WABCO Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: WABCO Holdings (WBC)

WABCO Holdings Inc. (NYSE:WBC)

Q4 2013 Earnings Conference Call

February 13, 2014 9:00 AM ET

Executives

Christian Fife – VP, IR and General Auditor

Jacques Esculier – Chairman and CEO

Jason Campbell – VP, Corporate Controller and Assistant Secretary

Analysts

Jeff Hammond – Keybanc Capital Markets

Jerry Revich – Goldman & Sachs

David Baker – Robert W. Baird

Joel Tiss – BMO Capital Markets

Operator

Good day, ladies and gentlemen and welcome to WABCO Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Mr. Christian Fife, Vice President, Investor Relations and General Auditor. Sir, you may begin.

Christian Fife

Thank you, Sayed. Good morning everyone and welcome to WABCO’s quarterly conference call. Today, we’ll present our fourth quarter and full year earnings 2013 results. With us this morning, we have Jacques Esculier, our Chairman and CEO, and Jason Campbell, our Vice President, Controller, and acting CFO.

As a reminder, this call webcast and the presentation that we are using this morning are available on our website at www.wabco-auto.com under the heading WABCO Q4 2013 Results. A replay of this call will be available through February 19.

Also as shown on Chart 2 of the presentation, certain forward-looking statements that we will make today are based on management’s good faith, expectations and beliefs concerning future development. As you know, actual results may differ materially from these expectations as a result of many factors. Examples of these factors can be found in the Company’s Form 10-K which was filed with the SEC this morning, and in our quarterly report. Lastly, some of our remarks contain non-GAAP financial measures as defined by the SEC. Reconciliations of the non-GAAP financial measures to the most comparable GAAP measures are attached as an appendix to this presentation and to our press release from this morning, both of which are posted on our website.

I’ll now turn the call over to Jacques Esculier.

Jacques Esculier

Well, thank you, Christian and good morning, good afternoon to you all and welcome to our Q4 and full year 2013 reporting. But before we jump into the details of our performance, I’d like to kind of take a step back and referring this last quarter of the year. Actually, we ended up on a pretty high note the year 2013 was quarter to drove an increase in our revenue line of 19% year-over-year. Certainly helped by a surge of demand from Europe driven by these pre buy impact ahead of the introduction of the Euro 6 standard in early 2014. Europe production level was up 10% sequentially versus Q3 and it held to 25% year-over-year versus 2012. We were also supported by another kind of surge, interesting surge in China with an increase of 21% sequentially of the level of production versus Q3 and 18% year-over-year, that could be to a certain extent explained also by a pre buy ahead of the introduction of an enforcement of some initial regulations in early 2014, but we continue to have some headwind Q4 from India with sequential further erosion of 22% of production versus Q3 and 35% year-over-year during that fourth quarter. But overall, with this market we again kind of ended the year very nicely. Now, when we look at this full year 2013 performance, we kind of first look at market that had an eager 3% of global growth. And it was pooled by a 5% year-over-year gross in production in Europe, 16% up in China versus 2012 and South America was up 30% versus the previous year. But we had a very strong headwind from India that had a further 30% decrease in production versus 2012 and a continuous erosion of the U.S. market that was down at further 4%.

So again as you can imagine this year 2013, during that year we had to face a continuously uncertain and volatile market but because of our continuous ability to flex and adapt to this fast kind of moving market we are able to generate a pretty healthy 8% out performance generate some good, strong incremental margin in a very healthy cash flow while we were investing an additional 20% in capital expenditure to further enlarge and enhance our capabilities to support our future growth.

Now looking at 2014, I would say the way we see today it’s going to be steer more of the same with flattish market that this year were quite a wild and that’s a nice chance we will see hopefully some very good gross in the U.S. market unfortunately upset by the softness coming from emerging market and I don’t think we could expect Europe to be much better than flattish. So out of these, we steer some good value that we will deliver to shareholders through continuous good out performance of the market, good steady incremental margin and again good cash flow. And actually this year we will be helped in addition to the franchise we have been driving so far by this acquisition of leader in its market, and I am talking about the fleet management solution market, Transics, the name of this company is actually of the same breed as WABCO in terms of top-line growth, healthy profitability, good cash flows. So I think the combination will actually bring us to best of breed and we will continue to help us further enhance our value to shareholders.

Now looking at the results starting this fourth quarter, sales was up as I said 19%, performance upward income at $86.5 million versus $75 million a year ago, leading to margins of 12% this year versus 12.6% last year at the same period but you are going to see and Jason will explain that to you that this was impacted by first continuous impact from Foreign Exchange in the magnitude of about $30 million and then also impacted by one timer due to the fact we had to bumped up the reserve for annual incentive compensation.

So EPS was $1.29 per share versus $1.08 a year ago, return $89 million a year generated $89 million of cash flow at a conversion rate of 102% and we return that cash to purchase one million of shares. Full year 2013, sales was up 9.3% overall for the year, performance operating income was $355 million versus $335 a year ago, again a margin degradation from 13.5% in 2012 to 13.1% due to the tax from foreign exchange that’s in itself $40 million and then some incentive plan increase of $30 million, leading to performance EPS of $5.01 versus $4.46 a year ago, and we generated very healthy cash flow of $280.7 million leading to 88% conversion rate. So I think this year will stay as another good solid performing year for our shareholders.

Going to the next page and looking at the profile of the fourth quarter sales performance again overall excluding translation order effect we grew 19% led by the OE business channel that went up 26%, supported obviously again by an increasing our markets in Europe and China but also supported and propelled by continues increase of our content per vehicle, after market was up only 3% because in the first quarter we saw the end of the field content to replace our competitors at this brakes that M&A in Europe is to exclude this impact, the aftermarket would have grown another healthy 8% year-over-year, just to give was at 13% due to actually growth year-over-year in the U.S. market as well as some additional content per vehicle.

Now when looking region by region and comparing WABCO’s evolution versus the market dynamics starting with Europe, we outperformed the market by 10% with a strong 26% year-over-year increase and that’s again due to an increase in our share of market and the impact of this very strong surge in production at our customers that also had a positive impact on the working capital that we requested more volume from us. North America was up year-over-year 6% and we out performed by 11% and that’s driven by content per vehicle around our collision mitigation system on guard and the continuous attraction to the automated manual transmission technology.

The year was also up 21% for WABCO overseas market dynamics of 8% and that’s mostly driven by the large share that we took in the volume of ABS related to the mandate to cover 40% of the fleet in 2013 with ABS. The remaining 60% I remind would happen in 2014. Japan, Korea, was up 6%, we out performed by 7% because of favorable mix, actually there is less exports to Southeast Asia and more domestic demand that is driving this mix. China was up 39% for WABCO, 19% for the market this out performance was driven by positive vehicle mix we have now more tractors built in Q4. And also some continuous gain in share of market and content per vehicle. In India, was down again dramatic 34% in the market and 32% four WABCO? So overall when you look across all the different regions we have continued to outperform and actually we out performed in every one of those regions.

Going to the next page which will review the sales profile across the Europe, went up 9.3 OE, and went up 12% again reflecting mostly here the impact of the increase in content per vehicle, after market was up 7% or 8% outside of this air disc brake campaign. Sales to joint venture were down 5% because overall the market was down in the U.S. for the full year. So looking at by region most specifically, in Europe, we were up 13% in market that was up 5% driven by mostly penetration of air disc brakes at customers like Volvo and MAN as well as some further penetration of the AMT technology in the European production particularly at Daimler and Volvo. North America, we outperformed again because of additional content per vehicle, South America still writing for the full year this opportunity to bring the technology of ABS on 40% of production. Japan, Korea, we outperformed by 6% for the same reasons. China, we outperforms by 4% and that’s again due to share of market increase in some favorable mix. And India, we have seen this continued dramatic decline particularly affecting the heavy multi axles vehicles was the largest content per vehicle. So when you look at overall as I told you upfront, we have been to raise our level of our performance to 8% in the market that was still growing very much overall.

So I am going to like Jason drive you through the detailed of our financial results for the quarter full year. Jason?

Jason Campbell

Thanks, Jacque. Good morning and good afternoon everyone. I will take you through our financial results for the fourth quarter and the full year 2013. You turn to Chart 6; I’ll walk you through details from sales to earnings per share for the quarter. Looking at both reported and performance numbers. To remind everyone the performance numbers are adjusted to remove operational streamlining and separation costs, and European Commission fine reimbursement as well as discrete and other tax items. We also adjust in comparisons to 2012 for currency translation effects.

As Jacques just highlighted for you, we delivered strong organic sales growth in the quarter at 19.1% in local currencies versus last year. We had price reductions of 1.7% for the quarter which included serving one time item as we still expect 2014 to be consistent with the full year 2013 ranging between 1% and 1.5. Our WABCO operating system continued to power excellence and our execution across our organization. In Q4, it further improved our results by generating increase in gross profit of 14.6% which was driven by 6.2% gross materials productivity, partially offset by 0.2% of commodity inflation, and our factories were able to generate 6.4% of conversion productivity, another strong result.

WABCO’s operating system further demonstrates the Company’s ongoing ability to optimize resources and flex capacity to address the changes in market finance.

The impact of volume mix and better fixed cost absorption generated $29.4 million from additional gross profit; from inflation on labor costs added approximately $4.1 million to our cost of sales. This resulted in performance gross profit margin of 28.9% for this quarter.

Going through our operating expenses, we continued to invest in research and development activities to support our long-term innovation and growth strategies, which added $7.1 million to our costs, while labor inflation increased operating expense by $2.8 million in fourth quarter. Additionally, our incentive compensation expense was $6.6 million higher than a year ago which is attributable to a full year true up of expense recorded this quarter due to higher performance resulted versus a year ago. This represents 6% of the 16% increase in operating expenses versus 2012. We generated operating income of $86.5 million or 12% of sales on a performance basis.

This quarter, however, we were negatively impacted by $13.1 million on a year-over-year basis from transactional foreign exchange. Excluding that impact, our incremental margin was 20% on organic sales growth of 19%, another mark of healthy profitability. After slight increases in equity income and $1 million decline in non-controlling interest expense versus last year, we delivered performance EBIT of $89.9 million or a margin of 12.5%.

Moving to taxes for the fourth quarter, reported in U.S. GAAP resulted in a benefit of $46.8 million, this result includes a favorable benefit from the release of evolutional item pertaining to a deferred tax assets from net operating losses which we had anticipated and described you at the start of the year, also included in this quarter’s tax results is the charge associated with $300 million of Belgium earnings for which the Company does not assert permanent reinvestment outside the U.S., this in due to the exceptional gain recorded for European fine reimbursement. On performance tax basis, we recorded an expense of $10.5 million, which brings the final rate for 2013 to 13%. After excluding the non-performance items, you can see that our earnings per share were $1.29 for the quarter. This EPS has improved by 19% versus the same period a year ago.

In summary, the fourth quarter WABCO delivered an exceptional level of organic sales growth, supported by high level of outperformance against our market while continuing to deliver healthy profitability.

If you turn to Chart 7, I can walk you through the details of sales and EPS for the full year. We delivered organic sales growth of 9.3% in 2013 including 1.2% of price reduction which is within the range we had anticipated for the year. The full year impact of executing within the WABCO operating system included 5.3% gross material productivity partially offset by 0.3% in the commodity inflation and our factories were able to generate 6.3% of conversion productivity achieving yet another new annual record. The impact of volume mix and better fixed cost absorption generated $55.9 million of additional gross profit while inflation on labor cost added approximately $40.7 million to our cost of sales.

Our continued focus on quality help drive the reduction in warranty expense compared to last year, representing an improvement of over $9 million in gross profit. All in all the result was performance gross profit margin of 30% for the full year.

Going through operating expenses, investments to support our growth strategy added $18.6 million to our cost, while labor inflation increased operating expenses by $11.2 million. Given the improved performance of the business throughout the year, both in key financial metrics as well as our quality target we achieved higher level of incentive compensation which added $13.6 million to our cost versus 2012.

All together we generated operating income of $355.4 million or 13.1% of sales on performance basis. As we have discussed all through our 2013, transactional foreign currency impact has been a significant headwind for us, negatively impacting our operating income by over $40 million compared to 2012. Excluding this impact, our incremental operating margin is 25% or 9% organic sales growth, an achievement on profitability value we are very pleased with.

The low operating income, we had a slightly increase in accretive income and $1.8 million decline in non-controlling interest expenses versus last year resulting in performance EBIT at $364.4 million by margin of 13.4%.

Moving to taxes for the quarter for the year, a full year U.S. GAAP taxes resulted in a benefit of $21 million which I mentioned before include the very favorable benefit from the release of evaluation allowance and also a charge associated with the excess profit primarily driven by the exceptional gain from the European Commission reimbursement. From a performance tax base, we’ve recorded an expense at $47.5 million, this opening in final rate of 13% for the year. After excluding nonperformance items, we continue our earnings per share are $5.01 in 2013, a new annual record for WABCO.

In summary, we are very proud of the organization as it continues to execute very well in an environment where 80% out performance in the market delivered the majority of our sales growth and also generating healthy profitability.

Let’s turn to Chart 8 and I will take you through our cash flow for 2013. Working capital was an increase at $27.2 million, driven by higher levels of business activity in 2013. Our days sales outstanding and past dues have improved from last year while we've seen inventory turns improved by one.

The primary driver of other adjustments to our operating cash is non cash, net tax benefit recorded in the fourth quarter of the year. Net cash used for purchases of PP&E unit and computer software totaled $121.5 million for the year. This continued to reinforce the investment required to grow globally and support infrastructure on core confident and continue to gain new business.

This is led to a free cash flow $544.3 million or $280.7 million on excluding the European Commission fine reimbursement and streamlining separation team for the Europe, resulting in a conversion rate of 88% on our performance net income. This resulted at the upper end of our guidance range that we committed at 2013.

Finally, we continue to return cash to our shareholders through the buyback program. We purchased just over one million shares for $89 million in the fourth quarter during the full year sell over 3.1 million at the cost of $241 million. As at the end of 2013, we still have around 380 million wealth under our existing buyback authorization which is still available through the end of 2014.

For the time being we intend to keep returning free cash flow back to our shareholders through this buyback program.

Now, I’ll turn it back to Jacque who will highlight our current market dynamics.

Jacques Esculier

Thanks, Jason. So turning to Page 9, we are going to through the dynamics of each one of regions starting with Europe, registration for the Q4 of heavy duty truck in Western Europe was at healthy 44% but as we know certainly very much influenced by the impact of the pre buying otherwise for the full year it was up 8%. When you look at production of truck and bus altogether, Q4 was up 26% versus a year ago and 10% sequentially. And for the full year truck and bus production was up 5% versus 2012.

Looking ahead, right now the forecast that we would see for 2014 calls for a level of registration of heavy duty truck in Western Europe down 2% which obviously a weak first quarter and looking at the production level altogether for the full year 2014, our best estimate right now would be between minus two plus three meaning kind of flattish year-over-year with a first quarter that would be down around 20% versus the last quarter of last year.

Moving to the U.S., Q4 production was up 6% year-over-year but see another 3% down versus Q3. For the total year we see a further erosion of 4% in spite of the GDP growth of around 2% now looking ahead in 2014, we would actually this time anticipate a positive evolution was announced both between 5% to 10% driven by an economic activity and GDP growth that should be closer to 3%.

China, the market as I said in fourth quarter had a surprising surge at 19% additional volume year-over-year at 21% sequentially due to this pre buy effect. For the total year we end up with 16% year-over-year increase in production, we are at about $1.2 million level of production of truck and buses and we believe that we probably will take another kind of – we are going have extension at the flats to slightly erosion in minus 5% for 2014.

India, again Q4 showed another 34% year-over-year decrease, 22% decrease sequentially for the total year it represents 28% erosion year-over-year. When you look at 2013 level versus 2011, it’s more than 40% down so that kind of size is the extent of the dramatic show that we have seen in demand over there. Unfortunately we don’t predict much better outlook for 2014. We kind of see the market further eroding another 5% to 10%. We believe that it would take another year or so to recover – to start the recovery process.

Next page continuing to turn you around the world with Japan, Korea, again some good production increase versus Q4 last year and the sequentially up 6%. Full year down 3% but favorably impacted by a mix that you see more sales in domestic market than outside of Japan was particular kind of decrease in Southeast Asia and Indonesia and Thailand in particular. And in 2014 we still see Southeast Asia kind of hurting the volume, we still healthy market domestically but we see overall the production further eroding to flat to minus 5%.

Brazil, Q4 was up 8% year-over-year but significant down 23% sequentially and that’s obviously following the impact of the expiration of the subsidies by the government that may be actually restarted or actually extended slightly but at a much lower level in 2014. For the total year the production was up 31% year-over-year, but you remember that 2012 was particularly low because it was following a pre buying – a very strong pre buying 2011, when you take a step back and look at production level since 2010, compensating the low in 2012 by the high in 2011, you are kind of stabilized at about 230,000 trucks be up in that regions of the world. And as in 2014, the GDP growth will slow down versus the year before, we believe that actually we may kind of erode out of the 230,000 by another 5% to 10% overall.

After market as I said we have completed the replacement of competitors on certain excellence of MAN so when excluding the service campaign the 2013 growth was between 7% and 8%. Actually, we believe that 2014 for our existing after market activities would be in the same range of 7% to 8% growth year-over-year to which you include the acquisition revenues and that would bring our aftermarket activities altogether around the 15% up year-over-year.

Finally, trailers production was up 6% in Q4 year-over-year and 5% sequent – and down 6% to 5% sequentially. For the full year the production was 1% up year-over-year and was very healthy growth in Brazil.

When we look at 2014, we believe the trailer market should be nicely influenced by the positive impact of the growth in commercial – in a truck and bus, there will be North America. Altogether leading to a flat to plus 5 global expectations for growth.

Next page has we usually we report the highlights of our achievement along the three pillars of strategies starting with globalization. WABCO was recertify as hi-tech company in China. We were in 2010 when we obtained this status, one of the very first global suppliers to reach here. And actually 2013 and it was renewed force we remained one of the very few global suppliers to hold that status.

We also open a new factory in Lucknow which is in the northern part of India which serves one of the major production sites for commercial vehicles from Tata. Along technologies, we introduced our latest version and most advanced version of our ABS system at IVECO integrated the breakthrough ESCsmart study to control system. We also introduced our innovative OnLane departure of warning system which is now available on the Cascadia truck at Freightliner. Along the equation we received award as the Heavy Duty Remanufacture of the year for Reman Solutions and in the fourth quarter we received six supplier award from three major customers in China, namely CNHTC, Dongfeng and Foton. And then we deliver as Jasan read, where he went through some very healthy productivity actually breaking new records.

The following page is again kind of going further into this acquisition that we just closed yesterday night and it’s acquiring a Belgium headquartered limited company that is a leader in this fleet management solutions space, that’s space by the way representing we believe around $1.5 billion of revenue today with 10% to 15% growth overall, the growth being higher in the U.S. as in Europe and Europe revenue representing about 50% of the $1.5 billion.

So the company that we are acquiring was established in 1991; 300 employees we already contracted 1300 fleet and delivered 85,000 installations. From the revenue profile standpoint up to 2012 and 2013 revenues have not been audited and cannot published prior to a formal communication as it is here listed company. So in 2012 it was EUR 49 million with more than 50% of that revenue being recurring revenues and that number is progressing year after year. Profitability pro fine reaching 21.1% of EBITDA in 2012.

Now in our own view as we acquired this company including the synergies that we see is supported by WABCO’s capabilities we would anticipate an overall 10% of figure over the next three years so that’s pretty healthy top line growth. And we have acquired this company for net consideration of EUR 95.8 million covering 97% of the business. The remaining about 3% being planned to be acquired during the first half of this year.

So when you look at this $95.8 million it correspondence to a single digit multiple of EBITDA.

Moving to next page we kind of describe the structure of the value proposition that we are pulling together which I think is going to be extremely attractive to fleet. It gives you all the different functionalities and elements of the value that we bring to these fleet management solutions to the fleet and you can read them by yourself. The yellow color would represent the contribution from Transics to each one of those functionalities and blue would representing what we bring in the package and the synergies that we will leverage. Obviously our contribution will be more about distribution, kind of having this European rooted company expand and leverage our distribution channels and network to each customers around the globe, and we also will connect to all our system to build that, prevent this maintenance value proposition as well as providing opportunities for drivers to drive more safely. And the rest is just around management of fleets to management to trucks about providing indication and training to trailers how to drive their truck more efficiently to save fuel, about flaking obviously vehicle to make sure that they don’t depart from corridors that we have plan to utilize. And so anyway a very strong kind of set value proposition that I think provide a very compelling and growth range of services to fleet and again I am very excited about this acquisition that very, very nicely, actually fairly perfectly fits one of our key strategies to expand our business relationship with fleet.

Turning to next page, I want to take this opportunity to kind of clearly share with you how we will recognize performance tax from 2014 on. And this bridge will tell you how we go from the performance tax level of 2013 that ended up at 13%, to which we have to add 1.5% which would represent a special program that was run in Germany since 1998 of tax on acquisition that ended up at the end of last year. Another 1.5% due to the profile that we expect from the revenues of each region across the world, so and that’s mix of revenues across different regions will have this year a negative impact of $1.5 million, then that leads to what we will call from that one our performance tax rate and that is going to be the 16% for 2014.

Now to reach the gap recognized tax rate we have to add that 4.5% which is the impact of the fact that we recognized upfront at the end of last year $178 million of NOI that will continue on tier around 2018 to favorably impact the cash tax rate in Europe. So we want to continue to recognize that tax rate because it’s what is I think important in terms of performance to shareholders, but again this is the difference between the performance tax rate and gap tax rate that will be – that is here well kind of depicted and described.

Going to the next page, I am going to go through the guidance as we see today for 2014 starting with Feb growth of 6% to 11% and that includes a favorable 2% increase in sales coming from the Transics acquisition. That would lead to sales of $2.92 billion to $3.055 billion, performance operating margin between 12.8% and 13.6%, performance EPS of $5.3 to $5.8 per share, and again free cash flow remained in that range of 82% to 90%. The key assumptions behind the guidance would be that price erosion is still maintained between 1% to 1.5%, raw material inflation would impact material cost by 0.5%, and productivity level across the supply chain would be in line with what we have seen lately. The transactional impact and headwind coming from foreign exchange assuming the rate would stay where they have been at the begin of the year would affect us a further $7 million year-over-year which is clear kind of – quite a bit of money but certainly a lot less than what we have seen in 2013. And performance tax rate of 16%, the average diluted shares being through the buyback down to 61 million shares.

So in 2014, we kind of plan as we see here some very good growth throughout performance helped by this acquisition, good, solid, incremental margin and again a very healthy cash flow was a great conversion rate.

So in summary we turn to page on 2013 that will remain on our memory as the year with strong performance and strong value delivered to shareholders in spite of the continuously uncertain and volatile markets with an EPS of $5.01 per share and generating a healthy cash flow that we continue to return to shareholders through buyback.

In 2014, we would probably again deal with a very flattish market but we will be able to deliver good solid performance through our ability to outperform the market and generate good incremental margin. We finalized this acquisition yesterday of something that I believe is perfectly aligned with our strategy and that will further expand our revenue source from fleet, and then we will continue along this at buying back our shares and returning something around $370 million of cash to shareholders. So a good solid year ahead of us.

This end our presentation. I would like to open the session for Q&A now.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from (inaudible) Piper Jaffray. Your line is open. Please go ahead.

Unidentified Analyst

Hi, guys. I was wondering if you could I guess first of all just comment on the European truck market, looking out to 2014, clearly you expect the headwind here in Q1 in the first half due to the pre buy. I was just wondering if you could give a little bit more granularity around your flattish expectations. Is that basically just assuming that GDP growth and improving economy is going to come around us to support truck sales in the back half of the year? Any additional details would be helpful. Thanks.

Jacques Esculier

Yes, I think your first half I would say the first quarter but also towards the second quarter were see the impact of the pre buy. But then we on PP&E as you said that the slight improvement that is now foreseen in Europe will generate additional demand in commercial vehicle that would kind of offset this negative impact from the first half of the year. So overall we – that’s why we kind of PP&E the market that would be kind of flattish may be slightly eroding if again the gain in GDP doesn’t have an impact on the demand for truck that is fully offsetting this pre buy impact that will going go through in the first half of the year. But I think it’s reasonable because you look at the demand from last year, you take out the impact of 25,000 probably pre buy effects and you kind of transfer that 2014 you would expect this take off because of an improvement in the economy, because the fleet is aging as you know we have not replaced the volume of trucks which should have acquired a while so it would be unreasonable to be more pessimistic than that.

Unidentified Analyst

Okay, great, that’s very helpful. I was wondering if you could comment a little bit on air disc brakes in North America. If you starting to see increased penetration of your product survey respect in general and if so what some of the explicit strategies are to address that? Thanks.

Jacques Esculier

Well, I think there is probably some incremental progress but I think nothing drastic at this point. To be fair we are – we need put our self an infrastructure in place that would help us deliver locally, air disc brakes, I think the name of the game will be to provide a product that will be financially not as kind of far as the drum brakes are right now in upfront acquisition price. Because air disc brake is more expensive than drum brakes and it can be justify through the lifecycle across of the air disc brakes but fleets are agitating through the steer kind of come up with the upfront money, I mean we need to decrease the cost of air disc brakes to really make some breakthrough again aside from (inaudible) legislation that could come from Washington that would regulate braking distance and really impose at this brakes as the technology of the future. So for me we have to continue to support whatever demand we can address right now. In the meantime establish the proper infrastructure to lower the cost and manufacture locally. And with the objective to progressively see some volume increase and decrease cost and hope for again the government to regular braking distance, mandating the age of the brakes.

Unidentified Analyst

Okay, great, thanks a lot guys.

Operator

And our next question comes from Jeff Hammond from Keybanc Capital Markets. Your line is open. Please go ahead.

Jeff Hammond – Keybanc Capital Markets

Hey, good morning guys.

Jacques Esculier

Good morning, Jeff.

Jeff Hammond – Keybanc Capital Markets

Can we just go back to kind of the SG&A bump, can you just talk about what was – and what you think was kind of one time for the quarter and how we think about SG&A the percentage of sales in 2014 or overall incremental in 2014?

Jason Campbell

When you look at Q4 and actually overall full year, we have had an increase of incentive plan expenses for two reasons. First because our incentive plan delivered good reward this year versus what you had in 2012 so we have to increase it. We also had to increase the reserve for the longer term incentive plan that also had seen some better performance as what was in the plan. So that’s about it 30 whatever million dollars for the full year and that’s about $5 million or $6 million for the quarter. When you take that out Jeff you kind of end with an OpEx rate of about 10% increase in 2013 including Q4, Q4 was out of the $6.6 million at an increase about 10%. So which is in line with the rest of the year? And but we have unfortunately recognize this in Q4 because the performance expectations went up and the value was delivered to the shareholders had to be kind of reconsidered in calculating incentive

Jacques Esculier

In 2014, I would say we are still focusing at kind of maintaining OpEx where we don’t have OpEx rate leading the growth expectation but we still have to accept and respect the fact that there is inflation, there is particularly coming from emerging market that we have to continue to invest into developing products that we are continuously selling across the world. So we don’t want to obviously prevent what WABCO from day dream from all the business opportunities and that’s why we will increase OpEx in 2014 but trying to continuously focus at lowering the overall impact that OpEx has on the bottom line. Right now we must be kind of at 17% and we want to lower that rate. Obviously, the best way would be to increase the revenue line but as the market is not providing us with the full – tell what to do so at a very, very high rate we need to also be very, very focused at limiting expenses without hurting our ability to grow.

Jeff Hammond – Keybanc Capital Markets

Okay and then Jacques, it is like look around on blunt image, you guys just had exceptional out growth in 2013 overall but particularly second half. So what’s your visibility and what’s going to build into guidance in terms of an outgrowth number for 2014?

Jason Campbell

For 2014 right now we have a line of sites between 5% to 6% yes so but this is as you know a nature metrics for us because I don’t manage WABCO on a target of growth, I manage WABCO on a target of our performance. So all our business leaders are focusing at finding ways to maximize our performance. Objective is 8% to 10%; it is clearly the 8% to 10% unfortunately as we shared with you several times that 8% to 10% would be kind of the natural objective in a market environment that would provide some decent growth right. We are going to struggle to reach that 8% in a market that is flat, this year we are able to, next year we are kind of thinking that 5% to 6% is a reasonable starting point but obviously our objective would be too hopefully to deliver even more.

Jeff Hammond – Keybanc Capital Markets

Okay, great. And then just final question. Can you just update us on the CFO search and what’s best guess on the timing that wraps up and we get some announced.

Jacques Esculier

Unfortunately we had a candidate that I think I had introduced during our last call. Unfortunately for personal reasons he dropped just at the last minute and he turned down the proposal. So we had that point of kind stop the search. We had to restart it, we did, and actually we have a pipeline of very promising candidates. I would really aim at having one CFO would be probably presenting and hopefully presenting the result of the second quarter with us. No promise here but that’s the objective I have.

Jeff Hammond – Keybanc Capital Markets

Okay, thanks, guys.

Operator

Thank you. And our next question comes from Jerry Revich from Goldman & Sachs. Your line is open. Please go ahead.

Jerry Revich – Goldman & Sachs

Good afternoon and good morning.

Jacques Esculier

Good morning, Jerry.

Jerry Revich – Goldman & Sachs

Jacques, can you just update us on the products with enhancement opportunities that you have lined up for 2014? How is that compared to major up – is pitted on? In 2013, you mentioned your over account in backlog, can you just give us a little bit flavor on things opportunities?

Jacques Esculier

I am sorry Jerry; I didn’t because your line is not really good. Could you repeat me the first part of the question, if you don’t mind?

Jerry Revich – Goldman & Sachs

I apologize. I was asking if you could update us on the products with the enhancement opportunities for your business in 2014 and what’s the nature of that since you are taking in 2014 versus 2013?

Jacques Esculier

Okay, yes, Jerry, well productivity you know you don’t kind of recreate a new portfolio of activities and focus year-over-year. Productivity is kind of momentum that you get along basic principles and we have productivity in our facilities driven by the commitment and the adoption of the lean philosophy and activities and that’s what actually is being increasingly adhered to explaining the fact that our productivity is actually gaining momentum along those activities. That’s our factories in the second period of productivity is obviously in the world of material purchase and we continue to deal with negotiations, we continue to deal with redoing the design of our parts to make them less costly for our suppliers to manufacture, and we continue to deal with transferring sourcing material from high cost country to low cost country. That’s what continuously feeds that [5.3 – 5.4] gross productivity performance. What we have started to do which are not reported in those numbers but it is also important is to drive some productivity in the order of OpEx and particularly last year in the world of engineering, and we were able to drive actually an improvement of 5% of productivity in engineering and we want to kind of gain momentum along those lines, and we have had some outside support, some consultation to help us do to so, actually at portion starting is helping us in the world of engineering. So engineering –- productivity around supply chain continuing to drive the initiatives and the philosophy and the efforts we have been succeeding with in the past year and again kind of putting more focus on driving the concept of productivity through OpEx as well.

Jerry Revich – Goldman & Sachs

And Jacques, we have seen some pretty steady margin performance from your business and choppy end markets. Can you just talk about what is your margin guidance for the year, whether you expect the back half to be better than the first half as the function of the product starts in Europe or whether you have been able to scale that down without really driving a kind of end margin seasonality at this year?

Jacques Esculier

Well, I think I may not be able to give you profile of the margin Jerry but I would say margin is obviously relating to top line as well. I would expect that the first quarter would be impacted by this kind of pre buy in Europe so one could expect that the margin probably towards the second half of the year or may be better than the margin in the first half.

Jerry Revich – Goldman & Sachs

And Jacques lastly from a capital structure standpoint, can you talk about are there acquisition offers that you are evaluating? What do you think of the target balance sheet for this business even after the stock buyback program and the acquisition work place, is still going to be our net cash position by year end, is that how we should be thinking about your business or you reevaluating further coming opportunities?

Jacques Esculier

Yes, number one, we are not at all stopping the search for additional acquisitions. We are actually encouraged I would say by having close this acquisition is actually prove to us that it was good to wait until we find the right target and that they are good targets out there. Because sure there are lot of people who are spending a lot of enthusiasm and trying to analyze and scan opportunities but so far nothing as you know expect the small one last year has been kind of executed. And to have finally finalized this acquisition yesterday is really kind of demonstrating to ourselves that it’s continuing scan because they are good companies to acquire, so we will continue to do this. In terms of cash positions, Jerry, I would say the overall philosophy that we have shared with you is to be cash neutral, cash balance, at the end of the year we said that the additional cash that we got from the European Commission in the fourth quarter we are going to return completely to you through – to shareholders through buyback. How this all thing will kind of happen if we end up having going through another acquisition, I don’t care, I don’t know but my reference is that I think cash neutral is good. We don’t want to go and borrow a lot of money to acquire and return cash for you at this point and that’s what we have been doing for years and that continues to be the kind of approach that we have across the board.

Jerry Revich – Goldman & Sachs

Thank you, very much.

Operator

Thank you. And our next question comes from David Baker from Robert W. Baird. Your line is open. Please go ahead.

David Baker – Robert W. Baird

Good afternoon.

Jacques Esculier

Good morning, David. How are you?

David Baker – Robert W. Baird

Doing fine. As we are – Europe you talked about production came down 20% plus but the numbers out of Volvo and Daimler, you both said they are flat or up year-over-year because of how weak their Q1 was last year. Seems like most of that’s target is [Scandia] which is a smaller customer. I would guess you would end up; your revenues in Europe would probably perform better than what down 20% production in Q1 would be. Am I looking at that the right way?

Jacques Esculier

David, I don’t know. Let me kind of say again what I said. This 20% quarter-over-quarter, not year-over-year, sequential, what we said is actually when you look at year-over-year it may not be dramatically down, it may not be down much actually at all because the first quarter of 2013 was particularly weak.

David Baker – Robert W. Baird

Okay, all right. And then on the aftermarket side, you continue your strong performance there. As you built out your presence in these other regions, can you just update us on how much of that after market is Europe versus other regions and if you can give us some sense what your growth is in the market outside of the Europe?

Jacques Esculier

David, we don’t share that information, however, I can tell you that we continue to really gain a lot of good momentum in emerging markets where we historically didn’t have natural resource for aftermarket. You think about China – I am not talking about India. India, we have probably the best infrastructure, fast distribution over there. And after market is really shining star in that part of that world. I am talking about more places like South America or China, particularly China where we started almost from scratch, we don’t have too much – at that time we didn’t have too much of established base, now obviously we are also growing there. And we have put enormous amount of focus at understanding how you reach this market in the most efficient way, what kind of distribution channels and presences you need and all this. And I am telling you starting to deliver some good value. And we continue to actually open new offices and distribution across those new countries. We have been working on South America extensively. We have been actually working on Central Europe, that part of Europe that touches Asia and that actually expands all the way through the Western part of China. And we are getting some nice contribution from there. So obviously we continue to seek for growth in Europe and actually very confident that European the market continuous to grow because the aging of the fleet is getting higher and that will naturally lead to better revenues from aftermarket. But I would say percentage wise the growth in that kind of new geographical area is a lot higher than what we generate in our kind of well-established markets.

David Baker – Robert W. Baird

And then if you look at the transactional currency issues, not those currencies reestablish historical relationships the impairment on the profit margin, what is the action to – per capital capacity and below end market that are causing you problems in terms of reducing that transactional impact and pushing those margins over time?

Jacques Esculier

Well, there are two aspects through transactional impacts, David. One of them is purely transactional kind of buying from a country and selling in another currency. The other one is pure balance sheet effect because countries accumulate receivables at certain currency and we have to each quarter kind of reveal that in the logic of the evolution of that currency versus dollar. And one can certainly to a certain extent addressed by expanding you’re reaching to those markets and increasing manufacturing capabilities. Even though there is a limit to it because the investment is pretty high, if you don’t have high volume it doesn’t justify. The second one is obviously to kind of review our policy and approach on currency hedging. And we are doing it as we speak. Because historically we have kind of looked at FX situations around Dollar versus Euro and it was pretty neutral, translation or transactional at the bottom line would basically cancel each other. Last year, various countries departed from that logic for the first time because we had currencies acting that didn’t really kind of move very much before like the Yen, like the Rupee, like the Brazilian Real. And so now we all are reviving reviewing our attitude and approach in the world of hedging.

David Baker – Robert W. Baird

Is that something that gives in place here for 2014 or is that a longer term project?

Jacques Esculier

No, it’s not yet in place because we are reviewing it. We have discussed with the board. The problem is we were hit obviously strongly in 2013 in a fairly unexpected way. The question is now do you want to hedge at the bottom, is it going to go even further down or do you want to actually kind of wait for currencies because for me the world of conversion countries right now is suffering but I don’t believe that the world of emerging market re-suffer for very long and as soon as those guys will restart to gain some momentum in growth, India should kind of fix their problem, this year hopefully. Brazil we don’t know but those countries will continue to grow one way or another over medium to long term and their currency will go back to probably more reasonable currency reserve with Dollar. So then you have suffered and then you are at edge of the bottom, I am not sure it is a very smart thing to do so. So that’s the analysis we are going through. With some investment bankers in kind of we are going to make the position that we probably would be in a position to share with you during the first quarter reporting.

David Baker – Robert W. Baird

And then just thank you on that. And then just one last, I don’t get on Transics; I guess two pieces are there, one, their revenue growth that you are showing here is pretty flat in 2013 versus 2012 in a market that sound like its growing faster. And then talk about that then secondly you are talking about $1.5 billion market; half in U.S., half in Europe. Is that $50 million Company, can you scale that within the infrastructure that you have at WABCO or is this an initial company at the platform for making other acquisitions in the space?

Jacques Esculier

Hard a lot of questions. Number one, I cannot comment on 2013 numbers because the numbers you referred to David are actually guidance numbers that were provided I don’t when in the year 2013, but are not the final result, and I cannot comment of the final result of 2013, so I would still wait from kind of making any conclusion there. If you don’t mind. The second thing is we are dealing with an extremely fragmented market. And you have a lot of entrepreneurial company Transics being one who are obviously kind of identifying the space of value that should be invaded. What we believe is actually out of this fragmented market Transics being a leader of it, yet it’s not one of the smaller one, it is one of the bigger ones. By combining the position of WABCO, the leading position of WABCO in this industry, invites leading, it is leading in technology in access to data because our system provide us with a lot of data in distribution, in knowledge of the industry and what not. Combined with one of those leading entities I think the combination of those two can make a breakthrough, right. So and that’s our strategy. Now, I would not comment either on further acquisition but I am saying it is not anecdotal move that we make because we like Transics. It is a step in a direction that’s strategically we have been kind of thinking about as a major kind of way to again increase the connectivity and the revenues coming from fleet.

David Baker – Robert W. Baird

Perfect, thank you very much.

Operator

Your next question comes from Joel Tiss from BMO. Your line is open. Please go ahead.

Joel Tiss – BMO Capital Markets

Hi, can you hear me I guess.

Jacques Esculier

Sure, Joe.

Joel Tiss – BMO Capital Markets

Okay. So I am just wondering if you could give us any sense about some of the businesses features, what the mix looks like for 2014. I think you gave us little from there on the foreign exchange and the operating expenses. I was thinking more inside of the businesses, you have a lot of new initiatives and pieces and I just wondered if you could quest that out a little bit?

Jacques Esculier

So I would not go beyond saying that we have given you guidance on top line. We had given you a model in terms of how we kind of align our objective of incremental margin versus top line growth. So once you have that I would say you will connect with the kind of elements of the guidance that we provided to you. I don’t think I can really be lot more granular than that. We are trying to limit OpEx at a reasonable level versus the growth that we anticipate. We are obviously continuing to generate productivity obviously for the gaining momentum in productivity. Pricing, we limited probably to close where we are in that 1% to 1.5%; we ended up at 1.2% something. So this is kind of – I don’t think I can go in further than that.

Joel Tiss – BMO Capital Markets

Okay. I was just trying to get a sense on some of the new like OnLane departure warning systems as that business matures, is that kind of contribute to margins in a bigger way?

Jacques Esculier

Again, Joel, I always stay away from kind of going through this type of things because there is always gives and takes in the portfolio. We have an extremely broad portfolio of products that deals very, very different market. There are all kinds of dynamics in there. And obviously you are right OnLane in the U.S. that are still representing a fairly kind of fairly limited amount of revenues for 2014. We just introduced it; we will drive some nice contribution in the meantime you may add something else that happened in complete different market. So overall that has been like this forever. It is a mix of things; so mix of new products, a product with better margin, product with better growth, product with lower margin with lower growth and this all thing is what we make the – that built up the value we deliver to shareholders and that kind of guidance that we provide.

Joel Tiss – BMO Capital Markets

Right, okay, all right, thank you very much.

Operator

Thank you. Your next question comes from [Larry Domivera from Williams]. Larry, your line is open.

Unidentified Analyst

Okay, thank you. Couple of questions. I am sorry to pre buy gross, you mentioned 25,000 units. Did you know what the demand was in excess to the pre buy? And also very much was imported which it means another words from trucks that are made coming from emerging market, goes over production, so I am trying to get of that and whether or not – and how much there was excess demand over the pre buy like you can comment in the following year.

Jacques Esculier

Well, the pre buy actually itself was representing about what 10% of the registration of the heavy duty trucks in Western Europe because the pre buy these heavy duty trucks in Western Europe mostly and this impact was about 10%, right. So when you think about it that means that we are planning to today an erosion of 2% of registration, this year 2014, so we now the pre buy right, we would have had that 10% actually moved to 2014, that means we would have expected 8% more registration in heavy duty trucks in 2014. Right, so that could think in perspective and gives you that – and when you look at 25,000 in perspective business full production including exports and what not but produced in Europe, this is 4%. So we have added 4% production in 2013 that would be missing in 2014 so when you look at our kind of – at the current outlook for 2014, with obvious impact it would have been plus 2% to plus 7%, right, which again you look at the correlation between GDP growth as level of production of trucks, it is not unreasonable at all. And that’s way we have to kind of look at it.

Unidentified Analyst

Okay, yes because I know the stocks are sold out for a while, so I didn’t know if that some of the demand may be pulled away or just pushed out in second half or net or even further out into early 2015 or not. But that’s helpful. And then secondly as it relates to Transics, what specifically do you have in the guidance for EPS accretion and then how much of differentiator is this for you versus your various competitor and have the only customers and free customers suggested or endorse this kind of move or are you going to – you making this move and then you are taking it to them?

Jacques Esculier

Well, I may not be in a position to give that thing because it could be kind of indicating pointing fingers to the 2013 so I don’t want to go there. So I cannot tell you at the bottom line. What I can tell you is overall our view of Transics including synergies kind of affective the top line would be about corresponding to 2% additional growth. So you have EBITDA from 2012, I leave it up to you do whatever assumption around what 2013 was and what 2014 could be. And I think you will then calculate obviously your own view of that EPS impact, if you don’t mind. And I think that’s probably should not be too far from our kind of assumption. But now in terms of competitive differentiator, for me it is pretty important because as you can see we are linking importance of system on board the truck that generated a lot of important information and we are exploring that information and making them helpful and easy to exploit from fleet. And when you think about a fleet that has a system like this has an ability to connect to WABCO kind of onboard products and system, I think they would obviously, it should be kind of calling products more than others, right. And we would be able to really develop our products in way that we are now more focused on what kind of information would be really useful to fleet and really kind of deal it as part of the product and system we are going for trucks. That’s a new – that’s an extension of the logic we have. Before we were thinking in product and system as part of the truck, now we are thinking about obviously product as you said as part of the truck but also kind of connecting to this world. And to me, it may be kind of 50,000 could vision but I don’t use that they are was to vote it, for example, again the breaking system allows you to identify all events that happens on the truck like a ABS action or stability control action that identify immediately drive expose himself to a fairly kind of non-safe environment. And then you can help the driver understand what did he do that triggered those events, what can you do to prevent them, alright. Then you have all that world translated to the objective of saving fuel. How does a driver kind of operate and instruct? What could he do to be more fuel efficient? Or a lot of data come from our system, and we can deliver them to the fleet to be able to again kind of translate them into a proper training. You see so I think this is a world that we discover. We don’t surely pretend to already possess all the different kind of leverage that we would be able to trigger to synergize those two worlds, but I think we can imagine enough of them already to be very excited and I think as we would progress, we will able to see more and more of those.

Unidentified Analyst

Okay, thanks, that’s very helpful. So I guess you don’t envision any issue getting the data from the fleet and from the system and then using it to develop your product I guess. But thanks very much, it’s very helpful.

Operator

And our next question comes from [Scott Grove from Wolf Research]. Your line is open.

Unidentified Analyst

Hey, thanks for the questions. Just going back to the question on the accretion from the deal. I just want to make sure sometimes when companies to do deal their purchase price accounting can impact profitability in the first quarter. It doesn’t sound like you are suggesting that we should think about in those terms from that perhaps using historically but then also was the starting point is good place, is that the right way to think about it?

Jason Campbell

Now this is Jason here. It is right way to think about it. Any kind of upfront cost associated with deal we would like to call – it is kind of nonperformance way if there more of one time nature. So again it is more think about the size of revenue we are adding to the business versus the dates from last year for WABCO, and then you can make your assumption on what kind of margin trickles down from there.

Unidentified Analyst

Okay, that’s helpful. In terms of the market in China, certainly I guess – certainly around kind of quickly and how strongly that NS4 regulation going to be implemented. What’s your view OnLane and how that’s implemented in and once it is – what do you think of the implications kind of may be for your content opportunity and then your pricing end market share in China?

Jacques Esculier

Scott, I don’t think there will be impact on market share. We are not providing products and technologies around these emission systems. So it’s not like this adoption of EURO 4, NS4 will be driving additional opportunities for us. What we see is – and understands that during the first half of the year, the government has committed to really enforce these new standards in many different cities. And that’s why some people have been kind of pre buying some of those trucks. What it could be though, it could enhance the ability for China to export trucks to countries that demand you for. And that could ultimately have a good impact on our content per vehicle on those trucks that are built in China. Now obviously on the other hand depends who they get against, they win against because that would be traditionally trucks coming from Europe at this level of capabilities and standards and that would be business we could loose from Europe as well. However, Europe will have kind of balance share with our competitor obviously in China we have a much stronger market presence than they do, and I think the net-net of this kind of movement of Chinese kind of gaining some market share I think Scott would be to the benefit of WABCO. But I think those are huge movements that will review transformational at the top line or bottom line of WABCO’s P&L.

Unidentified Analyst

That’s helpful. And then just last thing, I know it’s not your core market but what your view on the recent trends and the Class 8 orders? The past couple of months in the U.S. – I see that you raised your 2014 outlook to 5% to 10%. Do you think that you kind of fully captured what we’ve seen in terms of the good order capacity month or do you think there is may be further upside to your expectations in the U.S.?

Jacques Esculier

Well, I think that was one of the very first one, Scott, to really express a very strong optimism during the last meeting we had three months ago, the third quarter. Actually I was happy to see that the fourth quarter was already in line with our expectations, it increase the number of trucks in the forecast that we had kind of anticipate for 2013 and it kind of gave even more of momentum for 2014 as we now kind of see the 5% to 10%, before we had 0% to 5% on the lower base of 2013, now we move to 5% to 10% on a higher base. So that demonstrates the fact that I am very confident that the U.S. market will benefit from GDP growth, will kind of start moving from 18 fleet and what not. And listen, I would not be surprised at the end of the day if we see something that goes beyond that in terms of growth.

Unidentified Analyst

Okay, that’s helpful, thanks guys.

Operator

Thank you. I am showing no further questions at this time. I would like to hand the conference back over to Mr. Jacques Esculier for closing remarks.

Jacques Esculier

Okay, well, thanks you all and thanks for your attention. And well we will talk to you first may at March because we are going to be there. I am going to be there on 26 – 27 and I know that we will be able to meet some of you. And otherwise we will talk in three months during our first quarter report. Thank you.

Operator

Ladies and gentleman, thank you for participating in today’s conference. This concludes our program. You may all disconnect. And have a wonderful day.

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