TRW Automotive Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: TRW Automotive (TRW)

TRW Automotive Holdings (NYSE:TRW)

Q2 2013 Earnings Call

July 30, 2013 8:30 am ET

Executives

Mark Oswald - Director of Investor Relations

John C. Plant - Chairman, Chief Executive Officer and President

Joseph S. Cantie - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Ravi Shanker - Morgan Stanley, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

John Murphy - BofA Merrill Lynch, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Adam Brooks - Sidoti & Company, LLC

Operator

Good morning, and welcome to the TRW Conference Call. [Operator Instructions] 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 trw.com/results. Please download the material now if you have not already done so. [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'd like to welcome everyone to our second quarter 2013 financial results conference call. This morning, as usual, I'm joined by John Plant, our Chairman 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 and discuss other related business matters, including our outlook for the remainder of the year. 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.

Before I turn the call over to John and Joe, there are a few items I'd like to cover. 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 2 of the presentation for our complete Safe Harbor statement.

The Risk Factors section of our 2012 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 2012 10-K and 2013 quarterly SEC filings by visiting the Investors section of our website at trw.com or through the SEC's website at sec.gov. On a related matter, we expect to file our second quarter 10-Q by the end of today. 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 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 in the conference call materials, which are posted on the Investors section of our website.

Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given our 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?

John C. Plant

Thank you, Mark, and good morning, everyone.

As you can see from the second quarter results posted this morning, TRW continues to execute and overcome the weak industry conditions in Europe. Our results reflect the company's success at mitigating the challenges, while remaining focused on executing growth and the strategic investments for the future.

During the second quarter, sales which totaled $4.5 billion were 6% higher compared with the prior quarter. The higher sales were driven by increasing demand for TRW's technologies and strengthening presence in the developing economies.

Operating profit before special items was $386 million and marked the highest level of operating profit for any second quarter in the company's history.

Net income was $252 million and earnings per share were $2.02 on the same basis. Compared to last year, earnings per share increased just over 17%.

And finally, in line with our expectations, the company generated cash from operations of $271 million during the quarter.

I'll also point out that during Q2, the company continued to repurchase common stock, returning approximately $190 million to our shareholders through the share repurchase program. Joe will discuss the financial performance and capital structure in more detail in just a few moments.

Combining TRW's second quarter performance with its Q1 results, it provides a solid foundation for TRW to achieve our full year financial goals as we head into the second half. I'll expand on our year-to-date results in just a few moments. But first, just a few additional comments on the second quarter.

In North America, vehicle production remained strong and tracked in line with the expectations industry observers established at the beginning of the quarter. Overall, North American production was up 6% compared with the second quarter of 2012. And on a sequential basis, compared to Q1, production was up just over 200,000 units. Consumer demand remained strong as the second quarter seasonally adjusted annual selling rate averaged about 15.3 million units. The selling rate in June of 15.9 million units marked the highest level achieved since December 2007.

In Europe, although some signs of stabilization began to emerge as the quarter progressed, the vehicle industry remained weak as recessionary conditions continue to weigh on consumer confidence and vehicle sales. For the quarter, total European vehicle production was essentially flat compared with last year's second quarter, but at least avoided the sixth consecutive quarterly decline. Although this level of production was better than expected, it is important to note that volumes on an absolute basis remain at multiple-year lows. The depressed level of production continues to be influenced by lower sales in 4 of the 5 largest markets, with the U.K. being the exception.

One bright spot providing encouragement for the future is that the rate of decline in registrations moderately and sequentially in Q2 -- moderated, sorry, moderated sequentially in Q2 compared with the first quarter and suggest that demand in the region may be stabilizing, albeit at low levels.

In China and Brazil, the vehicle industry continued to trend higher. Combined sales for China and Brazil accounted for 20% of TRW's total second quarter sales and they were up 26% year-on-year, well ahead of vehicle build. With respect to our year-to-date results, we remain on track. Sales totaled $8.7 billion, an increase of 3% compared to the same period last year.

Operating profit, excluding special items, was $676 million on sales of $8.7 billion -- an operating margin of 7.7%, a good outcome considering that we continue to invest in our future to support the growth. Net income on the same basis was $441 million and earnings per share were $3.52. This is a good start to the year. Low production volumes are expected in the second half of the year, however, given the seasonal operating patterns of our customers.

Moving on to the second quarter business developments. Product launches during the quarter continue to strengthen TRW's diversity and leadership in the intelligent safety solutions. A few examples include: foundation brakes, vehicle stability control, airbag electronics, electronic park brake and steering wheel on Volkswagen's Tiguan in Asia-Pacific. General Motors launched its all new Silverado pickup truck, with TRW's forward-looking camera, seatbelts and vehicle stability control. And Mercedes-Benz launched its S-Class executive car in Europe, with TRW's airbag modules, electronic park brakes, seatbelts and steering wheel.

As a result of our ongoing quality and Six Sigma programs, we continue to launch products with world-class quality. For the first half of 2013, our quality averaged under 3 parts per million across all products and customers worldwide. In addition to the broad range of products launched during the second quarter, TRW recently made announcements related to our innovative technologies that will further position the company's -- company for long-term success. A few examples include: auto production of TRW's Electrically Powered Steering Column Drive technology with a major Chinese vehicle manufacturer -- the production marks the first of 4 launches that will occur over the next 12 months on China domestic platforms. In addition, we recently started production of our Belt Drive EPS technology for the first time on a global vehicle platform in China. Production is located at TRW's state-of-the-art manufacturing facility in Anting. In support of the increasing regulatory focus and demand for advanced driver systems, TRW announced that it's launched production of its camera systems in the U.S., and it's investing in its electronics facility in Marshal, Illinois.

TRW's scalable video camera can provide a range of safety functions, including lane departure warning, forward collision warning, headlight control, traffic sign recognition and pedestrian detection. When integrated with vehicle chassis systems, the S-Cam provide advanced driver assist functions, including lane-keeping and centering and automatic emergency braking.

And finally, TRW announced it has launched its first integrated Remote Keyless Entry and Direct Tire Pressure Monitoring system with a major Japanese vehicle manufacturer. The integrated system provides RKE and TPM functions with fewer parts.

We remain confident that a bright future lies ahead for TRW as the technologies designed to meet the safety needs of tomorrow continue to strengthen our market position.

In addition to moving forward with our technologies and growth strategy, the company also took action to further reduce certain of our legacy liabilities. During the quarter, voluntary lump-sum payment opportunities were offered to certain of our U.S. active employees. The voluntary offer, similar to the program completed last year to certain of our U.S. retirees and former employees, is intended to allow participants a choice in managing their retirement planning while allowing TRW to reduce its long-term pension obligations and administrative costs. Subject to regulatory approval, the company expects the program will be fully executed by the end of 2013.

Having a balanced focus on our strategic priorities of best quality, global reach, technology and lowest cost will continue to be the foundation of TRW's success.

Before I turn the call over to Joe, let me comment on our expectations for the third quarter and the remainder of 2013. Overall, our vehicle production forecasts have strengthened since our last conference call. In North America, supported by strong consumer demand and new product introductions, the third quarter production is estimated at 3.9 million units, up approximately 8% compared to last year.

For the full year, we expect North American production to total 16.1 million, an increase of about 5% compared to 2012. In Europe, despite signs of stabilization in demand, we remain very cautious on the near-term vehicle production, as normal seasonality, combined with negative economic conditions within the Eurozone, are expected to place continued downward pressure on the industry.

For the third quarter, vehicle production in Western Europe is expected to be about 2.7 million units, down about 3% compared with last year. Total European production is forecasted at 4.2 million units. Similar to the first half of the year, TRW's global footprint and product mix should help offset the negative impact of low vehicle build in the region. For the full year, our production is for 18.6 million units for total Europe. Within this estimate, Western European production is 12.1 million units, down roughly 4% compared with 2012. As you would expect, we will continue to monitor the production plans of our customers and make any necessary adjustments to our operations accordingly.

Beyond North America and Europe, we continue to expect full year vehicle production increases in China and Brazil. Based on the forecasted production estimates, currency assumptions and our first half performance, we now expect annual sales to be in the range of $16.8 billion to $17 billion. For the third quarter, sales are expected to be approximately $4.1 billion. We expect capital spending for the year will be toward the higher end of our previous guidance, let's call it approximately $740 million, as we continue to build capability in the high-growth areas such as China and in support of our continued expansion of newer technologies.

Consistent with prior years, TRW expects to continue its trend of cash generation in 2013 despite the increased level of investments. With regard to restructuring, we continue to expect 2013 restructuring expense to be in the range of $50 million, primarily concentrated in Europe. Despite Q2's modest year-on-year improvement in European production, we do not expect a significant, or indeed, quick recovery. And as a result, we will continue to implement actions towards improving the cost base in the region as we grapple with the lower demand.

In summary, a lot of hard work lies ahead. The team is focused on executing growth while mitigating the near-term industry challenges, particularly in Europe.

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

Joseph S. Cantie

Thank you, John, and good morning to everyone. As John mentioned earlier, our second quarter results demonstrate the positive impact of increasing demand for TRW's technologies and our continuing efforts to mitigate the challenging industry conditions that continue in Europe.

We had a very good quarter on many fronts. However, we remain cautious regarding Europe for the second half and beyond. A quick recap of the key highlights for the quarter just completed included sales of $4.5 billion, a best-ever quarterly sales record and evidence of increasing demand for TRW's products.

We had an operating profit of $386 million and a margin of 8.6% after excluding special items -- a very strong margin for us, benefiting from volume and a robust mix of vehicles produced in the quarter.

Earnings per share were $1.99 on a GAAP basis and $2.02 after excluding a few minor special items. And finally, with regard to our capital structure, the company continued to repurchase its common stock, returning approximately $190 million to its shareholders during the quarter. In addition, about $96 million of cash was used to repurchase certain debt obligations over the last 3 months.

I'll expand on our capital structure in a few minutes. First, let me review our second quarter results with you in a bit more detail. For the quarter, we reported sales of $4.5 billion, an increase of $275 million compared to the same period a year ago. Currency translation benefited sales by approximately $36 million during the quarter, as the euro to dollar exchange rate averaged 1.31 this quarter compared to 1.28 last year. Excluding the effects of currencies and a divestiture that occurred in the third quarter of last year, sales increased about 5.6% compared with the previous year, with increases in each of our major geographic markets.

For the quarter, we had an operating profit of $385 million compared to $337 million in the 2012 period.

Excluding minor restructuring charges of $1 million this year and $2 million in last year's second quarter, the year-on-year increase in profit of $47 million was primarily driven by the associated profit from the higher level of sales, partially offset by approximately $15 million in planned cost increases to support our future growth.

Moving down the income statement. Interest expense totaled $34 million, slightly higher compared with last year's level of $27 million. The higher level of interest reflects the negative carry of our first quarter bond issuance in anticipation of sizable debt maturities within the next 9 months.

Separately, this year's quarter included a loss on retirement of debt, totaling $5 million. Finally, tax expense was $97 million in the current quarter compared with $92 million last year. Both the 2013 and 2012 periods included tax benefits relating to special items totaling $2 million and $1 million, respectively. Excluding these tax benefits, the overall effective tax rate was approximately 28% for the second quarter of 2013.

For the quarter, our diluted share count averaged 125.8 million shares, which is 3.8 million lower than last year, reflecting our share repurchase programs. At the bottom line, we posted GAAP net earnings of $1.99 per diluted share compared with $1.71 in the prior year. Excluding the special items I've discussed from both periods, our earnings were $2.02 this year, up 17% compared with last year's second quarter earnings of $1.72.

In terms of EBITDA, for the quarter, we had $492 million, excluding special items, compared with $444 million in the prior year, measured on the same basis.

Moving on now to a brief review of our first half results. We reported sales of $8.7 billion, which is an increase of $280 million compared to the previous year. Increased vehicle production in North America and China, combined with continued growth resulting from increased demand for TRW's safety technologies, more than offset production declines in Europe.

Excluding restructuring charges, our operating income in the first half of 2013 was $676 million compared with $672 million last year. Basically, the profit pull-through from the higher level of sales was offset by a higher mix of lower-margin business and planned increases in cost to support future growth.

Below operating income, interest expense was $64 million compared to $56 million last year. In both the current and prior year first halves, we recognized $5 million losses on retirement of debt. Tax expense for 2013 was $159 million on a GAAP basis and $171 million, excluding the special items mentioned earlier, resulting in an effective tax rate, again, of about 28%.

For the first half of 2013, our diluted share count averaged 126.3 million shares, which is 4.1 million lower than last year, again reflecting our share repurchase programs.

At the bottom line, we reported GAAP net earnings of $3.28 per diluted share, about even with last year. Excluding the special items, earnings were $3.52 for the first half of this year, up over 5% compared with last year's net earnings of about $3.34.

And finally, in terms of EBITDA, we had $888 million, a solid result considering the difficult industry conditions experienced in our largest market.

Let me shift now to our cash flow and capital structure. For the quarter, operating cash flow was $271 million, which compares to $191 million in 2012. Capital expenditures for the current quarter were $167 million compared with $104 million last year. Free cash flow, which I'm defining as operating cash flow less capital expenditures, was $104 million this quarter compared to $87 million last year. And for the first half, we had free cash outflow of about $178 million compared with an outflow of $111 million in 2012.

CapEx at $271 million during the first half of this year was $71 million higher compared to last year's level. Despite the cash outflow in the first half, which is consistent with our projections in normal seasonality, the company continues to expect a positive cash flow result for the full year.

At the end of the second quarter, our total gross debt was about $1.9 billion, while net debt outstanding was $642 million, both in great shape. As mentioned earlier, the company was opportunistic and repurchased certain of its debt securities during the quarter. $96 million of cash was used to repurchase $91 million in bond debt as we continue to focus on further positioning our balance sheet in advance of upcoming maturities.

As far as an update on our share repurchase programs, for the quarter, the company used approximately $190 million in cash to repurchase over 2.7 million of its common stock. Combinations of methods were used to execute the repurchases, including a small accelerated program and open market transactions.

For the first half of this year, we repurchased over 2.9 million shares using approximately $200 million of cash. As we mentioned on our last conference call, the company is targeting repurchases in the $500 million range during the 2013 calendar year. Our second quarter activity demonstrates our commitment to achieving this target.

Switching subjects now to the third quarter and the remainder of 2013. As John indicated, TRW's full year 2013 production forecasts are for 16.1 million units in North America; 18.6 million in Europe; and growth in the rest of the world regions. Based on these production assumptions and our first half performance, full year sales are now forecasted in the range of $16.8 billion to $17 billion. At this time, we're expecting third quarter sales of about $4.1 billion, an increase of about 3% compared with last year's level.

We expect capital expenditures to be approximately $740 million in 2013, which is at the high end of our earlier projections. Ancillary costs associated with our growth plans, namely engineering, development and infrastructure costs, are tracking as planned at about $60 million to $70 million for the full year. I'll also remind you that as a result of our increased investments over the previous 2 years, depreciation expense is tracking $30 million to $40 million higher for the year. This D&A increase is consistent with our earlier guidance.

Although we are committed to ensuring the appropriate capital, engineering and infrastructure support spend takes place to build out our preparedness for future business, rest assured, we are equally focused on protecting the company's profitability.

Moving on, consistent with our first half results, we continue to expect that commodity prices will, overall, have a neutral effect on us for the remainder of the year. We'll continue to update you on this assumption as we report our future quarters.

With regard to restructuring, again, full year expense of approximately $50 million continues to be our best estimate at this time. Full year interest expense should be about $130 million, no change from last time. Finally, given our expected results by geographic location, you should continue to assume a full year 2013 effective tax rate of between 28% and 30%, for modeling purposes.

In closing, we're pleased with our second quarter and first half performance as it's established a solid foundation for us to build on, as we progress through the second half of this year. We remain focused and, of course, realize that a lot of hard work lies ahead to ensure the company achieves its 2013 objectives.

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 Ryan Brinkman with JPMorgan.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Obviously, you reported much stronger 2Q revenue and I see that you're increasing the full year guidance by roughly a commensurate amount with the 2Q beat, but not more. Can you maybe just talk about why you think 3Q and 4Q might not track similarly stronger, relative to your expectations than 2Q did? Did this have something to do with pull-forward of demand or production in certain markets or maybe inventory builds in Europe or some other particular factor?

John C. Plant

I think, Ryan, we should be very cautious regarding Europe in the second half. Just because we've had one quarter without Europe going down, I don't think that's a trend. And as of the moment, based upon seasonality, you'd expect vehicle build across Europe and North America to be lower in the second half. But certainly, Europe is still a major concern for us.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay, then. And then just -- maybe just a couple on kind of your growth-related expenses. So you're looking for about $740 million of CapEx now, not really too changed. But just CapEx, in general, how much of the CapEx this year do you think relates to the 11 plants coming online? And can you kind of help us think about how CapEx might trend once you cycle past those investments?

John C. Plant

Well, I'd rather answer it in terms of not just the 11 new plants. I actually can't bring to mind the exact number which pertains to those. Maybe, say, Mark Oswald can follow up with you your later on that question. But clearly, the majority of our capital is allocated to new programs and to executing our contracts and growth [ph] for the future. In terms of CapEx going forward, my current feeling is that 2014 will see similar sort of expenditures as 2013, and I can't be precise at this point. And then hopefully, we'd see a trending down in terms of, I'll say, getting over the hump of a lot of expenditure, and reverting to normal. On the other hand, I mean, it's also possible that our revenues might also be higher. And therefore, they -- that itself would require a higher level of CapEx. So at this point, I'm not really able to say it's going to go down in the future, but I think in terms of a trend line, if everything else were equal and the future demand were, I'd say, flat in terms of vehicle build, which we're hoping it isn't, we're hoping that it would increase, then we would expect that it would trend down in '15, '16. But having said that, at that point in time, we would hope that maybe vehicle production in some of the jurisdictions, and particularly Europe, is showing some upwards trajectory.

Joseph S. Cantie

I think, Ryan, one of the best ways to think about it is in percentage terms. Typically, we're somewhere between 3.5% and 4% on sales. If you take the midpoint of our sales guidance and the CapEx, I think it works out to be something like 3.7%, 3.8%. And we'll be somewhere in that range, 3.5% to 4%. But as John just commented, we can't call it exactly, depending on what's happening in the market conditions going forward.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay, that's really helpful. And then just the last question, also relates to kind of long-term trend in these expenses. SG&A as a percentage of sales in the quarter was 3.2%. I think that's amongst the lowest that we've ever seen for you guys. Was there something unusual about the timing of expenses during the quarter? They were flat year-over-year, and sales were up 6%, 7%. Can this degree of SG&A leverage continue as the year progresses, or how should we think about that line trending [indiscernible] through the rest of the quarter?

Joseph S. Cantie

Right. That's right. So we're about 3.2% on an absolute basis, it was dead-even with a year ago. Of course, as the company gets larger and gets bigger, you'd expect a little bit of an increase in the absolute amount. But that said, somewhere in that 3.2% to 3.5% is typically what we've tracked historically, and I see no reason right now why that wouldn't continue.

Operator

Our next question is from Ravi Shanker with Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

Are you guys -- what are you hearing from your OEM customers in that -- are they sounding as concerned or as cautious about the second half in Europe as you are? Or are you seeing them maybe open up a little bit in terms of both their schedules, as well as maybe looking at future technologies and new products as it seems like Europe is probably starting to bottom?

John C. Plant

I think our customers continue to be concerned about Europe. I don't think anybody's willing to be positive about it at this point. In fact, I note that the VW group, if anything, is suggesting maybe it'll be -- their outlook is for reduced production rather than a flat production. If the -- one of the biggest and strongest is concerned, then I think that we should be concerned.

Ravi Shanker - Morgan Stanley, Research Division

Understood. And quick follow-up, Joe, was there an FX impact on EBIT in the quarter?

Joseph S. Cantie

It was de minimis, immaterial. I think we actually lost a couple of million dollars due to currency, but it was not a big factor in the quarter.

Operator

Our next question is from Brett Hoselton with KeyBanc.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

I was hoping you could comment on margins. And specifically, in the past, you've kind of talked about this investment period kind of temporarily compressing your margins and then reaching an inflection point beyond the investment period. I'm somewhat surprised that second quarter margins were up about 60 basis points year-over-year. And I'm -- just what I'm wondering is, as we kind of thinking about the remainder of this year and then into 2014, do you feel that we've reached an inflection point from a margin standpoint? Or was there something unusual about the second quarter that you think is not necessarily going to repeat into the third or fourth quarter, and we're not quite there yet?

John C. Plant

I don't think we should think about an inflection point at this moment. In fact, if you recall, the last results announcement, I did talk about some of the new contracts indeed being pushed out because of the European demand situation, and that was actually having a dampening effect overall on the -- on our trajectory. In terms of the second quarter, I think it reflected the fact that Europe didn't go down, which was welcome -- good continuing execution. So there's nothing I'd point to in terms of an unusual nature in the second quarter. I think it reflected, say, good execution and say, at least, say, the year part of the equation is stabilizing to some degree. But again, we don't call it for one quarter's results. You did see the buoyant revenues in rest of the world, in China, in particular, and that obviously was very welcome where we've continued to stride well ahead of vehicle build because of content growth and, say, technology and share improvements. But at this stage, I don't think you should read anything in terms of inflection points. In fact, I think that whereas we'd seen, let's say, growth begin to accelerate, I'd say, I already commented that, that will actually be dampened by the program push out and some delays that I talked to you last quarter. And that still is the current position.

Joseph S. Cantie

Yes, I would just add to that, Brett, that again, careful on one quarter's reading. As you saw in the first quarter, we were a little bit weak around the margin. This quarter, it's a good margin result for us, and now we'll move into the third quarter, which is a quarter where usually, you go through the shutdowns and the natural change, and we would expect that it'll be consistent with what we did last year, moving forward. But no question about it, we're certainly enjoying the quarter that we just completed and are announcing today.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

And switching gears. Just on the pace of the share repurchase, you reiterated your target of $500 million in 2013. And I think in the past, you've kind of talked about a similar trend or pace into 2014. I guess my question is, you certainly have the balance sheet to potentially accelerate that program. What might cause you -- or what might you like to see to cause you to possibly accelerate that? Or is $500 million just -- that's pretty much a fixed target and that's where we're heading?

John C. Plant

We did say, regarding what seemed shareholder-friendly activities that we announced, or what we call the initial phase of that and we're partway through the execution of that program. And as and when we feel, I'll say, in an appropriate position, we'll announce the second stage of that. And we have no particular timing that we've set, that we would discuss that and, in fact, prepare ourselves for doing so. But clearly, if you can imagine the current program at the existing pace, it will exhaust itself some time during 2014. And between now and then, we'll obviously be talking to you again and stating what we intend to do.

Operator

Our next question is from Matt Stover with Guggenheim Securities.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

I'm wondering if you could just provide us some more color, just on the outlook in the second half. Because if I think about the third quarter and fourth quarter last year, in Europe, you had some disruptions from reductions in production schedules, which would've provided a negative operating variance. And although they look a little bit down in the second half, it doesn't look to be a significant year-to-year decline, so presumably, you'd be able -- in a better position to plan for those decline. So point number one. Number two, if I think about sort of the quarterly costs and the engineering expense, the $50 million in the first quarter and guidance for $60 million, it would appear that those expenses for the balance of the year would not be increasing -- through a run-rate basis?

Joseph S. Cantie

Two -- so you've got 2 questions there. First of all, on the second half outlook. Last year, there was a little bit of choppiness in the production in the third quarter. That said, this year, Matt, we're looking at the third quarter being down 3% in units year-over-year. The fourth quarter, who knows? Right now, thinking it's going to be flat in the fourth quarter production year-over-year. So when you look at that environment, we're still at low levels, we're still, for the full year, in that 18.5 million, 18.6 million zone, which is still very low-level. So with that, comes inefficiency. So it's nothing more than just trying to be cautious with what we are seeing in Europe going forward. And the second question, the engineering expense, it's more than engineering expense. It's program managers, quality people, shadowing, I mean, it's a whole infrastructure investment, if you will. And we do see that continuing to be incremental quarter-on-quarter. When I think of us talking about a $60 million to $70 million pace increase this year versus last year, we had about $25 million in the first half, I think, so far. So it would indicate that, actually, there'll be a bit more spending in the second half. And that's natural as you get closer and closer to launching product and having new launches. And then the only other thing I'd add is our D&A, our depreciation, will be accelerating as we go through the next 2 quarters. So we're indicating for the year to be higher $30 million to $40 million. In the first half, we only saw an increase of something like $5 million, I think it was. So that would tell you that as we placed our capital during the course of this year and late last year, our depreciation is going to start accelerating on us as well. So you wrap all those things together and that sort of helps you with looking at our second half and how we're prepared to move through it.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Two other questions, a follow-on to that. You took some restructurings charges, what's the cash restructuring this year expected to be?

Joseph S. Cantie

Cash restructuring will probably be up there around the $100 million mark. I can't tell you for certain because while we did take the charges late last year and into the first quarter this year, that just starts the process, if you will. And we're still working and working with -- negotiating with the labor side of those restructuring actions, and it's -- I can't pinpoint exactly what month we'll actually be expending the cash on that. But right now, our estimate for the full year is somewhere around $100 million.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Is that more like 3Q than 4Q?

Joseph S. Cantie

Probably more towards the end of the year.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Okay. And the last thing is this. You guys are very well positioned with regards to your active safety strategy. Your balance sheet's in terrific shape, you've throwing off cash flow. I'd imagine that you could augment that strategy with M&A. And as you guys think through that -- do you think through M&A as being something you'd execute more from bolt-on side of things or would you think about something more significant?

John C. Plant

We've talked about having some bolt-on acquisitions as -- on our radar screen, but obviously, having them on your radar screen doesn't mean to say that they are available. It's something that we would consider as one of the uses of our cash, but nothing to talk about at this point in time.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

But when you're thinking about it, John, are you thinking about it more in the scope of a bolt-on or something big?

John C. Plant

Yes. We have not envisaged, at this point, anything what might be deemed transformational because -- I mean, there's a lot of graveyard deals in terms of transformational acquisitions and that really hasn't been part of our DNA, or really, thought process in recent times. And that's about it, really. So nothing that I can really comment on further in that regards.

Operator

Our next question is from John Murphy with Bank of America Merrill Lynch.

John Murphy - BofA Merrill Lynch, Research Division

Just a first question. As we look at sort of your 3 regions that you break out sort of in your thought process, North America, Europe, and rest of the world, just curious if you could give us rough numbers just around the operating margins in those regions, what the delta is. And maybe -- I know you probably can't give exact numbers, but just around or relative to the $8.6 billion for the total company.

Joseph S. Cantie

Sure. I mean, just directionally, North America right now, as you imagine, with its strength, is slightly higher than that average. Europe, slightly lower than that average. And again, that's down to -- we're operating at the 18.5 million, 18.6 million vehicle production, which is historically low. And then the rest of the world would be slightly below that. And the rest of the world is very good for us, but we do have a number of joint ventures and partners there. So when we consider the minority interest impact, so a lot of times, we're consolidating 100% of the sales but only our share of the profits through our P&L. So when you think of that, our margin is going to be crimped there a little bit for that, but soundly profitable in the rest of the world regions.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then just a follow-up, the capacity utilization in the 3 regions, roughly, I mean, can you give us an idea of where you're operating on cap ut for the 3 regions?

John C. Plant

Well, basically for North America and China, it's a pretty good utilization, with -- obviously, coming up a little bit in China, having the plant buildout that we've talked about. And in Europe, we do have areas of underutilization, particularly in Western Europe. Nothing dramatic, but it would certainly be helpful to have additional vehicle production there, which would -- we'd certainly be able to take on both a capital and also probably from a labor productivity perspective.

John Murphy - BofA Merrill Lynch, Research Division

But as you think about North America, I mean, is there room left in your capacity to really ramp up as volumes increase going forward?

John C. Plant

We think we can ramp up. But I mean, one thing you should note is the -- that we have just completed a brand-new plant, in fact, in Mexico. And if we had lots of capacity, we wouldn't have built that out. So clearly, we are bumping up against that in certain areas. But also, from the sub-supply base, it's been a matter of trying to manage the incoming materials, taking those up and putting that extra capacity in place, either in North America or indeed, import from elsewhere in the world. So we've been managing all of that. Nothing that's caused us any particular difficulties. But certainly, as we've, say, moved into the higher production areas, it has been stretching us in certain of our product lines.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then just a question on the investigations ongoing in Europe. I mean, there's been some pretty favorable outcomes for the electronics and the wiring side, not in your business, but in other businesses. Just curious if you're hearing the resolution may be upcoming or forthcoming, and what your thoughts are there on that.

John C. Plant

Nothing really to report at this stage. I mean, you saw that the wiring harness investigations indeed took a very long time to complete and then materialize into an outcome. And I think you should expect the same in terms -- anything in terms of the restraint business, and that's as much as I can say.

John Murphy - BofA Merrill Lynch, Research Division

And then just lastly, on the pension lump sum. You had almost $1.1 billion on your PBO in the U.S. at the end of last year. What is the target that you're getting at? Is it 50% of that? All of that? What's your target where you're offering those lump sums?

Joseph S. Cantie

Well, I think we did complete one program since last year, so we'll be able to show the benefit of that by year end. And then the second program that we hope to end by the end of this year will also help in taking that down. That said, of the roughly $1.1 billion, I think the target between the 2 programs is somewhere in the $300 million to $350 million zone.

John Murphy - BofA Merrill Lynch, Research Division

So it's about 1/3 of it?

Joseph S. Cantie

Correct.

Operator

Our next question is with Brian Johnson with Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

I just want to -- I know you don't want to comment too granular on margins, and you've mainly talked about the operating leverage. But in addition, there's a few things you've talked about on prior calls, and just want to understand how those have impacted the quarter and going forward. One, the growth of active safety and just general safety electronics, which are higher margin in general. Two, filling out your China capacity with actual production and maybe some up-contenting, perhaps in terms of the China content. And then three, are you getting any early returns on some of the restructuring investments you've made to further reduce your Western European cost base?

John C. Plant

Well, in terms of the active safety, first. I did talk about the launch of some of the new camera-based systems. In fact, we've talked about them being on the new, large GM pickup truck, which is just launching. So you can see that, that is already occurring. And that, of course, is not our first launch for this technology. We've also, in fact, launched -- or are launching with another North American customer, but that vehicle is not yet in the market, but will be very shortly. In fact -- and then secondly, this week, we actually did a, I think, a press release, only yesterday, regarding one of our new short-range radars, which is launching on a European platform. And so, you can see that as an additional, I'll say, new -- additional products within the radar technologies that we have. So we have both the long-range and short-range radars. So clearly, things are beginning to take hold now and, indeed, are really important for the achievement of future NCAP ratings, and also, I'll say, the possibility of both lane keeping and also automatic emergency braking. And, of course, we have the technologies also, which allow lane keeping in terms of electric steering and clear with our suite of breaking technologies to do the automatic emergency braking. So in terms of the achievement of future European NCAP, we have both the underlying existing technologies and the deployment of new products, which are helping us a lot in terms of getting those active safety technologies put into place. I also commented, if you recall, on the last call and the call before that, in terms of while the percentage increase of those individual products is actually very high, at this point in time, the absolute dollars, in the context of TRW, overall, was not significant. But clearly, as each quarter goes by, it will be becoming increasingly significant as we march into '14, '15 and '16. In terms of restructuring, nothing in particular in terms of the cadence of results. The majority of our restructuring at the end of last year, if you recall, we've stepped it up closer to, I think, about $90 million in total. And there's a very large fourth quarter component. A lot of that was aimed at Europe. As Joe has already said, it does take time. We have executed one of those, I'll say, those plant closures in principal, in terms of agreement but it hasn't actually yet taken effect. And we talked about a 2-year payback on those. And so the cadence of that is exactly in line with what you should expect in terms of the previous announcements. So that deals with 2 of the questions you asked there.

Joseph S. Cantie

And then the third one was China, and as we fill out the capacity with the new plants that we're building, and my observation for you on that one is that when we build plants and then we put them in place for a cadence of launches that occur over a 2-, 3-year period, so these plants and investments are really about a 2-, 3-year investing period before you get to a point where there -- they have enough volume in them and through enough launches to the point where they get up to, what I call, normalized margin levels. So we continue to go through those launches and we will expect a heavy cadence over the next 3 years in those plants, and basically, it's going to take a while for us to get up to what we call our normalized level.

Brian Arthur Johnson - Barclays Capital, Research Division

So it would be fair to say, just to summarize that, the -- none of these 3 things really drove the sharp up -- sequential uptick in margins? But over the next 2 to 3 years, the growth of safety, getting rid of European cost and filling out China could potentially help margins?

Joseph S. Cantie

That's right.

John C. Plant

I think I terms of cadence, yes. But again, I -- I tried to dampen that word in the first question that came this morning in terms of inflection point. I don't think you should look for -- the term inflection, I think, is wrong in our context, given the overall, I'll say, if you look at every one of our regions, every one of our platforms and products, every one of them is -- we have a great diversity of the company. And so we tend to move in, I'll say, slower rhythms. And because no one thing is material by itself. So we're not usually exposed to one product, one customer, one region.

Operator

Our next question is from Adam Brooks with Sidoti & Company.

Adam Brooks - Sidoti & Company, LLC

You talked a lot about China. I just wanted to hit on Brazil for a second. Can you give us a sense of where you're coming out as far as capacity? And then maybe the major content growth drivers you see in the near term and medium term.

John C. Plant

I think the first half has been, I'll say, pretty good in terms of vehicle build in Brazil, supported by the, I'll say, taxation rebate or wherever it's been on reduced taxes in line by the Brazilian government to help maintain that demand. Of course, that goes away in the second half, so I'm thinking that maybe the second half in Brazil, in terms of the underlying production, will be somewhat lower. I think the cadence of new product introductions across the, I'll say, breaking and restraint products will help offset a lot of that weakness in underlying vehicle production in the second half. But it's still coming up. I mean, as you know, we're only partway through the regulations in terms of the fitment of anti-lock breaking and the frontal airbags for vehicles in Brazil. And I think it's the end of this year -- it could be in the next, I've just momentarily lost the date in terms of requirement to have half of all new vehicles produced with these technologies. But in terms of is it on track for what we said in terms of the cadence of launches? Yes, and it's -- this year, it's basically down to the cadence of demand and some of the withdrawal of the stimulus from the -- by the Brazilian averment, if -- indeed, if that occurs as expected in the second half. 2014 should see a further and gradual pickup of demand in terms of the fitment of these newer technologies as we move to the next -- toward the next stage, which I think is the end of '15 or '16 in terms of having 100% fitments. But in terms of those specific dates, if it's important to you, then Mark can come back to you and reconfirm because momentarily, I've just forgotten them.

Adam Brooks - Sidoti & Company, LLC

And then just quickly on China. Can you maybe tell us what you've been pleased with and what you haven't been pleased with regards to any new program launches?

John C. Plant

Let me talk, first of all, about the underlying demand. Underlying demand has been very healthy in the first half. So even though we've seen press articles about the relative weakness of growth rate being maybe 7.5% of GDP, rather than 7.7%, which all seems pretty good to me. In terms of underlying vehicle production, it's been healthy. If anything, maybe it moderates in the second half. In terms of our new products, at the moment, everything is on track. In fact, the plants we've talked about, many of them are well-facilitized. In fact in production and I did talk about, they would be earning, let's say, profits in 2013 and that is the case, albeit not at the, I'll say, mature run rates of profitability. But I did talk about them earning that cost of capital in both the, I'll say, finalization of initial phase, and we are on track for that. And then, of course, that will be further enhanced as we only have to add additional machinery to it because we've built those plants big enough in terms of infrastructure to be able to take the future expansion for the next 3 or 4 years. So in terms of cadence, I think we're only expecting the buildout in terms of one brand-new plant, which is on our radar screen as we go into '14 to '15 to add an additional plant. And the rest, what we've already done should supply us for 3 or 4 or 5 years now.

Mark Oswald

Mandy, I'm showing that we're now out of time. If you could please move to conclude the call?

Operator

Yes, sir. This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

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