TRW Automotive Holdings Corp. Q3 2009 Earnings Call Transcript

TRW Automotive Holdings Corp. (TRW)

Q3 2009 Earnings Call

November 4, 2009 8:30 am ET

Executives

Mark Oswald – IR

John Plant – President & CEO

Joe Cantie – CFO

Analysts

Himanshu Patel – JPMorgan

Chris Ceraso - Credit Suisse

Rod Lache - Deutsche Bank

John Murphy – Banc of America / Merrill Lynch

Brett Hoselton - KeyBanc

Michael Ward - Soleil

Presentation

Operator

Good morning and welcome to the TRW conference call. (Operator Instructions) I would now like to introduce your host for today’s conference call, Mark Oswald, Director of Investor Relations.

Mark Oswald

Good morning. I would like to welcome everyone to our third quarter 2009 financial results conference call. Joining me this morning are John Plant, our President and Chief Executive Officer and Joe Cantie, our Chief Financial Officer.

Today’s call will follow our usual format. John will provide an overview of the current automotive environment 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 second 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 third quarter 10-Q within the next day or so. Once we file, the 10-Q you can access that through either website also. 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 performance.

Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found on the conference call materials, which are posted on the Investors section of our website at www.trw.com. And finally, a replay of this call can be accessed via dial-in or through a webcast on our website.

Replay instructions were included in the 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 Plant

Thank you Mark and good morning everyone. The positive signs that began to emerge during the second quarter have continued to gain strength. Cautious optimism has emerged and is supported by the increasing levels of vehicle production around the world.

In North America the Cash for Clunkers stimulus program had a significant impact on reducing dealer inventories and the momentary effect, increasing consumer demand. In August for example the light vehicle annualized selling rate was about 14.1 million units, up 3% versus the same month in 2008 and up about 26% from the July levels.

Manufacturers were left with inventories approaching historic lows at the end of August. In fact, August inventories for the Detroit Three manufacturers were more than 30% below normal levels. This shortage contributed to the lower level of sales in September and dealers were left with fewer vehicles to sell.

Manufacturers are now in the process of replenishing their inventories which should translate into increased vehicle production for the remainder of 2009. Stabilization and increased production going forward is essential to the long-term health of the industry.

In fact in North America even without an increased selling rate, TRW will experience a volume increase in the second half compared to the first half due to the non-recurring inventory reduction effects.

Outside of North America scrappage plans in several European countries have helped drive consumer demand. In Germany prior to their scrappage scheme expiring, the Germany market was up about 27% for the first eight months of the year compared to the same period in 2008.

September sales remained robust as consumers took delivery of vehicles ordered prior to the scheme’s termination. In France, Italy, Spain, and the UK, they have experienced consumer demand increases after implementing similar programs.

Certain countries such as the UK and France have announced plans to extend their programs while the countries are contemplating actions which hopefully result in a soft landing when their programs do expire.

There is no doubt that the short-term impact of the scrappage plans has been positive. The longer-term impact of production resulting from pull ahead sales remains uncertain, most notably in Europe. The increasing production schedules around the world reaffirm our belief that the industry is on the road to recovery and that the worst of the economic reckoning that began late last year is behind us.

Based on current projections it appears full recovery will be a long process. In this slow recovery environment the downturn management actions that were taken by TRW are paying significant dividends as was demonstrated in our second quarter results and again today in our third quarter results issued this morning.

In addition to our ongoing efforts to improve the cost structure of TRW during the third quarter we also took steps to improve our capital structure by successfully completing a public offering of 16.1 million shares of common stock.

The net proceeds of $269 million were used to repay debt. This action strengthened our balance sheet and provides greater flexibility to our capital structure. Our team continues to take the necessary steps to position the company for long-term success.

Before going into further detail on the overall environment and our expectations for the remainder of 2009, let me please provide you with a brief financial overview of where we finished the quarter and the first nine months of the year. Joe will provide greater details with his financial overview.

Third quarter sales of $3.1 billion were down 13% compared to the prior year but up 14% compared to our second quarter results. The year over year decline continues to result from low but now improving global vehicle production.

Excluding the one-time items the company reported third quarter net earnings of $76 million or $0.68 per diluted share. Within this number our operating income was $165 million, up $121 million compared to last year on the same basis, again excluding the one-time items.

We are pleased with this accomplishment especially when considering the decline in overall sales for the quarter. These results provide clear evidence that our restructuring actions have taken hold and also demonstrate TRW’s earnings potential given the improvements made to the cost base.

Offsetting the positive effects of the restructuring actions were the declining core sales attributed to the year over year decline in production levels and the negative impact of currency movements during the quarter.

In the third quarter compared to the prior year vehicle production was down in North America and in Western Europe, our two primary markets. In North America overall vehicle production was down 21% with the Detroit Three down slightly more at 23%.

Although production continued to show a steep decline compared to year ago levels, overall production in the third quarter was up 33% compared to the second quarter this year. Production in Europe continued to show signs of strength as a result of the government’s scrappage programs.

In Western Europe although production was down 8% for the quarter compared to the same period a year ago, the quarter was marked by the smallest year on year decline to date. Production was down 2% versus the second quarter due to normal seasonality.

In the emerging markets vehicle production was mixed. China’s growth in the quarter continued with a year on year increase of some 66%. However South America experienced an 8% decline during the same period.

Although vehicle production is showing signs of a rebound in many regions and quarter over quarter increases are encouraging and returning to more normalized production levels that these are not expected for some time.

With respect to our year to date results, excluding special one-time items we’ve posted a year to date net loss of some $0.30 per share on sales of $8.2 billion. And these compare to net earnings of $2.23 per share on sales of some $12.2 billion in the prior year.

We are pleased to see evidence within our results that the restructuring and cost containment actions are paying significant dividends. Restructuring has positively impacted both the third quarter and year to date results. However further efforts to reduce the cost base continue.

In fact during the third quarter we have continued to reduce our salaried workforce by an additional 200 employees which brings our total salaried reductions to about 3,000 since we began the programs last year.

Short [time] working continues to be utilized in Western Europe albeit at a lower level compared to prior quarters due to the increased production. And with regards to our facilities and plants we continue to look for opportunities to consolidate and thrift certain operations.

Although the magnitude of the restructuring actions will diminish our intense focus on reducing costs will not. Turning now to the third quarter business developments, during the quarter we had a high level of product launches which continued to strengthen our leading diversification and leadership in intelligent safety solutions.

A few examples include multiple product introductions on the VW Polo, the new Buick Lacrosse, and the BMW X1 and these products are shown on the slide deck which is on the internet at the moment. Also during the quarter in conjunction with the Frankfurt Auto Show, we highlighted many new products that demonstrate how TRW is putting the thinking into safety systems.

Our leadership in intelligent safety solutions, or as we call it cognitive safety solutions, is underpinned in three areas. First through our advanced intelligent systems, these products sense, analyze, anticipate, and act to assist the protection of drivers and occupants and pedestrians.

Secondly by expanding our smart thinking portfolio of products which offers affordable safety solutions and these are designed for mass application in a wide range of vehicles. And thirdly through our green thinking range of innovative and fuel efficient systems which address global efforts to increase fuel economy and reduce harmful emissions, particularly CO2.

This broad portfolio of technologies will serve TRW well as the industry volumes rebound. Our quality and Six Sigma programs ensure recently launched and future products are delivered with world-class quality.

During the first nine months of the year our quality averaged approximately six parts per million defects at zero kilometer across all products and customers. This is truly a world-class performance. Before I turn the call over to Joe, let me comment on our expectations for the remainder of the year.

Overall vehicle production forecasts continue to show quarter over quarter improvement. In North America as a result of the successful Cash for Clunkers program and inventory rebuilding that is presently taking place, we now expect full year production to be about 8.6 million units.

Within this estimate second half production is expected to be up 47% compared with the first half production levels. Q4 is expected to show the first year on year increase with production forecasted at 1% higher compared to the prior year.

In Europe we expect production to be 16.3 million units. Within this estimate Western European production is expected to be 11.8 million units, down 17% compared to last year. Similar to North America, Western European production for the second half of 2009 is expected to be increased though compared to the first half of the year.

We still expect that the mix shift to smaller, small fuel-efficient cars in the A and B segments will continue through the end of 2009 as a result of the scrappage programs. Beyond North America and Western Europe full year vehicle production levels are mixed with the high growth countries of the world such is China, India, and South America and Russia, albeit with Russia being substantially down.

Based on the current production estimates we estimate sales of approximately $11.4 billion in 2009 for TRW which is about $700 million better then the mid point of our previous guidance. Capital spending is expected to be slightly lower then our previous forecast at approximately $250 million for the full year.

And finally with regards to restructuring we expect full year restructuring to be approximately $100 million. As you can tell from this guidance second half of 2009 will be significantly better then our first half results.

With regard to 2010 we have not yet finalized our operating plan assumptions. However it is reasonable to expect production for North America will almost certainly be up in 2010 compared to the dismal 2009 level especially in the first half.

The latest CSM forecast is projecting production at 10.5 million units which feels appropriate at this time. In Europe the expiration of scrappage plans most notably in Germany may result in a lower level of sales in Western Europe.

However the magnitude of the payback effect is still being debated. In fact the 2009 inventory take out will not be repeated in 2010 and hence production may be more robust then sales next year. Also industry observers while acknowledging payback will exist, the impact could be partially offset by an improvement in the mix of vehicles sold.

We expect to discuss our 2010 assumptions with you when we report on our 2009 full year results early next year.

In summary we are encouraged by the recent positive trends in vehicle production. TRW is well positioned to take advantage of the industry rebound especially in light of our cost reduction actions and the capital structure improvements that have been achieved.

The actions taken to date and TRW’s results based on those actions demonstrate our ability to earn a profit, at significantly lower production levels. Within that, I’ll now hand over the call to Joe to discuss our financial results in further detail.

Joe Cantie

Thank you John and good morning everyone. As you can see from our financials published this morning along with John’s earlier comments our third quarter results were positively impacted by our strong downturn management focus and the improving vehicle production schedules.

Similar to our second quarter results there were a number of positive outcomes in our third quarter which are encouraging signs for the future. First, our sales were 14% higher compared with the previous quarter and 30% higher compared with the first quarter of 2009. A welcomed positive trend as we move through the second half of the year.

We were profitable at the operating income level for the second consecutive quarter despite the pressed production levels which demonstrates the success of our restructuring and cost containment initiatives and ultimately our ability to be profitable at lower revenue levels.

Of course another positive was the fact that after all costs including interest and taxes we were profitable at the net income line and cash flow positive in the quarter. Lastly we received $269 million in net proceeds from our public offering completed in August which allowed us to pay down debt, strengthen our balance sheet, and prove the flexibility of our capital structure.

I’ll expand on our liquidity and a few more comments on our capital structure in a few minutes, first let me review our third quarter results with you in a bit more detail. For the third quarter we did report sales of $3.1 billion, a decrease of $484 million or 13.5% compared to the same period a year ago.

In addition to the lower production volumes discussed earlier currency translation also reduced sales by $209 million. The euro to dollar exchange rate averaged 1.43 this quarter which was about 5% lower then the same period a year ago.

Excluding the effects of currency translation sales declined about 8% compared to the previous year. Now we did benefit on the sales line from our third quarter cutting off on October 2 this year. Its important to note that our fourth quarter will have fewer days in 2009 as compared to the prior year and the quarter just completed.

Revenues declined in North America in the quarter by 15% and in Europe by 8% excluding the effects of currency. However due primarily to the strength of our sales in China the rest of the world regions increased by 9% for the company.

For the quarter we had an operating profit of $141 million which is $129 million above the previous year. We accomplished this despite the lower level of sales compared to last year. The primary reason for the increase in operating income was the significant impact of our restructuring and cost containment programs as well as lower material prices.

In addition the quarter benefited from a number of non-repeating mostly customer and supplier settlement items totaling approximately $20 million. These positives of course were partially offset by the profit impact of the $484 million of lower sales between the two quarters.

Included in this quarter’s operating profit were restructuring and fixed asset impairment charges totaling $24 million. As we continue to execute our downturn management action plans, the prior year had $32 million included.

On a sequential quarter basis, the incremental margin on the $376 million sales increase in Q3, compared to our second quarter was a very respectable 25%. Below operating income the higher costs associated with the bank amendment completed in late June resulted in a higher level of interest expense totaling $55 million for the current quarter compared to $43 million in the prior year.

And finally tax expense was $28 million in the quarter, an increase of about $5 million compared to 2008 as a result of the higher pre-tax earnings. The 2009 period included tax benefits of about $5 million related to the previously mentioned restructuring actions.

At the bottom line we posted GAAP net earnings of $0.50 per diluted share compared with a net loss of $0.53 per share in the 2008 period. Excluding the restructuring charges, net of tax benefits from both periods and the loss on retirement of debt in the current quarter we reported net earnings of $0.68 per share compared with a loss of $0.22 per share in the prior year.

In terms of EBITDA we had $292 million for the quarter excluding special items compared with $189 million in the prior year measured on the same basis reflecting the improved operating income between the two periods.

Turning now to our year to date results, we reported sales of $8.2 billion which is a decline of $4 billion or 32% compared to the previous year. This comparison is a stark reminder of the depressed production levels we are living through in 2009.

Excluding restructuring and asset impairments, our operating income in the first nine months was $164 million which compares to the $488 million in 2008. Given the significantly reduced production levels this outcome is a good accomplishment and demonstrates the effectiveness of our downturn management actions as it represents a less then 10% [decrimental] margin on the sales decline.

Interest related expenses for the first nine months were $139 million compared to $136 million last year. The increase as discussed earlier is due to higher costs associated with our bank amendment completed in late June offset by lower market interest rates during the period.

Tax expense for the nine-month period was $37 million which compares to $126 million in 2008. We have tax expense in 2009 despite the losses before taxes given the geographic earnings profile of our company.

At the bottom line we reported a GAAP net loss of $0.82 per share which compares to earnings of $1.63 per share in the previous year. Excluding restructuring charges and related tax benefits from both periods we reported a net loss of $0.30 per share compared to earnings of $2.23 last year.

And finally in terms of adjusted EBITDA we had $527 million for the nine-month period ending October 2. Moving on to our cash flow and capital structure, overall we continued to be in very good shape especially considering the improvements made during the quarter.

For the quarter operating cash flow was $174 million which compares to $79 million in 2008. Cash flow after capital expenditures was $125 million this year compared to a use of $42 million last year. Obviously cash flow was highly positive for us in the quarter and demonstrates our intense focus on managing our cash given the challenging industry conditions that exist.

We’ll continue our focus on cash flow which will become more difficult given the natural draw on working capital as the production environment improves. For the nine-month period net cash used by operations after capital expenditures was $178 million, an improvement from the use of $334 million in the prior year.

Now for the year to date period reflecting our downturn management actions, capital expenditures were $121 million which is down significantly from last year’s spend of $338 million. For the full year we expect CapEx to be approximately $250 million.

At this point we estimate that our cash outflow from operations for the year after capital expenditures will be in the range of $100 to $250 million, better then our earlier guidance due to our strong third quarter results and a higher level of clarity for production schedules and other variables in the remaining months of this year.

In terms of liquidity at the end of the third quarter we had in excess of $1.6 billion available to us consisting of cash on hand, undrawn revolver, and undrawn receivable securitization facilities. This is one of our highest levels of liquidity which is impressive given the industry downturn that occurred in the first half of this year.

During the quarter we successfully raised $269 million in net proceeds from our public offering of common stock. The proceeds were used to repay borrowings under our term loan and revolving credit facilities. The offering was not necessary from a liquidity standpoint, rather it was a proactive step to strengthen our balance sheet and provide greater flexibility to our capital structure.

At the end of the third quarter our net debt was $2,073 million, down $659 million from the balance at the end of the prior year third quarter and down $83 million from year-end 2008. Our track record of reducing debt since becoming and independent company especially in light of the current environment is an accomplishment we’re very proud of.

Switching subjects now to our expectations for the remainder of 2009, as John indicated full year production is forecasted at 8.6 million units in North America and 16.3 million in Europe with second half production outpacing first half levels in both regions.

Based on these revised production estimates we expect full year sales to be about $11.4 billion. This would imply Q4 sales of about $3.2 billion, up $400 million or 14% compared with fourth quarter 2008. The positive impact of currency movements will account for a portion of the increase.

With regards to restructuring we continue to implement actions that are necessary in reaction to the current environment. We expect our fourth quarter restructuring to total approximately $25 million. And again for the year, our full year restructuring fixed asset impairment charges are forecasted at $100 million.

With respect to taxes we expect our full year 2009 tax expense to be in the range of $60 to $75 million.

In closing the restructuring and cost containment actions previously implemented are producing significant benefits to the bottom line for us. Those benefits combined with the forecast for Q4 production levels allow us to maintain a positive outlook for the remainder of 2009.

We remain focused on finishing the year strong and look forward to reporting our full year results to you in February at which time we’ll also discuss our expectations for 2010. Thank you, we’ll now move to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Himanshu Patel – JPMorgan

Himanshu Patel – JPMorgan

Couple of questions, first as we sort of try to model out to 2011 can you talk about commodity cost economics, have they changed with the car makers during this downturn where you would think maybe as fuel and all of the critical commodities start rising next year, should we think about the impact for you being very similar to what we saw in the 2005 through 2008 time period or should something be different this time around.

John Plant

Clearly at the moment we’ve seen some strengthening of commodities and mainly that’s due to the effects of both the weak dollar and also the I’ll say continuing rise in the East, in China and India. It really is difficult to understand how that really plays through at this point in time. I would say if it continues to strengthen then clearly we would see some impacts going into 2010 and 2011.

I would say it may not be quite the same as it was in 2005 and let’s say 2008 and that’s because we’ve possibly put in to our contracts greater protections. So it would be a blend so you have to take some percentage of the effects compared to last time. But it still would be an impact.

Himanshu Patel – JPMorgan

And then just on the fourth quarter revenue guidance for $3.2 billion it looks like its roughly up 3% sequentially but I think CSM’s combined North American European production is up about 12%, is that just a calendarization issue.

Joe Cantie

Yes, there’s a couple of things there. The biggest driver is the calendarization. As you know we run a five-four-four accounting system here so our third quarter cutoff on October 2, what that means is that the fourth quarter compared to the third quarter, there’s something like seven or eight production days that there’ll be less in the fourth quarter versus CSM that does everything on a calendarization.

The second thing I’d point out too is when you’re looking sequentially third to fourth quarter we do have an over a billion dollar annual sales aftermarket business and typically seasonality of aftermarket businesses the fourth quarter tends to be lower then the third quarter sales and that is occurring in our businesses.

You don’t see that when you compare fourth quarter this year to last year because it occurs every year and that doesn’t show up in that comparison.

Himanshu Patel – JPMorgan

And then just two more questions, I believe at the Frankfurt Auto Show you had mentioned that you were cautiously interested in Delfi’s safety business, any update on your thoughts there.

John Plant

Actually not sure as I recall saying that, maybe having a memory lapse after jetlag. But I think that what I understand Delfi is basically selling assets off more than anything else and in a piecemeal basis, so I don’t think its going to be any sort of transactional based, as you normally expect such things and indeed the business itself was not really in a fundamentally good shape anyway.

Himanshu Patel – JPMorgan

And then I wanted to go back to your earlier comment, I think you suggested there were two potential offsets to European production payback in 2010, one was the non-repetitive inventory destocking and the second was the potential mix improvement, any way to dimension for us how much those two items may have hurt your revenues in 2009 so we can kind of try to get an understanding of how much that could aid you in 2010.

John Plant

I would struggle to give you that today. Its still, we’re actually struggling with it ourselves. We can understand more about this year and the impact of the A and B class in terms of the average transactional values, and I think those average transaction values are something approaching maybe half of the C, D class vehicle.

But predicting for the future just how much of a I’ll say rebound into more of a normalized mix even though we don’t think it would go all the way back to a normalized mix, is truly difficult to understand at this point in time. Certainly I really don’t believe we’re going to see the inventory effect that we had in Q1 of this year, and I think at this point for 2010 the best position is to take a cautious view.

Look more closely during the December timeframe and maybe early January as we truly understand the impact of the let’s say, either the easing or the cessation of these scrappage programs and indeed how much pipeline is left at the, I’ll say, buying on these coupons or certificates that were particularly in Germany and just how much that will sustain production in the first quarter of next year.

So its truly one of the biggest imponderables and if anything at this point we’re taking more of a cautious approach and in fact, some of our restructuring costs that we are choosing to take in the fourth quarter of 2009 is really aimed at our European cost base to try to make sure that we don’t get caught out as we enter 2010.

Operator

Your next question comes from the line of Chris Ceraso - Credit Suisse

Chris Ceraso - Credit Suisse

Are you still at three to four day work schedules over in Europe and what’s the latest outlook on that based on the most recent production schedules you’re seeing there.

John Plant

We were on three to four days depending upon location and product line in our first and sometimes going into our second quarter. As we move from Q1 and Q2 and then Q2 to Q3, we have seen the effects of both the rising production particularly as we rose from Q1 to Q2. As you heard from my comments Q3 was rather more muted in fact slightly lower but then you had the impact of the vacation in Europe.

But nevertheless with our thrifting programs that we have been doing which have included Europe of course, then the numbers of working days decreased from basically Q1 to Q2 to Q3 and we are expecting the same in Q4. So we are still working short time. Where we are working it is mainly I’ll say an average of a four day basis, on the three day basis, now three and a half day basis, but there will be pockets I’m sure in between.

But having said that many of our plants are now back on five day working and so its truly a complete blend across the plants according to the products they make, the segments that they serve, and the custom mix within those plants. But certainly short time working has decreased and clearly the drag associated with that because we’re still having to pay depending upon the country, some 30% to 40% of the let’s say the fifth day wages.

But that drag has reduced and again with the programs I talked about that we’ve been continuing in terms of thrifting the workforce is that that drag hopefully will reduce as we go from 2009 to 2010 but that’s obviously again a function of what will the production levels be which as you know I took a very cautious stance on that both in what I said and also my answer to the previous question.

Chris Ceraso - Credit Suisse

And then I may have missed this, did you give the dollar amount of the supplier and customer settlements in the quarter versus year ago and also the amount from the second quarter if you have that.

Joe Cantie

Yes, I indicated that its about $20 million in the third quarter here. Every quarter we have a number of what I’ll call one-off positives and negatives. Typically they tend to net themselves out. This quarter was a bit of an unusual one in that we did very well in that category. I don’t have the exact dollar amount for the prior year but my guess is its negligible because we would have called that out so I think you should look at it as a $20 million one-time good guy when you do that comparison.

Chris Ceraso - Credit Suisse

And then what is your euro assumption for Q4 you’re using.

Joe Cantie

We’re at 143 I believe.

Operator

Your next question comes from the line of Rod Lache - Deutsche Bank

Rod Lache - Deutsche Bank

I just had a couple of questions, so if I net out that 28%, that $20 million, should I be pointing to that mid 20’s incremental margins, can I use that as like, should we think about that as that sequential, you can look at revenue sequentially, that’s how you’d be thinking about your incremental margin.

Joe Cantie

Yes, I’ve been on record a number of times saying that we have a blend of many different businesses globally around the world so it differs a lot by specific product range and countries and all that kind of good stuff but mostly on an aggregated basis a contribution margin somewhere in the range of 23, 25 makes sense.

Rod Lache - Deutsche Bank

And just on the cash flow side, one thing that seems pretty remarkable and its not just you, it seems everyone in the industry, there’s been no working capital earned this quarter where you would have expected it because of the huge ramp up of production sequentially, how should we be thinking about what working capital will do next year as production likely increases on a full year basis. Do you think working capital can be a net neutral next year or do you still think it will be a negative based on the production ramp up.

John Plant

I think in the third quarter I mean some of it stand to obviously the cut off but I think when you see generally production increases and let’s hope that 2010 shows an average production increase for us across the world. Again depending upon what happens in Europe then clearly as production increases there will be a working capital outflow.

I’m assuming we’ll do our normal thrifting, make sure we are efficient on inventory and obviously we’re managing the receivable and payable days. But you have to take our average trade position and assume that as a percentage of that increased revenue as you move in to 2010 and 2011, again, according to what volume assumptions we choose to make at the end of the planning period.

Joe Cantie

I think John is absolutely right. The general rule is is that as production goes up working capital will outflow. I think if you look closely at the company, as you look at TRW for the year to date period we are at a negative cash flow for working capital as production has come back. For us the third quarter, October 2 cutoff, when you think of like [inaudible] that gave us a bit of a good guy for us in the third quarter versus the fourth quarter but generally speaking as production does ramp up there is a cash outflow for working capital.

Rod Lache - Deutsche Bank

On pricing, obviously the pricing seems to be a lot better now that we’re in, but as the industry comes out of for lack of a better word, this crisis, do you expect your customers to revert back to their old ways as far as their demands on pricing. Do you think this pricing improvement for the industry can hold going forward.

John Plant

It’s a very difficult thing to know. I would expect that many of our customers will, we’re hopeful improve pricing. I’m also hoping that the supply bases is much more disciplined in its response and choosing how it deploys capital and seeks the appropriate return on that and again, avoids just chasing volume as we all approach it in a very disciplined way because we have to achieve the right returns on the capital.

So I don’t know how to answer that question really because how the vehicle manufacturers think about pricing, one would hope that they’ve learned some lessons of the distress that’s occurred in the industry and particularly in the supply base and maybe just a function of the supply base is difficult access to capital, I’ll say distress and insolvencies that have occurred during this period, then maybe everybody will be more interested in obtaining source of production and security of that production rather then the chasing the lowest price which may not be a long-term good strategy as in fact many customers have found they’ve had to pay out very large sums of money when they’ve had to face supplier insolvencies.

Operator

Your next question comes from the line of John Murphy – Banc of America / Merrill Lynch

John Murphy – Banc of America / Merrill Lynch

I know you’ve hinted at this incremental margin or actually stated this incremental margin at 25% as sort of the ballpark that we should think about going forward but as we look at the production, significant production ramp in the fourth quarter and potentially into next year, is there the possibility that given all the cuts that you’ve executed or cost cutting that you’ve executed, that this number actually might be a lot higher as production ramps up significantly.

Joe Cantie

No, again a couple of things, first of all I always say 23 to 25% and its not just you but everybody seems to focus on the 25% but 23 to 25%, when you think of fixed costs take outs that have been done that gives you a one-time up lift to that incremental margin in the quarters that it occurs.

So in our second quarter I think the incremental margin was something like 41% because most of the fixed costs coming out give you that one-time step up. After that if you’re just basically flexing up and down on volumes, it is more in that 23 to 25%.

John Murphy – Banc of America / Merrill Lynch

Then also on mix, obviously you said you thought it was going to be negative this year, potentially positive next year, you didn’t really quantify anything there. I’m just wondering if you can give us an idea on A and B segment vehicles in Europe versus C and D, what the content differential might be that you supply. Obviously its easier for us to figure that out on structural parts and interiors but you are in a different arena. What would be the delta there.

John Plant

Again I didn’t really answer that question fully earlier in the call and I think we’re examining that right now because where there are option fits and in fact content changing its been a difficult thing to nail because you’ve got so many moving parts in this, the assumptions of what vehicles what customers, how much C and D class, clearly the transactional values are different.

But then you’re looking at how many of them will have let’s say full impact, side impact airbags, or roof rail curtains, are they A to B, A to C and then the degree of changeover to electric steering. Its truly a very difficult thing to do.

We are going through our planning right now. We are actually asking ourselves that very question so we can actually get a good handle on different scenarios according to different mix assumptions we can make for 2010. And we’re going to be more [fulsome] in that as we announce our fourth quarter results.

John Murphy – Banc of America / Merrill Lynch

But it would be fair to say that there’s the option, there’s a potential if we have a, as we go through a negative mix shift the options on smaller cars are ramped up and that the mix shift might not be that horrific for you as it might be for some other structural parts suppliers and other suppliers, is that correct.

John Plant

Yes, again its very difficult but when you’re looking at it you get wildcard [inaudible] where for example previous plants have maybe let’s say some radar [inaudible] pipe systems moving down from the luxury cars and then they were planned in and now they’ve been taken out of the vehicle manufacturers cycle plans for launch next year.

And so its truly difficult to answer the question and I know I’m stepping, side stepping it a bit at the moment, all I can say is that clearly just look at the vehicle transactional price. You can take some of our base products like say a drum brake versus a rear caliper, an electric power brake, fundamentally different price positions, and content for us.

But its so fluid and you’ve also seen probably the lowest of the specs done this year in terms of some of the A and B class vehicles that its been, moving too rapidly for us to really know and we’ve been focusing so much on other things which have really, our cost base and you’ve seen I think that was the right focus for us because of the results which I think are good.

And we’re going to be more refining our sub-analysis on mix as we move into 2010 because clearly the I’ll say the crisis management has been, will be at a far lower level hopefully to move in transition between the years as we see more solidity and stabilization within the industry.

John Murphy – Banc of America / Merrill Lynch

On CapEx, the $130 million roughly in the fourth quarter is a pretty heavy weight in the fourth quarter, is there anything going on there that’s unique or is this just a result of large model, a number of large model launches. What’s driving that big number in the fourth quarter versus the rest of the year.

Joe Cantie

Just seasonality, if you look at every year for the last four or five years our fourth quarter is always our highest level of CapEx as typically we’re going through the approval process with launches for the spring launches and we need to have that capital in place so its nothing more then the capital we need to put in place for our launches as we move into next year.

John Murphy – Banc of America / Merrill Lynch

But are there a higher number of launches because of the CapEx being so large in the fourth quarter then usually.

John Plant

No, we’ve been very careful managing our capital as you can see. Our product pipeline continues to be I think fairly full as we move into the 2011 model years. As always we’ll be updating you in terms of those exciting launches as we go into them, but you shouldn’t be reading that there’s an extraordinary spike in launch compared to normal and we have seen I will say vehicle manufacturers if anything, reducing their cycle plan refreshment over the last couple years.

So that’s had a dampening effect while of course we had a, I’ll say a constant growth effect in our figures and so maybe some of that’s blending out into just a normal level which is resulting in an increase compared to prior quarters in the year, but really you should think of it more in line with the cadence of the last couple of years.

Operator

Your next question comes from the line of Brett Hoselton - KeyBanc

Brett Hoselton - KeyBanc

First of all can you provide us with the FX impact on operating income.

Joe Cantie

Yes we had, on the sales level for the quarter compared to last year it was $209 million and we actually had a negative impact when you consider our hedging and everything else of roughly about $10 to $12 million.

Brett Hoselton - KeyBanc

And then one of the largest assets that you have had for many years but have been unable to utilize is your deferred tax assets and given all the restructuring and so forth, is there at all a realistic possibility that you might be able to utilize some of those deferred tax assets over the next three, five years and I know that that is implying that you are going to start making money in the US but is there a realistic possibility that you could utilize those in your opinion.

Joe Cantie

Yes I think there is, you bring up a good point. Our, primarily in the United States we have net operating loss carryforwards of a billion given all the restructuring and the things that we’ve done. We have always been working very hard to get the US into a profitable position despite the load that the United States carries given all of our debt that is in the United States.

And quite frankly we’re in pretty good shape before this downturn occurred and we expected to be profitable, then the downturn occurred. We do need ourselves to get to a higher level of production in North America and in the United States but when we look out over the next three to five years, we do expect to be taking advantage of that tax loss carryforward position.

Brett Hoselton - KeyBanc

And then outside of the US is there any significant NOL’s particularly in Europe where you obviously generate a fair portion of your revenues.

Joe Cantie

No, the only, there’s small bits and pieces in what I’ll call ancillary countries but the big story is just the United States deferred tax position. There’s really nothing to speak of outside of the US.

Brett Hoselton - KeyBanc

And then other then shielding net income is there any opportunity to utilize then through for example repatriation of cash or anything else along those lines that you can think of.

Joe Cantie

Nothing substantial, I don’t see any opportunity in the near-term to do anything along that line.

Brett Hoselton - KeyBanc

And switching gears, revenue growth, as you think about new business revenue growth apart from FX, production and so forth, traditionally you’ve kind of been that low mid single-digit range, is there any reason to believe that that has significantly increased or decreased based on the quoting activity, market share, so on and so forth.

John Plant

We’re in the depth of our planning process right now and going through and trying to reexamine all of the impacts of the change in the vehicle manufacturers whole I’ll say cycle plans of their vehicle introductions and their refresh rates. Also whether they’ve, some of the programs which were on there in terms of new technologies, whether they’ve [inaudible] all of the, I’ll say the thrifting that they’ve gone through and so again we’ll be in a better position to talk about that in 2010 then we are now, just because its live analysis for us and trying to establish where all of those effects of mix, cycle plan change, optionalities and also the impact of technologies which were wanted and now being deferred for a couple of years.

So, there’s too many moving parts to give you a good answer at this point in time.

Brett Hoselton - KeyBanc

As you think about the move from the third quarter sequentially to the fourth quarter and we’re thinking about earnings here, there’s some obvious impacts like production and so forth, are there any other significant factors besides production that you can think of that might drive earnings higher or lower and one of the things that you mentioned earlier which sounds a little bit unique is maybe the hedging on the FX side, but is there any other material factors, maybe that included that you see.

Joe Cantie

Just going up and down my income statement I don’t see anything significant out there. Interest expense will have the full quarter effect of the equity offerings so perhaps there’s a little bit of opportunity there but otherwise, don’t see much other then the effects of production and the days change, yes, I’m sorry I forgot about the fact that we have six less calendar days in our fourth quarter this year compared to the prior year.

So make sure you factor that in.

Brett Hoselton - KeyBanc

John, Joe, Mark, really exceeded my expectations, well done, congratulations.

Operator

Your final question comes from the line of Michael Ward - Soleil

Michael Ward - Soleil

I wonder if you could talk a little bit more about the calendar, it looks seasonally you usually have a very strong cash flow period in the fourth quarter, is the calendar the biggest chunk, now this year you’re not expecting as big as a cash flow pop, so it’s the calendar, and then you have working capital use in the fourth quarter.

Joe Cantie

Yes, I think there’s a couple of things and thanks for the question, first of all production has strengthened in the third quarter and the fourth quarter so production up, working capital usage so there’s that effect.

Secondly the calendar cutoff did matter, the October 2 when you think of like again, [GMM and S2] you get paid second day, second month, well we got paid on October 2. Last year when we cut off on September 26 you would have a series of those payments falling into the fourth versus the third. So there’s a number of those factors.

But I do want to highlight that in my comments I did indicate that the cash outflow for the entire year is now expected to be about $100 to $250 million which is significantly better then what we were anticipating three months ago. A lot of it is because of our strong third quarter and clarity to the remaining months and it helps when there’s only a few remaining months to the year.

And when you think of what we’ve been through in the first quarter of this year where the world basically stopped in auto sales and production that’s going to be a pretty good year for us if we can land within the range that I gave.

Michael Ward - Soleil

It sounds like so its in the last six months then if you look at it and maybe that’s a better way to look at it, that you’re going to be cash flow positive somewhere in the neighborhood of $200 million.

Joe Cantie

Well that’s exactly right. The second, again thanks for that, the second half of the year obviously earnings is much better, cash flow much better, and we’re digging ourselves out of that hole that occurred in the first quarter of this year.

John Plant

In fact the way I’d like to think of it is that last year had I think some exceptional features to it particularly in the fourth quarter where with the reductions in production there was a working capital inflow so if you look year to year the way I think about it is that we’ve gone through the economic car [de risk] or the economic reckoning as I call it, the most severe I think position for the global economies in 70 years, certainly for the US anyway and Europe.

And if you adjust the working capital because of fourth quarter to fourth quarter I think we’ve come through actually have I think the same or actually we have an equity offering in there as well in terms of the net debt but I think the cash management through the whole period has just been a great credit to the company.

Michael Ward - Soleil

If I recall last year in Europe inventory was a big problem and part of the hit in the first half of 2009 was the inventory draw down, do you have any color on how manufacturing inventories are right now going into 2010 or are they in better shape then they were last year.

John Plant

Very much so, if you look at say North America its just below 60 days. Again you got a blend between SUVs, trucks, and pass cars and obviously by different manufacturers and obviously still influenced by the daily selling rate, but in terms of a sales rate that we saw in October and the inventory that we exited, it’s in really good shape.

Similarly in Europe I think its in reasonable shape and then it’s a function of selling days and of course the wildcard is the scrappage plan payback and what that does as we move into the first quarter but relatively speaking inventory as we exit 2009 compared to exiting 2008 are in just a really super condition on a relative basis.

Michael Ward - Soleil

Okay so that risk has diminished versus last year.

John Plant

Yes, as we go into 2010 absent the inventory effect which we’re just not going to have then clearly the first half of 2010 is going to be so much better then the first half of 2009.

Operator

This does conclude today’s conference call. We appreciate your participation.

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