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Wabco Holdings, Inc. (NYSE:WBC)

Q1 2010 Earnings Conference Call

May 5, 2010 9:00 AM ET

Executives

Mike Thompson – VP, Strategy and IR

Jacques Esculier – CEO

Ulrich Michel – CFO

Analysts

Josh Pokrzywinski – KeyBanc

Ben Elias – Sterne Agee

Robert Kosowski – Sidoti & Company

Operator

Good day ladies and gentlemen and welcome to the WABCO Q1 2010 Results 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 follow at that time. If anyone should require technical assistance you may press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today Mr. Mike Thompson, Vice President Corporate Relations VP.

Mike Thompson

Thank you (Sean). Good morning everyone and welcome to WABCO’s quarterly conference call. Today we will present our first quarter 2010 results. With us this morning is Jacques Esculier, our Chairman and Chief Executive Officer and Ulrich Michel, our Chief Financial Officer.

Before we begin, I would like to remind you of a few things. First, this call, webcast and the presentation that we are using this morning are available on our website www.wabco-auto.com under the heading WABCO Q1 2010 results. Replay of this call will be available through June 5th.

Second, as shown on chart 2 of the presentation, certain forward-looking statements that we’ll make today are based on management’s good faith, expectations and belief concerning future developments. As you know, actual results may differ materially from these expectations as a result of many factors, examples of which can be found in our company’s Form 10-K and quarterly reports including our first quarter 2010 report, which was filed with the SEC this morning.

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

Thanks Mike. Good morning everybody. So turning to Page three. First this is no news to you that our industry is starting to show signs of recovery but what may be more surprising to you are two things. Number one, the pace of increased in the number of buses and trucks built in Asia and South America is increasing incredibly fast. Second thing, we experienced in the first quarter an unusually high level of growth in our aftermarket activity. Actually this is the record growth level we have ever seen.

And these two bursts of growth support WABCO’s strong performance in this first quarter of 2010. But before we jump into numbers, I have three highlights from WABCO’s perspective, one is our growth was strongly above the rise of truck and bus built in our traditional market i.e., Europe and the US fueled obviously by again exceptional increase in the production of commercial vehicles in emerging markets.

Two, the exceptional growth lead to a superb marginal profitability, and three, what happened in the first quarter is actually building up our confidence into progressing recovery of our industry to the point where we feel very comfortable at raising our overall guidance for the current year.

So now looking at numbers. We ended the first quarter with sales of $491 million, up 47% reported or 36% in local currency. What is interesting is what makes up this 36% growth. About two-third of it comes from increasing sales to OE out of Asia and South America. You have to realize that 75% of the commercial vehicles built during the first quarter globally were manufactured either in China, India or Brazil.

The second part of this growth, 20% of those 36% was driven by again this exceptional surge in revenues from aftermarket and the rest was coming from gross in OE business in Europe and in the US.

We have seen a very strong gross profit margin of 28.5% or 20.6 at a performance level, which is actually one of the highest level of margin that we have seen in a lot of years. Actually, you have to go back to 2006 to find this kind of levels, but remember in 2006, it was supported by much higher level of revenues.

Operating income was at performance level $44.5 million or 9.1% margin versus sales, which leads to an incremental margin on these incremental sales of 31%.

EPS reported was $0.47. We generated $0.51 at a performance level and our free cash flow was a healthy $26.7 million excluding the $11 million of payment for the streamlining programs that we had initiated last year and that leads to a conversion rate of 87%. So altogether again, we feel comfortable at upgrading our full year guidance and we will give you more details at the end of the presentation.

Turning to page four, which gives you snapshots on our sales performance versus market trends. In the first quarter, we were really propelled by the market’s natural growth. In particular our sales growth strongly benefited from WABCO’s, what I would say, well-anchored position in fast growing emerging markets like China, like India or Brazil.

We also, as I said, benefited from record growth in our aftermarket business. So, looking at our three segments of business, OEs to start with, our revenues went up 38% or 25% when we exclude the impact of the acquisition of our joint venture back in June 2009, which was not accounted for obviously in the first quarter of 2009. It’s still up 17% versus the last quarter of 2009 and this is driven, again, a lot by these exceptional growth in emerging markets as well as continuous increase of technology level and – i.e. content per vehicle.

Aftermarket went up 27%. When you exclude the contribution of India, it’s 20%, still the highest level of growth, reaching actually the highest level of quarterly revenues ever seen. It’s up 6% versus the last quarter of last year and it’s driven by an increase in fleet utilization rates. I think we are probably around (90%-92%) utilization rate in Europe which is getting close to the normal structural level. It’s also benefiting from all the strategic initiatives that we have been driving for years to focus on growth from aftermarket activities.

Sales to JVs went up 68%, it’s 23% higher than Q4 2009 supported by an increase in production of commercial vehicles in the US (and traders). Also by higher content per vehicle particularly in our advance driver assistant systems like the OnGuard collision mitigation system that really sees a growing success in the US.

Then when we look at WABCO’s performance against the markets (inaudible) by region starting with Europe, production of commercial vehicle of trucks and buses in Europe actually ended up at about 67,000 down 4% year-over-year; however, you have to remember that in Q1 2009, the level of production was still not aligned with the very fast decreasing level of demand, so the industry continued to build up some inventory at that time.

In any case, our revenues from Europe are up 7%, obviously nicely outperforming the market, for two reasons we believe. Number one, we increased again our content per vehicle and number two, we assume that our OE customers are building up some inventory of components as they themselves are increasing their level of capacity.

North America built about 57,000 trucks in the first quarter, up 10% versus last year. Revenues were up 28%, again mostly driven by content per vehicle addition.

South America built 51,000 trucks, up 64% year-over-year. We outperformed nicely by a growth of 72%, again, driven by an increased level of technology that we sell to our Brazilian customers.

Japan and Korea, which built 55,000 vehicles in the quarter, up 60% from last year. We outperformed very strongly the natural growth of the market and this was due to the fact that this growth was mostly serving the domestic market and trucks sold domestically in these countries have a higher level of technology and a higher content of WABCO products and systems obviously.

China was up with a record level of production of 390,000 trucks, up 107% versus a year ago. We followed with an increase of our sales by 108%. And last but not the least, India, which produced 93,000 trucks in the quarter, up 141% versus last year, we saw our revenues increase by 236%. Obviously the revenue base for the first quarter of 2009 is the revenue of our joint venture as it was a standalone business before being taken over. But the operation is still obviously valid and legitimate, meaning that we have seen a fairly nice increase in the penetration of new technologies like ABS in India.

So in summary, we have seen in this quarter a significant sales growth and we have outperformed the markets in all regions, continuing to efficiently and successfully introduce new systems and technology that increase our content per vehicle. Now I will let our CFO Ulrich Michel drive you through the details of our financial results, Ulrich.

Ulrich Michel

Thanks Jacques. Good morning everyone and thanks again for joining us today. I am going to spend a few minutes to take you through our financial results of the first quarter of 2010. Turning to Chart 5, let’s go from sales to earnings per share for the quarter, looking at both our reported and performance numbers.

Performance numbers for 2010 are adjusted to remove operation of streamlining and separation costs as well as discrete tax and other items.

In addition, comparisons to 2009 have been adjusted for currency translation effects. As Jacques just explained, our sales increased by 36.2% in local currencies versus the year ago, which is also an improvement of 11% compared to Q4 2009.

This Q1 growth of 36% includes average price reductions to customers of 1.2%, which once again is at the low end of what we would expect and reflect our continuous efforts to limit price erosions.

Gross profit increased 63.1% with and adjusted gross profit margin that has improved by 474 basis points compared to a year ago. It is also noteworthy that this quarter’s 28.6% performance gross profit margin is one of the highest WABCO has achieved in many years.

To see a similar type of margin, we will have to go back in history to quarters, which on an apples-to-apples basis is 40%-50% higher sales volumes than Q1 2010 and a significantly more favorable commodity price environment.

So Q1 results show the strong effectiveness of our cost reduction efforts and productivity initiatives in terms of reducing our cost base.

The largest increase of gross profit was driven by higher business volumes though, which contributed $32.9 million. In addition, our productivity initiatives keep delivering strong results such as material productivity of 5.9%, which is the net result of an impressive 6.1% productivity generated by our material productivity projects and 20 basis points of commodity inflation.

We also continue to deliver good conversion productivity in our factories. In Q1, we achieved a level of 4.7% and we generated significant benefit for more efficient absorption of overhead cost which contributed over $9 million. This positive result further reflects the benefits from the reduced level of fixed cost in our factories.

These improvements were partially offset by slight increases from warranties, inflations and the few other items which all together cost us about $1.6 million of profit compared to the first quarter of 2009. In operating expenses, you can see an increase in the first quarter versus a year ago. As stated in our previous earnings call we operate in certain costs that we had aggressively curtailed in 2009 and which could not be sustained into 2010.

These items include annual cash bonuses for employees, benefits from reduced working time as well as other deep cuts through our discretionary spending on marketing travel and other items at the operating expense level. As you can see the reinstatement of these cost items means an unfavorable variance of $7.9 million versus the first quarter a year ago. However this is in line with the full year estimated impacts of $24 million that we had shared with you in our previous call.

As WABCO’s first quarter performance is well above our prorated annual targets for 2010, we have also in Q1 accrued $3.2 million of incentive compensation beyond target. Inflation increased operating expenses this quarter by about $1.5 million and the consolidation of our Indian subsidiary added another $3 million in operating expenses compared to Q1 20009. We do continue to benefit from successful accomplishments in 2009. For example the streamlining and other cost reduction efforts that we succeeded in implementing during the course of 2009, continued to deliver year-over-year savings of $3.4 million. Importantly we are viewing that the $700,000 of the savings in our strategic initiatives still leaving net cost reduction of $2.7 million.

Given that we have been able to limit the overall increase in our operating expenses to only 47% of the sales pro, we had expanded margins by an additional 327 basis points versus a year ago. So altogether, we generated operating income of $44.5 million or 9.1% of sales on a performance basis. This is a significant increase over last year’s performance of $3 million and it has resulted in a margin expansion of 801 basis points.

In summary, we delivered an outstanding financial performance for the quarter generating an impressive 31% incremental operating margin on our sales increase versus a year ago. In this quarter, SEC equity income was $1.8 million this is also a strong improvement versus the loss of $4.8 million a year ago. In particular it includes an improvement in earnings of $1.6 million from our North American joint venture and the effect of the divested share of the non-break part of our former Indian joint venture.

On the reported basis, we recorded a tax expense in the amount of $7.6 million for the quarter, excluding its pre-tax items as well as other onetime items we incurred $8.2 million of performance based expense for the quarter which is in line with our full year expectation of an approximate 20% performance tax rate. As a result we ended the quarter with reported net income of $30.7 million and after excluding the non-performance items net income was $33.6 million.

With regard to earnings per share, this translates to $0.47 reported and $0.51 on performance basis. Compared with the reported loss of $0.57 and the loss of $0.08 on a performance basis a year ago. Although, both the market and our sales are still probably low than peak 2008 levels. The profitability we are now generating is already impressive in our view.

All in all, our first quarter financial performance makes us very enthusiastic about the potential future profitability of this Company. Turning to chart six, let’s go through our cash flow for the quarter. We generated free cash flow of $15.6 million after making more than $11 million in streamlining payments in the quarter. As you can see, working capital had a significant impact on our operating cash flows as would be expected in this high growth environment.

Accounts receivable increased $61 million due to higher business volumes, however even now our continued focus on collections read up an addition of $6 million in cash by further reducing cost to receivables. Overall, our days sales outstanding are at the lowest level in over three years. Inventory increased by just over $12 million, which was in line with this quarter’s increased business activity. At the same time, an increase of nearly $24 million in payables dampened the overall negative impact of the increase in working capitals.

As you can see the changes in other assets and liabilities for the quarter represented a favorable impact of $23 million. Some of them are significant items in this amount include $19 million of indemnification and tax related items, $15 million of payroll and other paper related costs partially offset by $11 million in streamlining payments for the quarter. As a result net cash provided by operating activities was $28 million. Net cash use for travel expenditures was up from $4 million up from $10.6 million a year ago, driven by increase capital investments in support of new products and increased manufacturing capacity in China.

The results was free cash flow of $15.6 million or $26.7 million excluding the $11.1 million in payments for streamlining activities. This represents an 87% conversion rate of our reported net income into free cash flow. Considering the boost in business volumes, the quarter’s conversion rate of 87% is a very strong result. It is also well within our full year guidance for free cash flow conversion despite a high growth in the first quarter.

Now I’d like to turn it back over to Jacques, who will highlight the market dynamics. Jacques?

Jacques Esculier

Thanks Ulrich. And let’s now review the market dynamics for each of our key markets and this will help us actually frame our expectations in the coming quarters. Starting with Europe, I would start with some very actually important news I believe, that happened in the first quarter.

The number of heavy truck registered went up for the first time quarter-over-quarter in the last two years. It’s up 5% versus quarter four of 2009. In addition, I’ve already mentioned to you, we believe the fleet utilization is now above 90%, actually basically around 92% which is getting close to the structural utilization of normal times, during normal times and is notably up as compared to last year which we again believe indicate that the demand for new trucks will start to rise.

Overall for the year, we expect the production of truck and bus in Europe to grow about 30%. This is up from the 15% we had shared with you just three months ago and this 15% is made up of two things. Number one, we believe that the demand for new trucks will actually start increasing Europe by five to 10%, whereas three months ago we were assuming that it would stay flat. Second, we think that during the first quarter the inventory burnout – that inventory of finished trucks that was built up at the end of 2008 and 2009, it took four quarters for the industry to absorb actually was melted faster than we had anticipated leading to an impact – positive impact this year of 20% to 25% up from the 15% that we had again shared with your during our last call.

In North America, the Q1 production was up 10% year-over-year. There was some pre-value effect and it may impact the second quarter production, actually we heard yesterday that the April orders were surprisingly high, so we may even have to revise this assumption. However, we see the demand for trucks in the U.S. rising fast towards the end of this year or at least in early 2011 by as much as 40%. Overall, we believe that the truck and production across the year 2010 will be up 10% versus what it was in 2009.

Looking at China, as we said, the rate has been surprisingly high, have increase 107% versus Q1 a year ago; 32% versus previous quarter. This raise is supported by a very strong efficient stimulus package put in place in mid-2009 in China. We expect for the year though that the overall truck and bus production will be 10% up, it’s 5% above what we had shared with you during our last quarter with you. And the reason why we think it’s going to be only 10% is because our current estimate of the second half is lower than the first half because we believe the that stimulus package maybe kind of lifted or stopped by the government given the fact that the first quarter was slightly overheating in China and the government may slow down on their incentives for economic recovery. And when we talk to our customers, obviously they would kind of anticipate that this would have an impact potentially on the number of trucks in the second half. But again one has to admit that this market in China is the hardest one to forecast for the industry.

In India, truck and bus production up 141% above Q1 ‘09 and 29% above production levels in Q4 ‘09, again supported by a stimulus package from the government as well as some prebuy activity given the fact that India introduced some new standards for emissions at the end of the first half of this year.

Overall we believe that for the year 2010, India will generate truck and bus growth of about 50%, which is up from the 20% we had anticipated a quarter ago.

Turning to the following page, page eight, looking at Japan, Korea, again nice growth driven by a stimulus that was introduced in the second half of ‘09, mostly driven therefore by domestic demands. And when you look at it, the production levels seems to have stabilized at around 50,000 to 55,000 trucks since the third quarter of ‘09 and we believe it will stay that way for the remainder of the year, leading to assumption of growth year-over-year over 25%, which is 5% above what we had anticipated just three months ago.

Going to Brazil, again, very strong growth, 64% versus a year ago, 12% versus the last quarter of ‘09, supported by government stimulus packages. And again, we expect that overall for the year, the truck environment growth will be of 30% versus ‘09 and it’s up 15% versus what we had anticipated during our last call.

Looking now at aftermarket, obviously we are fairly upbeat with 27% we have seen in Q1, which also 6% quarter-over-quarter growth, driven by higher fleet utilization driven by again kind of additional revenues generated by our strategic initiatives and we believe overall that our annual growth in aftermarket will stabilize at about 15%. I remind you that this first quarter of 2009 was also fairly weak but (inaudible) year-over-year 15%, up 5% from our last estimate.

Finally looking at (inaudible), which has been the segment of our industry that has been the most affected by the prices, we have seen a nice growth of 35% versus Q1 ‘09 and 28% versus Q4. So we raised our expectation to 25% growth for the year versus 5% to 10%.

So in summary, we expect basically all the regions to really accelerate their pace of recovery.

Turning to page nine, so based on these superb results of Q1 and our visibility and guesses of the market dynamics ahead of us, we are confident that we can raise our guidance for the full year. Starting with sales where we add 8% to which a bracket of 23% to 28%, performance, operating margin, we add 1.5, a 1.5%, going to 6.5%, 8.5%. We add $0.40 to our EPS, at the performance level we will end up $1.4 to $1.8 and then we maintain our guidance for free cash flow conversion. On the right you can see some of the assumptions that we – that sustained our guidance. One thing though as usual we are not including any impact from the (ET fund), just taking the opportunity to update you; we have continued to interface with the commission, we think these people continuing to share the information around the context that the – that their industry had to face. And the latest news is things are finally moving. We have been receiving numerous number of requests for information that demonstrate that the team is right now working on the case. And very (inaudible) the best estimate we have is that it is likely that we get the sign prior to next call.

Turning to following page and they are showing some progress we are making in our three-pillar strategy, starting with globalization. We got a nice contract from FAW, which is the largest manufacturer of trucks in China for equipping their trucks with our clutch servo. We also won a special award from them for 2009 contribution. The joint venture between Mahindra Navistar ordered vacuum pressures, products of the breaking system in clutch servo to equip their new class of cars. And we got some nice awards in China from the CNHTC Group.

Turning to the technologies, we won the PACE award with our OptiDrive breakthrough automated manual transmission technology, I remind you that this is a technology that we developed specifically targeting emerging countries. It was introduced back in the fourth quarter of 2008 in China. And I can tell you that this is that WABCO is one of the very few truck suppliers to ever win a PACE award. Then we have signed a agreement – a joint venture actually with WUeRTH it’s a very important strategic move for us. WUeRTH is an industry leading supplier and distributor of automotive products to professional workshop worldwide and together with them we are developing and introducing and distributing a multi-brand diagnostic system.

We also (cutting lines) with Iteris. With our joint venture Meritor WABCO in the U.S., Iteris is a leader in the traffic management system and we are going to connect our sophisticated smart truck and OnGuard collision litigation system and stability control systems with their online safety direct system that monitors driver’s data.

And finally, we received a good contract from Rolls-Royce to equip their latest sedan with our most advanced air suspension.

Moving to our execution, the WABCO operating system still kind of drives a lot of good successful results for us. Number we have completed in a record period of time two new factories in China, one in Jiefang which is actually part of the industrial park build by CHTC and the second one in the premises that Ford [ph] has developed in Southern China to manufacture their actual industrial support our joint venture we have with them to manufacture and distribute these rights, and we generated this record productivity or not but very high level of productivity both from mature and conversion and finally we keep increasing our service level to customers wanting to getting the level of PPM that has been reduced 69% year-over-year.

So we’re sure that we continue to successfully generate good value out of strategic peers. Turning to the last page, I would say in summary that in this first quarter, we again demonstrated powerful ability to adapt to first changing market conditions. We also fully leverage and benefited from these three key or strategic effort that we have pursued in the last five years. Our focus on technology innovation continues to provide opportunities to add content per vehicle globally.

This is globalization allows us to fully capture the benefit from exceptional growth in emerging markets, and our focus on execution allows to drive very solid conversion of additional sales into very good profit. So overall again we are very confident in raising our full year guidance and I would like to finish to reiterate while I said in our previous call WABCO is well poised to generate superb incremental profit on future growth in the coming years.

So now I’d like to open the lines to answer your questions. Sean?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). One moment for the first question. Our first question comes from Josh Pokrzywinski with KeyBanc.

Jacques Esculier

Hi Josh.

Ulrich Michel

Good morning Josh.

Operator

Josh your line is open, could you try pressing your mute button possibly.

Josh Pokrzywinski – KeyBanc

Good morning, guys.

Ulrich Michel

Good morning Josh.

Jacques Esculier

Hi Josh.

Josh Pokrzywinski – KeyBanc

Great, just want to dig in here on the stimulus comments in some of these emerging markets. Are you guys thinking about a pull back or expecting more of a leveling out from here. How is that framed in your outlook and (inaudible).

Jacques Esculier

Well again Josh, it depends on the countries. Starting with China where I would say we have the least visibility ahead of us. If you look at the last three, four years when we always started with very conservative view of China and we always were proven dramatically wrong, you know what, we are still fairly conservative on the second half. Actually we are because our customers are kind of indicating that, now we entered the first quarter having a fairly conservative view of what potentially could be the rate of production and we ended up having to air freight products from Europe to China to ship out an extremely unexpected growth. So it’s very hard to nail, China’s forecast ahead of us but again relatively again I would say that we expect a second half to maybe down 20 to 30% as compared to first half.

Now India, I think is a little more stable even though we believe that this pre-buy may have an impact on the second half but it’s a lesser extent, I would say probably in 10, 15% overall and then if you look at South America, again we really don’t know when the government is going to kind of lift this incentive package that they have in place that the election is taking place to what’s the end of the year in November. Depending on what the government would do, it may or may not kind of impact overall demand in those times.

So overall what we shared with you, I would say could be conservative but is definitely planning for a slower second half in those emerging markets.

Josh Pokrzywinski – KeyBanc

Got you, but first is Europe where your content per vehicle is a little higher, should we look at those items in the bush?

Jacques Esculier

Europe we see it actually nicely continuing to grow, if you look at our first quarter we see about 67,000 vehicles (inaudible). We think that actually there were maybe still another 10 to 15,000 trucks that we have pulled out of inventory. So we think that Q2 could be both 80,000 trucks and that it could stay there and maybe increase a little bit towards the end of the year. So we see a nice kind of growing curves, but slow growing curves actually moving forward in Europe and then US we’re getting, we kind of anticipated Euro dip in Q2 that maybe actually proven wrong again given the strengths in the orders that we just discovered yesterday.

Q3, Q4 we are seeing already some kind of a nice uptick because we really believe that towards the fourth quarter and certainly first quarter of 2011, we’re going to see a very strong need for new vehicles finally.

Josh Pokrzywinski – KeyBanc

And that’s helpful and then just shifting over quickly to the incremental, it looks like on a performance EBIT basis, the incremental margin was around 15% in the first quarter. Yes, I see the temporary costs are already coming back. Even a high end of your guidance, incremental for the rest of the year around that 23% number that you laid out on the 4Q call. What am I missing that kind of gets you to bottom end or even the mid, is that (inaudible).

Jacques Esculier

Yes, when you are looking at – we didn’t – rightly with an update on the incremental margin but when you kind of drive the calculation of all those things at any point, you will realize that actually our incremental margin has been raised to about 25% now. Now you have to take into account the fact that between last call and this call we have increased as Uli said our provision for the annual incentive plan. That’s the bonus program for the employees by $3.2 million.

We have also triggered an additional $3 million of investment for capital and business opportunities that we will talk about later in the year, that we believe are going to be very actually very successful for WABCO. So altogether, what I’m saying is we will see a better incremental margin than planned, that’s no more because we see also more revenues to the level of probably 25% or so and that covers again these additional let’s say about what $6.5 million of additional expenses that we had to trigger in that first quarter.

Josh Pokrzywinski – KeyBanc

Got you that’s helpful. Thanks a lot guys.

Jacques Esculier

Okay. Thank you Josh.

Operator

Our next question comes from Ben Elias with Sterne Agee.

Ben Elias – Sterne Agee

Thank you. Good morning. Ben Elias from Sterne Agee.

Jacques Esculier

Hi Ben, how are you?

Ben Elias – Sterne Agee

Good. I was wondering if you could give us your thoughts on what’s happening in Europe and what you think is happening with the used truck sales especially as future sales, the developed countries depend on some of the older trucks being sold to merging Europe which looks little week right now. How is this – how is the financing environment there as well.

Jacques Esculier

Well it’s a little bit complicated for us to right now track the used sales activities, but then we have to refer to what our customers are really telling us around those lines and again the common wisdom here seems to be that, there will be a slight increase in demand for new trucks this year. That is I think fairly sustained by the fact that there is an increase level of fleet utilization. So at one point the fleet will be fully utilized and fully utilized means probably in the 95% kind of range and we are getting close to it with, if we are not there yet, and then that will ask for new trucks, no matter what the used market does, you will need to have new trucks to support the increased demand in freight.

And that’s by the way supported obviously by this pretty strong growth we see aftermarket. So and then when you look across the board, our customers have slightly different opinions on things but (inaudible) I think it is reasonable to believe that the market could increase by five to 10%.

Some people, some customers are more bit than a little bit more prudent but everybody recognizes that it may go up and five to 10% seems to be a fairly decent reasonable assumption at this point.

Ben Elias – Sterne Agee

Okay. So that’s kind of interesting that Europe is not so much due to the age of the fleet as it is in North America more utilization. With two-thirds of your 36% of sales coming from Brazil, India and China and the new markets. Could you give us an update on content of vehicle, the differential between Europe, North America and the emerging markets? Is that content out from that $250, $300 of April range?

Jacques Esculier

Well, yes, what I can tell you is content per vehicle went up nicely actually across the board in all regions. The strongest growth was in Asia, particularly. And here, I mean, it’s always hard to say, but we see a pretty nice growth in Asia, pretty nice growth in our content per vehicle. I really cannot kind of a share the numbers – the exact numbers with you, because I think it’s competitively sensitive. But I would say that obviously the logic is that there is a strong kind of increase in the level of technology.

In China, in particular, when you think about it, I mean we have introduced the AMT a year-ago. We are right now introducing the added brakes ahead of the United States actually. Now it’s not obviously something that will increase all the 1.5 million trucks that we predict to be or 1.2 million trucks that we predict to be this year in China, but it’s going to start at a low level. But I think it’s going to start penetrating more and more. So, overall, what I am saying is the play of the technology increase is the right way of looking at growth opportunities even beyond the market dynamics.

I was with some customers two weeks ago in China and very promptly they themselves see the technology path as an obvious kind of path for the Chinese manufacturers, particularly as they are looking at exports outside of China. And some of them were thinking, one day of exporting trucks to Europe. That means we are going to have to equip those vehicles with the adequate level of technologies. So I think this is a very legitimate and very strong path for us grow our business.

Analyst

Okay, thank you very much. Will get back in queue.

Jacques Esculier

Okay, thanks, Ben.

Operator

(Operator Instructions). Our next question comes from Robert Kosowski with Sidoti & Company.

Robert Kosowski – Sidoti & Company

Good morning, guys.

Jacques Esculier

Good morning, Bob.

Robert Kosowski – Sidoti & Company

I was wondering if you can give some commentary about the Euro and kind of the weakness that we have seen in it over the past month or so, given now the Greece difficulties?

Jacques Esculier

We have a little bit difficulty understanding your question. Let me repeat what I thought you asked. You are asking if we can comment on the impact of the Euro on our business.

Robert Kosowski – Sidoti & Company

Yes, and your reported results of the Euro is weaker right now and I know in the K, you guys had natural hedged sales and production or sales and costs, just wondering if that still holds and can we see any (inaudible).

Jacques Esculier

Yes, Rob, the numbers we have given you in our guidance update on a Euro, Dollar exchange rate going forward of about 137. At the moment, we are around 130. When I walked into here, we were at 129 something. So we do have some partially natural hedge, but we will suffer from a stronger dollar, i.e. a weaker Euro, because we have more income Euro than we do export business into the dollar around.

And I would say if the dollar stays around the 130 Euro mark and strong towards most other currencies, the way it is now you could see an impact of maybe $0.75 per share on our net income or earnings per share. But you should also see a slight improvement in our operating margins, because the products that we export from Europe to North America, do provides a better margins were installed in dollars.

Robert Kosowski – Sidoti & Company

But either way, it’s still very relatively small impact on your guidance.

Jacques Esculier

Yes, we would typically say, in the disclosure you find in our K, for example, we have said if you look at the dollar strengthening 5% or weakening 5% towards all other currencies would have X impact. At the moment, its impact would be about 5% or 5.5% of our net income. So 10% movement in the dollar, moves dollar – earnings per share by about 5%.

Robert Kosowski – Sidoti & Company

Okay. And then do you have any idea which share of your China sales are for domestic use versus export? And kind of do you have any concerns about a truck overbuild situation in China or kind of a utilization over there?

Jacques Esculier

Well, not really. I think when you see what’s going on in China right now, I don’t think you believe that that we are already producing – the question very frankly is, will this construction activity in particular stay at the same level, because obviously this slowdown in construction would impact immediately the number of commercial vehicles needed. But at this point and I don’t think they are building inventories, they are not already producing, they are just kind of producing in an economy that is obviously strongly pushed by the stimulus packages.

Robert Kosowski – Sidoti & Company

Okay. And do you have your weighting towards domestic use versus export?

Jacques Esculier

In China?

Robert Kosowski – Sidoti & Company

Yes, amongst the trucks they develop in China.

Jacques Esculier

Well, we don’t have the latest update, the only thing is we think or we get from our customers that there is a slight increase in exports, but certainly not of the scale of the increase that we just described to you at the overall level of production.

Robert Kosowski – Sidoti & Company

Okay. And then in the press release from last week, you talked about $460 million of incremental for the next like five years or so. Can you kind of describe when a lot of that’s going to hit? Is there going to be kind of closer term, ‘11 or ‘12 or the bulk of it hit more closer to ‘13 and ‘14? Any kind of time guidance will be helpful.

Jacques Esculier

No, we don’t have really kind of any additional details at this point. I think it’s important already to share the $460 million, I cannot give you a calendarization of the implementation of this revenue growth.

Robert Kosowski – Sidoti & Company

Okay, well, thank you very much, and good job.

Jacques Esculier

Okay, thanks, Bob.

Operator

Our next question comes from Ben Elias with Stern Agee.

Ben Elias – Stern Agee

Thanks for the second round. My question is relating to the fine with the EC, this fine as we move along and it gets delayed on an ongoing basis, does it bother you that with increasing EBITDA, your borrowing capacity goes up and do you know if the EC gets pretty greedy, you are liable to pay a bigger fine? Yes, it’s a good problem to have that your EBITDA is going up, but –?

Jacques Esculier

Yes, no, to tell you the truth, I think it shouldn’t. There is a certain inertia on things over there. What I am saying is actually overall, when you look at our industry, even though we are starting to talk about recovery, we are still significantly below where we are coming from back in the year 2007, 2008.

So what we have been sharing with them about the sensitivity of the closing a sizeable fine to us right now at this time, I think it’s still valid. It’s not because we have obviously seen a positive trend, a strong, nice positive trend, but still far and below where we were before the crisis, it’s still a valid argument.

And again, things will happen I think pretty fast right now. The overall process is moving and I don’t know believe that this people kind of track our EBITDA and what not, because I don’t really want to know –

Ulrich Michel

I think the impression that they follow our leases, our publications and the arguments we made with them were less around our absolute ability to pay rather than to restraining our ability to reinvest and develop technology that’s needed and so on. So I think they are all still valid. And when I would rather be in the situation we are now than in the situation we were a year-ago, it’s much better.

Jacques Esculier

It seems much better to be on the uptick and see the liquidity problems diminishing or disappearing, rather than increasing, yes?

Ben Elias – Stern Agee

Okay, thank you very much.

Jacques Esculier

Okay, thanks Ben.

Operator

I am showing no further questions at this time. I would like to turn it back to Jacques Esculier for closing comments.

Jacques Esculier

Well, just wanted to thank you for attending our call and obviously I hope you guys will join us in another three months for another update of our activities on our recovery path. So thanks and have a nice day. Bye-bye.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the conference. You may now disconnect.

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