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TRW Automotive Holdings Corp. (NYSE:TRW)

Q1 2014 Earnings Conference Call

April 29, 2014 08:30 AM ET

Executives

John Plant - President & CEO

Joe Cantie - EVP & CFO

Mark Oswald - Director of Investor Relations

Analysts

Ravi Shanker - Morgan Stanley

Rod Lache - Deutsche Bank

Brett Hoselton - KeyBanc Capital Markets

Ryan Brinkman - JP Morgan Chase & Co.

Richard Hilgert - Morningstar Inc.

Jacob Hughes- RBC Capital Markets

John Murphy - Bank of America/Merrill Lynch

Operator

Good morning and welcome to the TRW Conference Call. All lines have been placed on a listen-only mode. And as a reminder, this conference call is being recorded. Presentation materials for today’s call were posted to the Company’s website this morning at www.TRW.com/results. Please download the material now if you have not already done so. After the speakers’ remarks there will be a question-and-answer period. Due to the limitation on time, the Company request that the participants limit follow-up questions to one per caller. (Operator instructions.)

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

Mark Oswald

Thank you and good morning. I’d like to welcome everyone to our First Quarter 4 2014 Financial Results Conference Call. This morning I’m joined by John Plant, our Chairman and Chief Executive Officer; and Joe Cantie, our Chief Financial Officer.

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

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

The Risk Factors section of our 2013 Form 10(k) contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2013 10(k) and other SEC filings by visiting our website at TRW.com or through the SEC’s website at SEC.gov. On a related matter, we expect to file our first quarter 10(q) within the next day or so. Once filed, the 10(q) can also be accessed through either Web site.

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

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

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

John Plant

Thank you, Mark, and good morning everyone. As you can see from the results posted this morning, TRW has achieved a solid start to 2014. During the quarter, sales were $4.4 billion, which is 5.4% higher compared to the prior year quarter and marked the highest level achieved for any first quarter. A good result considering the negative year-on-year impact associated with exiting certain of our brake and module business in North America.

Adjusting for the terminated businesses, sales were up about 9% year-on-year. Operating profit and margin before special items was $328 million and 7.4% respectively. Net income before special items was $215 million and earnings per share were $1.81, an increase of 20% compared to last year’s first quarter earnings of $1.51. These were in line with Company expectations and normal seasonality operations; our operating cash flow for the quarter was a use of $183 million.

And finally, demonstrating TRW’s ongoing commitment to enhancing shareholder value over time, the Company entered into a $400 million accelerated share repurchase agreement and repurchased approximately 3.9 million shares of stock during the quarter. Overall, the first quarter result demonstrates TRW’s strong market position and do provide a solid base for the Company to achieve its goals in 2014.

I will expand on our outlook for the remainder of the year in just a few minutes. First a few additional comments related to the first quarter. In North America, vehicle production remained strong and tracked in line with the expectations that the industry observers established at the beginning of the quarter. Overall, North American production was up 6% compared with the first quarter of 2013.

On a sequential basis compared to the fourth quarter of last year, production was also up about 6%. Within the quarter the vehicle build, the Detroit Three manufacturers kept pace with the regions overall growth. However, we expect as the year progresses, a larger proportion of the regions growth will be provided by the non-Detroit Three manufacturers.

Although harsh winter weather contributed to a drop in the annual selling rates early in the quarter, sequentially stronger sales as the quarter progressed has suggested, strong momentum heading into the spring selling season. In fact, the 16.3 million sales rate achieved in March marked the strongest rate since February of 2007.

In Europe, first quarter production provided further evidence that the region is now stabilizing and beginning to head in the right direction. For the quarter, total European vehicle production at 5.1 million units was up about 7% compared with the last year’s first quarter. Western European production expanded by 10% year-on-year. We’re encouraged by the increase in vehicle production and registrations during the quarter and are hopeful that the positive trajectory continues.

In China, vehicle sales and production continued to trend higher. Vehicle sales in that market or TRW sales in that market were up 16% year-on-year in Q1. This was well ahead of vehicle build and accounting in fact for 16% of TRW’s total sales.

Moving on to the first quarter business developments. Product launches during the quarter continued to strengthen TRW’s diversity and leadership in intelligent safety solutions. A few examples include TRW’s driver, passenger and side impact airbags; electric power steering; seat belts and steering wheels on the Volkswagen Polo, in Europe. Chrysler launched its 200 vehicle in North America with TRW’s forward looking camera; seat belts and foundation brakes. And General Motors launched its new Tahoe with TRW’s forward looking camera; seat belts and slip control.

Products launched during the first quarter were delivered with world-class quality as a result of our ongoing quality programs. For the quarter, TRW averaged just over two parts per million defects across all products and customers worldwide.

In fact, TRW’s world-class quality was recently validated by Quality Magazine as TRW earns the number one quality ranking among North American companies. In fact our braking facility in Fowlerville, Michigan was being named as 2014 plant of the year in North America.

Demonstrating TRW’s commitment to developing solutions and enhancing existing technologies to meet the growing demand for safety systems, the company recently announced the start of production for its innovative Roof Airbag Technology and second generation Active Control Retractor seat belt system. The new bag and roof technology being launched on the Citroen C4 and it replaces passenger airbags typically mounted in the instrument panel and can allow for improved interior design aesthetics, ergonomics and functionality while saving space in the instrument panel.

Upon deployments, the bag unfolds across the windshield in front of the seat occupant, helping to ensure that the necessary restrain to front-seat passengers of varying shapes and sizes. The Active Control Retractor seat belt system or ACR2 recently started production on the award-winning 2014 Cadillac CTS, in North America. This advanced seat belt technology combines active and passive approaches to offer enhanced safety, comfort, and convenience to vehicle occupants.

The ACR2 is designed to use braking and stability control sensor information to recognize critical situations before a potential accident, helping to secure the occupant by reducing seat belt slack. Additionally, the ACR2 provides dynamic driving support which has been developed to keep the driver in a more stable position during the seat during highly dynamic situations and during rapid deceleration. TRW is excited about the prospects for 2014 and beyond as the company continues to design, develop and deliver advanced safety globally.

Before I turn the call over to Joe, let me comment on our expectations for the second quarter and for the remainder of 2014. Overall, vehicle production volumes are expected to remain fairly stable over the next few quarters. In North America, supported by strong industry fundamental such as available credit, new product introductions, the second quarter production is estimated at 4.4 million units, up approximately 2% compared to last year. Sequentially compared to Q1, production is expected to be up about 1,000 units.

For the full-year, we continue to expect production to total 16.8 million units, up about 4% compared with 2013. In Europe, we’re encouraged by the increase in vehicle registrations that occurred in the regions markets in Q1. And this continues to signal the industry is heading in the right direction. During the second quarter, vehicle production in Western Europe is projected to be about 3.4 million units, essentially flat compared with last year. Total European production is forecasted at about 5.1 million units.

For the full-year, our forecast of production increased slightly to 19.6 million units for total Europe, up a modest 1% compared with 2013. Within this estimate, Western European production is expected to be about 12.8 million units. Beyond North America and Europe we expect full-year vehicle production levels to increase in China, although the pace of growth will likely moderate compared to last year.

In Brazil, negative economic conditions are placing downward pressure on vehicle demand and production in that market. As a result, vehicle production is now expected to fall compared to last year. As you’d expect we will continue to monitor the global environment and make adjustments to our operations as necessary.

Based on the forecasted production estimates, currency assumptions and our first quarter performance, we now expect sales to be in the range of $17.4 billion to $17.7 billion in 2014, a slight increase from our previous guidance reflecting essentially the first quarter’s improvement in sales. For the second quarter, sales are expected to be approximately $4.5 billion.

We still expect capital expenditure for the year to be in the range of $730 million to $750 million, as we build out our infrastructure in strategic, higher growth areas such as China and in support of continued expansion of newer technologies. Consistent with prior years, TRW expects to continue its trend of cash generation in 2014.

With regard to restructuring, we now expect 2014 restructuring expense to be about $55 million, which is slightly above our previous guidance as we continue to improve the competitiveness of our business in Europe.

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

Joe Cantie

Thank you, john and good morning to everyone. Hopefully you had a chance to review our first quarter results that were posted earlier this morning. You see that we carried the positive momentum of last year’s financial results into the first quarter, which demonstrates the positive impact of increasing demand for TRW’s technologies.

We had a very good quarter on many fronts. A quick recap of the key highlights for the quarter just completed include sales of $4.4 billion, a best ever first quarter sales level and an increase of 5% compared with same period last year. We had an operating profit of $328 million and a margin of 7.4% after excluding restructuring charges, an increase from the prior year level of 6.9%. And earnings per share were $1.68 on a GAAP basis and $1.81 after excluding the special items.

And finally with regard to our capital structure, the Company continues to repurchase its common stock returning $400 million to its shareholders during the quarter through an accelerated share repurchase agreement. In addition, $469 million of face value bond debt matured during the quarter and was paid off with a combination of cash on hand and short-term debt facilities.

I will expand on our capital structure in a few minutes and add a few comments regarding the outlook. But first, let me expand on our first quarter results in a bit more detail. For the quarter, we reported sales of $4.4 billion, an increase of $229 million compared to the same period a year-ago. Currency translation benefited sales by approximately $48 million during the quarter as the Euro-to-Dollar exchange rate averaged 1.37 this quarter compared with 1.32 last year.

Excluding the effects of currency and the negative impact of about $130 million in lost sales related to the exit of certain of our brake and module businesses in North America, sales increased about 7% compared with the previous year with increases in each of our major geographic markets.

One last point on sales and for modeling purposes, in our first quarter we had about 105 million of sales associated with the wind down of the brake component and assembly businesses previously disclosed that will not recur in sequential quarters or next year.

Moving on for the quarter, we had an operating profit of $308 million compared to $253 million in the 2013 period. Included in the 2014 and 2013 first quarter operating profits were restructuring and asset impairment charges of $20 million and $37 million respectively.

Excluding these charges from both periods, operating income was $328 million in the first quarter of this year compared to $290 million last year. The year-on-year net increase in profit of $38 million was primarily driven by the associated profit from the higher level of sales. Within that net increase, there were approximately $10 million in planned cost increases to support future growth and a negative profit impact of currency movements between the periods.

Moving down the income statement, interest expense totaled $31 million, about equal with last year’s level of $30 million. Finally, tax expense was $78 million in the current quarter compared with $62 million last year. Both periods included tax benefits relating to special items totaling $4 million and $10 million respectively. Excluding these special items, tax expense in the first quarter of 2014 totaled $82 million compared to $72 million last year.

For the quarter our diluted share count averaged 119.8 million shares, which is 7.1 million lower than last year reflecting our share repurchase programs. At the bottom line, we posted GAAP net earnings of $1.68 per diluted share compared with $1.29 in the prior year.

Excluding the special items I’ve discussed from both periods, the earnings.84 per share were $1.81 this year, up 20% compared with last year’s first quarter of $1.51, which highlights the strong quarter that we had and the impact of our repurchase programs. In terms of EBITDA, for the quarter we had $437 million excluding special items compared with $396 million in the prior year measured on the same basis.

Let me shift now to our cash flows and capital structure. First on cash flow. For the quarter, operating cash flow was a use of $183 million which is consistent with the prior year level of $178 million. Capital expenditures for the current quarter were $105 million compared with $104 million last year.

Free cash flow, which I’m defining as operating cash flow less capital expenditures, was a negative $288 million this quarter, again very consistent with the prior year level of $282 million. This cash flow result is consistent with normal seasonality and our internal expectations. Despite the cash outflow in the first quarter, we anticipate that 2014 will be another cash generating year despite our continued investments for the benefit of future years.

At the end of the first quarter, our total gross debt was $1,886 million while net debt outstanding was $1,075 million. The $228 million decrease in total gross debt compared with year-end 2013, primarily reflects the $469 million of face value bond debt that matured during the quarter partially offset by an increase in short-term lower cost credit facilities. Net debt increased from the position at the end of the year essentially by the $400 million of cash used to repurchase shares and the $288 million of cash outflow during the quarter.

As far as an update on our share repurchase programs, we entered into the $400 accelerated repurchase agreement in Q1 and initially retired 3.9 million shares. As previously disclosed, the agreement is expected to be completed by the end of the third quarter this year. At that time, the total number of shares to be ultimately delivered and therefore the average price paid for share will be determined. Despite the pace of activity during the quarter, the Company has not changed its guidance for the full-year and continues to target repurchases in the $500 million range during 2014.

Switching subjects now to the second quarter and the remainder of 2014. As John indicated earlier, TRW’s full-year 2014 production forecasts are for 16.8 million units in North America, 19.6 million units in Europe, and continued growth China.

Based on these production assumptions and our first quarter performance, full-year 2014 sales are now forecasted in the range of $17.4 billion to $17.7 billion, slightly higher compared to our previous guidance provided in February. At this time, we’re expecting second quarter sales of about $4.5 billion; about equal to last year’s results which will be a great outcome considering that the prior year included approximately $250 million of sales associated with the exited brake components and module businesses.

Sequentially compared to the quarter just completed, we expect our second quarter operating margin to improve slightly, but not reach the 8.6% level achieved last year due to product mix, incremental investment and the negative impact of the exited brake components and assembly business. We still expect capital spending to be in the range of $730 million to $750 million in 2014 as we continue to execute our investment in growth areas.

Ancillary costs associated with our growth plans, namely engineering, development and infrastructure costs are tracking as planned at about $45 million for the full-year. I will also remind you that as a result of our increased CapEx over the previous few years, depreciation expense is also tracking about $35 million higher for the year.

Although we’re committed to ensuring that the appropriate capital, engineering, and infrastructure support spends take place to build out our preparedness for future business, rest assured we’re equally focused on protecting the Company’s profitability.

Moving on, although it’s difficult to predict, we continue to expect commodity prices will remain neutral this year. We’ll continue to provide you with updates on this assumption as we report our future quarters.

Restructuring expense for the full-year which now includes a $12 million asset impairment charge taken in the first quarter associated with the exit of the brake component and assembly business will likely come in slightly higher than our original guidance, lets call it $55 million for the year.

Interest expense continues to be forecasted at about $120 million for the full-year perhaps slightly less based on the current level of gross debt we’re carrying. And finally, given our expected results by geographic location, you should continue to assume a full-year 2014 effective tax rate of between 28% and 30% for modeling purposes.

In closing, our first quarter results provide a firm foundation to build on as we progress through 2014 year. Our team is focused and realizes that a lot of hard work lies ahead to ensure the Company achieves its 2014 objectives.

With that, we’ll now move to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Ladies and gentlemen, we’ll now begin the question-and-answer portion of today’s call. (Operator Instructions) And your first question comes from the line of Ravi Shanker with Morgan Stanley.

Ravi Shanker - Morgan Stanley

Thanks. Good morning, everyone.

Joe Cantie

Good morning.

Ravi Shanker - Morgan Stanley

Joe, if I could just follow-up on your comments on the 2Q margins. Can you give us a little more color on what you mean by a product mix in the second quarter, because it does seem like you’re getting out of some of the module business which should be margin accretive? And also I believe the brakes contract was lower than 8.5% margin business, so that should also be accretive to your margin to (indiscernible)?

Joe Cantie

So let me start with the brake component and module business. That was a healthy margin business for us. So it was above the Company average as we’ve discussed before at the EBIT level. So that goes away and we wind up having a higher amount of sales, a lot of it driven by some of our expansion plans primarily in places like China, when you’re ramping up business, it tends to come with a lower profitability in the early parts of the ramp versus the later. So that’s the -- that's what I was referring to in broad strokes regarding the product mix.

Ravi Shanker - Morgan Stanley

So you’re saying higher backlog versus higher core business?

Joe Cantie

I guess, yes.

Ravi Shanker - Morgan Stanley

Okay. I can probably follow-up offline for some more detail on that. Also we heard some other suppliers talk about potential movement in the M&A environment in the last few months and how it appears that some people appeared to be talking now and deals maybe getting done. Are you seeing something similar and are you guys potentially looking to move on the M&A side?

John Plant

I’m not aware of any discussions regarding on Ravi. So it’s difficult for me to provide any illumination to your comment, specifically on other deals regarding TRW, we have nothing at this point to comment on. I think in previous calls, although we said that there are some things that we’d consider would be in -- on our radar screen, should they ever become available. There is nothing to decide on that front at this point of time. And I guess that there will be always things we’d consider divesting if that was appropriate, but at this point you shouldn’t assume any change for TRW.

Ravi Shanker - Morgan Stanley

Understood. And just lastly John, just following up on your comments on Brazil, clearly it’s a difficult environment and the number of suppliers and OEMs are talking about that as well. Are you thinking of taking any concrete actions either restructuring or anything else to right size your footprint or something that will improve the kind of the profitability of the operations there?

John Plant

I mean the short answer would be to be no. We have not increased our footprint in Brazil over recent years. We have taken steps to increase the investment in some of the new product areas. For example, our investments to introduce airbag technology to Brazil in -- due to legislation plus some investments in electronics and antilock braking. And also we’ve had the opportunity of increasing our steering business through electric power steering, so we’ve actually had the opportunity of substantial content growth in Brazil, which enabled us to weather a lot of the storm in 2013, and we were -- I’d say profitable. Maybe we would like it to be more profitable than it was and we are hoping for a better result in 2014 as soon as these investments reach a greater position in maturity. But it's specific as to restructuring in terms of closing plants. No, we will do our normal thrifting of, I would say for productivity because we need productivity in South America to improve the overall competitiveness of the region, but that is -- that’s just our normal way of doing business and it doesn’t evolve any specific plant closures or restructuring. So, nothing to be announced in TRW on that front, that I can see at this point in time.

Ravi Shanker - Morgan Stanley

Great. Thank you.

John Plant

Thank you.

Operator

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

Rod Lache - Deutsche Bank

Good morning everybody.

John Plant

Hi, Rod.

Rod Lache - Deutsche Bank

You guys have permission to butcher my name as well.

John Plant

Yes.

Joe Cantie

No, I don’t want to do that. I was thinking about -- I am thinking about Nick the guy you see on the TV or MTV, but, I mean Rod we -- that's right. But I am good with just Rod Lache, that’s good.

Rod Lache - Deutsche Bank

Okay. I have a question for Mr. Cantie, about the -- just the earnings -- just one detail; was there a tailwind year-over-year from legal expense and pension in the quarter?

Joe Cantie

No, when you look at the pension, when you see our queue that will be filed probably later today. There’s a page drawing it out. We had a $2 million difference between pension -- between the two quarters, so $2 million is the material on the pension side. On the legal side, no there’s no material difference between the two quarters.

Rod Lache - Deutsche Bank

Okay. So, the way we should be thinking about the conversion on a year-over-year basis was yet EBIT up $38 million, but if you add back maybe 7.5% margin on the business roll off, you’d really be closer to $48 million on the $311 million increase in core, so around 15% something like that. And lower than normal because of the higher engineering?

Joe Cantie

That’s right. Maybe the last thing I'll throw in there is a bit of a mix change which will become a little bit more pronounced in the second quarter as we’re ramping up some of the products in the emerging markets.

Rod Lache - Deutsche Bank

Okay. And just kind of a bigger picture question, many of the automakers now obviously are very focused on warranty, and we’re just wondering about how that may or may not affect you guys in just a sub-par community in general. Is there a (indiscernible) your ability to extract [ph] [VAVE] savings just given (indiscernible) to make engineering changes or is there any kind of pass along that’s occurring right now to suppliers from these expenses?

Joe Cantie

Regarding [ph] [VAVE], Rod we’ve always had to have a very -- I’ll say long sight (indiscernible) or any change because of the safety critical nature of our product. In fact it's one of the reasons that I’ve used in many discussions with our customers over the years. When they’ve introduced some new [ph] [VAVE] program they will -- in our case, we’re not going to be in immediate response to that because of the very long testing and homologation times required to achieve the level of quality that we need to achieve and for the delivery of our products. We have been highly focused on quality. We continue to do that. You saw again my reference to it in my notes that I was talking to, we’re achieving between two and three PPM on a zero mile or zero kilometer basis. Of course that is as delivered to this (indiscernible) your question about warranty. But when we examine ourselves in terms of the extended warranty for our products compared to industry averages then we do compare very favorably operating at less than half the industry average because of the tremendous focus that we put on warranty and robustness of product. Now didn’t we saw that we’re not without our moment’s that’s certain, I’ll call it spikes because that’s the feature of the industry, I mean things do occur but we manage them and are very planful over changes and on product introduction. So, at this point in time, I mean I can’t say that there’s any noticeable change from our customer base regarding their sensitivity. I assume that they will be. But I am hopeful that the quality disciplines that we have in place continue to service well in the future.

Rod Lache - Deutsche Bank

Right. Thank you.

Joe Cantie

Thank you.

Operator

And our next question comes from the line of Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc Capital Markets

Good morning.

Joe Cantie

Good morning.

John Plant

Hi, Brett.

Brett Hoselton - KeyBanc Capital Markets

Just first one, actually a question about revenue growth I think over the past couple of years it was kind of in the expectation that your revenue growth -- new business revenue growth might accelerate over and above production due to some new business launches particularly in China. I am kind of wondering where we’re at in that process at this point in time?

John Plant

Well specifically regarding China when I look at vehicle build and compare it to our increase in sales then last year I think in aggregate our content growth actually exceeded the increase in vehicle production in 2013, and I am going to say from memory the increase in vehicle production last year was around about 11% to 12%. So, that was a very significant, I’ll say level of content. Now when I say content I do mean in the wider sense it can be both the average transaction values of vehicles, it can be the degree of shipment of our parts, the relative sophistication of the technologies as fitted. So, it's a very broad (indiscernible) to fit the increase in sales that went above the vehicle build. In 2014 in the first quarter again we’re above vehicle build, and in this particular case I think we were about 5% or 6% above vehicle build in the course, assuming of that nature possibly that might have been had some adverse currency effect in that because the RMB did show some weakness during the course of the quarter against the U.S. Dollar. But I couldn’t categorize that for you. We have to do some calculation or maybe Joe could do it and if you need amplification we could do that in a follow up call. But the essence of it is we're continuing to see strength in our business in China. As you know we built out a significant increase in footprints, well the year before last and I think on the last conference call, actually earlier this year I commented that to the nine plants we’re now in a profitable state. But there was one that was still yet to achieve that. Things continue to be on plan and we tried to make those plants big enough that we could actually just continue facilitization of plant and machinery inside those so that it would prove the overall I’d say pull through in the next few years. In actual facts the content growth has continued to be very strong for us and that actually is most likely going to require us to build an additional two plants now something had more than we expected. Of course those plants won't come on stream for -- until 2015, 2016. But the important message in that, that the content growth which is the defining I’ll say mark for us in that market continues to be very strong and that we’re already seeing the need to actually have further expansion and therefore you can take from that the -- that major expansion that we have undertaken is going well, and the build out is continued and is requiring us already to consider additional footprint which was quicker than I expected, all be it of a much more modest nature. So we should not be having the significant drag that we had when we obviously -- two compared to nine is of a different order of magnitude.

Brett Hoselton - KeyBanc Capital Markets

Thank you very much. And on the capital deployment front, what constrains you from maybe doing more on the capital deployment front obviously your balance sheet is very solid and you’re basically deploying a little bit more than your free cash flow. And it seems as though you’re potentially could do some more. So what's constraining you from doing more?

John Plant

We said we have a very measured approach to our capital deployment. We would consider obviously the need to do business and we have told you the significant capital investments in the business. We’ve also commented that we also wanted to see continued and if anything accelerating the effacement of our legacy liabilities of pension. And we’re hopeful that we will be able to take additional significant steps in the balance of 2014, and that may require some cash to enable that to be done. And we think that’s an important strategic third improvement of our balance sheet even though the aggregates of our pension plans is now in a surface condition and I think it's good for us to reduce the gross liability and therefore volatility within the balance sheet. I would also note that within that we’ve also taken the steps to strengthen, and I’ll say make the asset base far more secure. And then beyond that we’d say we would also take action and continue to deliver on the let’s call them -- basically shareholder friendly actions. We have already commented on the cadence of that. We have already increased the size of the buyback by a further billion. And at this point we’re just marching with that program. And as and when we would have something to update you with, as we may, I mean there’s no decision’s regarding that, then obviously we will be making appropriate announcements. At this point in time, we think that the cadence of the program is in the right zone. You can see we took a major step in the first quarter of $400 million which is 80% of the authorization or well it will be the pace of the, after the announced deployment of authorization in 2014, and I have no doubt we will be updating you later in the year regarding the pace of that and the remainder of the authorization that we have and if we were to do anything else.

Brett Hoselton - KeyBanc Capital Markets

Thank you very much, John.

Joe Cantie

Brett, John said everything very well. It basically is all things within a balance, and the only other thing I would add to that is we do have a commitment to maintaining our investment grade status with the rating agencies. That’s the only other factor that I’d throw in there as well.

Operator

And our next question comes from the line of Ryan Brinkman with JP Morgan.

John Plant

Good morning, Ryan.

Ryan Brinkman - JP Morgan Chase & Co.

Suppliers have alluded to 2Q industry volumes in Europe potentially tracking better than IHS. IHS I think, see this going from up 7% in 1Q to minus 1% in 2Q, there’s a year-over-year compare issue there but it does seem a bit of a deceleration. I am curious if there’s anything that you’ve seen on the ground over there related to customer orders or anything else that could maybe cause us to track better?

Joe Cantie

We have no update to IHS at this point in time, Ryan. We I think expectable tracking line with that, and clearly it's still fairly early in the quarter. I mean I wouldn’t expect significant change if there was any. And we are hopeful that the selling rate continues at the pace they’ve shown over the last four months, and if that selling rate were to be continued then that should board well for us, I’ll say later in the year compared to currency I think it's actually -- the current IHS forecast is showing some deceleration in the third quarter.

Ryan Brinkman - JP Morgan Chase & Co.

Okay, great. And can you remind us of some of your exposures to some of the hot spots out there right now, like Venezuela and Russia. Was there any impact in the quarter from operations in those countries that might have impacted the comparability?

Joe Cantie

We have nothing in Venezuela, so that was very simple to cover. Regarding Russia, we’ve always been very cautious regarding investments in Russia. We have made several studies but never actually taken the plunge on doing that, and that I’ll say conservativeness or reluctance has served just well over really over more than 10 years now, because we see tremendous volatility within that -- it was originally I’d say a petrocurrency zone and now obviously with the tensions that are there again that had served us well and we have noted that certain of our customers have actually reduced significantly, even half production in Russia and that obviously would have been a major blow to us had we had the invested assets in the country. We do supply vehicle manufacturers in Russia but those are all on an export basis, and therefore we feel the down raft of that, but it's farer less than what would have if we had invested assets or traditional assets in the territory.

Ryan Brinkman - JP Morgan Chase & Co.

That’s excellent. Very, very fortuitous. Thanks for all the color.

Joe Cantie

Thank you.

Operator

And our next question comes from the line of Richard Hilgert with Morningstar.

Richard Hilgert - Morningstar Inc.

Thanks. Good morning everyone.

John Plant

Good morning.

Richard Hilgert - Morningstar Inc.

I was curious if you could give us a little color on the active safety market with respect to where you’re at right now in terms of revenue, and we’ve seen various projections out there for the market going from anywhere from $2 billion to $3 billion in 2016 and then upwards of more than $10 billion by 2020. I wonder if you could give us a little bit of color on where you’re at with active safety and where you think the market is going.

John Plant

First of all the definition of active safety is really critical to answering the question because right now there are so many different definitions of what that really is, that if you’re not careful the comparisons can be rendered -- I'll say meaningless or certainly misleading. So, first of all when we talk about active safety we tend to talk about the confluence of all of the braking, steering and I’d say forward looking control systems, whether it's radar, camera or then even the crash sensors that’s part of that wider market. But I think what you’re really driving at in that question is more of the forward looking sensing systems regarding as a forward looking camera, forward looking radar and also maybe sideways looking I’d say sensors as well all to do with the vehicle control maybe leading to automatic emergency braking which also enhances the brake system or collusion -- warning collusion mitigation or maybe even collusion avoidance which also then plays back into electric steering area. So, I think I’ll just conserve -- I’ll say constrain my comments to the, what we call the driver assist section or part of the wider active safety market. Within that essentially for TRW it's the forward looking camera and forward looking radar. And in my notes if you saw we actually commented on two particular vehicle manufacturers today, one was Chrysler on their new 200 vehicle, for your information that’s not the first folding camera with Chrysler, we’re currently in a -- I think a sole supplier situation on all the cameras on their vehicles. And I also commented on the one on the new K2xx which is basically the Chevy Tahoe and Silverado and Cadillac Escalade et cetera where according to the fitment rates again we’re in that I’ll say sole supplier situation on that platform, or it’ll not be the vehicle manufacturer. We have a burgeoning business. I mean first of all our revenues which were modest in 2013 and significantly below $100 million are increasing rapidly in ’14 and ’15. And I am on record of saying that by 2018 it was going to be around about $800 million +/- $200 for us. And that fund with the range essentially is down to the lack of clarity yet regarding the final application rates, the need for vehicle manufacturers to achieve certain of these sensors to achieve the end cap ratings particularly for five star rating and the degree of buffer they want in terms of achieving that end cap rating or five star rating, but currently the market looks to be stronger and more opportunity than we have seen. So every time we really take an assessment of it, it seems to have greater opportunity for us rather than lesser opportunity. And it's particularly one of the fundamental building blocks towards the opportunity which exist for the autonomous vehicle should that ever appear on our roads. And so the choice we’re facing this year is probably to increase the expenditure in engineering in driver assist in 2014 and maybe we will -- I think we’re going to increase our expenditures there because we see the opportunity for further revenue growth and it's a particularly exciting and a great value proposition for us. And so, it's more likely than that not and we anticipate getting that investment up starting in Q2.

Richard Hilgert - Morningstar Inc.

Okay. And just one follow-on, does the market for the active safety side of the equipment get divided up among the various players in a similar fashion as some of the passive safety market has been divided up among the different players or is there an opportunity here for TRW to penetrate the market more so on the active safety side than your number two position in the passive safety technologies overall.

John Plant

It's very difficult to know how the markets will finally shape its self by 2018. I expect that all of the major players will be present in the market, and I mean I could name them for you, it will be helpful but basically you should anticipate I think maybe three to five significant players in the market all with different capabilities regarding radar, camera, frontal side and then again as I said before we need to be very careful over the definition requirements and in particular the ability to backward integrate those and fuse them, their systems there are not going to be other active safety subsystems.

Richard Hilgert - Morningstar Inc.

Good. Thank you very much for taking my questions this morning.

John Plant

Thank you.

Joe Cantie

Thank you.

Operator

And our next question comes from the line of Joseph Spak with RBC Capital.

Jacob Hughes- RBC Capital Markets

Hi, good morning. This is actually Jacob Hughes on for Joe.

John Plant

Okay.

Jacob Hughes- RBC Capital Markets

I just has a quick question, on the sales walk you guys provided $130 million with a headwind from terminated businesses and I understand there’s another $105 million from the wind downs and maybe $235 million is that a good rate for the next three quarters or do you think that’s a bit below of the billion dollars you guys talked about?

John Plant

Yes, so it's varies by quarter, so in my comments in indicated that in the second quarter it's $250 million, so there’s a $250 million headwind if you will that will face us in the second quarter an it's -- so I would say the $250 million is a better one to use each quarter.

Jacob Hughes- RBC Capital Markets

Okay. And just a follow-on on that, was there any drag in the quarter from the wind down of these two businesses?

John Plant

No, I don’t think so in the quarter because obviously we still had $105 million of that we’re profitable on. There will be a little bit of what I call drag noise as we go through the next two quarters which is very understandable as we close the business, stop shipping parts. We do need to deal with exiting leases and some moving equipment and all that kind of good stuff, so they’ll all come really in the second and third quarters.

Jacob Hughes- RBC Capital Markets

Okay. Thank you.

John Plant

Thank you.

Operator

And our next question comes from the line of John Murphy with Merrill Lynch.

John Murphy - Bank of America/Merrill Lynch

Good morning, guys.

John Plant

Good morning.

John Murphy - Bank of America/Merrill Lynch

My first question is on mix, where you guys kind of alluded to in a number of different angles, but can you just talk about a mix specifically in the European market, in North American markets and then as we think about the growth in China exceeding your expectations, you kind of alluded to that creating some maybe weaker mix in your business although it seems like there’s a lot of content coming on in China. So, if we think about that China business growing faster will that be a positive or negative to mix going forward?

Joe Cantie

Lets start with Europe first and I expected that when we moved from ’13 into ’14 if we were to see a European recovery then the majority of that recovery would be at the very low end vehicles. It actually had been slightly more broad-based than that, it has also I have seen recovery in the -- and also good sales in the, I’d say luxury brand area as well. And so it has been fairly broad-based, so better than I had anticipated but still it's a skew to the probably a lower transaction level and it's difficult to know where that will bounce out just because through the next few quarters and into 2015 but we’re optimistic that it may become more broad-based than we have seen today because that’s been the trend that we’ve say -- a positive trend compared to where we consider it to be. In China it's very difficult to know exactly how future mix is going to shakeout. What we do see is a very significant popularity of SUVs in China which is obviously positive for mix. We see on average higher transaction values is within the overall vehicle market part of which is driven by SUVs but part of it's overall as the GDP earning capita increases, and that leads to I’ll say improved mix. And then of course there’s the increasing sophistication of cars in particular in the Chinese domestic segment as they need to establish the same or try to improve their brand equity positions to be in the same position as the West and or other Asian based manufacturers in the market. So, my expectation will be that probably mix continues to be a helpful development and leading to further content improvement beyond vehicle build in China on a prospective basis. And it's always difficult to actually give total guidance on that because it's wrapped up in I’d say so many over wider economic factors but generally speaking I think as the population becomes more and more, has more and more expectations and more and more anticipation of I’ll say aspiring to bigger and maybe better vehicles to that content and that mix should be positive in that territory.

John Murphy - Bank of America/Merrill Lynch

Okay and the North America though just in the short-term.

Joe Cantie

The interesting thing has been despite all the investment in small vehicles and talk over the last few years, there’s still a very strong pull-through for, again for the SUVs, for the larger pick-up trucks and I think we’ve seen that. At the moment, if there’s been weakness in the market it actually has been at the smaller end of the vehicles where I’ll say certain manufacturers actually pulled shifts back on their small cars and turning to increase them on the bigger vehicles and maybe that should be no surprise to us but it seems to fly in the phase of some of the statements made over recent years is that, the U.S. was going to move to a smaller car market. I mean there has been a move but probably not as pronounced people thought.

John Murphy - Bank of America/Merrill Lynch

Bigger is always better. Except when it comes to share count Joe just on that last question, I mean if we look at the share count of 119.8 for the quarter that was the average, I would imagine the ending share count was probably much lower because of the ASR, can you give us that number?

John Plant

Yes, hang on one second here. It was …

Joe Cantie

John, I think if you work and you’ll see the queue come out later today. In April we had somewhere around the 110.7 million shares and that was the basic, when you add the (indiscernible) and the exchangeable on there another 6.5 million, you’ll get to somewhere around the 117 million, maybe slightly over 117 million.

John Plant

That’s right, so that won't be in your press release. That will be in the queue that we’ll see later today.

John Murphy - Bank of America/Merrill Lynch

But almost 3 million shares less than what you talked about almost are for the quarter.

Joe Cantie

Right.

John Murphy - Bank of America/Merrill Lynch

Thank you very much.

Joe Cantie

Thanks, John. Angel, I’m showing that we’re out of time. If you could please move to wrap the call up it would be appreciated.

Operator

Thank you. This does conclude today's conference call. We appreciate your participation. You may now disconnect at this time.

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