Executives
Joseph Cantie - Chief Financial Officer, Executive Vice President and Treasurer
John Plant - Chief Executive Officer, President and Director
Mark Oswald - Director of Investor Relations
Analysts
Rod Lache - Deutsche Bank AG
Christopher Ceraso - Crédit Suisse AG
John Murphy - BofA Merrill Lynch
Himanshu Patel - JP Morgan Chase & Co
TRW Automotive Holdings (TRW) Q3 2010 Earnings Call November 3, 2010 8:30 AM ET
Operator
Good morning, and welcome to the TRW Conference Call. [Operator Instructions] Presentation material for today's call was posted to the company's website this morning at trw.com/results. Please download the material now if you have not already done so. [Operator Instructions] I would now like to introduce your host for today's conference call, Mark Oswald, Director of Investor Relations. Sir, you may begin.
Mark Oswald
Thank you, and good morning. I would like to welcome everyone to our Third Quarter 2010 Financial Results Conference Call. As usual, I am joined by John Plant, our President 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 2010. After John's comments, Joe will provide an expanded review of the financial information. At the conclusion of Joe's comments, we will open the call to your questions.
Before I turn the call over to John and Joe, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to Slide 2 of the presentation for our complete Safe Harbor Statement.
The Risk Factors section of our 2009 Form 10-K and our first and second quarter 10-Qs contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2009 10-K and our 2010 quarterly SEC filings by visiting the Investors section of our website at trw.com or through the SEC's website at sec.gov. On a related matter, we expect to file our third quarter 10-Q within the day or so. Once filed, the 10-Q can also be accessed through either website.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found on the conference call materials, which are posted on the Investors 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 website. Replay instructions were included in our release this morning. We have not given our permission for any other recordings 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 Plant
Thank you, Mark, and good morning, everyone. As you can see from the results posted this morning, TRW's third quarter performance continued to build on the positive momentum and the record results posted in the first half of the year.
During the quarter, sales which totaled $3.4 billion were 10% higher compared to the prior year quarter and just over 14% on a currency adjusted basis. Operating profit was $269 million, a margin of 7.6%. This marks the highest level of operating profits and margin for any third quarter. And when considering the seasonality of our customer's vehicle production, we're very pleased with these results.
Net income was $199 million, and earnings per share were $1.54. The company generated cash from operations, less capital expenditures of $206 million. And finally, and possibly most importantly, net debt for the second straight quarter reached a historic low for the company at fractionally above $1 billion.
TRW's performance for the first nine months of the year is very, very solid. I'll expand on the year-to-date results in just a few minutes. First, just a few additional comments on the third quarter. During the most recent quarter, industry production volumes remained robust and once again exceeded the expectations of most industry observers that was set in June.
In North America, overall vehicle production was up 26% compared with the third quarter of 2009. On a sequential basis compared to the second quarter of this year, production was down 3%. Normal seasonality of the production schedules and our customers accounted for the quarter-on-quarter decline and ended the trend of five consecutive quarter increases in production for this region.
In Europe, vehicle production was flat compared with last year. Planned summer shutdowns were indeed shortened in some instances to keep pace with customer demand outside of Europe, as exports from Europe continue to provide support to the region's overall production levels and help offset the weaker demand in the European markets.
In Europe, the seasonal shutdowns resulted in a sequential decline in third quarter production compared to Q2 and this was about 18%. For Western Europe, third quarter production was down about 15% or some 700,000 units compared to the second quarter.
Partially offsetting the negative effects of the lower absolute production levels was the continued improvement in vehicle mix, as the majority of the exports tend to be larger and higher contented vehicles compared with the scrappage scheme incentivized vehicles, which are mainly A and B class vehicles in 2009.
In China and Brazil, TRW continues to strengthen its position and capitalize on the dynamic growth that is occurring. For the quarter, TRW sales outpaced the industry production in both markets. Combined sales in these two markets alone accounted for over 15% of TRW's third quarter sales.
With regard to China, during the quarter, we announced plans to start production of our electric power steering systems at our plant just outside of Shanghai. This production will be for both international and Chinese vehicle manufacturers. This is truly exciting news as it will create a regional production base for our Asian customers and provide a cost-effective source for this fuel saving and emission reducing technology. Over the next few years, significant additional capital will be allocated to both China and Brazil as we continue to invest in opportunities that strengthen our position in these key growth areas.
With respect to our year-to-date results, we are pleased with our performance. Operating profit for first nine months of the year was $891 million on sales of $10.7 billion, an operating margin cumulatively of 8.4%. Net income was $630 million and earnings per share were $4.93, once again, records for a third quarter year-to-date period.
The performance achieved through September provides a very solid foundation for the remainder of 2010 and beyond. As our earnings and cash flow generation allow us to further position the company for long-term success. Of course, we remain committed to finishing the strong year and are clearly focused on our upturn management to prevent costs from creeping back into our operations during this period of recovery in the industry. Our third quarter results demonstrate that commitment.
Moving on to the business developments during the third quarter. A high level of production launches continued to strengthen our diversification and leadership in intelligent safety solutions. A few examples include: Our vehicle stability control, long-range radar, numerous airbag modules and seatbelt retractors and electronic park brake on the Volkswagen Passat. The Ford C-Max was launched in Europe with TRW's electric power steering, seat belt system and driver's airbag module. And in North America, BMW's new X3 vehicle includes both side and curtain airbags, our electric park brake and seat belt system. These products continue to be delivered with world-class quality as a result of our ongoing quality and Six Sigma programs.
For the quarter, our quality averaged a little over six parts per million across all products and customers worldwide. The electronic park brake conducted on the Passat and the BMW X3 launch is a great example of TRW's innovative technology and is expected to be one of several contributors to our future growth. EPB is forecasted to be on one in five of European passenger cars by 2015. And for the mid to large vehicle sector, it is forecasted that half of these vehicles will be fitted with EPB.
TRW's EPB system utilizes electrical cables on a control switch to simplify the routing and allow for greater freedom of design for vehicle interiors with the added benefit to production and weight. It provides park brake from and also a variety of other parts of improvement to the brake system and improves overall system performance and driver's convenience.
Demonstrating TRW's commitments to continuing to enhance our safety technology and also solidify leadership position, TRW launched its dynamic locking tongue seat belt system in North America on GM's Impala vehicle during the quarter. And unveiled next-generation head protection system for convertible vehicles. The head production system technology is fully integrated into backrest bolster, eliminating the need for an integrated headrest and increasing its compatibility with a broad range of convertible vehicles at a low cost point.
You can see why we are excited about the future. We combined these new technologies with TRW's world-class quality, global reach and low cost base. Simply put, remaining focused on our strategic priorities of quality, cost and technology will drive our continued success. Before I turn the call over to Joe, let me comment on our expectations for the remainder of 2010.
Overall, production forecast for the second half of this year have increased since our last conference call, but continue to lag behind the first half vehicle output. In North America, we expect fourth quarter production to be roughly 2.8 million units, an increase of about 3% as compared with the fourth quarter of 2009, but slightly down compared with the third quarter.
For the full year, we now expect North American production to be approximately 11.8 million units, an increase of 38% over 2009 and this has been increased from our prior guidance. This level of production appears appropriate, given the rate of recovery in vehicle sales through the first nine months of the year and the inventory build which has taken place.
In Europe, vehicle production continues to exceed expectations of many observers. As mentioned earlier, exports have been a key driver of this robust production and have offset soft demand in that region. During the fourth quarter, total European production is forecasted to be at around 4.3 million units, essentially flat with the prior year and up only slightly compared to the third quarter. Vehicle production in Western Europe is projected to be about 3 million units, down about 8% compared with last year.
Given TRW's expectations for the fourth quarter, full year 2010 production is expected to be around 18 million units, up some 11% compared with 2009. Within this estimate, Western European production is 12.7 million units, an increase of about 8% compared with last year.
In addition, we still expect further improvement in vehicle mix as last year's high mix of smaller fuel-efficient vehicles have turned back to a more normalized level. As you would expect, we will continue to monitor the production plans of our customers closely and make any necessary adjustments to our operations accordingly. Beyond North America and Western Europe, we expect full year vehicle production levels in the developing markets of the world such as China, India and South America will remain robust.
Based on our revised production estimates and our updated currency assumptions, we now expect sales of approximately $14.1 billion for 2010, which is about $700 million higher than the midpoint of our previous guidance. Capital spending is still expected to be approximately $325 million for the year, as the spending is aligned with the launch plans of our customers. Although this level continues to be well below our historical run rate, we do anticipate an increase in 2011, given our customer launch plans and the incremental capital that is required to support the exceptional growth we are seeing in China and Brazil.
And finally, with regards to restructuring, we continue to expect the full year restructuring to be approximately $35 million, with a pickup of spend in the fourth quarter. As you can see from this guidance, 2010 will be an outstanding year for TRW. We're on track to report record earnings, record free cash flow and historic low for net debt.
With regards to 2011, we have not finalized our operating plan assumptions yet. Our thoughts are for a continued slow recovery in both North America and Europe. China and Brazil should continue to be bright spots. We'll provide our 2011 assumptions when we report on our 2010 full year results early next year.
In summary, we're pleased with the business performance to date and remain focused on finishing a good 2010. Beyond 2010, we're excited about the future given the low cost base and the continued emphasis on vehicle safety, combined with TRW's leading technology portfolio and the overall growth that is forecasted for the industry and our content within that.
With all this, I'll now hand the call across to Joe to begin to discuss our financial results in more detail.
Joseph Cantie
Thank you, John, and good morning, everyone. As you can see from our results published this morning, TRW has continued the incredible momentum established during the first half of this year, with most key financial metrics showing record results for the quarter and year-to-date periods.
Key highlights for the quarter included operating income of $269 million and a margin level of 7.9%. This result marked the best third quarter operating profit and margin performance in the history of the company. Earnings per share were $1.54 on a GAAP basis and $1.47 after special items, which I'll discuss in a few minutes. And perhaps the most impressive highlight of the quarter is that our net debt declined to $1,030,000,000 benefiting from $206 million of free cash flow in the quarter. Clearly, our capital structure has taken a step change improvement this year. More on this later in my comments.
Compared to a year ago, the favorable Q3 performance resulted primarily from the higher vehicle production levels in North America, surprisingly strong European build levels and the benefits of our downturn management actions taken in 2009.
For the first nine months of the year, we continued at a record pace as the company posted earnings per share of $4.93 on a GAAP basis, $4.84 excluding special items. No doubt, playing the foundation for an incredible year for us. We're obviously pleased with our year-to-date results and expect to continue the strong operating performance as we move into next year. However, the enthusiasm is tempered as we recognize the continuing challenges that face our industry.
I'll expand on our outlook for the remainder of 2010 shortly. But first, let me review our third quarter and year-to-date results in a bit more detail.
For the quarter, we reported sales of $3.4 billion, an increase of $318 million or 10% compared to the same period a year ago. Currency translation partially offset the sales increase from the higher production volumes discussed earlier, decreasing our sales by about $113 million compared to the prior year. The euro to dollar exchange rate averaged $1.29 this quarter, which was about 10% lower than the same period a year ago or ago. Although the euro has strengthened recently, we still expect a negative sales comparison to last year's fourth quarter when the average euro to dollar rate was $1.48. Excluding the effects of currency translation, Q3 sales increased about 14% compared to the previous year, with increases in each of our major geographic markets.
We had a third quarter operating profit of $269 million compared to operating income of $141 million in 2009. The $128 million increase was primarily driven by the positive impact of higher sales and the benefits of the cost reduction programs that the company implemented in 2009. We're extremely pleased with the resulting margin of 7.9% and our ability to hold margins near the 8% level as historically, Q3 margins dropped some 200 to 300 basis points compared with second quarter margins. Our third quarter did benefit from approximately $20 million of favorable income items that will not recur going forward. However, even after considering these items, the margin is impressive.
Moving down the income statement, interest expense totaled $39 million, a decrease of $16 million compared to last year. The reduced expense is reflective of our cash flows and reduced levels of debt between the two periods.
Finally, tax expense was $39 million in the current quarter compared with $33 million last year, excluding one-off tax benefits of $11 million and $5 million in 2010 and 2009, respectively. Similar to our second quarter, the Q3 effective tax rate of 16%, excluding the $11 million one-off benefit, reflects the impact of our overall improvement in operating results and the geographic mix of our earnings. In the United States, we are currently in a valuation allowance position and therefore do not recognize tax expense on U.S. income, which is benefiting our tax situation.
I'll provide a revised full year tax expectations in just a few minutes. At the bottom line for the quarter, we posted GAAP net earnings of $1.54 per diluted share compared with net earnings of $0.50 in the prior year. Excluding restructuring and fixed asset impairment charges in the 2009 period and the impact of debt retirements and favorable tax benefits from both periods, we reported net earnings of $1.47 per share compared with $0.68 in the prior year.
In terms of EBITDA, for the quarter we had $385 million, excluding special items, compared with $292 million in the prior year measured on that same basis. The improvement primarily reflects the increase in operating income between the two periods.
Moving to a brief review of our year-to-date results. We reported sales of $10.7 billion, which is an increase of $2.4 billion or 30% compared with the previous year. Increased global vehicle production and continued growth resulting from our portfolio of safety products accounted for the majority of the year-on-year increase. Currency movements did not factor in the comparison.
Our operating income in the first nine months of 2010 was $891 million, which compares to $60 million last year. The significant increase between the two periods was primarily the result of our operating leverage against our higher level of sales and a lower amount of restructuring charges between the two periods. Below operating income, interest expense was $125 million compared to $139 million last year. In the prior year nine-month period, we did have a $34 million gain on retirement of debt compared to a minor $2 million loss this year.
Tax expense for 2010 was $130 million, which compares to $37 million in 2009. The increase was primarily the result of higher pretax earnings in the 2010 period. Both the current and prior year period included tax benefits of $23 million and $15 million, respectively.
Again at the bottom line, we reported GAAP net earnings of $4.93 per share, which compares to a net loss of $0.82 per share last year. Excluding special items, earnings were $4.84 per share for the first nine months of this year. And finally, in terms of EBITDA, we had $1,247,000,000 which is a nine-month record for us compared to $527 million in the prior year.
Moving on to our cash flow and capital structure. For the quarter, operating cash flow was $267 million, which compares to $174 million in 2009. Free cash flow, which I'm defining as operating cash flow less capital expenditures, was $206 million this quarter compared to $125 million last year.
For the nine-month period, the company generated $522 million of free cash flow, a great outcome for us this year compared to a use of $178 million in the prior year. Capital expenditures at $168 million during the first nine months was $47 million higher compared to last year's depressed level. The year-over-year improvement in free cash flow is due primarily to the increased level of profitability between the two periods and of course, our continued focus overall on capital management. We do expect to generate cash in the fourth quarter, which will only add to the $522 million of free cash generated so far this year.
At the end of the quarter, net debt was $1,030,000,000, which was $553 million lower compared with the balance at year end 2009. Compared with the balance at the end of our third quarter last year, net debt has been reduced by over $1 billion. Measured on a trailing 12-month basis, our net debt-to-EBITDA ratio is 0.6x at the end of the quarter, great progress when you consider that we finished 2009 at 1.7x. So far at this page, we're thrilled with the progress we've made towards reducing our net debt this year.
Regarding our $1 billion plus cash position, we continue to evaluate the levels of liquidity needed for the company, our future investment in growth opportunities and whether any capital structure opportunities exist. Our primary short-term focus right now is further to cash generation and debt paydown.
To that end, earlier this week, we began the process to pay off our remaining bank term loans totaling $149 million, which will be complete by the end of this week. Regarding liquidity, at the end of the quarter, we had an excess of $2 billion available to us, consisting primarily of cash on hand and our undrawn revolver. This is an obvious statement but I like saying it, TRW's capital structure is in great shape.
Switching subjects now to our expectations for the remainder of 2010. As John indicated, full year production is forecasted at 11.8 million units in North America and 18 million units in Europe. We have also updated our currency assumptions to current spot levels. These revised assumptions should translate to full year sales for TRW of about $14.1 billion, up $2.5 billion or 22% compared to last year. Of course, this implies fourth quarter sales of $3.4 billion, about flat with the prior year. As a reminder, we expect a negative impact from currency movements, which is incorporated in our guidance.
We expect commodity inflation will be a negative headwind in Q4 compared to both last year's fourth quarter and the quarter we just ended due to the rising commodity prices witnessed earlier this year. Similar to prior periods of inflation, the company will aggressively work to reduce and minimize the negative impact on our results.
For prior year comparison purposes, as a reminder, similar to our third quarter results just ended, our prior year fourth quarter included non-recurring income items primarily customer and benefit settlements of approximately $25 million, which we highlighted last year. With regard to restructuring, we still expect our full year expense to be approximately $35 million, which implies a higher level of activity and charges in the fourth quarter, about $25 million.
Full year interest expense should be approximately $165 million, given our expectations of interest rates and our components of debt. With respect to taxes, the lower-than-expected tax rate achieved through the first nine months of the year will result in a full year rate below our previous guidance. Based on our current forecasts, it's reasonable to expect that our full year effective tax rate will range between 18% and 23% for 2010. And finally, as mentioned earlier, capital expenditures should total about $325 million this year, which is consistent with our earlier expectations.
In closing, we're pleased with the record results posted through the first nine months of this year. Our increased profitability, significant cash flow generation and outstanding capital structure, positions the company not only for an incredible 2010 year, but more importantly, for long-term success. We remain focused on finishing the year strong and look forward to reporting our full year results with you in February. At which time, we'll provide you with our assumptions and expectations for 2011.
That's it for the prepared comments. Mandy, we'll now move to the question-and-answer portion of the call.
Question-and-Answer Session
Operator
[Operator Instructions] We will take our first question from Himanshu Patel with JPMorgan.
Himanshu Patel - JP Morgan Chase & Co
Joe and I guess for John as well, it looks like by year end you're going to have roughly 10% of sales just sitting in growth cash. It's pretty high, especially considering where the net debt level is now. So I'm just kind of curious, what are kind of the initial thoughts you guys have? I know you want to maintain a more conservative balance sheet than history, but is there a greater appetite now to maybe consider acquisitions than before as the market for acquisitions and associated valuation multiples gotten better? And sort of thoughts on dividends and share buybacks, has any of that sort of percolating as well?
John Plant
I think the first thing, Himanshu, that point to is the comments that you may have missed in Joe's talk there was in Q4, we actually paid down remaining term loan debts. So as of right now, we have zero term loan debt so we sort of capped bonds and then this awful pile of cash. So you can see that we're still actively thinking about our capital structure and we've made a move in the fourth quarter because of the -- let's say, a very healthy cash generation that we have been achieving and that we do expect to continue to achieve. I mean, clearly, we're not going to say today what we're anticipating with further cash generation in the fourth quarter or 2011. I mean, we have signaled that capital expenditure will be higher in 2011 because of basically the high opportunities that we have in China and Brazil. So the CapEx will tick up a little bit. Because of that, I mean, we talked to you in previous calls about the legislation in Brazil for airbags and anti-lock braking. And really, the net promulgation of one of our fundamental technologies in China. And you can see by our results that we've been outgrowing China substantially. Substantially a great growth into vehicle builds for sometime. And so, I mean, we're mindful of that. We are mindful of maybe even addressing further some of our legacy liabilities and in fact, I'm sure we'll be talking more about that in the future. And then finally, clearly, as we said before, if there's any bolt-on acquisitions that seem right for us and we have a very, I'll say, receptive mind to those and providing that they really do fit and parcel of our hurdles in terms of shareholder return here, et cetera, et cetera. Beyond that, I mean I really don't see us commenting much further. And certainly, I can't see us moving to a dividend-paying situation at the moment. I mean, it is possible that we will consider share buyback at some stage in the future, but that also depends upon our determination of what our real capital needs are to cope with the explosive growth that we see the developing markets. And I mean, also what we feel like doing in terms of any bolt-ons or indeed addressing those legacy liabilities once we've clear on the long-term interest rates. But basically, having said all that, it's great to put ourselves in a position of choices. And when you got net debt to EBITDA because I think I said in an earlier call, I mean I'm convinced that we are any investment grade company in waiting and I really think that I want to achieve that before we address anything further on the CapEx. And so I'm very focused on moving up in terms of our underlying credit ratings and are hopeful of additional moves in that regard. All then I'll pass to Joe.
Joseph Cantie
I don't think I have much to add to that, Himanshu, other than reiterating what John said. It's a wonderful position to be in a position of having choice and sitting here, being able to take advantage of opportunities that present themself. And reiterate the fact that we do think we're an investment grade balance sheet. We need others to recognize that and that is the goal of ours. And I think we'll continue to have that in mind as we make our choices with the cash pile.
Himanshu Patel - JP Morgan Chase & Co
So do you have a kind of gross debt-to-EBITDA number in your head?
Joseph Cantie
A gross debt to EBITDA?
Himanshu Patel - JP Morgan Chase & Co
Like sort of a target for the business long term. Are you thinking about it that way or is that kind of a wrong way to think about it?
John Plant
I wouldn't put it like that at the moment. Well, we need to redo it. Now we've paid these term loans down and just do all of the mental gymnastics in the firm right now, and then consider what we want to do for 2011. So I'd rather not comment that today. Clearly, if you look at what we've been doing, we've been paying down gross debt while driving down net debt continuously. Well, for basically, every year we've been doing that and we kind of accelerated it this year commensurate with the very high cash generation.
Himanshu Patel - JP Morgan Chase & Co
I know you don't provide this disclosure regularly, but just to help us understand what's happening on the mix front in Europe. You mentioned European production was down 18% year-over-year. Could you help us understand what your European revenues did on a constant currency basis? Were they directionally much better than that, much worse than that or sort of in line?
John Plant
Currency adjusted our European revenues was slightly up year-on-year. During the third quarter, they were 3% on the third quarter. Yes, third quarter is I think about 3%. And year-to-date, I think we're up between 15% to 16%, something like that.
Himanshu Patel - JP Morgan Chase & Co
So up 3% year-over-year excluding currency, despite an 18% year-over-year production decline?
John Plant
Yes.
Operator
Our next question is from the line of Rod Lache with Deutsche Bank.
Rod Lache - Deutsche Bank AG
Just a first of all, point of clarification. Did you say that there were $20 million of favorable income items in the operating income? You're excluding the tax benefit in the quarter. Just wanted to clarify what incremental margin looked like, excluding items and FX.
Joseph Cantie
Yes, that's absolutely right, Rod. You got it right. There's about $20 million of hard-fought good income items that are really good for the company but they will not reoccur. So there's a number of things in there, the largest of which is a legal settlement that we had in the quarter that resulted in a $12 million pickup in the quarter. Obviously, things like that will not recur so you have to think about that. But I encourage you not to discount that too much, because that's good money and hard-fought money for the company.
Rod Lache - Deutsche Bank AG
I understand but I'm just trying to bend back into what the underlying incremental margin would be, excluding FX and things like this. It looks like if I'm doing the math right, something like 21%. Does that sound consistent? And as you look out to Q4, your revenue guidance implies revenues pretty similar to Q3. Is there anything that we should be thinking about aside from these kinds of items that would affect your margins?
Joseph Cantie
First of all, on incremental margins, if you compare me year-on-year, if I take out the $20 million from our Q3 this year, I get us around 26% incremental margin. If you compare it Q2 to Q3, which is obviously we're down given the shutdown period. When I think about Q4, clearly, you got the $20 million. You have to back out of Q3 if you're looking sequential. And then the comments I made in my script, we do expect to have a little bit of commodity inflation in Q4 versus Q3 as well as Q4 versus Q4 last year. So you have to think about that a little bit. Otherwise, it should be pretty straightforward.
Rod Lache - Deutsche Bank AG
So that 26% includes FX, right?
Joseph Cantie
That's correct, yes.
Rod Lache - Deutsche Bank AG
So it's maybe a little bit lower excluding FX, given the FX impact?
Joseph Cantie
A bit, but I don't think it takes to down the 21%, Rod. I would say maybe 26% goes to 24%.
Rod Lache - Deutsche Bank AG
And I'm wondering about your long-term capital spending. Your full year target makes to seem like I think about half of your capital spending for the year, what happened in the fourth quarter. I guess, first of all, is that plausible? And can you give us some thoughts on longer-term guidance on CapEx? Is this something that, just given the growth that you've got, would it match or maybe even exceed your D&A at some point soon?
John Plant
Well, I have already signaled the bottom on the prior question that CapEx is going up. Let me deal with the fourth quarter 2010 first. I mean, I think it is plausible that we're going to be in that $300 million mark. I think we've given you guidance of $325 million, plus or minus around that number. Fourth quarter is higher because of a couple of significant launches that we're doing. I mean without going into all of the fourth quarter launches coming up, and we have two very significant one's on the launch of the electric steering for, for example, the Ford Focus and C-Max around the world. And so just the Europe and North America, North America just coming up. And in fact, develop new programs, which I think it isn't announced yet therefore I won't mention it. So it may clearly going to tick up the fourth quarter. And then as a long-term trend, I think the one thing that we are seeing is we're going to be investing a significant increment in 2011 in China and Brazil. China, I mentioned the sort of development of electric steering technology beyond the growth of the vehicle build and the content growth in that country. And I mean, that clearly is the major market of the world that we talk about. And sales in China, let's say, more than doubled what we have in Brazil. I mean, when you look at Brazil, I mean, because of the general underlying growth, robust economy and the two items of legislation as I mentioned which is the airbag frontal systems and also the anti-lock braking. And clearly, we'll be positioning as all our competitors as well in 2010 to get a good market share in that market as it comes into 50% shipment by 2012 and 100% by 2014. So clearly, we're going to be investing in those two technologies significantly in South America and say Brazil in particular, where the majority of our production assets are. And so you can expect a big tick up in CapEx spending for 2011, and I think, and beyond. I don't think we're ready yet to give guidance compared to the D&A level for next year. I mean that's still being worked through. But the one thing you should be thinking about is the significant and maybe a very significant tick up in CapEx. And that really is -- I think it's good news. In one sense, obviously, you see any more than what have been right now but we managed it very carefully so far, and we've been focused on assembly lines and tooling rather than underlying, let's say, process assets. But now as we go forward particularly in China and Brazil, then we're going to see a very significant future growth of the company. And we want that market share and want it now and that's a very important strategic development for the company. And then it obviously helps our growth rates with regard into 2013 and 2014. So I think that's all that we see and obviously, we'll be talking more about this subject when we get to our Q4 results. We can give you more accurate guidance on the CapEx over 2011.
Joseph Cantie
And Rod, just one thing from my side regarding your first question. If you look historically at our capital spending, our fourth quarter is always our highest capital spending quarter by significant magnitudes, if you go back over the last five years. So in addition to those two platform launches John was talking about, that's a typical season pattern. So it's very logical that we can get to that $325 million this year.
Rod Lache - Deutsche Bank AG
Just to clarify on this CapEx, is there some kind of rule of thumb that you can provide to us in terms of what the relationship is between revenue growth and capital spending? Or I guess, we have a sense of where your maintenance CapEx is here just given where capital spending went. But how should we be thinking about the relationship between growth and that uptick in CapEx?
John Plant
I think, again, I'd like to refine our numbers and come back to the values in February. And with depressed long-run average from, let's say, just over 4% level down to the 3% level and maybe below that in the, I'd say, during the great recession of 2009. I mean, we've got a couple of things going on here. So we've got still excess processing capability in terms of, say, machining centers and molding machines and all sort of some general equipment in the West. Because vehicle production is the still depressed, I mean 12 million, let's call it, for North America thereabouts compared to a normalized 15 were 16. We are producing, let's say, 17 million or 18 million vehicles in Europe compared to capacities of probably 22, 23 for process equipment. So clearly, we've got ways to go there. We've got all the content growth, which obviously can't avail some of that. But then in the developing markets or maybe I'd say developed now because, as you know, China has already exceeded by units, maybe not by a value the production in North America. I mean there, we're just building both our process capabilities and our assembly lines and tooling and with the content growth, and some of the rule-making and the legislative growth in Brazil. I mean, it's blending all together and coming out with a new long-run average is actually pretty tough right now. And so I mean, we're working through both the operating plan assumption and also our strategic plan assumptions going out over the next five years, and we're doing that in the midst of it right now. And I don't think we're ready to give you a percentage guidance while we work these things through because its an unusual condition where half the world, you're investing, I'll call it, like crazy and maybe half the world, you're investing because of your content growth while you still got excess production out. So it's not exactly back to an equilibrium of points at this moment in time.
Operator
Our next question is from the line of Chris Ceraso with Credit Suisse.
Christopher Ceraso - Crédit Suisse AG
You've mentioned a few times how excited you are about the growth prospects in Brazil and China. Typically, you had talked about top line growth for your business in the 4% range which you generally exceed. But with all this business in the pipeline, are you comfortable with us thinking about a double-digit top line over the next couple of years for TRW?
John Plant
I don't think that we've come back out yet and requalified our growth percentage, Chris. And as I said in the last call, in fact, I don't think we are ready to do that yet because of the -- I quoted to you last time the uncertainties regarding things like vehicle mix, legislative change, underlying production and the semi-factors moving around. We have chosen not yet to go through that revenue guidance. I don't think it's anywhere near reasonable assumptions considering what you're saying, a double-digit revenue growth. I mean, I don't understand that relative to vehicle build growth. So I don't think you should be thinking that. But I do think that it's a reasonable assumption that TRW continues to grow in a good fashion, given the technologies we have, the global reach we have, the positions that we have already in these developing markets and the fact that if we are confident enough to invest the additional capital, then clearly, we know we've got that business coming in our pipeline in the future. But again, we're not yet ready to come back out. We haven't talked about revenue guidance on a company annual growth rates for a couple of years now, and that's basically because of the, I'll say, what happened in the second half relating to 2009. And there's a ways to go yet before we see clarity regarding, even the fundamentals of economic growth in the world. And until we've got that, I think I don't see how any company can have the clarity it requires to give revenue guidance.
Christopher Ceraso - Crédit Suisse AG
As I think about the profitability of your company, which appears to be structurally higher than it used to be, maybe you can help me with some of the big categories that has turned TRW into what seems to be a pretty sustainable 8% margin company versus what you used to be, which is a pretty consistent 5% margin company. Maybe you can help me think about some of the big categories, how much of it has come from headcount reduction? How much from closing underperforming plants? How much of it has a change in the mix of your business or maybe new products or price? How do you bridge that?
John Plant
I'll talk to themes and then pass it across to Joe to give you more accurate categorization of what it is. And that is possible, I'm not sure it is at this point in time. But 4.3%, yes. Clearly, I think some structural costs has change as being affected through the Great Recession time. I think that another significant factor playing into that is also, if you look at some of the things that we have talked about in terms of the chassis group and you can see their underlying margins have improved in that. And to some degree, to tell you what I see, is that I see a continued success on braking, but also on brake products. But really, it's also the electric steering, which I'd now begin to point to for where we have incurred a lot of the, I'm going to call it, change costs. I mean it's still incurring it to some degree because of all the launches that we're going through at the moment. But where that significant strain on the company for a period of time for the engineering and development of more than one technology, several braking, several steering technologies simultaneously, while revolutionizing the capital base and incurring significant launch costs. Then I mean that is coming through now. We're not in the position yet of maturity, which now coming to an improved fashion. You can see the tick up in those chassis margins, which were both necessary and obviously welcome. And so I'd say, if you think about structural cost plus the tick up in the chassis margins, I would say those are probably the most significant ones you talked to, even though if you want to go you can go to a lot further, I'll call it, list of items that helped us in improvements. And again, just to make it clear, we have not yet come out and set any margin guidance because we had been vehemently against giving margin guidance ever, and are not planning to give any margin guidance now. But I would point to structural cost and the pickup in the chassis margins and within that, the improvement in our electric steering position.
Joseph Cantie
So Chris, I'll just add perhaps just a little bit more detail to that. I put it three buckets, why we've gone from a 5% to an 8%. I actually think it was about 4.5%, 4.75% consistent performer up to the recent levels of 8%. There were really three buckets. First, when we went through to late 2008, 2009, as you know, we acted methodically quickly to re-adjust our fixed cost structure for, I'll call, the new reality of what we thought at the time would be the future production environment. And that constituted us reducing our fixed cost base by about 20%. And our fixed cost back in the 2008 timeframe was somewhere about $2.2. billion. So we basically took $500 million out. Of that 20% were $500 million, about 75% of that was really down to headcount and people-related reductions that we made. The remaining 25% of that would be our various indirect costs all over the world that we curtailed, cut, et cetera, et cetera. So that would be the first bucket. Second bucket regarding closing plants, it really was about downsizing the headcount. We did not do anything abnormal in terms of closing plants or anything like that during the period. We did close plants, but we close them every year and we really worked towards a long-term pattern of our footprint on that front. And then the third bucket, which John was referring to was the innovation product change, which that one is a bit more difficult to put an exact data number on it for you. So those are the three buckets. I will just end with one comment. Clearly, we made significant deep cuts at a time when we are going through the recession, if you will. There is, inevitably as we move forward and economies improve and production moves up, there will be some of that cost creeping back into the system. We are going to curtail that like crazy and you can see in results in 2010, we've done a great job of doing that. But practically speaking, some of the steps we took, like pay decreases or no pay increases, cutting 401(k) matches, things like that, some of that creeps back into the system as the economies recover and the competitive marketplace requires us to do some of that. So I caution you on making sure that you recognize what may happen as the economies recover going forward.
Christopher Ceraso - Crédit Suisse AG
How much of that has already happened, Joe, the pay increases, the 401(k), how much of that's back in already?
Joseph Cantie
As you can see from our results in putting up 8% margins this year, we've done an incredibly good job of suppressing it. So I'm going to say that we've had some, but not that much.
Operator
Our final question is from the line of John Murphy with Bank of America Merrill Lynch.
John Murphy - BofA Merrill Lynch
Just a question on sort of onetime benefits that you've had year-to-date. You called out $20 million of sort of onetime benefits you got in the third quarter. I was just wondering year-to-date, if there are other significant items that you don't think are going to repeat on a year-over-year basis in 2011 versus 2010, or just what the benefits that have been unique in year-to-date?
Joseph Cantie
Clearly, being a $14 billion global company, there are always things that occur quarter-to-quarter, sometimes good, sometimes bad. And whenever I have a quarter that there's a netting of my good and bad oneoff items are to the higher side, we disclose them, we talk about them. That's what we're doing this quarter, we're talking about the $20 million in the third quarter. When I look to my year this year in total, with the first and second quarters, I'm at a net good guy somewhere of around $40 million for the full year. And that is not unusual when you follow a period of recession like we did. When you got through the the dip, obviously, we went through the bankruptcies with GM Chrysler and some of our other customers, you tend to be able to settle out a lot of issues as you go through all those proceedings and we add many suppliers as well. So we are having a year of net good, which is a good thing for us. I don't know if that will recur next year. I don't know if it will or won't. We plan for it not to and we think you should as well, and let's see how we go through the quarters.
John Murphy - BofA Merrill Lynch
Then just on margins and returns and the capital that's being deployed in Brazil and China or the new capital. Is this kind of thing where it might be lower margins in the corporate average but still high returns so it makes sense. Is that how we should think about the margins and the returns in those two new buckets of investment?
John Plant
I think the long-run margins, you should assume they are pretty similar. I mean, clearly, when you're going to be spending the increasing capital that we've been indicating, combine that with some launch costs and you combine that with the fact that -- I mean, without saying today how many new plants we're going to have to build because I don't feel ready to give that an external airing yet. But suffice it to say that we're going to have to build several new manufacturing plants, basically in the single digit area, primarily in these developing low cost countries. We're not planning on any expansion of any that I can recall in a moment in high cost countries. But we're going to be building some new plants, we're going to be investing some equipment and we will investing in some launch costs. In particular, you can imagine in South America where we're stepping up to a good market share position in these new legislative requirements that we have. And so, I mean, there are going to be some costs associated with that. So when you do go into that period, clearly, in launch phase margins for that business will be slightly lower to the average. But in terms of is it good business and if it's in similar margins to elsewhere in TRW, once you got through that, then the answer is absolutely.
John Murphy - BofA Merrill Lynch
And Joe, just one last question. When do you guys think you get to an up position of net hiring in your developed markets, particularly in North America and the U.S.?
John Plant
We've already been hiring into develop markets in the U.S. Essentially, you could say in Europe we have, but it's really being one of taking people of short-time working because we still do have a legacy issue of short-time working in Europe, which is still there. We're still in the, I'll say, several hundred people which are not working a full five-day week. I mean, there's one good news is that short-time working programs essentially being extended through 2011. But that still is an issue, and it's all wrapped up in there. Once the vehicle build going to be next year, once that content grows, what efficiencies do we expect to drive through but we're going to be living with the short-term working in Europe in 2011. Albeit, we're hoping that it's going to be less than 2010, just as 2010 has been substantially less than 2009. So we're just working through that, I'm going to call it, that labor cost problem in Europe. But we did net hiring. If you took the total of our developed countries, we've been in net hiring situation for some time now.
Mark Oswald
Mandy, that concludes the call for today. Thanks, everybody, for joining us and please feel free to give me a call if you have any follow-up questions.
Operator
This does concludes today's conference call. We appreciate your participation. You may disconnect at this time.
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