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WABCO Holdings, Inc. (NYSE:WBC)

Q1 2014 Results Earnings Conference Call

April 25, 2014 09:00 AM ET

Executives

Christian Fife - VP IR and General Auditor

Jacques Esculier - Chairman and CEO

Jason Campbell - VP, Controller and Acting CFO

Analysts

Alex Potter - Piper Jaffray

Jeff Hammond - KeyBanc Capital

Scott Group - Wolfe Research

Jerry Revich - Goldman Sachs

Larry De Maria - William Blair

Nicole DeBlase - Morgan Stanley

Joe Vruwink - Robert Baird

Operator

Good day, ladies and gentlemen and welcome to the WABCO Q1 2014 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 be follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference Christian Fife, Vice President, Investor Relations and General Auditor. You may begin.

Christian Fife

Thank you, Nicole. Good morning everyone and welcome to WABCO’s quarterly conference call. Today, we’ll present our first quarter 2014 results. And 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 wabco-auto.com under the heading WABCO Q1 2014 Results. A replay of this call will be available through May 1st.

Also as shown on chart two 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-Q which was filed with the SEC this morning, and in our quarterly reports. Lastly, some of our remarks containing 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

Thank you, Christian, good morning, good afternoon all of you and welcome to our first quarter reporting and discussion of our performance results. Before we step in and review the details of our results for the quarter I would like to take a step back and kind of frame this first quarter of the year 2014, I would first say that this quarter was yet another validation of WABCO’s ability to continuing to outperform our global markets and we are continuing to achieve this outperformance in a market that is actually very uncertain and I would say hesitant, certainly not providing much of a growth for us.

Attached to this outperformance this quarter we also announced couple of weeks ago that in the past year WABCO has won $1 billion of new business, $620 million of which will benefit the outperformance ability between the year 2014 and 2018 and this in particular includes a new business with one of the major global truck and bus OE manufactures to cover all their global needs for braking systems.

The second thing I would like to highlight upfront is that we are continuing to transform top line growth into our strong contribution to the bottom line through our incremental model. Now I would call that the WABCO value machine because for me it’s important that we normally outperform market but we drive this machine of transforming top line growth into valuable contribution to the bottom line.

However like we have seen it in the past few quarters, this quarter was again affected by the dynamics of foreign currency movements and that resulted in an impact of a magnitude of about 1% of margin as compared to 2013 Q1. And so, that will have to be a kind of considered. What is important though is this value machine is still operating fully.

The [certain] and preliminary comment is that, in my own view I think that this first quarter will be remembered as the first quarter when WABCO drove a sizable acquisition. And I can tell you that after a couple of months of having Transics as part of the WABCO family, we have actually even further grown our optimism and enthusiasm I would say to drive and built value through this acquisition.

So, going now to the numbers and results, starting with the top-line, we ended up with sales of $729.5 million, up 12.7% in local currency, driving a gross profit margin of 13.3% versus 31.1% in Q1. And obviously you can see already this impact of the transactional effect of currency movements.

Performance operating income of $89.8 million i.e. 12.3% of margin versus last year's $87.6 million at 13.6% of margin. And that again reflects the FX impact plus a couple of one timers that Jason will bring you through in more details later on in the presentation.

Performance EPS of $1.28 versus $1.17 a year ago; free cash flow of $27.9 million, which is seasonally affected during the first quarter by a couple of things and Jason will go through that with you. Usually the month of March sees a lot more activity at our customers than December, leading to an increase in working capital for us as well as obviously Q1 is the quarter when we pay all incentive plans.

We returned as planned $100 million of cash to shareholders through the repurchase of 978,000 shares. We acquired 97% of Transics, the remaining 3% should be achieved by the end of May. And we reiterate our full guidance for the year.

Turning to the next page and kind of going through the profile of our top-line growth, again 12.7% short of translational impact of foreign currencies with by channel a year-over-year increase of 13% of our business from the OE channel which is driven by increase in value per vehicle as well as a further expansion of our share of the market. Aftermarket grew 8%, actually there was a tailwind and headwind, the tailwind being that the Transics business contributed 4% this year and the headwind being that last year we were still delivering air disc brakes to one of the European customers to replace our customers product in the field and this year this program is over, so that represents 4% of negative growth. So net, net 8% growth, healthy and still by the way breaking a new record in revenues.

Sales through joint ventures, mostly the joint venture that we have with Meritor in the U.S. up 28% driven by growth in the markets as well as further content per vehicle.

Now looking at the evolution of our revenues by region versus the dynamics of the markets starting with Europe, WABCO’s revenue grew 5% in an environment that has seen an erosion of 2% of vehicle produced and that’s again through a further penetration of our technologies as well as an increase in our share of market.

North America healthy 38% growth overall in a market growing also a very significant 15% through adding new technologies in content per vehicle, the penetration of OnGuard collision mitigation system as well as AMT is whether increasing.

South America, we were 9% in market, and already 2% and we benefit obviously from the second phase of the roll out of the mandate of ABS. I remind you that we started last year covering 40% of the market, this year should see the coverage of the remaining 60% of the market with ABS.

Japan, Korea, we grew 23% in a market growing 5% and there is a favorable vehicle mix, particularly in Japan where we see more demand for domestic vehicles and export vehicle with higher content per vehicle and in Korea, we see more demand for hydraulic ABS content. China, we grew 31% in market progression of 13%, again purely related to share of market increase and further expansion of our technologies.

India, we achieved 3% growth in a market again eroded 6% and that’s the positive vehicle mix we see more multi-axle vehicles than we have a year ago and we also sale more ABS even though those ABS are not yet mandated across but just for 10%, 11% of the fleet. So with a lot more potential in the future. So ending up the quarter with a solid 10% outperformance with contribution from each region across the world.

I am going to let now Jason go through the detail of our financial results. Jason?

Jason Campbell

Thanks, Jacques. Good morning everyone. I am going to take you through the financial results for the first quarter of 2014. If we turn to chart five I am going to take you through the details of the sales to earnings per share for the quarter looking at both reported and performance numbers. The performance numbers are adjusted to remove operational streamlining and separation costs as well as costs associated with the Transics acquisition and discrete and other tax items. We have also adjusted comparisons to 2013 for currency translation effects. As Jacques just highlighted for you we delivered strong organic sales growth in the quarter, sales increased 12.7% in local currencies versus last year largely driven by our outperformance to the market.

Price reductions were contained to 1.2% which is within the range of what we have anticipated for the full year. Our WABCO operating system continue power excellence and execution across our organization. In Q1 it improved our results by generating 5.8% gross materials productivity partially offset by 0.2% of commodity inflation and our factories were able to generate 6.3% of conversion productivity another strong results.

In total these continually strong productivity results generated a quarterly record of $21.4 million in savings further demonstrating the ability of WABCO’s operating system to optimize resources and flex capacity to address changes in market demand. The impact of volume mix and better fixed cost absorption generated $20.1 million of additional gross profit, while inflation on labor cost added approximately $3.5 million total cost of sales. This resulted in a performance gross profit margin of 30.3% this quarter.

Looking at operating expenses. We continued to invest in research and development activities to support our long term innovation and growth strategies which added $3.7 million to our costs, while labor inflation increased operating expense by $3.1 million in the first quarter.

With the acquisition of Transics business during the quarter, we now consolidate the operating expenses of that business which added $5.2 million of costs versus last year. One thing to highlight on this is that Transics brings a different structure of costs into WABCO. The difference is that Transics’ cost of sales are minimal in relation to WABCO’s products while Transics’ operating expenses from product development and selling related expenses make up the majority of their cost and resulted in overall profitability in line with WABCO’s.

Additionally our operating expenses were impacted by certain reassessments of table related taxes in the quarter that added $3.4 million of costs. This expense is reflective of a high level of stock option exercises in the past few years, which generated the need for higher tax provisions related to the tax equalization for our expatriated employees. Given the nature of this expense, we do not anticipate such a material one off impact in the future.

As Jacques mentioned earlier in the call, we continue to be negatively impacted from transactional foreign exchange effects which amounted to $6.5 million in the quarter. At the moment we see some signs that more impact for currencies are stabilizing, so we anticipate the year-over-year impact in the coming quarters to be less than what we've seen through last year and this first quarter.

Operating income for the quarter was $89.9 million or 12.3% of sales on a performance basis. Our equity income was up a healthy $2.8 million versus last year, which is primarily driven by our North American joint venture. After a slight increase in our non-controlling interest expense, we delivered performance EBIT of $93.1 million or a margin of 12.8%.

Moving to taxes. Our first quarter expense on a U.S. GAAP basis was $15.8 million. While our tax expense on a performance basis was $13.9 million. This represents the performance tax rate of approximately 15% which is what we currently expect for the full year 2014.

After excluding the non-performance items, you can see that our earnings per share was $1.28 for the quarter, an improvement of 9% versus the same period a year ago.

In summary for the quarter, WABCO delivered an outstanding level of organic sales growth, supported by a high level of outperformance against our markets while continuing to generate profitability that is within the operational framework we commit to deliver on.

Now let's turn to chart six and I'll take you through our cash flow for the first quarter. As Jacques alluded to in the beginning, we had a big increase of working capital of $44.5 million, driven by higher levels of business activity through the month of March compared to much lower levels at the end of 2013. This is the result of normal seasonality in our business, when our industry slows down in the last few weeks of December.

Our day sales and payables outstanding have remained at good levels during the quarter. We have seen a slight improvement in our inventory turns and we anticipate improving turns by 1 through the end of this year.

Our first quarter cash flow was unfavorably impacted by our yearly incentive compensation payments typically paid every year in March. This represented a use of cash of approximately $27 million. For investing activities, our net cash used for the purchases of PP&E and computer software totaled $23.2 million for the quarter which is slightly below our quarterly depreciation and amortization of $24.4 million. This led to a free cash flow of $22.7 million or $27.9 million when excluding the streamlining separation and acquisition related payments for the quarter.

This result is fairly low for a quarter but it was anticipated to be low given the flow of business activity in the last month of the quarter and the timing of our annual incentive compensation payments. Nonetheless, we’re still committed to converting 80% to 90% of our performance net income into free cash flow for this full year. Finally we continue to return cash to our shareholders through the buyback program. We purchased nearly 1 million shares at a cost of $100 million this quarter. As of the end of Q1 we still have $279.4 million left under our existing buyback authorization. For the time being, we intend to keep returning free cash flow back to our shareholders through this buyback program.

I’ll now turn it back to Jacques who will take you through some market dynamics.

Jacques Esculier

Well thank you Jason. I’d like to take this opportunity to thank Jason for covering this interim CFO position for the last couple of quarters. As you also know we have actually hired a new CFO who will be attending the next quarterly report in July, so Jason again thank you.

Now turning to next page, and as we do every quarter update you on the way we look at the market dynamics and the forecast ahead of us for the remaining of this year starting with Europe.

When you look at the couple of months, at the beginning of year, January, February registration numbers are up 14% versus last year but down 39% versus the previous quarter. One thing that is important here is to highlight that last year’s level of production and registration was particularly low, affected by some bad news in Europe that had certainly hindered the demand for new trucks.

Truck and bus production was again down 2% versus what it was last year. It was actually flat in Western Europe and down 24% in Eastern Europe, and it was also overall down 23% versus the last quarter of 2013.

Now looking ahead, we see the new registration being down 2% for 2014 versus ‘13 with Q1 being the lowest in number, because of the impact of the pre-buy effect that we have seen in the last quarter of 2013. It’s interesting to see at this point that you can triangulate the estimate of this pre-buy to be around 28,000 trucks which represent by 12% of the overall registration in Europe for the full year. And if you transfer that 28,000 trucks from 2013 to 2014 where it belongs, actually you would bring the registration numbers to grow 10% year-over-year between ‘14 and ‘13.

Now looking at the production outlook, we see a production outlook flat to minus 5 which is degraded as compared to what we had estimated a quarter ago because apparently there are some finished trucks products in inventory at the end of Q1 that will still effect Q2 production, so the pre-buy should affect mainly Q1 but also have an impact on Q2.

Going to North America, as I said, Q1 has seen a very healthy 15% growth versus 2013 and also up sequentially versus Q4 of last year. We have upgraded our estimate for the market for the full year from a 5% to 10% bracket to a 7% to 12% range with Class 8 expected to grow nicely stronger as compared to medium size trucks.

China, Q1 production was up 13% year-over-year and still up 2% sequentially versus Q4 of last year. We also have upgraded our view of China from a minus 5% to flat to a minus 2% to plus 3% with H1 being stronger than H2 because up to actually couple of days ago it was assumed that the enforcement of the introduction of this Euro 4 equivalent standards would happen at mid-year of this year. Couple of days ago the government actually confirmed that they will demand manufacturers to move to Euro 4 at the end of this year starting early next year. So I would estimate that we may actually still see some further pre-buy in the second half which may actually even enhance the picture that we just are sharing with you today. So, it could be slightly better than minus 2 to plus 3 and we will confirm that and certainly update you in the next call.

India has been also nicely upgraded. Q1 production was down 6% year-over-year but was happened very healthy 51% sequentially. I think I was in India long ago, it seems the industry has recognized a very strong build up of demand that was not satisfied in the last quarters. The industry was artificially lowered in its level by this political situation. Now they are currently voting and everybody recognizes that as soon as the election time will be passed, that pent-up demand will create an additional momentum in the business.

So, we have updated significantly our outlook from minus 10% to minus 5% to a plus 5% to plus 10% for the remaining of the year.

Moving to next page with Japan and Korea, so production in first quarter was up 5% year-over-year and 1% sequentially. We expect full year production to erode in Japan but increase for domestic demand and decrease for export demand to Southeast Asia. We also expect demand in Korea to grow. And then net-net we have actually kind of now wrote the range from minus 5% to flat to minus 3% to flat for the remaining of the year.

Moving to Brazil, production in Q1 was down 2% year-over-year and up 6% versus the last quarter of ‘13. However, it seems that inventories of finished goods at our customers at the end of the first quarter represent 10% of the production level. And that obviously is of strong concern and force us to revise the way we were looking at the dynamics of this market for the full year 2014. We were estimating that it would end up in the bracket minus 10% to minus 5%, we have downgraded it to minus 10% to minus 20%. And that's obviously driven by a weak economy.

Aftermarket, again we have ended up the first quarter at 8%, even though we had to deal with an extremely soft, I would say even a lack of winter, very frankly lack of winter season in Europe. And obviously whatever happens to the Eastern part of our region that impacts the business and that we start to see through aftermarket in OE. The year-over-year campaign that MAN obviously impact negatively as. But overall net-net, if we add the contribution of Transics, the year 2014 should end up with about 15% year-over-year growth in this segment of our business.

And we end up with trailers, where production was up 6% year-over-year and up 9% sequentially with a strong growth in Europe and NAFTA and some strong erosion in Brazil. For the full year, we expect trailer business to be flat to plus 5% with major contribution obviously from North America accompanying these very strong growths we see in the OE truck and bus.

Going to next page, reporting the highlights along the three pillars of our strategy. starting with globalization. We have opened a new factory in Thailand to address the need for one of our European manufacturing starting production of a truck in that part of the world as well as addressing some demand from Japanese customers that manufacture trucks over there and that certainly would appreciate to have a local support from supplier like WABCO.

We have shared with you the recognition of our current WABCO President Asia who has been nominated as one of the top 100 new leaders in China. And along new technologies we have built an alliance with SmartDrive in the U.S. to provide a broader, more attractive value proposition along the path of improving safety that is connected to our collision mitigation system OnGuard and we call ProView and that will again further enhance the differentiation of our value proposition vis-à-vis competition.

Then we have participated in the first ever truck racing activity in India, actually I would say almost Asia. And Tata obviously offered us the opportunity to participate and take part in this very important event and as the braking technology partner for them. Then we have rolled out a new concept, breakthrough concept of fuel saving, modular fuel saving air processing technology with the computing part of the air processing technology helping to save fuel has been integrated into the electronic brain of our braking system. So there is a lot of synergies and obviously saving there that makes this value proposition extremely attractive. Our own execution as we have shared with you WABCO’s CEO was rank top three in the segment by investors and then as Jason reported to you we have reached a very strong level of productivity, a record level of productivity in dollars this quarter.

Moving to the next page and kind of looking at our guidance. As I said, we are not touching revising our guidance, we maintain sales flow between 6% to 11%, performance operating margin into 12.8 to 13.6 range performance EPS $5.3 to $5.8 per share and free cash flow as Jason shared with you in the 80% to 90% range.

We have actually slightly expanded the expectation of the impact of transactional affects, it was $7 million, [it was] $9 million. And we have also slightly lowered the performance that we expect from 16% to 15%. What I like to highlight here is that at this time of the year, logically we expect and we have a line of sight right now to end up in the mid-point of the ranges of the guidance and that the profitability will actually build up quarter-over-quarter, it’s going to be a gradual step-up from where we started in Q1 to our Q4 results.

And then last page, as a summary, as I said we -- for me our performance is the fuel to what I call the value machine that actually transform topline growth into good healthy profitability through our incremental margin model that we shared with you and we have added fuel to the tank of our performance and we have actually even not only added fuel for this year but for the coming years. And our incremental margin model is still obviously as valid as it has in the fact. However, we are today as we have in the past few quarters facing stiff headwinds from exchange rate movements. Now we see these movements actually coming down, right now there is not much there beyond what we had in Q4 of 2013, it seems to have stabilized, but that will still create some further headwinds year-over-year for 2014 and these headwinds as we all know are highly cyclical. And we have benefited from this foreign exchange activity in past, in some years in the past. It is cyclical, so I think we have to be patient and wait for this to become less of an annoyance and certainly at one point become a tailwind.

We also maintained as I said our guidance. And we continue to return cash to shareholders through our buyback programs as well as continuing to review and search for good acquisition opportunities inline with what we have demonstrated to ourselves and to our shareholders as we acquired this Transics business earlier this year.

So this is the end of our presentation. I will open the session for Q&A. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Alex Potter of Piper Jaffray. Your line is now open.

Jacques Esculier

Hi Alex.

Jason Campbell

Hi, Alex.

Alex Potter - Piper Jaffray

Hey, guys, great quarter.

Jason Campbell

Thank you.

Alex Potter - Piper Jaffray

Wanted to ask first of all, you mentioned Jacques just now the expectation that margins should improve on a sequential basis as we move through the year. I was just wondering kind of what underlies that expectation, what are some kind of the moving pieces that we should be watching for?

Jacques Esculier

Well, they are a number of things I think it’s mostly driven by volume. I think we are going to see volume built up because mostly in Europe which is still a key market for us. We still see Q2 actually hit by this inventory affect that we have kind of observed at the end of the first quarter. So we don’t think Q2s yet be a normal quarter, but I think H2 will be cleaner, so that will allow us to build up more revenues and obviously revenues being kind of feeding the bottom line that’s kind of overall what we would anticipate as we look at the next three quarters.

Also assuming obviously, I would like to say we don’t have any further kind of negative movement from those currencies in Japan, in India, in Brazil.

Alex Potter - Piper Jaffray

Okay, very good. Was wondering if you could chat a little bit about India too, obviously a pretty big sequential change there versus the outlook last year which is good to hear. If you could just provide a little bit more color around what you are hearing from customers, you said that you are just over that recently also unrelated about, when do you think if ever in an investable time price and at least ABS is going to be mandated in India? Thanks.

Jacques Esculier

Yes. Well, ABS actually we had a dinner with the person who was covering this at the government level. And apparently the Indian government is very much enthusiastic about introducing ABS to save lives and increase safety.

Now there is obviously discussions to make it a orderly reasonable kind of transition. And that's what they are finalizing right now. I would anticipate that it will come within next two years. We should know later this year, when it's going to happen, but I would say they will probably start addressing this in the coming two years, maybe not everything upfront, but in a couple of phases I guess. But it's in the movement and it will happen.

Now in terms of market dynamics, again I was kind of positively surprised by the kind of mindsets that I noticed from different players of the industry who I met over there who believe that the drop that we have seen in the last year has been excessive and not reflecting a lower demand, structural lower demand, but just kind of going beyond the slowdown of demand to an unreasonably low level and thinking that there is a lot of pent up demand that is built up, that will need to be addressed as people come back to after this political situation comes back to a more normal kind of business environment. So, that's why people are really thinking that this will relief a lot of value.

Interestingly, now when you look at the average demand in number and production of trucks in the last four years ‘10, ‘11, ‘12, ‘13 and you look at the current forecast that we have at WABCO of ‘14 the current forecast of ‘14 even after this upgrade is still 20% below the average of ‘10 to ‘13, you understand what I am saying, so it’s not I believe that is excessively positive I think there is still more to come and I would anticipate that in the coming two to three years India without even talking about ABS but in terms of volume of trucks gears I think will recover to the level that we have left behind couple of years ago and that will provide us with some nice growth opportunities.

Alex Potter - Piper Jaffray

Okay, very good. Thanks a lot.

Jacques Esculier

Thank you.

Operator

Thank you. Our next question comes from line of Jeff Hammond of [KeyBanc] Capital. Your line is now open.

Jeff Hammond - KeyBanc Capital

Hey guys, good morning.

Jacques Esculier

Hey, Jeff.

Jeff Hammond - KeyBanc Capital

Hey Jacque, impressive outperformance 10% in kind of the flat market and I think you’ve said historically that higher end of that 8 to 10 comes more in a growth environment. So I am just wondering based on kind of your announcements earlier this month on outgrowth and some of the wins and the performance this quarter, what’s kind of the visibility for that 10% to sustain in this kind of choppy an even environment?

Jacques Esculier

Well Jeff, we certainly update you on a quarterly basis of how we have basically achieved in the quarter, but very frankly outperformance in the quarter is not as meaningful as it would be to cover full year and certainly not as represented it, it’s more of a short slice of history. And I would not pull the conclusion that we are on our path to outperform for 10% across 2014. Actually I would say that right now we would anticipate in our performance north of 7, which is upgrade as compared to what we chat with you three months ago, we have been working hard and finding some new opportunities. But we are far from 10. And so don’t believe guys that 10 is representative of where we are going for ‘14 even though we are going to still obviously try to end up this year even though the market is not favorable, we will still end up as close as we can to this 8% to 10% range.

Now, what is contributing there is a list of things that we have kind of briefly started to touch as we reviewed why we outperformed this quarter. There is better penetration of AMT, OnGuard; there is some mix effect in India, in Japan; there is share of market in China; there is better share of market actually in Europe for us, as well as America. So there is all kinds of stuff that obviously support this number. But I would say Jeff, I would ask you guys to be prudent with this 10% and again not kind of thinking that this is from now on what we’re going to be reporting quarter-over-quarter, there will be ups and downs, obviously quarter-after-quarter.

Jeff Hammond - KeyBanc Capital

Okay, great. And then I’m little surprised that you fine tuned Europe down. I mean the tone in general from our company seems to be better that peer companies seem to be kind of holding the line, you only had 2% kind of industry production decline in this kind of post -- pre-buy quarter. So, I’m just wondering if there is any -- if this is just kind of fine tuning and a better understanding or if you are really seeing any incremental cost in there.

Jacques Esculier

No, I think we have to be prudent with a couple of things. First, this kind of minus 2% of registration is already actually in my own view, not overly conservative because if you admit the 28,000 trucks and the 28,000 trucks logic is clearly kind of straight forward because we look historically at the percentage of trucks registered in Europe versus trucks produced and it’s fairly consistent around 45ish percent.

In Q4 2013, the percentage of trucks registered in Europe versus build is 70%. So you kind of drive the math yourself, it’s 25ish percent above the normal percentage which could be normally attributable to this pre-buy effect and that leads you to 28,000 trucks. So, for me it’s not unreasonable. Now you switch these 28,000 trucks to this year, it would have created, left 2013 with a minus 4% of registration versus 2012 which was in line with what we had kind of expected before that pre-buy effect. It’s not illogical given the GDP eroded by 0.4% in Europe last year, so to have minus 4% is not unreasonable. But by transferring these 28,000 trucks to 2014, it represents an additional 12% and we end up at 2%, so net-net it would be kind of assuming that the demand for trucks would up 10% versus 13%, which to me is very healthy. And I don’t think you can go and assume at this point of the year a lot more than that.

Now in that production there is also trucks going to the very eastern part of Europe, and I am talking about Russia. And all of us kind of assume that whatever is going on right now cannot be without an impact on demand the for commercial vehicles and will ultimately degrade any forecast that we had earlier this year on the level of production of western truck moving to east. And that kind of further impacts in my own view the forecast that we came up with. And that’s why overall we kind of ended up with saying it should be minus 5 too flat. So I am sorry, it’s little bit long of a story but that’s also a very complex kind of situation here.

Jeff Hammond - Keybanc Capital

Okay, thanks a lot, Jacques.

Operator

Thank you. Our next question comes from the line of Scott Group of Wolfe Research. Your line is now open.

Scott Group - Wolfe Research

Hey, thanks. Good morning, guys. So I just wanted to follow up on that last point about Europe. How do you think about, not this year but ‘15 and ‘16 and a more kind of normalized run rate of production in Europe once we get through this pre-buy and assuming Europe continues to feel little bit better like we have seen recently?

Jacques Esculier

Well Scott, [whatever it’s worse], when you look at our estimate of production in 2014 versus the peak that Europe reached back in 2008. In western Europe we would end up 26% short of the 2008 level and in Eastern Europe we would end up short more than 40% of what it was actually in 2007 which was the peak. So, for me, I don't think we're going to come back to this level anytime soon. I mean it's going to take quite a while. But what I'm saying is, I think there is room for improvement, that's one. Second, again as I have shared with you before, when you look at the co-relation between GDP growth and the production of trucks, if we maintain a 1% growth level in Europe, inevitably I think we should count on a positive impact on volumes for commercial vehicles.

So, I think there is room to kind of continue to close the gap between now and the peaks we had before in the 2007-2008 kind of timeframe. And then there is this kind of logic of kind of co-relating the movement of our industry to the movement of GDP. Now, it depends what we predict or what you predict in terms of GDP movements.

But if we kind of assume that overall Europe will see some growth and it seems to be kind of agreed upon at this point, because it's also positively influence with what's going on in the U.S. And hopefully, because we're going to end up kind of sorting out things at the European level, I think we could probably see some decent growth in the coming year. But again, it’s obviously very preliminary to make any forecast for ‘15 and ‘16.

Scott Group - Wolfe Research

Okay. That make sense. Thanks for that. And then just on North America, I guess you said you think Class 8 better than 7 to 12. Do have a view on how good Class 8 is, and maybe if you have any commentary around how you think orders continue going forward from here? And then I just have one last follow-up within the North America market after that.

Jacques Esculier

Well, we upgraded the range and then we had unfortunately this news yesterday related to the construction of new housing which is obviously influencing significantly the medium size truck, right? And so we’ll see whether the medium size truck can hold up to our expectations even though construction of new homes is kind of still not really delivering to expectation.

In terms of Class 8, it seems that there is a certain momentum building up right now that is kind of a built up of additional demand for transportation with additional industrial activity which obviously I think starting to address the aging of the fleet, so maybe translating a certain build up in the confidence in the markets in the fleet that the economy is sustainable.

So overall, we could anticipate Class 8 to be in a double-digit growth this year.

Scott Group - Wolfe Research

Okay. Good to hear. And then so just a last follow-up on North America. There is just so much talks from the OEMs about AMTs; and where do you see opportunities for further penetration on AMT for you? And then where maybe do you see some risk as some many other guys are focused on it, with some the OEMs?

Jacques Esculier

Well again I don’t want to sound too presumptuous Scott at this point, but I would anticipate that there is probably more opportunities than risk for AMT for us, for our AMT products in the U.S. I think we have seen obviously Volvo being very efficient at demonstrating and introducing the value of AMT across its trucks making it actually even a standard a year ago. (Inaudible) I think will introduce our AMT on their trucks this year and I think that will offer probably ample opportunities for us to accompany their growth in introducing this and some other things that we can think about, but at this time, I would say for me the market seems to ideal to the value preposition of AMOUNT, the same way Europe has done it quite a few years ago and because there is evidence that AMT can help you in accepting its drivers with much lower experience, which is obviously one of the problem in the U.S. as we all know today, the population of drivers is certainly not growing at the pace of what it should be.

So you have to generate more and more new drivers and AMT is a device that allows new drivers to drive trucks more efficiently more rapidly and then there is also a non-negligible saving on fuel, on fuel consumption. So the value preposition is here I think it’s kind of building momentum and in our perspective it should keep driving growth opportunities, and outperformance opportunities in the coming years.

Scott Group - Wolfe Research

Okay. That’s great color. Thanks guys, appreciate it.

Jacques Esculier

Thanks Scott.

Operator

Thank you. Our next question comes from the line of Jerry Revich of Goldman Sachs. Your line is now open.

Jerry Revich - Goldman Sachs

Hi good afternoon and good morning.

Jason Campbell

Hi Jerry.

Jerry Revich - Goldman Sachs

Can you gentlemen talk about global OEM agreement that you announced at (inaudible) call is that an expansion of an existing relationship and when does that really start to contribute your results? Any additional color there would be helpful.

Jacques Esculier

Yes. I cannot reveal the name because we are not allowed to, but it’s one of the key manufacturers. It’s providing them with breaking system, I would say with quite exclusivity across all the regions of the world. And that’s a manufacturer we are dealing already with that we are dealing with all of them already. So but it’s incremental sales that will start kind of clocking up I would say probably what ‘16, ‘17 and will kind of continue to provide incremental revenues achieved, I think it’s 2021 or sort of something like it. So it’s kind of a long-term business relationship that we are building up here.

Jerry Revich - Goldman Sachs

Okay, thank you. And then on the Transics acquisition can you just talk about the margin profile in the quarter usually when you pose a transaction the initial margin profile was not ultimate, where did you take so I am wondering if you just update that for us and talk about where you see your margins over next couple of quarters in that business?

Jacques Esculier

Jerry we wouldn’t comment on the margins of the business going forward other than what I shared in my commentary earlier that when it comes down to bottom line profitability they have a similar profile of WABCO. In terms of the first part of your question those acquisition related costs which we have disclosed in our reconciliation tables as well as some amortization that comes along with certain intangible intrinsic value when due to purchase accounting for the business. So that’s included in the numbers pro rata for the period that we own them which is roughly half a quarter.

But otherwise other than what I share earlier that there clearly a much higher gross margin business because of waiting across more towards the operating type of expense, otherwise coming down to operating income there is fairly a similar profitability for us.

Jerry Revich - Goldman Sachs

Okay. And then in terms of just adjusting to visible production requiring in the first quarter from the fourth quarter in Europe. Can you just talk about if there was a headwind to your margins at all in the quarter and just so we can calibrate the expectations for the margin ramp. I would assume there was a significant headwind in the quarter but maybe if you could give us some more context to quantify (inaudible)?

Jacques Esculier

Yes. Jerry on that we obviously have a mix of absorption related favorable and unfavorable depending where demand goes. I mean I think it is safe to assume that if a particular location has a significant ramp down, it could impact the absorption of your fixed cost, but overall a lot of our factories are providing products for multiple markets. So I don’t think it was anything out of the ordinary for what we would expect in a quarter given the overall mix of our markets.

Jerry Revich - Goldman Sachs

Okay, thank you very much.

Jacques Esculier

Hey, thanks.

Operator

Thank you. Our next question comes from the line of Larry De Maria of William Blair. Your line is now open.

Jacques Esculier

Good morning, Larry.

Larry De Maria - William Blair

Hi, good morning, guys. Thank you. The first capital allocation, how committed I think are we now to the buyback following your acquisitions [comments]? I think we should not be surprised to see another acquisition this year. And then beyond the current authorization, should we think to be any change to the company’s strategy to return cash to shareholders, which you guys have been doing for a while now, and would you even consider dividend at some point? Thanks.

Jacques Esculier

Yes. Larry, there is nothing new as compared to what we have already shared with you guys. Meaning that depending on whether we find another interesting acquisition or not and depending on the size of that acquisition. We may alter if necessary the buyback program, if it's more sizable acquisition, we may kind of postpone it a little bit. Because, I don't want to borrow money to return money to shareholders through buyback. So meaning that, if we use the cash to acquire, we don't have, we will not borrow cash to return it to shareholders and create net debt for the company.

The second question, I would say is basically in line with what we also have shared so far with you guys. We at the Board level through discussions agreed that in our view, it seems more efficient to return at this point cash through buybacks. Because it's tax wise for shareholders more efficient. And in our view if people want to have access to cash, they can sale some of their shares and pay less taxes than if they would receive dividends. That's the way we see it. We know that there is a portion of the market that may have problems to buy WABCO stock, because they have this requirement of having dividends, but in our own view it doesn't represent a major part of the market.

Larry De Maria - William Blair

Okay, thanks. That’s helpful. And then you touched on this before couple of times Jacques, but as big as (inaudible) Europe, sounds like the visibility on the second half ramp and the profitability increase is really bad volume. Does the Audit Board suggest that what you are getting from OEs that the midpoint is achievable based on where your order books are now, or do we need orders to accelerate in the second and third quarters to kind of hit the step up in numbers or in other words how comfortable are you that the orders are going to be there or do we already have a lot of the orders in place?

Jacques Esculier

No we’re not comfortable with anything at this point Larry, because the order book is not yet capable of faithfully representing what will happen in Q3, Q4. Actually the order book is still moving up and down for Q2 at this point. So what I would say is the best guess that we have and we are kind of for the basis now that we I would say are the most comfortable with is what we shared with you which would lead us to this kind of mid range type of performance as compared to guidance.

I mean whatever -- the second half, there is nothing unreasonable at this point, there is nothing kind of overly stretched, but I do not think there is much overly conservative either in our assumption, this is what we believe is to be the most probable kind of scenario with [current] information we have. It’s not that we’re expecting a major, major blow up in production in the second half, not at all, but we certainly expect a ramp up of H2 versus H1 only because H1 was affected by this [pre-buy]. The only change right now that we have seen is again lowering our expectation of Q2 as compared to what it was when we entered the year, because when we entered the year, we thought Q1 would mostly absorb the pre-buy. It seems that in Q1, we end up Q1 with some inventory at some truck manufacturers and that will obviously penalize the production level of Q2.

Larry De Maria - William Blair

Got it. Thanks very much and good luck this year.

Jacques Esculier

Okay. Thank you [Larry].

Operator

Thank you. Our next question comes from the line of Nicole DeBlase of Morgan Stanley. Your line is now open.

Nicole DeBlase - Morgan Stanley

Thanks yes, good morning guys.

Jacques Esculier

Hi Nicole.

Nicole DeBlase - Morgan Stanley

Most of my questions have been answered, but may be just on kind of the software side of the Transics acquisition, if you guys could talk about what steps have been taken so far in the integration and how employee retention has been so far?

Jacques Esculier

We haven’t seen any movement of employees. We have put some incentive for key people to obviously stay, normally stay actually, because it’s beyond just hang as part of the company is just keeping their entrepreneurial mindset because the business model and the attitude of the people has to stay different from what it is in the rest of WABCO not saying that we don’t want to -- we know you are at WABCO, but obviously this kind of business demands, a very, very focus on entrepreneurial mindset. And we have put kind of incentive programs around these key people to keep driving the team in that environment and mindset.

So from that perspective certainly know negative movement to the contrary. In terms of integration, again we are certainly proceeding. We have a very kind of clean structured plan, but this plan is also kind of carefully protecting the integrity of that entrepreneurial environment that we don’t want to disturb. So we have to connect them to our key corporate processes and audits and what not. But we want to be very careful at preserving what has driven this company to where it is and actually to a certain extent learn from that too because we can always keep kind of raising the level of entrepreneurial attitude at WABCO.

But as I said upfront in my introduction, I said we are more and more enthusiastic about having this team join our WABCO team.

Nicole DeBlase - Morgan Stanley

Okay great, thank you.

Jacques Esculier

Thanks.

Operator

Thank you. And our next question comes from the line of David Leiker of Robert Baird. Your line is now open.

Joe Vruwink - Robert Baird

Hi, good morning. This is Joe Vruwink on line for David.

Jacques Esculier

Good morning Joe.

Joe Vruwink - Robert Baird

Just revisiting the new business number from last week, how does the 600 million or so in new awards over the last four quarters compare to internal expectations? Because if I just take that number and think about the absolute dollars you will need to sustain an 8% to 10% above market growth rate, it would seems 600 million gets you a meaningful ways there and that’s just on four quarters worth of bookings?

Jacques Esculier

Yes, but again David remember that every year we announce that the wins, the new business for the next five years, right, and last year it was $540 million and the year before whatever 580 or whatever it was. So it’s each year is kind of benefiting a one fifth average of what you announced the year before. So, the years before meaning that overall, you can expect a year or two benefit kind of around $500 million, $600 million. Also this is new business but there are business that we lose or that we change or whatever, so that’s why its fuel to the tank that I said but you will have to kind of net-net of every other thing. For me that’s incredible kind of fuel that is well identified to feed every year this test between now and the next five years in terms of driving out performance.

Joe Vruwink - Robert Baird

Okay. And then the fact that the mix of the bookings skewed more towards your developed markets so U.S., EU, where in years past, it’s really been the Asian and emerging markets that have been a bigger contributor. Is that just a function of Europe getting a little stronger or is that kind of a purposeful shift in direction just given some of the volatility you’ve talked about in Brazil and China that might be on the horizon?

Jacques Esculier

Well specifically this year, there were a couple of things. We have also actually won a business or share of the business for braking system at another European manufacturer which is new to us and which again obviously contributes to our performance in Europe. And that’s why -- it depends on the profile of what you win. Last year we had 45%, this year it’s 40% outside of Europe of western world and emerging markets. For me it’s not kind of a trend that can be very well explained. It happens that we had couple of business wins that we’re heavily kind of anchored into Europe that has kind of moved the needle a little bit further down to 40% versus 45% a year ago. But again, I would not kind of read it at this point as a new trend.

Joe Vruwink - Robert Baird

Okay. And then my last one. Just in thinking about the global air disc brake contract, does an award like that accelerate the need to localize production of that product? And ultimately, if you're localizing your disc brakes, so let's say you do that here in the states, I would imagine your cost basis is lower, which means you can offer a price that drives payback period and ultimately increases penetration. Is that kind of the several year timeframe for that product?

Jacques Esculier

Yes, for air disc brakes, I think you are referring to the U.S. because -- but anyway if it it's in the U.S. Joe, we are planning to and again that's not new news, we have shared that we are planning to establish or broadening the manufacturing platform in the U.S. to address some products including air disc brakes because we certainly believe that by localizing air disc brakes, it wouldn't favorably impact its cost structure.

We already source major components from Americas, but the assembly is not yet done in Americas, because it demands quite a bit of investment. And we are waiting to kind of reach a conviction of a certain level of volume to justify the development in assembly capability over there. We will kind of move in that direction now and that will allow us to be more competitive and obviously kind of go through the virtual cycle of less cost, less price more volume kind of thing.

Joe Vruwink - Robert Baird

Okay, great. Thank you.

Jacques Esculier

Okay. Thanks a lot.

Operator

Thank you. And I am showing no further questions at this time.

Jacques Esculier

Okay, very good. Well, thank you all and wish you a next great quarter and we’ll take to you at the end of July. Bye, bye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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