe; albeit utilizing them at a lower level in the second quarter, compared to the first quarter due to the increased production.

With regards to facility closures, we continue to look for opportunities to consolidate and close certain operations. During the quarter, we announced our intention to close the fastest operation in our Queretaro, Mexico plant and consolidate the business with another Mexican location. This action will leverage our injection molding capabilities at one site, and improve our overall market competitiveness.

Our quality, Six Sigma and business excellent programs ensure the cost reduction programs and actions are achieved without sacrificing quality. In fact, regarding quality, our first-half results remain at a world class level of approximately six parts per million as an average across all products and customers. This is a tremendous accomplishment that we are all proud of.

These disciplined processes also help support a number of our product launches during the quarter. A few examples include multiple product launches for TRW on the new Ford Taurus in North America, the Renault Scenic in Europe, the Porsche Panamera in Europe and the Volkswagen Polo in South Africa.

These recent launches continue to strengthen our competitive position by offering the broadest portfolio of active and passive safety products. I would also like to point out that our broad portfolio safety products are well positioned for the new Chrysler and the new General Motors.

At Chrysler, combining our fourth and sixth largest customers allows efficiencies in supporting our customers through their engineering programs and in addition, may create cross-selling opportunities between Chrysler and Fiat product areas in the future. General Motors is expected to remain one of our most significant customers once their brand divestitures are complete.

Before I turn the call over to Joe, let me comment on our expectations for the third quarter and the second half of 2009. Overall, production forecasts are stabilizing and continue to show quarter-over-quarter improvement into the future. In North America, we expect third quarter production to be approximately 2.2 million units; a decline of 27% compared to last year, but importantly, a 400,000 unit increase over the second quarter production.

As a result of the extended down weeks that took place in the second quarter, we now believe North American production to be at 8 million units for the full year. Within that estimate, the second half production is expected to be approximately 1 million units higher than for the first half of the year.

During the third quarter, vehicle production in Western Europe is forecasted at 2.9 million units, down 9% compared to the same period a year ago and down slightly from the second quarter levels, but this is due to normal seasonality patterns. Total production in Europe is forecasted at 4.2 million units. For the full year, the total European production estimate is now 16.4 million units. Within this estimate, Western European production is estimated at 11.6 million units.

In addition to these lower absolute levels of production for the year, the mix shift to smaller, more fuel-efficient cars in the A and B segments are expected to continue primarily as a result of the scrappage schemes. These vehicles tend to have less safety content and carry lower prices compared with the larger luxury vehicles.

Beyond North America and Western Europe, full-year production levels are mixed with higher growth countries of the world such as China and India and South America being offset by lower production in Russia.

The year-over-year decreases in vehicle production in most regions, albeit with the second half of 2009 production increasing notably compared to the first half. There is uncertainty surrounding with the global economy and the effects of the continued mix shift to smaller, fuel-efficient vehicles and this is reflected in our revised 2009 forecast. Based on the current production schedules, we estimate full-year sales of approximately $10.5 billion to $10.9 billion and this is slightly better than our earlier expectations.

Sales in the third quarter, are expected to be approximately $2.8 billion, or 22% lower than the prior year, but up on Q2. We now expect capital spending to be approximately $260 million, which is less than the $300 million guidance that we provided to you previously.

Finally, with regards to restructuring, we continue to expect full-year cash restructuring to be approximately $90 million. We remain cautiously optimistic and are encouraged by the recent positive trends in vehicle production.

TRW is well-positioned to take advantage of an industry rebound, especially in light of the cost reduction actions that have already been implemented. The actions taken to-date and TRW’s results based on those actions demonstrate our ability to earn an operating profit at significantly lower industry production levels.

With that, I’ll now hand the call to Joe to discuss our financial results in further detail.

Joe Cantie

Thank you, John. Good morning, everyone. As you can see from our financials published this morning, along with John’s earlier comments, our second quarter results, while suffering from the historically low car production levels at our customers, demonstrate our strong downturn management focus.

For the second quarter in a row, our sales were down over $1.7 billion compared to the prior year. This makes any comparison to the prior year numbers, which were the best results in the history of the company, a difficult one at best.

While the comparisons to the prior year are humbling, there are a number of positive outcomes in our results for the second quarter which are encouraging signs for the future. First, our sales in Q2 were 14% higher than the first quarter of this year, hopefully indicating that the first quarter was the trough in terms of industry production levels.

At the EBIT level, we were profitable on sales of $2.7 billion, demonstrating the success of our restructuring and cost containment initiatives over the past nine months. Our decremental margin on the sales decline compared to the prior year and our incremental margin on the sales increase compared to the first quarter were both in very good shape.

Lastly, we completed an amendment to our primary credit facilities during the second quarter that ensures substantial liquidity is available to us as we manage through the industry downturn in 2009. I’ll expand on the bank amendment, liquidity and our capital structure in a few minutes. First, let me review our second quarter results with you in a bit more detail.

For the second quarter, we reported sales of $2.7 billion, a decrease of $1.7 billion, or 38.6% when compared to the same period a year ago. In addition to the lower production volumes discussed earlier, currency translation also reduced sales by $466 million. The euro to dollar exchange rate averaged 1.37 this quarter, which was 12% lower than the same period a year ago.

Excluding the effects of currency translation, sales declined about 28% compared to the previous year. Revenues declined in all regions with North America down 54%, Europe 21% and the rest of the world down 18%, excluding the effects of currency. For the quarter, we had an operating profit of $44 million, which compares to income of $224 million in the prior year.

Of course, the primary reason for the decline in operating income was the $1.7 billion of lower sales between the two quarters. Although the comparison to the prior year is difficult, the fact that we achieved an operating profit on the depressed levels of production that occurred in Q2 is a very positive outcome for us.

The decremental margin on the decline in sales quarter-on-quarter was about 11%, which is well below our typical contribution margin levels. While a number of factors contributed to this outcome, including a few non-recurring income items, it demonstrates that the downturn management actions implemented by the company are having a positive effect.

Lastly, it was encouraging for us to have an operating profit in Q2 compared to the operating loss of $95 million incurred in the first quarter of 2009, excluding an intangible write-off that we had in that quarter. As expected, included in this quarters operating profit were restructuring and fixed asset impairment charges totaling $26 million, the prior year had $24 million.

Below operating income, net interest expense was $42 million, which is comparable to the prior year level of $44 million. Unfortunately, beginning with the third quarter of 2009, we do expect a sharply higher level of quarterly interest expense as a result of the higher costs associated with the bank amendment, which we closed on June 24. I will expand on the details of the amendment later in my comments.

At this point, we are expecting third quarter interest expense to be approximately $65 million, increasing slightly in the fourth quarter. During the second quarter, we recognized a net gain on retirement of debt totaling $1 million, which consisted of gains related to minor bond purchases earlier this quarter offset by the write-off of fees associated with the amendment.

Finally, tax expense was $14 million in the quarter. The 2009 period included tax benefits of $6 million related to the previously mentioned restructuring actions. In order to help you with your modeling in the area of taxes, for the full year of 2009, we are currently expecting expense in the range of $30 million to $60 million despite having a loss before taxes due mostly to our geographic earnings profile.

At the bottom line, we posted a GAAP net loss of $0.11 per share compared with earnings of $1.24 per diluted share in the 2008 period. Excluding the net gain on retirement of debt in the 2009 quarter and restructuring charges net of tax benefits from both periods, we had net earnings of $0.08 per share compared with $1.44 per share in the prior year. In terms of EBITDA, we had $192 million for the quarter, excluding special items, compared with $404 million in the prior year as measured on the same basis.

Moving to a brief review of the first half results, and I do this reluctantly given the comp to the prior year record results, we reported sales of $5.1 billion, which is a decline of $3.5 billion, or 40% compared to the previous year. The magnitude of this sales decline from the best ever first half in 2008 to the most difficult first half this year was unprecedented.

Currency translation accounted for $910 million of the decline. The remaining variance, $2.6 billion, is due to the significantly lower production levels at our customers. Excluding restructuring and asset impairments, we had a $1 million, let’s call it, breakeven result at the operating income level for the first half. Encouraging results given the top production levels.

After interest, gains on debt retirement and taxes, we reported a GAAP net loss of $1.40 per share for the six month period. Excluding the gain on retirement of debt and the intangible asset write-off, as well as restructuring charges and tax benefits from both periods, we had losses per share of $1.06 in 2009 compared to earnings per share of $2.44 in 2008 and finally, in terms of adjusted EBITDA, we had $235 million in the first half.

Moving on to our cash flow and capital structure; for the second quarter operating cash flow was a positive $23 million, which compares to $40 million in 2008. Cash flow used after capital expenditures was $14 million compared to a use of $80 million last year. As you can see, we had a strong cash flow performance in the second quarter, as we continue to manage the cash situation in light of the industry conditions.

For the six month period, net cash used by operations after CapEx was $303 million compared to a use of $292 million in the prior year. For the six months, capital expenditures were $72 million, which is down significantly from last year’s spent of $217 million. For the full year, as John mentioned, we now expect CapEx to be approximately $260 million lower than our expectations three months ago. Of course, in this environment, we’ll protect every dollar of cash flow that we can right now.

At this point, for the full year, we estimate that our cash usage from operations, less capital expenditures, will be in the range of $400 million to $600 million. In terms of liquidity, at the end of the second quarter, we had in excess of $1.2 billion available to us consisting of cash on hand, undrawn revolver and receivable securitization facilities. As you can see, despite the expected cash usage in 2009, we have and will have liquidity available to us to weather the current downturn.

At the end of our second quarter, our net debt was $2.469 billion, down $200 million from the balance at the end of the prior year’s second quarter. Of course, the other positive for us, which occurred towards the end of the second quarter, is that we successfully amended our bank debt facilities.

The amendment, while costly in terms of additional interest and upfront fees, eliminates the uncertainty around access to our liquidity and provides covenant relief as the company maneuvers through the current downturn. You can find the details of the amendment in our June 26, Form 8-K filing, which you can access through our website.

Switching subjects now to our expectations for the third quarter and the remainder of 2009. John discussed our revised full year expectations for production in North America and Western Europe, down 37% and 19% respectively, which should translate to the full year sales for us in the range of $10.5 billion to $10.9 billion. Assuming the midpoint of that range, our sales will be down 29% from 2008, or $4.3 billion. A portion of that decline will come from currency movements.

For the third quarter, we expect sales of approximately $2.8 billion, which will be approximately 22% lower, compared to the third quarter of 2008 and similar to the level of sales achieved in the second quarter or slightly higher despite the summer shutdown periods, which are substantial in Europe.

Lowering our costs and protecting our liquidity continue to be our top priorities in this environment. With regards to restructuring, we are continuing to implement actions that are necessary in reaction to the current environment. We expect full year cash restructuring to be approximately $90 million, which is consistent with our previous guidance.

Third quarter restructuring is forecasted at approximately $15 million. As mentioned earlier, full year 2009 tax expense is expected to be in the range of $30 million to $60 million. As you can tell from our comments today, the industry continues to face significant challenges, but we are encouraged by the signs of production recovery we are seeing, albeit slow recovery.

The first quarter of 2009 looks like the trough in terms of global industry production. We continue to work hard to mitigate the challenges associated with unprecedented automotive production levels. We remain cautiously optimistic and are encouraged by the success of our restructuring and cost containment actions already implemented.

Thank you. We’ll now move to the question-and-answer portion of this call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Himanshu Patel - JP Morgan.

Himanshu Patel - JP Morgan

Joe, I don’t know if you disclose this or not, but can you tell us how your European revenues fared on a constant currency basis Q1 to Q2? I just wanted to compare that two industry production or maybe you could just tell us, did you guys perform in line with industry or above or below?

Joe Cantie

If you look at our first quarter sales in Europe, compared to our second quarter adjusting for currency, our sales were up about 20%-ish. When I compare that to CSM, which is what you mentioned, they were slightly higher. They were up to about 26%. The reason for the difference, there is nothing indicative there that’s troublesome.

The reason for the difference is as you know; we cut-off differently on our quarters. So, the first quarter cut-off at April 3 and what winds up happening is TRW’s first quarter has about 5% more days than CSM. So, it has to do with a lot of timing between CSM and our cut-off periods, along with some timing of stocking for the Q2 production.

If you look back at the first quarter and compared first quarter to fourth quarter, you have the absolute opposite effect where we were much higher than CSM, again because we had those extra days in the first quarter and we actually start shipping some of the parts in March for April production.

John Plant

Eventually Himanshu, what you can see is basically on the half about the same and any mix shift to smaller cars was offset by content growth.

Himanshu Patel - JP Morgan

It looks like Q1 to Q2 at the EBIT margin line; you converted at about $0.40 on the dollar. If you just look at sequential EBIT change over sequential revenue change. Can you talk a little bit about the sustainability of that level of contribution margin going forward?

John Plant

I mean clearly when you look at, we have obviously calculated Himanshu both the decremental contribution levels compared to the second quarter of last year and also the incremental compared to the first quarter of this year. It’s always difficult to really comment on either sustainability through what period.

Certainly I think in the shorter term, you would say, why wouldn’t it be the same, two years from now, I mean who can say as you are incrementing at those times, but certainly through what has been this enormous trough and currently, it’s difficult to see why wouldn’t be of a similar order of magnitude, but again, you have to expect variability within that.

I mean there will be some effects of, I’m sure that the summer shutdowns throughout Europe and the fact that some of the short-time working that we still experiencing, because production is still lower, may be inefficient in the third quarter because of the holiday shutdowns, but there is a broad sweep through. It will be, I would say, similar orders of magnitude, but you can have variability around it’s on a quarterly basis.

Joe Cantie

I would say your question is specifically Q1 versus Q2. If you look at our sales increase and then look at the operating profit increase, you get something like a 43% incremental margin. Obviously, within that the contribution margin on our additional sales level is in that 23% to 25% zone that I keep talking about.

The majority of the difference is the fact that we saw the full effect of all the cost reductions, headcount reductions come true in the second quarter. So, to be very clear, you wouldn’t expect a 43% incremental margin going from the second quarter to the third quarter if the sales were up. You only get that restructuring and headcount benefit once.

So again, I keep directing people to this 23%, 25% volume contribution margin and that’s what should be expected when you go up and down on the volume side.

Himanshu Patel - JP Morgan

Then last question. As you kind of think of the industry production volumes coming back up hopefully next year, any thoughts on sort of a normalized profitability for the business, whether you look at it on a gross margin or an EBIT margin level basis?

I think one of the bigger questions we are all trying to answer is, is the business structurally more profitable in the next cycle? Because of some of the cost actions you have taken. Should we view historic margins being repeated as long as volumes go back to historic levels?

John Plant

We are optimistic Himanshu that the work we have done does put us in a relatively healthy zone in terms of margin position. I think at this point, we’re hesitant to nail a percentage and we wouldn’t want to do that, but if you looked at our operating profit as a percentage of sales in the last quarter and, if you looked at the underlying production, which really, I mean while it was relatively healthy on an increase in Europe, it still was massively down.

Certainly, North America, when you’ve got a run rate below $8 million, maybe more like $7 million, then I mean we were pleased with that result. So it would lead us to believe that the margin in the future would be at the higher level, certainly higher than we’ve experienced in the second quarter just from the fact that production is now coming up and we should begin to enjoy some of the benefit that’s cost takeouts we’ve done. Joe, anything you’d like to add?

Joe Cantie

Yes, I’d just reiterate what you said, John. I think clearly, when volume returns, I think you’ll see us and the other companies out there are doing the restructuring that we’re doing are going to be more profitable. So it’s going to take a, we’ll return to our former profitability levels absolute on a lower level of sales.

Himanshu Patel - JP Morgan

One last housekeeping question, Joe, you mentioned $30 million to $60 million tax guidance for the year. Does that include or exclude the impact of restructuring on one-timers?

Joe Cantie

It includes. So that would be our absolute tax expense.

Operator

Your next question comes from Rod Lache - Deutsche Bank.

Rod Lache - Deutsche Bank

A couple of questions, I think Joe, you mentioned that there may have been a few unusual items benefiting EBIT. I’m not sure if I heard that correctly. I did catch the $1 million benefit, but was there anything else there? Could you tell us what the impact was of FX on the EBIT line in the quarter?

Joe Cantie

Sure. I think regarding the one-off things, if you go through the example that I just went through with, Himanshu where our incremental margin was 43% and I indicated that contribution margin on our volume is normally in that 23% to 25%. The remainder of that increase is down to the restructuring and cost actions. We’ve taken a lot of headcount out.

Typically when you do that, you’re adjusting your pension plans, you’re adjusting some of your other benefits associated with those takeouts. That results in the odd $5 million to $10 million coming in that doesn’t come in every quarter, but it’s really related to things like the headcount that we’re reducing and a lot of the benefits related to that, so not a big deal, but I felt it was worth mentioning. Then your second question, which I can’t remember again, Rod...

Rod Lache - Deutsche Bank

On the impact of FX?

Joe Cantie

Yes, we benefited in the quarter by something like $460 million I think, on the sales line. I’m sorry. It was down $460 million compared to the second quarter and we were roughly about a negative $25 million to $30 million on the P&L side, mostly related to translation, Rod.

Rod Lache - Deutsche Bank

The 23% to 25% contribution margin that you’re sticking with for kind of the prospective view, does that get ratcheted down as you have to feather back employment levels. Is that sort of a net number that you expect to be able to maintain as you bring capacity back online?

John Plant

It won’t be down from that.

Rod Lache - Deutsche Bank

Then on the cash flow for the rest of the year, you mentioned. I think, $400 million to $600 million cash use so $100 million to $400 million in the back half. It’s a pretty wide range. Could you talk a little bit about what some of the drivers would be of meeting the high end or the low end? Are there any unusual things that you’ve done in the short run to kind of husband cash that might reverse under more normal conditions?

John Plant

First of all, there’s nothing unusual at all in terms of to try to bolster the current cash position. That’s not the case on that one, Rod. I think the uncertainty that we have at the moment is, and it’s a good problem to have.

What exactly will we face in terms of the up-tick in sales in the fourth quarter and therefore, what might be in our receivable therefore, our working capital at the end of the year and at the moment, we want to take a relatively cautious view regarding that and hence the bandwidth that we have suggested at this point in time.

So I mean really the question will come is what is the November and December sales, which we are hopeful are going to be substantially up on 2008. In fact, if we have take North America we have called out production at $8 million, but if we took the Deutsche Bank stuff that you put out this morning, then that would be more like $8.5 million.

Therefore, that would imply substantially higher production in particularly the fourth quarter this year seeing as inventory levels are so low at the moment. We agree with you that inventory levels of 48 days have to be rebuilt. So, given all of that, the real question is where do you call the sales.

We have made a broad assumption and at this stage, the caution really is on working capital essentially down to receivable management through the end of the year. Not that we don’t expect our customers to pay us just that more sales will equal more receivables, which is a pretty good problem to have.

Joe Cantie

I think John has got it right. The reason for the wide range is there are so many different things that can happen on the sales side as we exit the year. That’s a reason for the wide range. The other thing I would point to is we said earlier that our CapEx guidance for the year is somewhere around $260 million through the first two quarters or the first half, we are at about $70 million. Just the way that we have to lay capital for next year’s launches, our CapEx will be higher in the second half versus the first half and that is a contributing factor to it as well Rod.

Operator

Your next question comes from Chris Ceraso - Credit Suisse.

Chris Ceraso - Credit Suisse

Just to revisit one of the comments, did you say that maybe there was a curtailment gain, is that what happened in there as you take people out and make changes to the benefit plans?

Joe Cantie

Yes, it’s a number of different benefit related things, so when you take people out, think of like vacation accruals, think of healthcare adjustments, etc., so it is a number of things.

Chris Ceraso - Credit Suisse

That is in the $5 million to $10 million range?

Joe Cantie

Yes.

Chris Ceraso - Credit Suisse

Are you going to go back to a point where you exclude restructuring charges in your numbers as you go forward kind of as we go through this period?

John Plant

I don’t think we want to make a definitive statement on that subject at this point in time. We did note that we were going to go through a period of higher restructuring than what is normal. We also notes that we were almost unique in the industry calling out, it is part of our normal operating sort of results. So we are not sure at the moment, Chris. So I think you should assume that it gets called out is an exceptional for this point in time and no policy decision on that at all.

Chris Ceraso - Credit Suisse

The CapEx of $260 million, that is a little bit more than half of what you used to run at. What should we think about as we go forward in terms of normal CapEx for the business? Or maybe said another way, of the $500 million or so that you were running at in the past few years, how much of that would you say was for maintenance and for the normal productivity enhancements that you do in a year?

John Plant

The way of want to answer that one is clearly being in the $200 million to $300 million range is lower than the $500 million. We spent, I guess, an average of $500 million, $520 million over the last three to five years and essentially that was at a level when I will say industry production in Europe was 21, heading to 22, maybe 23 and North America where underlying capacity was let’s say we were building 15 million and 16 million units

Clearly both of those territories, because of what we were putting in, I mean we had capacity in terms of manufacturing equipment to do over 22 million in Europe and probably over 16 million in North America.

So right now, if you take this last year, I mean our machinery has hardly worked, particularly here in North America I mean whatever lives are of those equipment, it is clearly longer and we have got an enormous ability to increase our throughput through the current asset base for sometime to come.

So let’s assume that we see $10 million in North America next year. In terms of capacity, we don’t need any more equipment. We will need new equipment for new launches and tooling and for assembly lines on new product launches.

For example, our new electric steering, but clearly it’s going to be lower levels for the next couple of years than our historic level. At the same time which will increase and given the launches that we expect, then our expected should be increasing from 2009, but still substantially lower than historically at the $500 million plus level.

Operator

Your next question comes from Brett Hoselton - KeyBanc.

Brett Hoselton - KeyBanc

I wanted to ask you a little bit about potential for takeover business from some of your competitors. Obviously, Delphi is going through some challenges. I’m still surprised personally, that Key Safety Systems is still in business, but any opportunities near term for a takeover business that might help you from a capacity utilization standpoint?

John Plant

I mean, at the moment we could point to one, two or maybe three or four examples. I think, relatively minor business, which either has come out. I mean, we have one where we could point to here in North America starting in July of a relatively small nature. In terms of business, we’ve taken over from somebody who is considered to be in difficulties or it maybe this is a sustainable company going forward.

I would say it’s been relatively minor at this point in time and it’s truly difficult to know what is going to happen, when we see the future sourcing roadmap of the customers going forward. One would expect that that sourcing will tend to be hopefully, the stronger suppliers.

Clearly, we believe that we’re in that category of having clear liquidity, good operating model and business model. So I think we’ve been seeing that TRW will be able to sustain and take this additional business going forward, so either opportunities coming forward. More, I think you mentioned Delphi. I mean I guess that once that gone through restructuring that might result in opportunities for us across several of our product ranges.

At this point in time, I’d say it’s a fairly modest amount of business, a bit starting in the summer of this year and a bit more in the early part of next year, but nothing of a major note. At this point in time, we can say we received firm production orders. We maybe working on two or three things in terms of shadow plants, but that’s about it at this point in time.

Brett Hoselton - KeyBanc

Then you talked about your profitability, let’s say returning Joe, at a lower production level. I guess as I think about the revenue side of things, as you think about those new contracts that you’re bidding on today and so forth. Is there any change in those new contracts, whether would be in terms of changes in the expected price downs or commodity cost escalators or pricing? Is anything changing there or is it just kind of the same way as it was five years ago?

John Plant

I mean, first of all, in terms of stuff coming through.

Brett Hoselton - KeyBanc

What I’m trying to get at is, are the contracts more profitable for you than they have been for the past five years, because clearly the supply base has been under tremendous pricing pressure for the past five to 10 years. I’m wondering, given the supplier landscape has obviously somewhat let’s say, diminished at this point in time, ravaged possibly at this point in time, has the competitiveness lessened to the point where you might be able to have a little bit more pricing power?

John Plant

I think it’s going to be in a couple of waves on this one. First of all, there will be products, which are going to come through in the next year or so, which were I’ll say, were bid and were maybe in a hypercompetitive mode. In our case they will, I believe all be profitable.

In terms of where I think mentally we are is that, I think we should deploy our capital in a very considered way and what I really mean by that, interpreting it that is that we should expect a good if not better returns on capital we commit in the future because fundamentally, cost of capital, I believe has gone up and we should act accordingly.

I suspect that’s many of the other large mature suppliers in the industry will probably be doing likewise. Because, when you look at some of our competitors, I mean they themselves will have recognized their underlying costs of capital have increased and they will deploy their capital and expect a higher return on it in the future.

Now, those contracts may take time to come through and therefore, I think you’re going to see, I will say, it change over a period of time and also recognizing that the supplier landscape has also changed.

Operator

Your next question comes from Patrick Archambault - Goldman Sachs.

Patrick Archambault - Goldman Sachs

I have two questions. First, just on coming quarters; you touched on it a little bit, just with your color on most of the incremental headcount reductions having been accomplished.

Are there any costs that have been sort of maybe taken out that have been temporary in nature that we would expect to sort of come back in the back half, as volume recovers? We’ve heard other companies pushing back on 401k and travel and just all sorts of things that will, by definition have to be there once business activity recovers so, just trying to get a sense of that first.

John Plant

Well, clearly we have thrifted every cost and I would include travel, but we are also being very clear in all things we have been doing. We’ve tried not to take soft options and have costs, which are of a temporary nature. Now, I mean inevitably, just use travel. I guess at some point that will probably increase, but that will only increase commensurate with our business need to do so with increased activity levels.

All of the other things we’ve been doing, we’ve been hopefully very conscious that the vast majority of everything that we’ve done is of a structural nature. In particular, during our discussions of cost take-out, we’ve been concentrating on not costs which are just driven by compression and therefore bounce back like a rubber ball afterwards, but really costs, which either we’ve taken out structurally.

If we have seen compression, its then, how do we work in an intelligent way to ensure that’s, there is a structural take-out through the application of I will say of knowledge and such things. So, I would say, we are optimistic that the vast majority of the savings that we’ve taken out are indeed fundamental and are there for the longer term. Even though, inevitably I’m sure that there will be some compressive effect on some of the areas.

I will say generally speaking, we have tried not to take soft options, which would just lead to cost-compressed, cost-expand, because I don’t think that’s the right way to approach what we’ve been through. If you look at it, for TRW the one thing that I would point to is, back in October of last year at the very first few days of October, we moved and moved significantly and have undergone our first level of structural cost take-out by the end of October last year.

Now, as I said the majority of our headcount actions have already been taken albeit, some came out of course in Q2. Therefore, there is a carryover affect, but the rest of it is really tidying up through Q3, but it’s fundamentally structural.

Patrick Archambault - Goldman Sachs

I guess my other one was just a very high level question on revenue. We’ve focused a lot on costs, but wanted to just get your take-on where you thought some of the biggest content growth opportunities were for TRW as we look out maybe a little bit longer, maybe over the next 12 to 18 months?

John Plant

Well, 12 to 18 is a very short period of time to get content growth. I mean, what I’d have to do, in that period of time, is to, if you look at the last few years where we’ve experienced content growth, during the next 12 months, you’d expect the same trajectory of that and of course, this particular our, revenues today are influenced not only by vehicle build, but also the huge mix shift that we’ve seen from trucks to cars and within cars down from big ones to little ones, let’s say, across the world.

What you can see from our results is that, we also had content growth offsetting some or if not all of that. So in the shorter term, yes, I think the same trajectory you should anticipate for the future. In the longer term, I think there are things coming through we haven’t talked in the recent past about. For example, we’ve used electric steering as one of the things that we’ve been doing and clearly that is an area of content growth. In fact, I think we announced last quarter the launch of our first belt drive rack steering program here in North America.

In fact, in the second quarter, we’re just launching the second wave of that, which goes with the Ford Eco Boost engine so that which goes on the Flex and the new Lincoln Mark T and tender Taurus. So I think there’s other things that are going to come through and then we are hopeful of some of the other programs we are developing to some years in terms of our driver assist programs and radar programs, that those will also see fruition and give us content growth in years to come.

We’ve been, I’ll say, spending sufficiently and in fact, driven our engineering spends up over recent years. Albeit we have cut back this year, so intersyncly, I’d say, 12 to 18 months, you can’t comment about those things which are in the pipeline and over the medium term, we’d certainly hope that content growth continues for us.

Operator

Your last question comes from Derrick Wenger - Jefferies & Co.