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TRW Automotive Holdings Corp. (NYSE:TRW)

Q4 2013 Earnings Conference Call

February 14, 2014 08:30 am ET

Executives

John Plant – President & Chief Executive Officer

Joe Cantie – Executive Vice President & Chief Financial Officer

Mark Oswald – Director of Investor Relations

Analysts

Patrick Archambault – Goldman Sachs

Matthew Stover – Guggenheim Securities

Rod Lache – Deutsche Bank

Ravi Shanker – Morgan Stanley

Operator

Good morning and welcome to the TRW Conference Call. (Operator instructions.) As a reminder this conference call is being recorded. Presentation materials for today’s call were posted to the company’s website this morning at www.TRW.com/results. Please download the material now if you have not already done so. (Operator instructions.)

I would now like to introduce your host for today’s call, Mark Oswald, Director of Investor Relations. Sir, you may begin.

Mark Oswald

Thank you and good morning. I would like to welcome everyone to our Q4 and Full-Year 2013 Financial Results Conference Call. This morning I’m joined by John Plant, our Chairman and Chief Executive Officer; and Joe Cantie, our Chief Financial Officer.

On today’s call John will provide an overview of the current automotive environment and its impact on TRW. John will also provide a brief summary of the financial results and discuss other related business matters including our outlook and planning assumptions for 2014. After John’s comments, Joe will provide an expanded review of the financial information. At the conclusion of Joe’s comments we will open the call to your questions.

Before I turn the call over to John and Joe there are a few items I’d like to cover. First, today’s conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete Safe Harbor statement.

The “Risk Factors” section of our 2012 Form 10(k) and our Q1, Q2 and Q3 10(q)s contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2012 10(k) and our 2013 quarterly SEC filings by visiting the Investor Relations section of 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 2013 Form 10(k) within the next day or so. Once filed the 10(k) can also be accessed through either website.

In addition to the financial results presented on a GAAP basis we will be discussing non-GAAP information that we believe is useful in evaluating the company’s operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials which are posted on our website at www.TRW.com.

Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given our permission for any other recording of this call and do not approve or sanction any transcribing of the call.

This concludes my comments. I’ll now turn the call over to John Plant. John?

John Plant

Thank you, Mark, and good morning everyone. As you can see from the results posted this morning, TRW’s Q4 performance concluded another good year for the company. TRW’s successes in 2013 highlight the company’s strong market position and diversification as our achievements were accomplished against the backdrop of challenging economic conditions that persisted in our largest market – Europe; and modest economic growth in North America.

During Q4 sales totaled $4.5 billion and were 12% higher compared with the prior year quarter. The high level of sales were driven by the increasing demand for TRW’s technologies and our strengthening presence in developing economies. Operating profit before special items was $336 million, an increase of 14% compared to the last year.

Net income before special items was $222 million and earnings per share were $1.84, an increase of 19% compared to last year. And finally, in line with company expectations TRW generated free cash flow of $562 million during the quarter.

The strong performance achieved throughout the year enabled the company to make additional progress on several strategic initiatives, such as funding the company’s growth strategy, actively managing and reducing our exposure to legacy liabilities – namely the company’s pension and other post-retirement obligations.

In addition to the positive impact from the slightly higher discount rates TRW’s obligations were reduced at year-end compared to the prior year thanks to a number of actions implemented during the year, one of which included offering lump sum retirement payments for certain of our US employees which reduced liabilities by about $150 million. This transaction was completed in Q4.

And in addition, TRW’s business performance enabled the company to increase its share repurchase authorization to $2 billion and return over $520 million to its shareholders during 2013.

Beyond the strong financial performance achieved throughout the year, TRW’s world-class quality metrics, expanding regional diversification, and success at winning new business positioned the company for sustained, long-term success. I’ll expand on the full year highlights in just a few moments. First, a few additional comments related to Q4.

In North America vehicle production remained strong and tracked in line with the expectations industry observers established at the beginning of the quarter. Overall, North American production was up 6% compared with Q4 2012. Consume demand remained strong in the quarter and the annual selling rate averaged about 15.6 million units, up 4% compared to last year and about equal with Q3.

In Europe, Q4 production provided further evidence that the region is stabilizing and possibly found bottom in 2013. For the quarter, total European production at 4.8 million units was up about 3% compared with last year’s Q4, with Western European production expanding by 6% year-on-year. We’re hopeful that the modest improvement in vehicle production will continue into 2014. I’ll have additional comments on our 2014 planning assumptions in just a few minutes.

In China, vehicle sales and production continued to trend higher. TRW sales in that market were up 28% year-on-year in Q4, well ahead of vehicle build and again due to the high content growth. For the full year sales were up 25% and accounted for 16% of TRW’s total sales.

With respect to our full-year results we are pleased with our performance. Sales totaled a record $17.4 billion, an increase of 6% compared to 2012. Operating profit excluding special items for 2013 was $1.3 billion, for an operating margin of 7.5% - a good outcome considering our continued investment to support TRW’s future growth.

Net income on the same basis was $850 million and earnings per share was $6.89, up about 12% compared with the $6.14 earned in 2012. In addition to these strong financial results the company continued its relentless focus on providing innovative technologies with the highest quality everywhere in the world.

Moving on to Q4 business development, product launches during the quarter continued to strengthen. A few examples include TRW’s forward-looking camera, driver airbag steering wheel and electronic park brake on the Nissan Qashqai in Europe. BMW launched its 4-Series Cabriolet in Europe with TRW’s driver and passenger airbags, steering wheel and seatbelts; and Ford launched its EcoSport in Asia with TRW’s driver and passenger and knee airbags, steering wheel, and electric power steering.

Products launched during Q4 as well as earlier this year were delivered with world-class quality. For the year TRW averaged just under 3 parts per million across all products and customers worldwide.

In addition to the broad range of products launched, TRW continues to develop leading edge tech systems and enhanced existing technologies to meet the growing demand for a full range of safety systems that help protect drivers, occupants, and other road users.

A few examples of technological advancements announced during the year include the next-generation radar and camera sensors and [safety-demand] electronic control unit that can help support semi-automated driving functions; integrated electronics systems that combine passive and remote entry, and tire pressure monitoring; and further advancements in electric braking and steering systems that work across the broad range of electric, hybrid, or conventional powertrains.

It’s clear that the push for more sophisticated safety products will continue as enhancements to NCAP programs and more stringent regulations are enacted, in particular on the active safety front. The breadth of TRW’s expertise places the company in an excellent position to meet the demands of today and tomorrow.

Meeting those demands in all global markets continues to be a top priority for the company as evidenced by the establishment of TRW’s largest technical center in Anting, China. The 34,000 sq. meter facility became operational in Q4 2013 and can house more than 1000 engineers and technicians. The company is excited about the prospects for 2014 as it continues the design, development and delivery of advanced safety systems globally.

In addition to moving forward with our technologies and growth strategy, protecting the company’s profitability is essential in sustaining and building upon TRW’s accomplishments.

On that front we restructured certain of our businesses to further reduce the company’s cost base to enable the competitiveness increases to continue as evidenced by the $66 million restructuring charge called out in the full-year results this morning. As you might expect, given the weak conditions that persisted in Europe this past year the majority of the restructuring actions were focused in that region. During 2013 we completed the closure of four manufacturing plants in Western Europe.

In addition to the restructuring of our operations to improve our competitiveness the company continued to manage and reduce legacy liabilities. As mentioned earlier the pension buyout program completed in 2013 relating to certain of our US employees reduced obligations by about $150 million. When combining last year’s completed program for certain employees and former employees with this most recent program, the obligations have been permanently reduced by about $500 million over the last two years, and we’ll continue to focus on permanently reducing TRW’s pension obligations as we move through 2014.

Turning to 2014, let me comment on our expectations and planning assumptions. Overall, steady growth in vehicle demand is expected to have a positive impact on vehicle production levels in each of the major regions. In North America, we expect Q1 production to be 4.3 million units, an increase of about 6% compared with Q1 last year.

For the full year our planning assumptions are based on a 16.8 million build in North America. This would represent a 4% increase. It’s important to note that within this estimate we expect production growth for the Detroit Three manufacturers to lag the overall region, increasing by a modest 2% year-on-year. As you’re aware our business performance is more correlated with the movements in the Detroit Three production due to the amount of content on those vehicles.

In Europe we are encouraged by continuing signs of stabilization and favorable leading indicators that signal that the industry is heading in the right direction. Although we do not anticipate a sharp or quick recovery we do expect some modest improvement in 2014. During Q1 vehicle production in Western Europe is projected to be about 3.3 million units, up about 4%. TRW’s European production is forecasted at about 5.0 million units.

For the full year, our forecast for production is 19.5 million units for the total of Europe, up only 1% compared with 2013. Within this estimate, Western European production is expected to be about 12.7 million units. Beyond North America and Europe we expect full-year vehicle production in China and Brazil to increase, most likely in the mid-single digit range.

Along with the forecasted production estimates just discussed, TRW’s 2014 sales will be impacted by the decision to exist certain of our North American brake components and assembly operations. The consultation period relating to the customer supply agreement, which was previously disclosed, expired at the end of 2013 with our customer choosing to make alternate supply arrangements. Revenues associated with that business totaled approximately $700 million in 2013 which is consistent with our previous disclosures.

In addition to the supply agreement just mentioned and as discussed throughout last year we will further deemphasize the module business. In 2014 we anticipate module sales will decline by roughly $300 million as the business at our Sterling Heights facility in Detroit is shifted back to our customer.

Based on the forecasted production estimates and the negative impact from the sales associated with these exiting operations, and the currency assumptions that underpin everything, our sales are expected to be in the range of $17.3 billion to $17.6 billion in the year. When adjusting for the lost sales just discussed this guidance implies year-on-year sales growth in excess of 6% at the midpoint, well ahead of vehicle builds and further evidence of increasing global demand for our technologies. Sales in Q1 should be approximately $4.3 billion.

Capital spending for the year is expected to be about $740 million as we continue to build out our infrastructure in strategic and high-growth areas such as China and in support of the continued expansion of these new technologies. Looking beyond 2014 we would expect our capital expenditure to trend back toward our long-term historical average of about 3.75% of sales.

Despite the level of investment planned for this year and consistent with prior years, TRW will continue to generate cash. With regard to restructuring, we expect our full-year expense to be approximately $50 million as we continue to improve the competitiveness of our business in Western Europe.

In summary we are pleased with the many accomplishments achieved in 2013. However, we are now focused on 2014 and beyond to ensure the positive trends continue. We remain confident that we’re executing the right plans and strategies to ensure the long-term success of the company.

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

Joe Cantie

Thank you. Good morning to everyone and Happy Valentine’s Day.

As John mentioned earlier, our results for Q4 built on the positive momentum established throughout the first nine months of 2013 and solidified an outstanding year for the company. The Q4 results contained a number of net positive special items which I’ll discuss further in a few minutes. Adjusting for these items, you’ll find that the underlying results were also very strong as we benefited from a solid vehicle production cadence in the last three months of the year.

A quick recap of the key highlights for the quarter include sales of $4.5 billion, a best-ever Q4 sales level and evidence of increasing demand for TRW’s products. We had an operating profit of $336 million and a margin of 7.5% after excluding special items, an increase from the prior-year level of 7.3%. Earnings per share were $3.00 on a GAAP basis and $1.84 after excluding the special items.

Free cash flow was also very good. We generated over $0.5 billion in the quarter. And finally we had a high level of activity in the quarter with regard to our capital structure, repurchasing shares, issuing low-cost long-term debt, and retiring high-cost bonds in the quarter, all of which I’ll explain later in my comments.

For the year despite industry challenges that persisted in our largest market – Europe – TRW finished 2013 with record sales, sales growth above underlying vehicle builds, record operating income excluding special items, and returned approximately $520 million to its shareholders through stock repurchases.

We intend to carry the positive momentum and high performance of last year into 2014. Although we’re pleased with recent performance rest assured we remain grounded and realize a lot of work lies ahead to further position the company for long-term success. I’ll discuss our 2014 outlook in just a few minutes, but first a few more words on Q4 and 2013 results.

For the quarter, we reported sales of $4.5 billion, an increase of $464 million compared to the same period a year ago – a strong result as European vehicle production was a bit stronger than anticipated at the beginning of the quarter. Currency translation benefited sales by approximately $72 million during the quarter as the Euro-to-Dollar exchange rate averaged 1.36 this quarter compared with 1.30 last year. Excluding the effect of currency sales increased about 10% compared to the previous year, with increases in each of our major geographic markets.

For the quarter we had an operating profit of $300 million compared to $155 million in the 2012 period. Included in the 2013 and 2012 Q4 operating profits were restructuring and asset impairment charges of $23 million and $88 million respectively. In addition, as a result of the lump sum buyout programs offered to certain of our US pension and [OPED] participants both periods included net noncash charges related to the permanent elimination of liabilities. In 2013 these net charges totaled $13 million compared with $52 million in the previous year.

Excluding these charges from both periods operating income was $336 million in Q4 this year compared to $295 million last year. The year-on-year increase in profit of $41 million was primarily driven by the associated profit from the higher level of sales partially offset by approximately $25 million in planned cost increases to support future growth.

Returning to the lump sum buyout actions for just a moment, the program did result in an approximate $150 million reduction of pension obligations. Through proactive management and an increase in discount rates, the unfunded status of the company’s legacy liabilities improved year-on-year. When the 2013 10(k) is filed you’ll see the unfunded status of the company’s pension and [OPED] plans at year-end 2013 was $53 million, an improvement of $479 million from the prior year.

Moving down the income statement, interest expense totaled $35 million, slightly higher compared with last year’s level of $29 million. The higher level of interest primarily reflects the negative carry of our 2013 bond issuances as we prepared for upcoming debt maturities. I’ll also mention that the current quarter included a loss on retirement of debt totaling $15 million primarily resulting from the early retirement of our 8 7/8% notes which carried a face value of $205 million.

Finally, the company has a complex tax comparison between the two quarters in that we recognized a tax benefit of $107 million in the current quarter compared with a benefit of $286 million last year. Both the 2013 and 2012 periods include significant special tax items.

In 2013 net tax items totaling a positive $185 million resulted from the recognition of available foreign tax credits and the impact of various tax law changes. In the prior year, the 2012 period included $360 million of special tax benefit items, the most significant of which related to changes in our overall deferred tax position as a result of tax planning initiatives and the reversal of a valuation allowance on deferred tax assets in Canada. Excluding these special tax items from both periods, tax expense in Q4 2013 totaled $78 million compared to $74 million last year.

For the quarter our diluted share count averaged 121.7 million shares, which is 7.0 million lower than last year reflecting our share repurchase programs. At the bottom line we posted GAAP net earnings of $3.00 per diluted share compared with $3.26 in the prior year. However, excluding the special items I’ve discussed from both periods earnings were $1.84 per share this year, up 19% compared with last year’s Q4 earnings of $1.55 – which highlights the very strong quarter that we had. In terms of EBITDA, for the quarter we had $447 million excluding special items compared with $404 million in the prior year measured on the same basis.

For the full year 2013 we reported sales of $17.4 billion which is an increase of $991 million compared with the previous year and also sets a full-year record for the company. Increasing demand for TRW’s technologies combined with increased production in both North America and China drove the year-on-year improvement.

Our GAAP operating income for 2013 was $1.227 billion which compares to $1.085 billion last year. Our full year results for both 2013 and 2012 included special items related to pension and [OPED defacements] and restructuring charges that I’ve discussed previously which are detailed in our press release schedules issued this morning.

Excluding these charges from both years our operating income in 2013 was $1.3 billion, $74 million higher compared with last year. The ability to achieve a 7.5% margin, which is equal to the prior year was a very good outcome considering the increased level of investment deployed in 2013.

Below operating income, interest expense was $132 million compared to $111 million last year. Both 2013 and 2012 included losses on debt retirements totaling $20 million and $6 million respectively. With regard to taxes for 2013, the tax expense of $114 million was recognized compared with the tax benefit of $33 million in 2012.

Excluding the special tax items from both periods which I’ve referenced earlier in my comments or in prior quarters, tax expense was $326 million in 2013 which was about a 28% effective tax rate compared with $340 million last year. For the 2013 full year our diluted share count averaged 124.6 million shares which is 5.1 million lower than last year, again reflecting our share repurchase programs.

And then at the bottom line reported GAAP net earnings of $7.85 per diluted share compared with $7.83 last year. However, excluding the special items – primarily restructuring and significant tax benefits – earnings were $6.89 this year, an increase of 12% compared with last year’s adjusted net earnings of $6.14.

And finally in terms of EBITDA excluding special items we had $1.738 billion, a solid results considering the difficult industry condition experienced in our largest market and our planned increases in costs to support our future growth.

Let me now shift to our cash flows and capital structure. First on operating cash flow, for the quarter we had $886 million which compares to $711 million in 2012. Capital expenditures for the current quarter were $324 million compared with $298 million last year. Free cash flow, which I’m defining as operating cash flow less capital expenditures, was a positive $562 million this quarter compared to $413 million last year.

For full-year 2013, the company generated $391 million of free cash flow compared to $333 million in the prior year. This solid outcome is reflective of our higher level of income partially offset by increased investment deployed in strategic high-growth areas such as China and in support of continued expansion of newer technologies. For all of 2013, capital expenditures were $735 million compared with $623 million last year.

At the end of the year, our total gross debt was about $2.1 billion while net debt outstanding was $385 million. Net debt has increased slightly from the position at the beginning of the year essentially by the difference between the $520 million of cash used to repurchase shares less the $391 million of free cash flow generated in the year.

At year-end 2013 both our gross debt and cash balances are elevated as a result of debt capital raised in advance of $467 million of bond debt maturities in March of 2014, only four weeks away. As a result of March bond maturities, the typical Q1 cash outflow that we experience and any potential share repurchases in Q1 our cash balanced at the end of Q1 2014 will be significantly reduced from the $1.7 billion year-end balance.

As far as an update on our share repurchase programs, for the year consistent with our previous guidance the company repurchased just over 7.5 million shares of its common stock using $520 million of cash. For modeling purposes we’re targeting repurchases in the $500 million range again for 2014. It’s important to note, and if you recall our 2013 cadence, certain factors and market conditions could influence the pace of repurchases from one quarter to the next.

Switching subjects now to our expectations for 2014. As John indicated, TRW full-year 2014 production forecasts are for 16.8 million units in North America, 19.5 million units in Europe, and growth in the rest of the world regions.

Based on these production assumptions, currency rates and the negative impact from the lost sales associated with existing certain of our North American brake component and assembly operations, our guidance for 2014 sales is for a range of $17.3 billion to $17.6 billion, which is an increase from the range we discussed with you in November. Q1 sales are expected to be about $4.3 billion which is slightly higher compared with last year.

Capital spending is expected to be in the range of $730 million to $750 million in 2014 as we continue to execute our investments in high-growth areas. Ancillary costs associated with our growth plans, namely engineering, development and infrastructure costs, are expected to be about $40 million.

I’ll also point out, similar to the year just completed, as a result of our increased investment over the previous few years depreciation expense is expected to trend higher in 2014. For modeling purposes an increase of about $35 million is appropriate.

Moving on, although it’s difficult to predict we do not expect a headwind nor tailwind related to commodity prices this year. As usual we’ll continue to provide you with updates on this assumption as we report our future quarters.

With regard to restructuring, as John pointed out we would expect our full-year expense to be approximately $50 million. Primarily all of that expense is expected to be focused in Europe. Our initial thought on interest expense is that we’ll run at about $120 million for the full year given our expected debt structure. With respect to taxes, based on our forecasted results by geographic region you should assume a full-year effective tax rate of between 28% and 30%. Based on the guidance provided you can see that 2014 is expected to look very similar to the successful year just completed.

In closing, we’re pleased with our performance in 2013. As I said earlier it was a very good year, but we do realize a lot of hard work lies ahead. We’re excited and look forward to continuing the positive momentum into 2014.

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

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer portion of today’s call. (Operator instructions.) Your first question comes from the line of Patrick Archambault of Goldman Sachs.

Patrick Archambault – Goldman Sachs

Thank you very much. So a couple from me: just I have to ask the inevitable margin question. Even if, I mean if you do want to give us a sense that’s great; if not can we at least talk through the pieces? It does seem like you’re fairly well positioned. You’re getting out of some low-margin businesses like the brakes business, the modules business, you know, potentially better utilization in China, operating leverage, all those things. I’m sure there’s offsets so maybe we can walk through that.

John Plant

When you say “walk through it” I’m not sure exactly what you mean, Patrick. But I mean if you look at say the overall position and margin, I think the thing which we were pleased with the outcome in 2013 was the fact that despite all the additional costs we took on to build out the global infrastructure, the increased investment in engineering for our future sales really in the ’15, ’16, and ’17 timeframe is that we were able to hold margins. So I think that was a good outcome.

When you look to the future, the thing I’d point out there is on average we’ve said that the increase in drag from those investments will begin to meliorate. We have said that in 2014, Joe called out I think it was $40 million, it could be $50 million of additional expenditure we want to make in this area to continue the good trend of the company. And in terms of maybe specific margins we will not be calling a number out because we don’t do that. So I mean there’s nothing really… I mean you can take it in the same sort of order. We’ll be driving the company forward.

You’re right in the fact that that module business, a certain part of it would have had a lower let’s say content; on the other hand, there’s always the additional drag from the development [charges] of the company. So that’s sort of the extent I’d like to talk about it anyway.

Patrick Archambault – Goldman Sachs

Okay, and I mean from where I stand it sounds like there’s a lot more tailwinds than potential headwinds, and those headwinds that are there are diminished relative to last year. So it does seem like it’s shaping up for directionally an improvement but potentially you don’t want to commit to that.

John Plant

I’m not sure you can draw that as an assumption for 2014. I mean as the sales increase progressively in the future there’s a more likely vector to have that positive outcome. But I mean that’s always too far in the future to really comment. So I don’t think you’ve heard anything from me that says we’ve got sort of massive tailwinds in 2014.

Patrick Archambault – Goldman Sachs

Okay, well that’s helpful, thank you. And maybe just one more from me: the guide for revenue, I think it was previously what, $17.0 billion to $17.3 billion. So now it’s up a decent amount from that with one additional quarter of information. Can you just go through the items that led to that upward revision?

Joe Cantie

Sure. I mean when we talked last time in November which was off cadence for us really but we felt like we needed to say something in November given the $700 million business that was going away. So when I look at the difference between last time and this time and why we raised it essentially $300 million, in November we sat there and had a North American vehicle build of around 16.5 million; we’re now seeing 16.8 million. Europe we said back in November about 19.3 million and we’re now saying about 19.5 million.

And the other important factor is back then we were at a currency assumption of, well there’s several currencies but the most important one being the Euro was 1.33 and now we’re up to 1.36. So it’s a combination of more volume in our major markets and more information as you said regarding how some of the production’s going to roll in China; and then also that currency assumption as well. It’s good news..

Patrick Archambault – Goldman Sachs

Okay, great. Congratulations on the quarter, thanks guys.

Operator

Your next question comes from the line of Matthew Stover of Guggenheim Securities.

Matthew Stover – Guggenheim Securities

Good morning, thanks very much for taking the call. I was wondering if you could address two things – one is what was the R&D this quarter versus last year?

Joe Cantie

Hang on one second here, Matt, I’ve got to reach for that one.

Matthew Stover – Guggenheim Securities

And then as you’re reaching for that a little longer question: it feels like from a regulatory perspective and from a commercial perspective there’s more interest in some of the active safety technologies that you folks have been developing. And I’m wondering if you can kind of scope the size of that business within the context of your overall business right now and just sort of notionally describe if you’re actually seeing this sort of external interest translating to more bid activity. And then as I kind of think about the outlook on that, this is a business that I think is probably less than $100 million right now. Thinking about it being a $1 billion business, is that sort of a five-year event; is that a ten-year event? How should we think about the acceleration in the activity there?

John Plant

The picture does change almost every quarter at the moment on that, or maybe quarterly is a bit too strong but certainly the picture has been developing during the last twelve months. The first statement I would make would be that certainly regulatory interest has increased, in particular recent statements in the US by the Transportation Secretary is one who’s indicated a lot more interest in the vehicle control aspect of the active safety market.

So it’s hard to say that there’s a specific date in terms of a regulation at this point but our sense is that additional rulemaking, additional regulations are going to come. Currently the NCAP ratings for 2017-18 in Europe are already announced and they seem to march towards fitting out the vehicles with additional forward-looking cameras or radars and the necessary increase in some of the other stability control functions and the link to steering functions is indeed occurring.

The degree of the sales change on that, some of it is still to be determined because a lot of it is wrapped up with the number of I’ll say star ratings that vehicle manufacturers will aspire to; and indeed what degree of safety buffer they’ll want around their star ratings. So for example, do they fit a camera or a radar or both; and then the degree to which they’ll link into the subsystem. So there’s still a lot to play for.

Certainly it is true that we are seeing an increase in bid activity and therein lies one of the variables for 2014. So while at the moment Joe called out this morning $40 million of increased development costs I actually said already in the response to the first questions from Patrick that it’s $40 million to $50 million. It just depends because it’s just a question of how much additional monies do we choose to spend in ’14 and therefore influencing the degree of revenues that we will have in that ’17-’18 timeframe – and trying to balance all of these things out with achieving satisfactory returns for our shareholders in the near, medium and longer term.

Thinking about sales, for 2013 our sales were certainly significantly less in the pure forward-looking sensor area, significantly less than $100 million – I’m thinking about probably in the $50 million to $60 million range and within a bandwidth of variability. At the moment I would guess that we could be in that $900 million +/- $200 million in the I’d say ’17 going into ’18 timeframe but with an awful lot to play for.

And that really is looking essentially at the electronics aspect of the forward-looking systems, and without taking much into that name or not into that number regarding the enhancements that will be required for the functionality and pressure build and the power within the electronic stability control systems; or indeed it’s an emerging requirement for faster-acting brake systems in terms of what we’ll call our future brake system. So there’s an awful lot to play for during the next two or three years and it’s a necessary balance between how much we choose to spend, what opportunities we feel we’re going to get, the resources we can bring to bear and also the results for our shareholders.

But certainly if you’re thinking of building a business from essentially very low numbers or almost nothing to getting towards, and I gave you the number of let’s say $900 million +/- $200 million I think is a reasonable guesstimate at this point in time because there’s no one single point number which could be accurate. So hopefully that covers the bandwidth of the question, Matt, and with that I’ll hand it across to Joe to comment on the first part of your question.

Joe Cantie

So the R&D, Matt, for the full year 2013 our total engineering and R&D was about $905 million; that’s up from $834 million in 2012. And that $905 million represents, if you take our sales and you take out our aftermarket business and our module business, that $905 million is 6.7% of our sales. And again, that $905 million is up from the previous year at $834 million.

If you’re looking at the pure R&D within that number excluding the engineering which I would say that a lot of the engineering we do advances our products into next-generation products as well, but if you want the pure R&D according to the definition in GAAP that you’ll see in our 10(k), that was about $200 million –and again, that portion of it was up about $30 million compared to the previous year. So it shows that we’re clearly investing in a lot of our technologies in this very exciting time that John referenced in some of the comments that he just made.

Matthew Stover – Guggenheim Securities

Thanks very much, gentlemen.

Operator

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

Rod Lache – Deutsche Bank

Good morning everybody. I first wanted to get a clarification on Q4 – can you tell us whether there was any variance on the module revenue on a year-over-year basis and did you say that you incurred $25 million of higher engineering expense versus last year in the quarter?

Joe Cantie

You’re right, Rod – in the quarter it was $25 million year-on-year for the growth investments. So the growth investments would include not only engineering/R&D, Rod, that would also include where we’re placing quality managers, infrastructure program managers in some of the emerging markets and in some of our newer plants as we ramp up. So it’s a combination of a couple of things.

In terms of the module sales in Q4 between the two periods there was a [minimal] difference. I think we were actually up about $20 million or $30 million in sales between the two quarters.

Rod Lache – Deutsche Bank

The growth investments, just to clarify, that excludes D&A.

Joe Cantie

Yes, that excludes D&A, correct.

Rod Lache – Deutsche Bank

Alright. And I was hoping maybe we could approach this EBIT bridge that people are trying to get to a little bit differently for 2014. Basically you’re talking about revenue being kind of flat based on your guidance, but that’s net of the $700 million of core contracts that are going away and the $300 million of modules. So and I presume you’ve got flattish FX in there so it’s being offset by about $1 billion of growth from what you’re assuming from the builds and your backlog of net new business? Can you break that growth into two buckets just to kind of characterize the incremental and decremental margins? Is it reasonable to say that the core business growth of $1 billion has lower incremental margin given that a lot of it is coming from backlog which ramps up lower, and the loss of the $700 million of legacy core would have a higher decremental margin? Can you just give us a little bit of a feel for those pieces?

Joe Cantie

Yeah, the theory of what you’re going through is exactly right. So when you think of it, the $1 billion of new – which by the way is a pretty impressive new amount of sales when you consider the vehicle builds that we put in our assumptions. If you calculate out where we play in the regions, of that $1 billion, let’s say a quarter of it comes from increased vehicle build. And that increased vehicle build, whether it be North America or a little bit in Europe, comes through at very good margins for us obviously, at pretty healthy contribution margins.

But then after that quarter you’ve got $750 million either from emerging markets or new technologies. That’s a profitable business for us but the margins aren’t at what I’ll call mature margin levels, so therefore they’re at lower margin levels. And then I think you got the rest of it right – the module business, let’s call it $300 million, that’s low margin, that goes away. And of course there is the $700 million brake business that was good margin for us, and we’re sorry to not have that but as you can see we’re more than making up for it with the $1 billion that we’re expecting of other volume to come through in the year.

Rod Lache – Deutsche Bank

Mm-hmm. And you said on the cost side you’ve got headwinds of $40 million incremental engineering and $35 million of D&A but you also said something along the lines of you think 2014 will be very similar to 2013. Were you referring to like an EBIT level, is that what you were trying to say when you talked about it being similar? Or are we reading too much into that?

Joe Cantie

Well, again, if you look at our guidance and you look at the guidance we gave for the sales range it would imply as you said somewhere in that flat sales level. It’s an impressive number if you give me consideration of the module business and the brake business that’s going away, but at the end of the day it’ll be somewhere in that flat sales level. So walking through all the pieces that we gave you to build the mosaic you would expect a similar-type year between sales and margin levels.

Rod Lache – Deutsche Bank

Okay. And just lastly you gave us some color on what we should be thinking in terms of the pace of share repurchases. What are some of the things that you’re contemplating at this point that would kind of lead you to increase leverage at this point or ramp up the pace of buybacks?

John Plant

Given that on the last conference call we commented around the dynamics of increasing the repurchase by an additional $1 billion, really between November and now nothing has changed sufficiently for us to change any forward guidance regarding the pace or size of that particular item. Clearly as we go through 2014 we’ll probably provide additional commentary around it but there’s nothing really to add at this point in time, Rod.

Rod Lache – Deutsche Bank

Okay, thank you.

Operator

Your next question comes from the line of Ravi Shanker with Morgan Stanley.

Ravi Shanker – Morgan Stanley

Thanks, good morning everyone. So once this $300 million of module business comes out of your revenues in 2014 what percentage of your business, or what’s the size of the remaining module business there? And is that something that goes to zero actually?

John Plant

First of all we’re not planning on it going to zero, but I’m not going to defer to Joe regarding a percentage number that is in 2014. I’m not sure that we can give you percentages going beyond ’14 because that would give further sales guidance, which we haven’t done so far.

Joe Cantie

Right, so Ravi, today in our pack that we put out on the web to support this conference call there’s an appendix which has a bunch of schedules in it. But if you go to the last two pages as we do every year we updated our sales by region and then our sales by product portfolio. And you’ll see on that pie chart page that our total sales of core $17.4 billion; our modules were about 15% of that total. So if you just do the math our module business is over $2 billion, so John indicated we’ll be down about $300 million for the year so you can tell that it’s still a very sizable part of our sales profile and it will not go down to zero.

Ravi Shanker – Morgan Stanley

So I understand that you can’t give me the percentage of revenues beyond 2014 but is that something that just again keeps coming down but at the same rate? What’s your view of that business?

John Plant

I think the view we’ve tried to express is that we will be deemphasizing that as part of TRW’s forward economic activity, and therefore as TRW grows – and clearly we’ve been very clear on the fact that we do intend to grow. We haven’t given specific metrics on the rate of growth; I think you need to look at our history of performance relative to vehicle build – it’s been pretty healthy over the last decade and beyond.

And if you emphasize that part of it in vehicle and module sales you’ll see that inevitably even if it were to remain constant then you’d see it ticking down as a percentage of our revenues. And it all depends upon a natural cadence of if there are contracts which are run off which we choose not to renew. At the same time there will be some that I think we will choose to renew according to the positional assets that we have and till we make full economic use and achieve the I would say very high return on assets that we see both in our manufacturing business and our module business.

As we previously commented, that module business has to have a very high capital turn to make it interesting for us because we’re very much driven by return on capital for the company. And again, if you look at our balance sheet you’ll see there’s a very healthy return on capital.

Ravi Shanker – Morgan Stanley

Very helpful. And just finally on the $700 million brakes contract that you gave up, three questions on that: one, did that come off as of Jan 1? Second, are you still in any discussions at all with the customer on that business? And third is there any chance that business comes back to you at some point in the future if it’s moved to a low-cost country or something?

John Plant

First of all we are not in any continuing discussions with the customer. The matter is closed and it was closed amicably. And I’d say amicably was important for both of us so that we could continue to expand our general business with that customer. Over time you know, we will be bidding I’m sure for aspects of that business. Clearly we won’t be bidding from let’s say a Michigan address so maybe there’ll be something in the future. It would have to fit within the overall strategic framework of our distribution of resources and our required returns because we are very disciplined in terms of the return on capital for our shareholders. Regarding the first part of your question, I’ll let Joe cover that but essentially [it’s ended].

Joe Cantie

Yeah, as John just mentioned there’s a transitioning phase here through January and I’m sure there’ll be a little bit of spillover but it’s very immaterial.

Ravi Shanker – Morgan Stanley

Great, thank you.

Mark Oswald

Danisha, with that it looks like we’re out of time for any further questions. If you can please move to wrap up the call it’d be appreciated.

Operator

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

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