TRW Automotive Holdings' CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 5.11 | About: TRW Automotive (TRW)

TRW Automotive Holdings (NYSE:TRW)

Q1 2011 Earnings Call

May 04, 2011 8:30 am ET

Executives

Joseph Cantie - Chief Financial Officer, Executive Vice President and Treasurer

Mark Oswald - Director of Investor Relations

John Plant - Chairman, Chief Executive Officer and President

Analysts

Rod Lache - Deutsche Bank AG

Patrick Archambault - Goldman Sachs Group Inc.

H. Nesvold - Jefferies & Company, Inc.

Christopher Ceraso - Crédit Suisse AG

Brett Hoselton - KeyBanc Capital Markets Inc.

Himanshu Patel - JP Morgan Chase & Co

Operator

Good morning, and welcome to the TRW Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded. 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 First Quarter 2011 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 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 2010 Form 10-K contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2010 10-K and other 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 first quarter 10-Q within the next 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 in the conference call materials, which are posted on the Investor 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 or any other recording of this call and do not approve or sanction any transcribing of the call.

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

John Plant

Thank you, Mark, and good morning, everyone. As you can see from the results posted this morning, TRW started 2011 with a strong first quarter and has continued to build momentum. During the quarter, sales totaled $4.1 billion or 15% higher compared with the prior year quarter. Operating profit before special items was $382 million, with a margin of 9.3%. This marked the highest level of operating profit and margin for any quarter in our history.

Net income was $292 million, and earnings per share were $2.21 on the same basis. Regarding cash, the company generated cash from operations of $81 million and free cash flow of $14 million. We are extremely pleased with this best ever first quarter cash performance, considering the increased investment required to fund our growth and the normal seasonality of our cash flows. And this outcome in the first quarter laid the foundation for what we anticipate to be yet another year of strong cash generation.

And finally, our net debt of $719 million was another best outcome for the company and highlights our continued performance on further strengthening our balance sheet. Joe will discuss TRW's capital structure and the very positive developments that have occurred during the first quarter in just a few moments.

Overall, our first quarter results demonstrate that TRW is taking advantage of its strong position, and it continues to lay solid foundations to ensure long-term success. The trend established throughout 2010, during which the industry production volume has remained robust, was extended to the first quarter of 2011, with the recent production disruptions at our customers due to the earthquakes in Japan having a minimal impact in the quarter.

In North America, overall vehicle production was up 14% compared with the prior quarter. On a sequential basis compared to the fourth quarter of last year, production was up around 12%. This level of production has been supported by the gradual increase in consumer demand. For the quarter, the seasonally adjusted annual selling rate averaged 13 million units, up from the mid-12 million unit range experienced in the fourth quarter of 2010.

In Europe, vehicle production was up about 8% compared with last year's quarter. And on a sequential basis compared to the fourth quarter, production was up around 4%. Improving customer demand inside Europe, combined with strong consumer demand outside of Europe, which continues to support this level of production. In fact, in Germany and France, they recorded 14% and 9% year-on-year increase in registration, respectively during this first quarter, and these are definitely positive signs as we move into the year.

For Western Europe, first quarter production was up around 4% or 190,000 units compared to the fourth quarter of 2010. China and Brazil continue to be growth champions for TRW. For the quarter, TRW sales outpaced industry production in both markets. Combined sales in these 2 markets accounted for over 12% of TRW's total first quarter sales. Outpacing industry growth is not limited to China and Brazil, as TRW overall has outpaced the industry growth in each and every year in recent years. We expect this to continue in the medium term with incremental growth in excess of $1 billion per year based on our current views of vehicle build.

Moving onto the first quarter business developments. Product launches during the quarter continue to strengthen our diversification and leadership in intelligent safety solutions. A few examples include our electric power steering, driver's airbag module, seatbelt systems and steering wheels on the Ford Focus in North America.

In Europe, Audi launched Q3 with TRW's stability control, driver and passenger and side impact airbags, electronic park brake and steering wheel. And Honda Civic was launched in North America with our airbag control units, crash sensors and RF technologies. As a result of our ongoing quality and Six Sigma Programs, we continue to launch our products with world-class quality.

For the quarter, our quality average are just over 5 parts per million across all products and customers worldwide. In addition to the broad range of products offered to meet the needs of our customers to date, TRW unveiled several new products and announced future product launches during the quarter that will continue to strengthen our market position.

A few highlights include TRW's electronic park break for front axles, a development which marks the technology more affordable to a wider range of vehicle segments and brings advanced safety to smaller vehicles. Similar to rear EPB applications, the front axle system enables emergency braking performance and provides a wide range of competent safety features that can include heel and drive oasis, electronically controlled deceleration, rollaway detection and premium stencil management to support stop and go and also hold functionality.

Within our Steering business, recognition and demand for TRW's electric steering products continues to increase. During the quarter, TRW secured a major contract win to supply a range of vehicles with electrically powered hydraulic systems for light commercial van platforms. This EPHS system offers comparable reductions in fuel economy to EPS and reductions in CO2 similar to -- for electric steering, and it also accommodates higher rack load applications for the Light Van segments.

Another area of growth for the company is the growing demand for cameras and radar driver assist systems in vehicles. The company has gained a number of production contracts, including Ford collision warning enabled by camera and automatic emergency braking activities using our 24 gigahertz radars.

In addition to these production contracts, we continue to work on several development contracts with vehicle manufacturers to explore application options to integrate these systems. The future looks bright for TRW when you combine these products of today and tomorrow with our world-class quality, global reach and low cost base.

Before I turn the call over to Joe, let me comment on the expectations for the remainder of 2011. Overall, production forecasts have remained robust. However, uncertainty exists with regard to the near term global production as a result of supply-chain disruptions stemming from the earthquake in Japan, and has and will continue to have an impact on production schedules in the next 2 quarters.

At this time, taking into consideration the announced plant closures and reduced shift, we expect second quarter production to be roughly 3 million units in North America, about equal to last year, and roughly 300,000 units down compared with the first quarter this year. For the full year, we expect production to total 13 million units in North America, which is an increase of 9% compared with 2010. Within this forecast, we're assuming a large portion of the loss in light vehicle production occurring in the second quarter is recovered in the second half of the year.

In Europe, we're encouraged by stabilizing and increasing consumer demand in the region, combined with robust exports from the region thus supported the current levels of production. During the second quarter, vehicle production in Western Europe is projected to be about 3.2 million units, down about 8% compared to last year, and down roughly 300,000 units compared with Q1 total European production is forecasted at 4.6 million units. For the full year, our production forecast is 19.3 million units for the total of Europe. And within this estimate, Western European production is 13.4 million units, which is an increase of 2% compared with last year.

As you would expect, we'll continue to monitor the production plans of our customers and make any necessary adjustments to our operations accordingly. Beyond North America and Western Europe, we expect full year production levels in the high-growth markets, such as China and Brazil, to continue to expand, albeit at a slower pace compared with last year.

Based on the forecasted production estimates and revised currency assumptions on our first quarter performance, we now expect sales to increase to approximately $15.7 billion to $16 billion in 2011, an increase in our overall guidance we gave previously.

Sales in the second quarter are expected to be approximately $3.9 billion or 7% higher than the prior year. We still expect capital spending for the year will be in the range of $520 million to $560 million, primarily due to the incremental capital allocated to our strategic high-growth areas, namely China and Brazil, and the continued expansion of our new innovative technologies in support of the robust levels of business awards achieved in the past year. With regards to restructuring, we expect to continue as before in 2011, with expenses in the historical range of $30 million to $40 million.

In summary, we're pleased with our start to 2011, but are not complacent. Same as on generating cash and executing our growth strategy, while mitigating the impacts of the near-term industry issues. We're confident that by executing these strategies and that these will ensure the long-term success of our company. A solid balance sheet, the spend on technology, our strong market positions will enable TRW to maintain and intensify its positive momentum.

And with that, I'll now hand the call to Joe to go to our financial results in greater detail.

Joseph Cantie

Thank you, John, and good morning, everyone. As you can see from our results published this morning, TRW had a very strong starts to the year, as the company posted record results in each of the key metric areas for the quarter.

As John mentioned, in fortunate situations, Japan had virtually no impact on our first quarter results. The first quarter benefited from stronger sales and a lower level of anticipated returning structural costs. Key highlights for the quarter included sales of $4.1 billion, the highest level of sales in any quarter since the second quarter of 2008, when vehicle production levels were much higher. Operating income before special items of $382 million and an operating margin of 9.3% represent the best quarterly margin performance in the history of the company. Earnings per share were $2.13 on a GAAP basis and $2.21 after excluding special items, which is an increase of 34% compared to last year.

And continuing our trend of debt reduction, both total and net debt levels, again, reached historic lows, reflecting positive cash generation and debt repurchase activity in the quarter. More on the capital structure later in my comments.

Compared to a year ago, the overall favorable performance resulted primarily from increased demand for TRW products and the higher vehicle production levels in each of our major markets. Although we're off to a terrific start in 2011, we're focused on managing through and mitigating the negative impact of industry issues, the 2 most prominent being the Japan-related supply disruptions and commodity costs, to help ensure we achieve our full year goals.

I'll expand on our 2011 outlook shortly. But first, I'll review our first quarter in a bit more detail. For the quarter, we reported sales of $4.1 billion, an increase of $526 million or 15% compared to the same period a year ago. Currency translation had a minimal impact on sales during the quarter, as the euro to dollar exchange rate averaged 1.37 this quarter compared with 1.38 last year.

Excluding the effects of currency translation, sales increased in each of our major geographic markets. China continued to set the pace and help boost our sales in our Rest of World region by 14% year-on-year. For the quarter, we had an operating profit of $372 million, compared to $300 million in the 2010 period.

Included in this quarter's operating profit, was a one-off $10 million charge related to the termination of a service contract. The 2010 period included $7 million of restructuring charges.

Excluding these expenses from both periods, operating income and resulting margin in the first quarter of this year were $382 million and 9.3% compared with $307 million and 8.6% last year. The improvement in the absolute profit and margin reflects the contribution from higher sales between the 2 quarters and strong operating performance, partially offset by inflationary pressures, including higher raw material prices and increased cost to support our future growth.

We're obviously pleased with our ability to achieve margins above the 9% level, which demonstrates our focus on containing costs. However, downward pressure on margins from this level is likely, given near-term Japan-related production disruptions, seasonal offering patterns and higher costs associated with the industry attempting to make up the lost production when the supply chain issues are eventually resolved.

Moving down the income statement, interest expense totaled $34 million, which compares to $45 million last year. The reduced expense is reflective of our cash flows and reduced levels of debt between the 2 periods. The current quarter included a loss on retirement of debt totaling $10 million, as the company repurchased just over 113 million face value of bond debt during the quarter.

Below interest expense, the company also recorded a $9 million gain on the acquisition of a small business during the quarter. Although incremental sales will be minimal, approximately $10 million per year, and the consideration paid was negligible, U.S. accounting rules require that we recognize an immediate gain for the excess of the fair value of the business over the purchase price.

Finally, tax expense was $56 million in the current quarter, compared with $50 million last year. The 2010 period included one-off tax benefits totaling $2 million. The Q1 effective tax rate of 16% reflects the impact of our overall improvement in operating results and the geographic mix of our earnings.

As we've discussed previously, in various locations, but most notably the United States, we are currently in a valuation allowance position. As a result, we do not recognize tax expense and pretax income, which is benefiting our tax rate. At some point in time, and we're not sure when, this position will likely reverse at which time our effective tax rate will return to more normal levels. The good news about this is the fact that TRW will not pay cash taxes in the U.S. for many years due to our current and a well position.

At the bottom line, we posted GAAP net earnings of $2.13 per diluted share, compared with earnings of $1.61 in the prior year. Excluding the special items I just discussed from both periods, earnings were $2.21 per diluted share compared with $1.65 in last year's first quarter, again, an increase of 34%.

You can find a reconciliation between the GAAP and adjusted results I've just referenced in the schedules included in our press release this morning.

In terms of EBITDA, for the quarter, we had $498 million, excluding special items, compared with $425 million in the prior year, measured on the same basis. The 17% improvement primarily reflects the increase in operating income between the 2 periods.

Let me shift now to our cash flow and capital structure. First, on operating cash flow. For the quarter, we had $81 million, which compares to $21 million in 2010. Free cash flow, which I'm defining as operating cash flow less capital expenditures, was a positive $14 million this quarter compared to a use of $24 million in the prior year. The ability to generate positive free cash flow during the quarter is a very good result, considering that the higher level of investment needed to support our growth plan was fully funded by the positive impact of the increased level of profitability between the 2 quarters. The first quarter cash flow result, no doubt, lays a foundation for another strong year of cash generation despite a high level of reinvestment in the company.

Capital expenditures in the quarter totaled $67 million, up $22 million compared with the same period last year. The planned year-on-year increase was in support of our investments in strategic high-growth areas, our expanding technologies and the contract wins achieved last year.

At the end of our first quarter, our total gross debt and net debt outstanding were $1.760 billion and $719 million, respectively, both establishing record lows for the company. As I mentioned earlier, the company repurchased 113 million in bond debt during the first quarter, as we continue to focus on further strengthening our balance sheet and managing our maturity profile.

Subsequent to the first quarter, we have purchased an additional 33 million to date. Separately, earlier this week, the company has completed steps to eliminate the 2-stage maturity feature of our revolving credit facility, resulting in TRW having an approximate $1 billion facility that matures in 2014. While the size of our facility has declined by about $235 million, we have extended the maturity size, simplified the structure and lowered the cost of our facility. It was a necessary step.

Between the open market bond purchases and the revolving credit changes, the company's liquidity position declined by approximately $400 million. Our remaining liquidity continues to be very robust. We continue to evaluate the levels of liquidity needed for the company, our future investment in growth opportunities and whether any further capital structure opportunities exist, including options available to reduce our legacy liabilities.

We are actively managing our capital structure. And although from time to time, the company will run with a cash balance higher than historical levels, over the long term, we intend to operate with an efficient capital structure.

Switching subjects now to the second quarter and the remainder of 2011. As John discussed, TRW's full year 2011 production forecast are 13 million units in North America and 19.3 million units in Europe. And, of course, there's a higher level of uncertainty around the forecast relating to near-term production disruptions at our customers due to supply shortages within the industry. This uncertainty has unfortunately overshadowed improving demand for vehicles across our major markets.

Based on our revised production forecast, updated currency rates and our strong first quarter performance, full year sales are now expected to be in the range of $15.7 billion to $16 billion. At this time, we're expecting second quarter sales of about $3.9 billion, which is about 7% above last year's level. Compared to the prior year and the first quarter just ended, our Q2 sales will benefit from currency translation, which will carry little to no corresponding profit contribution.

As we move through the second half of the year, and specifically the third quarter, at this stage, we expect seasonality factors, such as summer shutdowns in both Europe and North America, to have a greater impact on our results compared with last year, when summer shutdown periods were reduced at several OEs.

For completeness, we continue to expect CapEx to range between $520 million and $560 million, which is consistent with our earlier projections. And with regard to restructuring, as John mentioned, we still expect our full year charges to be somewhere between $30 million and $40 million. Full year interest expense is forecasted to range between $135 million and $140 million, given the cost and level of debt for the company. And although difficult to predict, we still expect commodity and other inflationary headwinds of about $100 million to $120 million in 2011. As you might expect, we're aggressively working to recover and minimize the negative impact of these rising costs.

Finally, given our expected results by geographic location, we shall continue to assume a full year 2011 effective tax rate of around 18% to 20% for modeling purposes.

In closing, we're excited about the fast start in 2011, as it’s established a solid foundation to build on as we progress through the year. Our focus and commitment to growing the business while generating substantial cash and strengthening our market position has served us well in the past and will continue to drive long-term success for the company.

Mandy, we'll now move to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Himanshu Patel with JPMorgan.

Himanshu Patel - JP Morgan Chase & Co

I wanted to go to -- I think, John, in your opening comments, if I heard right, you mentioned that you guys expected $1 billion per year of sales growth per year. I think that's the first time I've heard that. Can you elaborate on that? Is that a kind of a backlog type of number you guys are providing? Or is that a number that includes TRW business wins plus industry production as well in there?

John Plant

I said on the last couple of calls, Himanshu, that we were thinking about how we wanted to give some expression of our future order book. And we've been thinking very carefully about that because as you know, I've never been in favor of a backlog measure because of there is a wide variety of means of measuring that amongst the companies. And previously, we've given sort of some CAGR commentary and said -- one, I think I said to you in the second half of 2010 and I think we emphasized in the, I think, November call and again, in February, was the fact that order book fill had been significant. We'd already been, I think, outpacing the industry growth. And this time, I decided to give some color to that and basically said to you that we would expect TRW to grow our top line something in excess of $1 billion per year based on our current views of vehicle builds. So, of course, it takes into account what we think vehicles will be. It takes into accounts our order intake and the new product launches cadence that we think is coming. So I thought I would give some indication today, which I hopefully, you'll recognize that as helpful to you and obviously, depends on where you thought we were and how you modeled us previously. But that does give you something to work on, albeit, of course, you'll tell me you'd like more.

Himanshu Patel - JP Morgan Chase & Co

We never say that, John.

John Plant

No. I mean, I can't hardly imagine so I decide to say it before just because I know it's like, I give you something, yes, yes, let me ask another question a different way.

Himanshu Patel - JP Morgan Chase & Co

I wanted to just clarify, was the -- just the excess of $1 billion sales figure. Is that a -- is there a timeframe attached to that? I mean, is that a 2012 type of number? Or is that like a multiyear number that we should think about?

John Plant

I'm just saying that, basically, based upon our views the build in the next few years, based upon our order intake, our current views at TRW's top line will be growing by something in excess of $1 billion per year. And of course, I'm not giving you any quantification what you mean by in excess of, I'm just saying, yes, I'm just giving you something, which is -- I'm hopeful you'll see it as helpful to you.

Himanshu Patel - JP Morgan Chase & Co

Yes, it is. Thank you. Joe, I wanted to go to your commodity comment. I think the $120 million to $125 million number is $20 million, $25 million above what you may have said last quarter. How are you guys just feeling about the overall commodity situation? I mean, obviously, we've seen a lot of spot price movement. Is there a general view that it's worse at a gross level, but maybe the net impact at the end of the day is not all that bad because the OEs are being cooperative and working with you guys to engineer cost out of the products and there's enough offsets there that we should think about? Or is this all just going to come straight out of margin at the end of the day, on a full year basis?

Joseph Cantie

I'll go first, Himanshu, then hand the costs to Joe. Just a bit of commentary and color. I mean, compared to the situation 3 or 6 months ago, I think we have experienced both a weaker dollar and might be hence, an increasing pressure for commodity increases. So that's been the general theme through the piece. I'm hesitant to say maybe there'll be some rollover of commodities in the next few months. But I sense and I feel and believe it may occur. But just right now, I think with what's occurred in the last quarter, we are seeing the higher impacts of commodity inflation. And as we've said to you in each of the previous years, when we've seen it, we worked hard to both offset it and also worked hard to recover that from our customers. I think any, let's say, value analysis that may go with we're trying to change and redesign products and materials around it, that's pretty tough in safety product because of the homologation activities. So it does tend to be a much longer process. And so I don't think you can say in any particular quarter, you'll see a change here. It's normally in a cadence of a year or 2 years for that to work and to take effect for us. But it's upon a question of what's the mitigation and what's the customer pass-through. And I believe we should work as actively in the future on those 2 subjects as we have done in the past then largely being able to deal with that, albeit, it's clearly higher pressure as we see it in May compared to what we did in February. And with that, Joe, I'll hand the numbers results.

Joseph Cantie

Himanshu, just to clarify. What I said was $100 million to $120 million in my comments today for the full year, three months or when we last talked to you, we talked approximately $100 million. So we're sort of still in that range, but maybe leaning though a little bit higher on that. And some of the commodities that we see coming up are things like yarns, of course, always steel, rare earth and bits of plastics that we're continuing to try to work around. It's very difficult, as John just mentioned, to forecast for the whole year. But right now, we are seeing the pressure, we have had incremental costs in the first quarter, and we expect it to be in that range. That's our best guess right now.

Himanshu Patel - JP Morgan Chase & Co

Okay, and then lastly, on the balance sheet, maybe by the end of the year, you may have more to say about this. But you mentioned potentially doing something with legacy liabilities. How do you sort of reconstruct the options for cash deployment over the next 2 years between doing something on legacy liabilities, acquisitions or share buyback?

John Plant

Well, first of all, we're very focused on reducing legacy liabilities. I think that's, if you track what we've done over the last 7 years, we've been very effective of driving those down to minimize the impact on the company. And in fact, as you saw, we did so again in 2010, I mean, we expect to take further actions in 2011 and in 2012 to try to do that, including maybe using some cash to effect some transition arrangements there. In terms of sequence, I mean, if the right acquisition comes along, I mean, we're always thinking in the, I mean, the more modest type bolt ons, I mean, you never can predict when those might occur, but we would obviously give those a very fair assessment. And I mean, I guess that would happen whenever it might happen. But it's always been in the case, we've done 2 in the last few years, it's always been in modest. I would expect, and my guess is we've got to fund it out of this year's cash flow. Then would come the legacy liabilities. And only after that would we consider at the end of this year’s moving to next year, what is the shape of the balance sheet and is it on the horizon to consider some sort of share buyback, and that will be the next thought we would have. But right now, we don't anticipate doing anything of that in 2011. And we should just continue to generate cash and then consider the options to really, well, I think strength the company, to first on just like an outstanding platform to help give ourselves even more choice in the future than we have now.

Operator

Our next question comes from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG

Just a couple things. First, just on the increase to your revenue guidance, You were at something like 5% on your prior quarter conference call. And now it's closer to 10%. It looks like 2 to 3-year points of that is the revisions to the build assumptions versus previous. Is the rest FX? Can you give us what you're expecting in terms of dollar contribution from FX for the full year?

Joseph Cantie

Yes, I would say, Rod, the revenue guidance raise for 3 reasons. One, productions up; two, a little bit more confidence in our penetration and growth of our safety products; and the third, clearly, currency. Right now, we view somewhere around 1.45 for the euro for the year. If you work the math on that compared to last year, that should benefit us year-on-year somewhere in the neighborhood of about $600 million on the revenue line. It's a good question. I'm going to use your question as an opportunity to make sure people heard the words I read in my prepared comments around the second quarter. Because in the first quarter, we had no currency effect year-on-year on the sales. We will have a large currency effect in the second quarter sales versus the prior year, somewhere around $300 million. So when you look at that, that has to be factored into the modeling on a quarterly basis.

Rod Lache - Deutsche Bank AG

Okay. And are you incorporating any kind of a mix impact to just with shifts in mix that are occurring as a result of higher fuel prices? Can you give us some color on how that is kind of taking into your -- into account in your outlook, if there's anything you can share?

John Plant

There's nothing that we could observe at this point that's fair enough to warrant within the, I'll say, approximate calibration of our guidance, there's nothing you could point to there that makes that bigger difference for us.

Rod Lache - Deutsche Bank AG

Okay. And are you still expecting structural costs to increases of something like $70 million? I think you had mentioned at least $25 million of higher engineering this year, $25 million of higher launch costs, and I think that there were some other things?

John Plant

I think that I said more than that. I mean, our increased engineering in 2011 was in the, I thought, more like the $80 million range.

Joseph Cantie

That's correct.

John Plant

So, I mean, we don't build ourselves for each quarter. We build ourselves for years of sustained growth and years of sustained capability of the company. And our judgment was not only had we increased engineering over the last few years in both a substantial amount of sales and in absolute dollars, but we felt it right with the opportunities that we've been able to develop from that to basically do all the application engineering necessary to -- for our growth. So in 2011, and this is like in respective of whatever happens to build now is, say, if there are disruptions this quarter for, let's say, for this Japan quake, our engineering build is going to be higher, and that's because we're engineering products that are going to come through in the 2013 and '14 and '15 timeframe. So that's our commitment to the future and to make sure that TRW is one of those strong outstanding companies in that timeframe, as well as also we're committed to our plan. And that plan includes the additional costs this year of which engineering is by far the most significant in terms of impact upon us, and we think that's just a great investment for the future. It's only part of the investment for the future. As you know, we've also already committed to and told you that we're going to spend in excess of $500 million on fixed capital, and a lot of that in the developing markets, again, to give us the penetration and market share that we want to have for a sustained business in those territories for the long term.

Rod Lache - Deutsche Bank AG

I guess I was hoping you can help me just reconcile. I mean, you're just achieving spectacular margin performance here. And if you use the midpoint of your revenue guidance, it's about $1.4 billion of year-over-year growth, $600 million is FX, so you've got $800 million or so organic. You apply the 20% to 25% incremental margin, you’re talking about maybe $180 million additional EBIT, but then you're mentioning raw materials of $100 million to $120 million, you're mentioning engineering going up by $80 million, yet we're just seeing very strong margin performance despite that. What are we missing in that kind of a bridge?

John Plant

Well, the first thing is the materials effect is, of course, is a gross effect, not a net effects. So that's one thing that's you may be missing. And outside of that, I'm not really sure.

Joseph Cantie

Yes, I mean, if I walk the bridge from the 14.3 plus, if you take the midpoint of our guidance at, let's say, 15.8, 15.9, you take off the currency, you get to the $800 million, no question. You multiply that by contribution margin. And then yes, you do subtract the $60 million, $80 million. You do subtract the raw material headwinds, and if you work that math, Rod, it shows, I think, what the right answer is. Now what the aberration is, is that we put up a 9.3% margin in the first quarter. What that implies when you think of that bridge that we just walked through is that margins are likely to contract as we move through the rest of the year, which is not unusual. When you think of the third quarter shutdowns and the fact that we typically are a couple 100 basis points below margin, just given the way summer shutdowns work with the flow of product. So I think that walk works.

Rod Lache - Deutsche Bank AG

Okay. My last thing is just on raw materials. I mean, you're giving us gross numbers, and I think last call, you said a lot of this is rare earths and yarn and things like that, that you didn't have a lot of experience in managing. How should we be thinking about the net effect of raw materials? How successful do you feel you could be in mitigating this?

John Plant

Well, it's clearly going to be variable. I mean, historically, if you look at the track over the last 6 years, the percentage that was covered with the range of our customer has been increasing. And just as we've -- I think we've commented in the past that we've got that coverage up against some very hoarse numbers because we choose to sign them. I said, so I think it was somewhere between 55% and 75% recovery. I mean, just as things we got it covered, then new areas appear, which quite honestly, we not thought about historically, so rare earth. So I got it quite still a work in process in terms of getting completion in all of these areas. And so as we turned it up from 2004 with the onset of last year's commodity inflation, our recovery percentage has been increasing with each year. And but then the kind of earning effect of new things coming on, which previously haven't been the feature. So it's a moving thing at this point, Rod. I just say that, we've given you the best guidance that we feel able to at this point, and I think that's about it, really.

Operator

Our next question is from Chris Ceraso with Crédit Suisse.

Christopher Ceraso - Crédit Suisse AG

Joe, on the second quarter, we appreciate the revenue guidance there to help us gauge the impact from Japan. And you mentioned the big FX piece, which helps us to model. Outside of that, is there -- are there incremental costs that you're bearing, whether it's premium freight or other kind of workarounds for your supply chain? Or should we think about kind of the normal decremental margin that you might see on revenue change from Q1 to Q2?

Joseph Cantie

I think there's a modest portion of drag, I guess, I'll call it, that will occur. So I think there's a little bit there, Chris, but nothing substantial. I think, again, I want to reiterate the fact that we're going to have a big currency benefit to our sales line that does not pull through profit. So you need to think about that when you're modeling in your margin against the incrementals. So when I look at the second quarter, production in the major markets of North America and Europe are going to be down over 6%. We gave a guidance number of $3.9 billion in sales, you have to factor in the currency movement.

Christopher Ceraso - Crédit Suisse AG

Right, understood. I don't think I saw any change or update to your cash flow guidance. Is it still, quote, positive? Is that the number?

Joseph Cantie

Yes.

John Plant

I think we gave a qualifying calibration of a word, which puts -- I think we gotten more positive. I think, Chris, I think we -- if you look at it, we tend to have outflows in our first quarters and commensurate with speaking out to enjoy a higher margin. So that's beneficial to us. And we managed to generate cash in the first quarter, despite what was really a very large working capital outflow, which you can see in our press release numbers. And so if you look at the historic cadence and obviously what's Q4 versus Q1, then we've experienced some of the -- and the toughest part of the year is always our first quarter. We've gone through generating cash. And so at the moment, we're feeling quite confidence that we're going to have a very healthy cash generation again in 2011. And I mean, you have to take notice that we're going to invest more this year as well. We said we're going to invest more in capital than last year. But nevertheless, it's part of the cadence of the company where, I mean, top I think is 2005 when we basically had a breakeven cash situation. But we are confident to seek to generate cash, and we intend to generate cash again this year.

Christopher Ceraso - Crédit Suisse AG

I guess that's kind of my point, John. You're now through what's typically one of the toughest cash flow quarters. You managed to generate a little cash. Your revenues are tracking up. Your margins are holding up well. You generated almost $800 million in cash last year. It seems overly vague and conservative to just say positive. Why wouldn't you put some bands around that for us?

John Plant

I guess, we could do. We will think about doing that for next time, I think, Chris.

Joseph Cantie

Yes. But I would say, right now, though, Chris, you've got a lot of things moving and shaking. You've got what's going on in Japan in the second quarter. You've got a lot of uncertainty around the production volumes. We talked about, perhaps, using some cash for legacy liabilities. There's just so many variables around it. We'll try to see whether we can give you some goalposts, but I think it's -- you start with last year, you look at the CapEx, you look at the sales growth and working capital factor on it, and I think you can get to a range and we'll try to see if we can provide you a little bit more guidance on that.

Operator

Our next question is from Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc Capital Markets Inc.

I was hoping you could provide me with a little bit more on the new business growth. Over the past couple of quarters, John, you've talked about it seems like an inflection point based on your orders kind of in that 2013 and 2014 timeframe. So and today, you're talking about $1 billion plus in sales over the next few years here. Is it still -- is it a reasonable expectation that your growth rate will likely accelerate as you kind of move into that back half of 2012, '13 and '14 timeframe still?

John Plant

I don't want to guide into specific years. And it's in -- and just trying to give compound annual growth rates because I think it's tough to be that specific and it assumes a level of knowledge about industry volumes, which quite honestly, we just don't have. But the clear thing I'd wanted to observe to you, I think, last time was that we had, had in 2010 and compared to the previous, let's say, averages over the last 3 years, where in each and every one of the previous years, we've had net incremental growth in our order book going forward compared to previous years. So while we always had that, we did observe to you that 2010 itself was an order of magnitude, better than that. And that's a result of maybe all the hard work we've done for years of increasing our engineering spend, building out our international infrastructure in places like China or in Brazil and India. And some of the benefits of that were taking hold. And so this time, without getting too specific because I don't want to assume a level of knowledge and presence that quite honestly, I don't think anybody in the industry can really have, what we tried to say to you today is that our revenue based upon our views as a vehicle build going forward should increase over the next few years by an excess of $1 billion a year. Now I don't really want to go much further than that. I mean, I suspect if I -- call it, it might be a touch higher in the, of course, in reality is the reason in the near years. But I mean, it's like that's feeling and sense rather than going too specific. But when you have the sort of things you talked about, like the increasing legislation and rule-making in certain countries, which takes the second level of effect in building up to 2014 in that sort of area, then obviously, that's helpful too. We've taken a good share of those markets. And with the -- some of the, I think, outstanding products that we've had developed in recent years, like the electric steering, with the increased demand for fuel efficiency, we're seeing a lot of demand for those. And actually did comments we did make a press release in January, which we don't normally do, we commented on some contracts for electric steering in China. And which we're really almost industry firsts in terms of the scale of those things and the excitement and the focus on fuel efficiency and emissions in those markets. So it's generally, I'm trying to say we've had a positive period more than the positive periods you have in the past. I mean, each one -- we've always had incremental net benefit in our order intake for years now. And it's, let's just say, it means slightly more, and I'm trying to give you some color around that.

Brett Hoselton - KeyBanc Capital Markets Inc.

Joe, as we think about some of these more significant headwinds, for example, the additional R&D or engineering expense here, is there any reason to believe that, that is going to result in step function increase in your expenses over the next few quarters here? Or is it pretty much baked into the first quarter and should continue all through the remaining 3 quarters?

Joseph Cantie

No, I would say it's evenly paced. We had -- when I look our first quarter which just ended, our support and engineering expense was up somewhere between $20 million and $25 million, and I expect that to continue each quarter.

Brett Hoselton - KeyBanc Capital Markets Inc.

And then how should we think about the raw materials. And normally, you have an increase in raw materials and you have some recoveries and so there can be some variability. It would seem as though the headwind would be greater here in the first half of the year and maybe a benefits from some recoveries in the back half of the year. But how are you thinking about the $100 million to $120 million?

Joseph Cantie

Yes, I mean, again, it depends on whether we're going to be in a constant inflationary cadence. So if have inflation each and every quarter, you're right, you have inflation then you recover it but you have the new inflation so you're basically taking a onetime timing hit as you go up on the inflationary scale. Of course, you would benefit when you have deflation, we don't see deflation this year at all. So it's a long explanation to saying that we expect to have inflation pretty evenly through the 4 quarters and maybe a tad bit more weighted to the first half of this year versus the second half.

Operator

And our next question is from Peter Nesvold with the Jefferies.

H. Nesvold - Jefferies & Company, Inc.

I missed the very tail end of Rod's Q&A. And I just want to clarify, you have said that the gross impact from materials are $100 million, $120 million for the year, but you have not quantified the net impact. Is that correct?

John Plant

That's correct.

H. Nesvold - Jefferies & Company, Inc.

Okay. What's the significance of terminating the Blackstone agreement? And was the $10 million an accrual expense, or was that actual cash expense?

Joseph Cantie

We're going to a transition phase with Blackstone. They own 17% of the shares. It's down to a de minimis level. A number of things happen in the first quarter. You would've saw that, John took over the chairmanship of the company, and it was time to transition out of that agreement. So we terminated it. And we -- it did not change the cash impact at all. So it was, in a direct answer to your question, it was an accrual. And it gives us certainty around that, an end date to that contract.

H. Nesvold - Jefferies & Company, Inc.

Is it [indiscernible] still chairs an accelerated basis or does that have no impact to the shareholding?

John Plant

Really, no impact. It doesn't make, change our decision at all because they had a right to call a present value of the remaining value anyway. So that doesn't matter to them at all.

H. Nesvold - Jefferies & Company, Inc.

And then last question, on the tax rate guidance, it was lower for the year, that's just an increase income mix in North America?

Joseph Cantie

We were always saying 20%. We're a bit lower in the first quarter, just based on the geographic spread what happened so we waited in what happened into the first quarter, and that caused us to go 18% to 20% rather than 20%.

Operator

Our final question comes from Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc.

Yes, actually, most of my questions have been answered. Just one I had was on Brazil. There's some concerns that we've heard about regarding the tightening cycle that's taking place there. As you guys are obviously on the ground and it's obviously an important growth market for you guys, can you tell us a little bit about the cadence of growth, specifically, if that's likely to sort of weigh on growth? And then secondly, is it something that would actually matter for your outlook? Or is the content opportunity there is significant enough to really propel your position there even if the market kind of slows down?

John Plant

I mean, Brazil is, it's always difficult to get. I'm talking about Brazil and then South America, and then the experience over 15, 20 years in exposure to it. And the, I'll call them the boom to bust cycle has occurred. I mean, I don't think any of us are feeling that Brazil is in anything at amount in far from maybe seeing a little bit of strength from a strengthening currency. And maybe they all find that they have occurred. So right now, I think all of us are feeling that Brazil continues to be strong, maybe equal moderate in the life of some of the pressures inside the country. I think we're expecting that wage inflation has to moderate and commensurate having a stronger currency. But if there is any pullback in the country, I mean, I don't think it's going to be materially in terms of the slow things we've talked about today in terms of revenues. And there's going to be significant content growth for us over the next 4 years, commensurate with the rule-making, which will I think, probably outweigh any degree of tightening and dimunition of economic activity. For the moment, I think, the maximum we're seeing is a slowing of growth rather than that georeversal into recession.

Patrick Archambault - Goldman Sachs Group Inc.

Okay, great. And actually, just one last one on China, if I can. Clearly, you guys have seen a lot of momentum there from electronics steering. How are they? Can you just refresh us, where are they in the stage of safety and legislation? It seems like fuel economy have taken a little bit more of a priority over safety in China, maybe a little bit like the offset of Brazil. How does the outlook for the safety side look like in China? When do you think that things like airbags and stuff like that might be? I'm sure they are starting to see shipment but when is the real opportunity on the safety side coming on?

John Plant

It's a more complicated picture in China because you got such dispersion of vehicles between the -- I'll call them the luxury and ultraluxury vehicles, not just the imported but also many of them like Audi's which are built in China, which have really a full suite of safety product. Like the way true to many of the small vehicles and light commercial vehicles, which have fairly modest levels of safety equipment at the moment. I mean, the best way I'll calibrate it is -- we'll talk about airbags, which is still fairly very low in terms of overall average equipment, putting it all there. To about seatbelts, where maybe only 10% of seatbelts today have pre-tension as fitted to them at 10%, plus or minus 5% depending -- media have change rapidly. But I think these 10%, therefore 90% don't have pretension. But over the next, I think, 5 to 10 years, we're going to see that moved to more western levels, not my rule mandated today but just because is really a great thing to having seat belt feature. So we are seeing increased activities on rule making. We are -- think about how we can best represent that in any industry. But right now, the prices in the economy, I think, we've seen the levels of the amount on emission, which is certainly, I think, looks to be greater than we have in the Western in certain respects. And so that's helped us a lot with our electric steering and I think we're going to see helpful effects in the future regarding the summary of all the safety products. But I don't think any impression to this. Airbikes and other. Because they already are. We have 2 airbags facilities. We have just built out inflated production facility and so that's the answer, healthy 2 airbag facilities, we've just built out our innovator production facility. And so it's a healthy market for us. Which have really expect to be much bigger in the future.

Mark Oswald

I think that wraps it up, Mandy. Thank you.

Operator

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

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