TRW Automotive Holdings' (TRW) CEO John Plant on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: TRW Automotive (TRW)

TRW Automotive Holdings Corp. (NYSE:TRW)

Q2 2014 Results Earnings Conference Call

July 29, 2014 8:30 a.m. ET

Executives

John Plant - Chairman, President and Chief Executive Officer

Joseph Cantie - Executive Vice President and Chief Financial Officer

Mark Oswald - Director of Investor Relations

Analysts

Rod Lache - Deutsche Bank

Ryan Brinkman - JP Morgan

John Murphy - Bank of America Merrill Lynch

Brian Johnson - Barclays

Richard Hilgert - Morningstar

Patrick Archambault - Goldman Sachs

Brett Hoselton - KeyBanc Capital Markets

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 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. After the speakers’ remarks there will be a question-and-answer period. Due to today's limitation on time, the company requests that 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 second quarter 2014 financial results conference call. This morning as usual, 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. 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 a complete Safe Harbor statement.

The Risk Factors section of our 2013 Form 10-K and our 2014 first quarter 10-Q contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2013 10-K and 2014 quarterly filings by visiting the Investor Relations section of our Web site at trw.com or through the SEC’s website at sec.gov. On a related matter, we expect to file our second 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 in the conference call material which are posted on our Web site 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 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. Before addressing TRW's second quarter and first half highlights, I would like to make a brief comment related to the preliminary, non-binding acquisition proposal that the company has received.

As stated in our release issued earlier this month, the company is evaluating the proposal. We have not set a timetable for the completion of the review process. Meanwhile the team remains focused on executing our business plan. We do not intend to comment further on this subject today and request that the Q&A portion of this call be reserved for questions related to the second quarter and first half performance.

I will now move on to the second quarter results that were posted this morning, which you can see reflect the company's focus on delivering profitable growth. During the second quarter, sales which totaled $4.6 billion were 2% higher compared with the prior year quarter. Adjusting for the terminated businesses, sales were up about 8% year-on-year. We are pleased with this outcome as it continues to demonstrate the increasing global demand for TRW's safety technologies, especially when you consider the negative year-on-year impact associated with exiting certain of our brake components and module business in North America.

Operating profit and margin before special items was $389 million and 8.5% respectively. Net income before special items was $270 million and earnings per share were $2.32, an increase of 15% compared to the last year's second quarter earnings of $2.02. And finally, in line with company expectations we generated cash from operations of $257 million during the quarter. Joe will further discuss the financial performance and capital structure in more detail in just a few moments.

TRW's second quarter performance built on our Q1 results to provide a solid foundation for TRW to achieve its full year goals as we head in to the second half of the year. I will expand on our year-to-date results in just a few minutes but first just a few additional comments on the second quarter.

In North America, vehicle production remains strong and exceeded the expectations industry observers established at the beginning of the quarter. Overall, North American production was up 4% compared with the second quarter of 2013. On a sequential basis compared to the first quarter, production was up about 5%. Within the quarter's vehicle build, the Detroit 3 manufacturers kept pace with the region's overall growth. However, we expect that during the second half, a larger proportion of the region's growth will be provided by the non-Detroit 3 manufacturers.

Spring selling season did not disappoint as consumer demand continued to accelerate as the quarter progressed. Second quarter seasonally adjusted selling rate average about 16.5 million units. Strongest quarterly rate since the first quarter of 2006. In Europe, new vehicle registrations within the core markets continued to trend higher advancing in the low-single digit range year-on-year to support the current level of production. For the quarter, total European vehicle production of $5.2 million units was up about 2% mp with last year's second quarter.

Western European production was also up 2% year-on-year at 3.4 million units. Despite being encouraged with the upper trend in registrations and production, we remain cautious heading into the second half of the year. Over the past three quarters, the seasonally adjusted selling rate for Western Europe has been relatively stable at about 12 million units.

In China, vehicle sales and production continue to trend higher. TRW's sales in that market were up about 15% year-on-year in Q2, outpacing vehicle build and accounted for 17% of TRW's total sales. With respect to year-to-date results, we remain solidly on track. Sales totaled $9 billion, an increase of 3.5% compared to the same period last year. Adjusting for terminated businesses, sales were up 8% year-on-year.

Operating profit before special items for the first half of the year was $717 million, resulting in an operating margin of 7.9%. This was a good outcome as we continue to invest to support our future growth. Net income on the same basis was $485 million and earnings per share were $4.12, an increase of 17% compared to the last year and last year's first half earnings of $3.52.

Moving on to the second quarter business developments. Product launches during the quarter continue strengthen TRW's diversity and intelligent safety solutions. A few examples include, TRW's curtain, passenger, side and knee airbags, electric park brake, foundation brakes and seat belts on the Mercedes Benz C-Class in North America, Europe and Asia.

BMW launches its X4 in North America with TRW's curtain and side airbags, foundation brakes, electric park brake and seat belts. And Peugeot launched its Citroen C-Cactus in Europe with TRW's driver and passenger airbags, seat belts, steering wheel and foundation brakes.

Products launched during the second quarter were delivered with world-class quality as a result of our ongoing quality programs. For the first half of 2014, our quality averaged just over two parts per million across all products and customers worldwide. In addition to the broad range of products launched during the second quarter, TRW highlighted certain of our innovative technologies and announced business development that will further position the company for long-term success.

A few examples include; the demonstration of emergency steering assist collision avoidance technology at TRW's recent customer Ride and Drive event held at Germany's Hockenheim based Hockenheimring test track. This technology helps support the driver when an emergency steering maneuver is initiated. For example, if the driver swerves to avoid an obstacle, the system calculates the optimal trajectory around the object and applies additional steering torque to help follow the trajectory and stabilize the vehicle. Emergency steering assist is designed to enhance driver response by helping them to react faster and more accurately.

TRW also underscored its expertise and commitment to driver assist systems at the Hockenheim event with a deep dive into the company's radar and video camera systems portfolio. By driving several demonstration vehicles, our customers were able to experience firsthand TRW's third and fourth generation sensor systems used for a range of safety and convenience functions including adaptive cruise control, forward-collision warning and automatic emergency braking.

TRW will continue to develop a scalable and flexible family of sensors to support its driver assist systems development. These technologies play a fundamental role in enabling the semi-automated and automated vehicle functions now being developed and implemented. TRW also made several announcements regarding the continued expansion of its global technology and manufacturing footprint in Asia including the opening of its largest ever technical center. A 66,000 square meter facility in Anting, China near Shanghai. The new center was designed and built to house more than 20 scientific testing labs supporting all of TRW's main businesses and will employ more than 1,200 members of engineering, research and technical staff.

In addition to opening the company's state-of-the-art technical center, TRW also announced it will supply its electric drive steering system to Great Wall, Chinese number one manufacturer of sports utility vehicles. As you are aware, the SUV market is the fastest growing segment in the rapidly expanding Chinese market and TRW's belt drive system is ideally suited for this vehicle class.

Now let me comment on expectations for the third quarter and remainder of 2014. Overall, vehicle productions forecasts have inched higher since our last conference call. In North America, supported by strong customer demand, third quarter production is estimated at 4.3 million units, up approximately 9% compared to last year. Within that estimate, Detroit 3 production is expected to be about 2.2 million units, up 6% year-on-year.

Sequentially, compared to the quarter just completed, production for the Detroit 3 will be down about 130,000 units primarily due to normal seasonality and model year changeovers. For the full year, we now expect production to total 17 million units, up about 5% compared with 2013. In Europe, despite continued signs the industry is heading in a more positive direction, we do remain cautious especially as we move into the second half of the year when normal seasonality is expected to influence the near term production.

For the third quarter, vehicle production in Western Europe is projected to be about 3 million units, up slightly compared with last year. Sequentially compared to the second quarter, production is expected to be down some 480,000 units. Total European production for the third quarter is forecasted at about 4.6 million units. For the full year, our forecast for production is 19.9 million units in Europe, up about 2% compared with last year.

Within this estimate, Western European production is estimated to be about 13.1 million units. Beyond North America and Europe, we expect full year production levels to increase in China although the pace of growth most likely will moderate compared with last year. In Brazil, negative economic conditions continue to place a downward pressure on vehicle demand and production. As a result, vehicle production is expected to fall about 8% compared with last year.

As you would expect, we will continue to monitor the global production environment and make adjustments to our operations as appropriate. Based on the forecasted production estimates, currency assumptions and the first half operating performance, we now expect sales to be in the region of $17.5 billion to $17.7 billion, essentially at the higher end of guidance provided to you in April.

For the third quarter, sales are expected to be approximately $4.2 billion. We still expect capital spending for the year to be in the range of $730 million to $750 million as we build out our infrastructure in strategic high growth areas such as China in support of the continued expansion of our new technologies. Consistent with prior years, TRW expects to continue its trend of cash generation.

With regard to restructuring. We expect 2014 restructuring to be about $65 million, slightly high compared to our previous guidance as we continue to improve the competitiveness of our business in Europe. The restructuring plan remains on track. In fact we just recently completed the process of closing our steering facility in France.

With that, I will now hand the call over to Joe to discuss our financial results in further detail.

Joseph Cantie

Thank you, John, and good morning to everyone. As John mentioned earlier, TRW's second quarter results demonstrate the company's focus on delivering profitable growth. We had a very good quarter on many fronts. A quick recap of the key highlights for the quarter includes sale of $4.6 billion, an increase of about 8% compared with the same period last year, adjusting for the terminated businesses.

We had an operating profit of $389 million and a margin of 8.5% after excluding restructuring charges. Earnings per share were $2.27 on a GAAP basis and $2.32 after excluding the special items. And finally, the company's capital structure remains in great shape.

Although we are pleased with our performance to date, we also recognize that a lot of hard work lies ahead to ensure the company's 2014 goals are achieved. I will expand on our full year outlook shortly but first I will review our second quarter results in a bit more detail.

Starting with the income statement for the quarter, we reported sales of $4.6 billion, an increase of $79 million compared to the same period a year ago. Currency translation benefitted sales by approximately $72 million during the quarter as the euro to dollar to exchange rate averaged 1.37 this quarter compared with 1.31 last year. Excluding the effects of currency and the negative impact of about $248 million in lost sales related to the exit of certain of our brake and module businesses in North America, sales increased about 6% compared with the previous year with increases in each of our major geographic markets.

For the quarter, we had an operating profit of $383 million, compared to $385 million in the 2013 period. Included in both of the 2014 and 2013 quarters, were restructuring charges of $6 million and $1 million respectively. Excluding these charges from both periods, operating income was $389 million in the second quarter of this year compared to $386 million last year. Essentially flat with the profit pull through from higher sales being offset by approximately $15 million in plan cost increases to support our future growth.

Moving down the income statement. Interest expense totaled $26 million, below last year's level of $34 million. I will also mention that the 2013 period included a loss and retirement of debt totaling $5 million.

Finally, tax expense was $92 million in the current quarter compared with $97 million last year. For the quarter, our diluted share count averaged 117.4 million shares which is 8.4 million lower than last year reflecting our share repurchase programs. At the bottom line, we posted GAAP net earnings of $2.27 per share, compared with a $1.99 in the prior year. Excluding the effect of the special items from both periods, earnings were $2.32 per share this year, up 15% compared with last year's second quarter earnings of $2.02, which highlights the strong quarter that we had and the impact of our repurchase programs.

In terms of EBITDA. For the quarter we have $500 million excluding special items, compared with $492 million in the prior year measured on the same basis.

Moving on to a brief review of our first half results. We reported sales of $9 billion, which is an increase of $308 million compared to the previous year. Excluding the effects of currency and the negative impact associated with exiting certain of our brake and module businesses in North America, sales increased about 7% compared with last year's first half.

Our operating income excluding restructuring charges in the first half of 2014, was $717 million and a margin of 7.9% compared with $676 million and a margin of 7.7% last year. The year-on-year profit increase of $41 million was primarily driven by the associated profit from the higher level of sales, partially offset by planned increases in cost to support future growth.

Below operating income, interest expense was $57 million compared to $64 million last year. And as a reminder, a $5 million loss on retirement of debt was recognized in the first half of 2013. Tax expense for 2014 was $170 million on a GAAP basis and $175 million excluding the special items mentioned earlier, resulting in an effective tax rate of about 26%.

For the first half of 2014, our diluted share count averaged 118.6 million shares which is 7.7 million lower than last year, again reflecting our share repurchase programs. At the bottom line, we reported GAAP net earnings of $3.95 per diluted share compared with $3.28 in the prior period. Excluding the special items, earnings were $4.12 for the first half of this year, up over 17% compared with last year's net earnings of $3.52.

And finally in terms of adjusted EBITDA, we had $937 million, a solid result considering the negative impact associated with our terminated businesses and our planned increases in cost to support our future.

Let me shift now to our cash flows and capital structure. First on cash flow. For the quarter, operating cash flow was $257 million, which compares to $271 million in 2013. Capital expenditures for the current quarter were $131 million compared with $167 million last year. Free cash flow, which I am defining as operating cash flow less capital expenditures, was $126 million this quarter compared with the prior year level of $104 million.

For the first half, we had a free cash outflow of $162 million compared to an outflow of $178 million in 2013. Capital expenditures at $236 million during the first half of this year were $35 million lower compared to last year's level. Despite the cash outflow in the first half, which is consistent with our projections and normal seasonality, the company continues to expect a positive cash flow result for the full year.

At the end of the second quarter, our total gross debt was $1,892 million while net debt outstanding was $961 million. Net debt increased from the position at the end of the 2013 year, essentially by the $400 million of cash used to repurchase shares plus the $162 million of cash outflow during the first half of the year from operations.

As far as an update on our share repurchase programs, as we discussed on our last earnings conference call in April, the company entered into a $400 million accelerated share repurchase agreement during the first quarter and initially retired 3.9 million shares of our common stock. Upon completion of the agreement which is expected by the end of the third quarter, the total number of shares that will be ultimately delivered and the average price paid per share will be determined.

Further repurchases will depend on completion of the current strategic review, market conditions and other potential uses of our cash. For example, actions to significantly defease portions of our U.K. pension plan which is currently under evaluation and may occur in the latter half of this year.

Switching subjects now to the third quarter and the reminder of 2014. As John indicated, TRW's full year 2014 production forecasts are for 17 million units in North America, 19.9 million in Europe and continued growth in China. Based on these production assumptions and our first half performance, full year 2014 sales are now forecasted in the range of $17.5 billion-$17.7 billion. At this time, we are expecting third quarter sales of about $4.2 billion, about equal compared with last year's results.

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 cost associated with our growth plans, namely engineering, development and infrastructure cost, 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 are committed to ensuring the appropriate capital, engineering and infrastructure support expense take place to build out preparedness for future business, rest assured, we are equally focused on protecting the company's profitability. Moving on, although difficult to predict, we continue to expect commodity prices will remain neutral this year. We will continue to provide you with updates on this assumption as we report on our future quarters.

Restructuring expense for the full year will likely come in at around $65 million, again, slightly higher compared with our earlier guidance. Interest expense is forecast at about $115 million for the full year based on the current level of gross debt we are carrying.

Finally, given our expected results by geographic locations, you should continue to assume a full year 2014 effective tax rate of between 27% and 29% for modeling purposes. In closing, we are pleased with our performance posted during the first half of the year. However, as I mentioned at the start of my comments, we realize a lot of hard work lies ahead to ensure the company achieves its 2014 objectives.

That completes my comments. Before we move to the question-and-answer portion of the call, I would just like to remind you that we will only take questions specific to TRW's second quarter and first half results and performance. Operator, can we have our first question please?

Question-and-Answer Session

Operator

(Operator Instructions) We will now take our first question from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank

Just first question. You mentioned the U.K. pension considerations, I know it's overfunded on a GAAP basis but it consumes cash. Could you just remind us what the option is as far as defeasing that based on the U.K. rules? What that would cost?

John Plant

The option we have before us, Rod, is -- this is John Plant speaking by the way -- we can take a portion of the plan assets, considering adding some cash to it and make a major defeasment of that gross liability. So basically making the balance sheet of the company less potentially volatile at different points of the economic cycle. We already have made a major stride or several major strides over the recent years, to change the asset allocation to provide adapting of volatility, but this would take it one stage further.

We haven't given any specific numbers in terms of guidance today but we will like talking about an increasing step in terms of defeasment. We talked each year about making increasing steps. This would be potentially quite a major one and any cash used to do it would be well within the year's cash flow. So even despite this we would expect to generate cash for the year.

Rod Lache - Deutsche Bank

And just kind of a prospective question. It looks like TRW' has won a quite a bit of active safety business lately and I was wondering if you can comment at all on whether these are getting big enough that it would change your prospective growth expectations versus the market over the next few years. And we are also seeing the margins, on the gross margins side it at least looks like they have improved quite a bit. Is that at all related to this active safety situation?

John Plant

Certainly we said that active safety would be a major part of the future growth path of TRW. I think we have been largely successful. Having said that, we are not a position today to update any sales guidance for the future and, yes, I think that if we do that it will be more towards the end of the calendar years as we go into 2015.

Rod Lache - Deutsche Bank

Okay. And should we be reading at all into the gross margin trajectory. It looks like it was up quite a bit this quarter.

John Plant

I don’t think so. I mean we are following our normal pattern which is basically growing the company, developing the margin (indiscernible).Continuing to invest in future technologies and growth with the sort of pattern of drag that we have talked about, those investment in the past, Rod. So I think it's part of the continuum that we have talked about for some time now.

Operator

Our next question is from Ryan Brinkman with JP Morgan.

Ryan Brinkman - JP Morgan

I am curious what your latest thoughts in regards to your leverage ratio and whether the commercial benefits of being rated investment grade, for instance you have remarked before that it might make it easier to start contracts with certain OEMs. Whether these potential commercial benefits outweigh the potential financial benefits if you were to lever the repurchased shares to such a degree that you would potentially no longer have the two investment grade ratings that you do have now?

John Plant

We were pleased to receive our investment grade ratings that we have. I think we also have an upgrade or potential upgrade from Moody's for positive outlook. So that part we are pleased about. In terms of where our bonds trade, it hasn’t really made much difference to them but the bonds are trading well, especially in the -- I will say the strike price of the last two offerings that we have done. So in that sense, everything is good.

I don’t think that at this stage we have an comment regarding future leverage of the company. We intend to follow the share repurchase path that we have outlined to you in the past and really have no update to that today. We commented last year, I think it's last November on the Q3 earnings call, that we would put in place a second billion of share repurchase program. You can see that we are striding through that and Joe commented on that, that would draw to a close by the end of the third quarter. And we will have to evaluate what we want to do after that.

Ryan Brinkman - JP Morgan

Okay. Great, thanks. You cited the strong spring selling season in your prepared remarks and I see that you source IHS automotive forecast in several places in your slide deck including on Page 8. I am curious if you base your full year revenue directly on those forecasts or whether you layer in your own production assumptions. I asked because I think that July, the mid-July IHS forecast in North America is predicated upon 16.2 million U.S. light vehicles and yet you ran 17 million last months. Our channel checks suggest we might do that again this month. So if you do use IHS, are you looking at potential upside to production and maybe revenue at least in North America?

Joseph Cantie

So we don’t use just IHS, Ryan. We have a number of folks within our business that focus on trying to do the best job possible so that we can plan our business and our cost structure and our plans. We use IHS and quite frankly several others that we triangulate with what we hear from our customers and the folks right in the plans and come up with what we believe is our best focus on it.

We tend to cite IHS externally because that’s the one that everybody tends to formulate on. And as you can tell right now we tend to be in sync with where IHS is, so it's rather an easy thing for us to do when we talk to the investment community. As you may recall, over the years there have been several times where we have had estimates have that have been different from what IHS has. Just so happens that we are in sync right now.

Ryan Brinkman - JP Morgan

Okay. Got it. Last super quick question on CapEx. It was quite a bit lower, 131 versus, I think, 167 last year. Is there some lumpiness or does this somehow indicate that you are cycling past some of the big capacity expansion that you had in China etcetera?

Joseph Cantie

No, it's just a matter of timing between quarters, nothing more than that. You know we gave an update where we still expect the CapEx to be somewhere around that $730 million-$750 million range and you know it's going to be there or thereabouts, and it's just a matter of timing between quarters.

Operator

Our next question is from John Murphy with Bank of America Merrill Lynch.

John Murphy - Bank of America Merrill Lynch

Just a follow-up question on CapEx. It seems like it's leveling out on a year-over-year basis for the full year yet you are supposing some growth cost rolling in through your operating expense. Just curious, as we see the CapEx flattening out this year, are the growth cost still increasing? You know would we see that kind of reverse next year where the growth cost might fade and the margins might expand as you kind of appear to be getting through this real growth spurt?

John Plant

We haven't commented on specific margins for 2015 and don’t plan to do so today. I think we have commented on the future trajectory of our capital expenditure. We have said that as a percentage of revenues, that that will begin to reduce. Currently, we see ourselves at a high of around about, I think we said about 4.25%. We thought that would trend down over the next years as revenues increase, CapEx stimulation will begin to ameliorate. And probably we would trend back to our long-term trend line of about 3.75%. Very roughly in those sort of orders.

If you recall, we said that we were going to, in our expansion, overbuild in terms square footage to be able to just facilitize plants, particularly in China. And that’s exactly what we have done. We have commented that those are in the main, currently profitable, steaming ahead. And I think on the last call, I did comment that we do see the prospect of building two new plants which we need to come into commission at the backend of 2015. So everything is in line with what we have previously said and really don’t feel able, John, to update further today.

Joseph Cantie

John, the only thing I would add to that is, the growth expenses that we have don’t always align perfectly with the CapEx. So a perfect example, as John mentioned, that we just recently opened a large R&D center in Anting, China. Well, you know that the facility was built, the test lab and equipment was put in there. That’s the CapEx. But then you go through a phase of, quite frankly, multiple years of adding your engineers, your quality people, your infrastructure people. So you can see where the timing doesn’t always match perfectly between when capital is spend and when those infrastructure support costs are spend.

John Murphy - Bank of America Merrill Lynch

It's a very high class issue.

Joseph Cantie

It is.

John Murphy - Bank of America Merrill Lynch

A second question just to follow up on that even a little bit further on China. If you look at the expansion over there, up to 17% of your total sales are coming from China, at least in the quarter. Could you kind of give us some kind of direction? Is your percentage of profit higher than that over in China, meaning are your margins at least equal to your corporate average? And as we look at the capacity utilization in China ramping up, could we see a much higher proportion of your profit coming from China, well over 17% in the coming years and the margin to potentially be higher than the corporate average?

John Plant

We have really spoken the fact that we make profit in each of the major regions in about equal amounts. So there is nothing significant between any of our regions really. China is (indiscernible) to some degree but we do actually have somewhat of a module business there, albeit a shrinking part of the overall part of our China sales because it's really focusing more and more on the engineering to manufacturing to added value sales with the way we see it.

I guess, if you just compare it to, let's say Europe or the U.S., we would have some drag from the fact that we have been building out the plant and the infrastructure fairly rapidly. I mean it's difficult to really give you an accurate forecast of what happens there when we reach a position of stability because over recent years we have never reached that plateauing of revenues in China. And each year we have been increasing the overall share of TRW sales by, I am going to say a couple of percentage points.

So at the moment that trajectory seems that it's going to continue the forecasted build, continue to be healthy. Content growth within China with the increasing fitments of the safety, critical devices that TRW produces, also continues to have momentum behind it. So at the moment we just see this continuing as a healthy and good story for us where we are building out infrastructure, making healthy margins. And I think the only time I could imagine potentially an overshoot compared to other regions would be in the case of plateauing of the revenues. Which, quite honestly, at the moment we don’t see.

Operator

Our next question is from Brian Johnson with Barclays.

Brian Johnson - Barclays

You provided a great overview of the growth of your driver assist systems. I am wondering if you could do the same for your electric steering business. Maybe just a brief recap. A, how you are positioned in the market, b, the type of growth you are seeing in that, and c, your kind of product and technology backlog.

John Plant

Well, let's talk about the product technologies first. We focus on both the column drive electric steering and the belt drive electric steering, both of which are in high demand. We anticipate revenue growth over the next few years, essentially based on the current order backlog. And that growth is thought that it's going to be quite healthy. And today on the call I did comment about -- I called out one Chinese vehicle manufacturer for the belt drive systems that we have.

We had already, I think in maybe a couple of years ago, called out, I think four or five column drive electric steering contracts. We haven't updated you since then. So basically the product technology that we have is, I think perceived to be good. The business is growing and it's an essential part of the overall active safety system along with the, I will say the brake control business. Because you bring those to play and we talked about the active steering maneuver, which you could now do. And it obviously fits together very well with all of the advance driver assist systems of the cameras and radars in terms of providing, I will say the sensor and control inputs to be able to bring all of these systems together.

Brian Johnson - Barclays

And could you just remind us of the revenue in that business?

John Plant

The specific revenue in steering is somewhere in the region of -- between $2.25 billion and $2.5 billion but I was going to refer to Joe while he pulled his flier, just in case I am having a lapse of memory there. Brian, last year's steering systems accounted for about 15.5% of our 2013 sales. And then out of that 13.5%, obviously EPS is a subset of that

Joseph Cantie

The exact number is $2.6 billion, so John had it ranges correctly.

Brian Johnson - Barclays

Okay. And you don’t quantify how much that’s electric versus hydraulic, mechanical?

John Plant

No. I mean what you can assume of course is that the electrics is featuring an ever large proportion of it as the hydraulic steering side basically dwindles away to almost nothing over the plan period.

Brian Johnson - Barclays

A final question, a follow-up. Is that content, is that more CPV and more margin or it's sort of like to like swap?

John Plant

Well, the CPV in steering has been increasing for us year-on-year because historically when we did the mechanical steering systems and went to hydraulic, the revenue enhancement was substantial. In the hydraulic area, we only ever did the gear, never the pumps and pulleys and these sort of things. So when we move towards the electric steering system, as you know all of those other components are eliminated and all comes in to the motors, electronics, gearbox control systems.

So, again, the content for TRW increased substantially with that move from hydraulic into electric power steering. Essentially because we are capturing value provided by the manufacturers during the evolution.

Operator

Our next question is from Richard Hilgert with Morningstar.

Richard Hilgert - Morningstar

I know you need to have another investigation like you need another hole in the head but is the pricing investigation that’s going on in the aftermarket over in China having any kind of an impact on your business?

John Plant

No.

Richard Hilgert - Morningstar

Okay. The other question that I had for was on the rollout of active safety. Has there been any changes with the urgency that you are hearing from the automakers and can you kind of characterize how they are viewing it at this point as to how quickly they want to see this progress from being a luxury product into the mass market, or are we still going to be looking at a luxury situation here for the next three to five years?

John Plant

I think you have really got different dynamics in each of the major regions of the world currently. Within Europe, essentially down to the result of the new NCAP regulations which are coming in, particularly around the 2017 timeframe. That in [itself] (ph) for cars to achieve a 5 star rating, for example, of their cars, then certain features of these driver assist systems, possibly including automatic emergency braking, will be required for cars to achieve that rating. And certainly cars which aspire to be achieving that rating with some degree of margin for error will absolutely need these systems.

So that in itself is providing a regulatory growth in one of the regions of the world. Obviously, supplemented by the convenience feature of being able to have, I will say that adaptive cruise control and automatic emergency braking. In the U.S. today there are no regulations. We have had insurance , I will say papers suggesting that best practice or whatever the word is they use, would see these systems.

My feeling is that’s going to move in 2015 and into 2016, that it will be more of a requirement. And in the fairly recent past, I think in the last few weeks, a couple of people in Congress have proposed bills and I believe supported by the National Highway Association, is also proposing the fitment of some of these, I will say driver assist systems and automatic emergency braking. And so there is the prospect of rule making coming to being in the North American or the U.S. markets specifically. Again, over the next, I will say three or four years, or maybe starting (indiscernible). I [saw] (ph) proposal '16 on a three year phase in.

I mean that’s only proposed at this stage, it's not actual legislation or not an FMVSS regulation. But the impetus behind it is clearly there and it's possible it's occur. And so in the U.S. market it could move from what is perceived to be a comfort feature and general safety feature into one which is actually regulated.

My expectation if that occurs than prospectively there will be a China or NCAP regulation as well. So very much by different markets currently, Richard, but one which is developing and developing rapidly and therefore, I will say, a back glass to help underpin positive future view of these technologies.

Operator

Your next question comes from Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs

Just on the incremental margins. On 3.5% revenue growth, in the first half you did -- you converted very obviously, almost 20%. As we go into the second half, and that’s obviously just all in, that’s not organic revenue growth that includes the headwind from the brake platform. But as you move into the back half, I believe your implied guidance has a smaller amount of year-on-year growth. And I just want to see if we could see how you are thinking about the incremental conversion in the second half. There is a little bit less incremental revenue, all in of course, not organic. You know you talked about some of these growth costs that are ongoing but then some of the plans that you have recently invested in are incrementally more utilized. So how should we think about all that tying together?

Joseph Cantie

Okay. First of all on the sales. With the second half being slightly lower and again if you remember last year, the third quarter of last year there was a number of call offs of the usual breaks that occur in Europe and in North America. So that’s factored into our thinking on the sales side. When I think of incremental margin, typically our pattern is such that it tends to be lower in the second half versus the first half. The first two quarters are always our really strong quarters. There is a lot of different reasons for that.

One or the ones that I will point to is our D&A for all the equipment that we have placed over the last couple of year, always tends to tick up towards the second half of the year as we are placing equipment into service. So our D&A will be higher in the second half versus the first half. So there is a number of those types of things including the summer shut down effect on our fixed costs absorption that will cause the incremental margins to be slightly lower in the second half versus the first half. This is a very normal pattern that we go through in most years. So if you went back and looked at 2011, '12, '13, you would see a similar pattern.

Patrick Archambault - Goldman Sachs

Okay. Thank you. And then maybe, John, just touching on -- a question on touching on one of the things you said earlier when you were going through Europe. I noticed you used the term you have remained kind of cautious about Europe into the second half. I just wanted to see if what you are referring to is just the normal seasonality going from first half into the second half which is depressed, or if there was anything else in terms of orders you are seeing or inventories, any other concerns there.

John Plant

No specific concerns about inventories or anything like that. We just noted that the IHS numbers weren't showing any particular growth in the second half. And we have always been very cautious about Europe over the recent years. And I think we always want to believe that positive things are happening in terms of underlying demand. But we also note that the high unemployment level and there are still, I think, things to be sorted out in terms of the overall, I will say structure of the Euro zone itself including maybe some of the labor practices.

So basically, overall what we are saying is, we shouldn’t get euphoric about Europe at this point. We are pleased with the development but just have an overall cautious view to our outlook which serves us well in terms of planning our approach to it and our cost base. And you notice we have continued with our capacity utilization plans. We closed down a plant down in the first half which was in France. And we noted the restructuring plan that we have, again it's all to do with what I call our long line of site restructuring. And we expect that we will be announcing at least one further plant rationalization in the coming months in Western Europe because that’s the way we approach the market.

Mark Oswald

Mandy, we have got time for one more question.

Operator

Yes, sir. Our final question is from Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc Capital Markets

Any update on the European antitrust investigation? I don’t think so but I figured I would just check.

John Plant

No updates at all regarding that. I just really can't add anything to that because there has been no discussions, no activity and therefore really nothing to report.

Brett Hoselton - KeyBanc Capital Markets

That makes sense. And obviously the (indiscernible) folks are obviously contemplating that in there deal proposal here. But second question I have for you was, this is about the future, I know you are reluctant to talk about the future, but it's more industry related and related to your European comments. And I am just specifically wondering, on the European production front, what are seeing as far as summer shutdowns?

John Plant

Specifically, I will say mainly aimed at Germany. We actually do see additional shifts if anything being proposed or enacted. So I will say that’s particularly around the luxury brands, and I will say that’s a positive dynamic for us. But does it sway our overall view, I don’t think so. But nothing, if you are asking for negative comments, they aren't any. It's going along with the plan as we expected. I would say the positive dynamic would be around the main luxury brands, let's say BMW, Mercedes and Audi. And I think that’s about it really. I mean I would just overall comment, we just don’t want to get carried away that in Europe everything is now looking really good. I think it's steady and it's now steady to positive compared to where we have been in recent years.

Mark Oswald

Mandy, if you could please move to I'll conclude the call, it would be appreciated.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!