TRW Automotive Q4 2006 Earnings Call Transcript

Feb.22.07 | About: TRW Automotive (TRW)
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TRW Automotive Holdings Corp. (NYSE:TRW)

Q4 2006 Earnings Call

February 22nd, 2007, 9:00 a.m. ET

Executives

Patrick Stobb - Director of Investor Relations

John Plant - President and Chief Executive Officer

Joseph Cantie - Chief Financial Officer

Analysts

Ronald Tadross - Banc of America Securities

Jonathan Steinmetz - Morgan Stanley

Robert Barry - Goldman Sachs

Christopher Ceraso - Credit Suisse

Chris - Deutsche Bank Securities

Himanshu Patel - J.P. Morgan

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

Presentation

Operator

Good morning, and welcome to the TRW conference call. All lines have been placed on listen-only mode. 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 www.trw.com/results. Please download the material now if you have not already done so. After the speakers’ remarks, there will be a question and answer period. Due to today’s limitation on time, the Company requests that participants limit follow-up questions to one per caller. If you would like to ask a question during the Q&A period, you can at any time press “*” then the number “1” on your telephone keypad, and you’ll be entered into the question queue. Alternatively, if you would like to withdraw your question, press “*” then the number “2” and you will be removed from the queue. If you are using a speakerphone or hands-free unit, please pick up your handset before presenting your question.

I would now like to introduce your host for today’s conference call, Mr. Patrick Stobb, Director of Investor Relations. Mr. Stobb, you may begin.

Patrick Stobb

Thanks, Mandy, and good morning. Welcome to our fourth quarter and full-year 2006 financial results conference call. With me today is our President and Chief Executive Officer, John Plant, and our Chief Financial Officer, Joe Cantie. During the call, John will summarize our fourth-quarter results, and discuss other related business matters. Joe will then follow with an expanded review of the financial information. At the conclusion of our prepared remarks, both John and Joe will be available for your questions.

A couple of items for me to cover before we get started. First, the financial information that we released earlier this morning includes our GAAP results for both this year and last year as well as non-GAAP information that we believe is useful in evaluating the Company's operating performance. As required by Regulation-G, we have in our earnings release provided reconciliations of the non-GAAP information we will be discussing today to the closest GAAP equivalent results and information. These reconciliations can be found in the press release and financial schedules included with the presentation material provided today on our website at www.trw.com. If you would please now direct your attention to the Safe Harbor statement on slide 3 of the presentation.

During this call, we will be making forward-looking statements. I would caution you that all forward-looking statements involve risks and uncertainties. While our remarks reflect our current judgment on what the future holds, our actual results could differ materially from those contained in any forward-looking statements made on this call. The risk factor session of our 2005 Form 10-K, and our first quarter 10-Q contains additional information about risks and uncertainties that could cause our actual results to differ materially from the forward-looking information that will be discussed today. You can access our 2005 10-K and other SEC filings by visiting the investor information section of our website or directly through the SEC’s website at www.sec.gov. Additionally, we expect to file our 10-K by the end of this week.

The last item from me, a replay of this call will be available for approximately one week and can be accessed via dial-in through webcast on our website. Replay instructions were included in our release this morning. Additionally, we have not given our permission for any other recording of this call, and do not approve or sanction any transcribing of the call. This concludes my comments. I will now hand over the call to John Plant.

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John Plant

Thanks, Pat, and good morning everybody. In 2006, the Company performed remarkably well in a difficult and challenging business environment. We delivered solid and improved financial results, and also made good progress advancing the Company's strategic priorities. The strength of our safety portfolio, our leading geographic and customer diversification, and the ability to reduce costs once again helped drive the results in the face of weak industry fundamentals, especially in North America.

The North American auto industry, particularly during the second half of the year, presented a number of challenges, highlighted by the impact of market share losses and cuts in vehicle production by the North American Big Three that has cascaded inefficiency and redundancy to all levels of the supply chain. These lower volumes have impacted U.S. parts operations, together with sustained commodity, price inflation, and the accelerated mix shift away from higher-value SUVs and light trucks towards passenger vehicles. Despite these factors, we ended the 2006 year in a solid condition, improving the Company measurably during the year.

Firstly, our financial results we posted have record sales on operating earnings growth when compared to the previous year. Operating cash flow was a healthy $649 million. On the equity side, we eliminated Northrop Grumman's ownership position in November, and increased our float through a public offering. We ended the year with net debt reduced by $117 million compared to year-end 2005, after cash outflows for the Lucas bond redemption and Northrop stock transactions. Excluding the net cash outflows related to these transactions, net debt would have decreased about $230 million.

In 2006, and in previous years, dating back to our independence in 2003, we have taken several actions to curtail both pension and post-retirement health care liabilities in the U.S. The cumulative effect of these actions reduced related liabilities by approximately $235 million, which combined with other FAS 158 accounting changes, reduced balance sheet liabilities at year-end by some $805 million, and increased equity by the same amount. The difficult industry conditions have elevated our corporate-wide cost efficiency and restructuring efforts over the past couple of years, as evidenced by the 17 plant closures announced since the beginning of 2005. The majority of which have been closed.

With one notable exception pertaining to the Automotive Components group, which I'll speak to in a moment, a majority of the business units were again successful at containing launch costs in an environment where our unit output and sales were growing. In 2006, our commitment to world-class automotive safety did not falter. During the year, we invested over $1 billion, or about 10% of sales, for engineering-related costs and capital investments. We are investing this capital to extend the boundary of safety as we know it today, and to better position our technical capabilities and engineering services in emerging markets.

And finally, our net business awards in 2006, the lifeblood of our future growth were in line with our business plan objectives, and at a level that supports our growth proxy for the Company of 4% compounded annual growth. In summary, throughout the 2006 year, we maintained our focus, met our challenges and moved the Company forward, which will serve us well this year and beyond.

Turning now to the financial results. We reported fourth-quarter sales of $3.3 billion, an increase of about 4% compared to the prior year. While sales comparisons benefited from foreign currency translation and the Dalphimetal acquisition, the underlying result is good after considering the lower vehicle production.

In North America, industry production volumes were in line with our expectations, as overall North American production declined 8% versus the prior year. Within this, Big Three production was down 12%, which again included much lower production of light trucks and SUVs in favor of cars. The combination of lower Big Three production and the mix shift away from SUVs had a negative impact on the Company during the fourth quarter, and will have an impact as we start 2007.

In Europe, customer vehicle production increased moderately compared to the fourth quarter – sorry, during the fourth quarter, primarily due to stronger sales in Eastern Europe. As has been the case in previous quarters, our relative product strength in Europe and growth in Asia helped soften the impact of the lower North American production. Net earnings after adjustments in Q4 was $0.16 per share, which is above the outcome implied in our previous guidance, and this is primarily due to a lower level of restructuring, and a better net operating income in the quarter. This compares to adjusted results of $0.40 per share in the prior year. The year-to-year comparison was impacted by a number of factors, including the significant Big Three production cuts, lower restructuring expenses, and a higher effective tax rate in 2006.

Additionally, underperformance in the Automotive Components group continued in the quarter, albeit at a lower scale than we experienced in the third quarter. As I said during our last call, we have implemented a number of actions that have stabilized the performance in the group, and we are working to correct the remaining inefficiencies, which will have some legacy impact through the first half of 2007. Regarding our full-year results, we reported record sales for the Company, which grew 4% to $13.1 billion compared to the prior year. We reported operating income of $636 million after restructuring, which is up 15% compared to the prior year result. Additionally, operating margins in 2006 improved to 4.8% of sales.

Net earnings excluding non-recurring items, related primarily to debt retirement expenses, taxes and a one-time litigation reserve last year was $2.10 per share, which is a marked improvement compared to a comparable $1.72 per share in 2005. Despite facing significant second-half operating challenges related primarily to the Big Three production cuts in North America, we did report solid growth in our financial results, generating good cash flow and made considerable investments in our future that will help to enhance our technology and market presence as the global leader in safety.

Moving forward, the challenges facing the parts industry are significant. This is a result of intense market competition amongst the vehicle manufacturers, particularly in well-established markets, where significant new capacity is being installed. The industry also faces the resource constraining impact of rapid globalization, cost pressures from commodity inflation and supplier insolvency issues. The North American market has been the most severely impacted, where consecutive years of Big Three market share losses and commodity inflation have taken a heavy toll on many companies, and has put into motion unprecedented actions at all levels aimed at rightsizing operations in the region.

We are monitoring customers and suppliers as we work to protect TRW against costs resulting from financial issues, including insolvency filings. Although we been relatively successful in managing these situations, we are bearing costs at a higher level than normally associated with our supply base. We have been very active in countering the impact of the industry pressures.

As I mentioned previously, since the beginning of 2005, we've announced 17 plant closures, including a fasteners plant in Madrid during the first quarter of this year. To update you on our progress, 12 of these facilities have already been closed. In addition to plant closures and moving capacity to competitive locations, we have also a number of programs that are aimed at making current facilities more competitive. This can be achieved by improving productivity and work flexibility, maximizing utilization, and addressing uncompetitive wages and benefits.

We are also focusing a great deal of effort on rationalizing our non-manufacturing costs as well. For example, over the last few years we've taken a number of critical actions to curtail pension and post-retirement related costs, which have resulted in a reduction in liabilities of approximately $235 million over this period, and this is after inflation. In the midst of this environment, the Company has performed well. And I can say with comfort that TRW in 2007 is fundamentally a much better company than it was just three years ago at the time of our IPO. The premise of our plan is to continue to improve at this pace for the foreseeable future.

Looking beyond the 2007 environment, the projected outlook through to the end of this decade for TRW is solid. This is based on our contract wins over the next few years, which we anticipate providing steady demand for added safety content in vehicles. During this time, you'll become more familiar with our leading-edge suite of technologies of electric steering, electric power brakes, advanced rollover curtain airbags, to name just a few.

The progress of the Company is not limited to our technology. We have near-term opportunities to improve our capital structure. And, indeed, in no later than early 2008, we’ll be making the progress at driving down our effective tax rate. We believe our business potential and the progress we've made during very difficult times helps TRW stand out as a leading supplier to the automotive industry.

Now I'd like to turn to our assumptions and outlook for 2007. The business plan for the year will again depend heavily on the strength of our safety portfolio, diversification, and our ability to achieve the appropriate level of cost reductions. The full-year outlook we are providing today reflects the industry conditions and other factors impacting our business.

We expect production in North America to be approximately 15.4 million vehicles, which is on a par with the prior-year level. In Europe, including Eastern Europe, we expect vehicle production to increase moderately to 20.5 million vehicles. With respect to North America, Big Three production is expected to be down about 4%, with first-half production significantly lower within that overall result.

As a result, the net impact of industry volumes is expected to be negative for the year-to-year sales comparison. With that said, guidance for 2007 is as follows. We expect sales in the range of $13.4 billion to $13.8 billion. Considering the impacts of the industry production, as I just mentioned, and customer pricing pressures, we expect much of this revenue growth to come from currency translation and new business contracts, which for 2007 includes a higher-than-normal rate of module sales.

We expect earnings per diluted share to be in the range of $1.85 to $2.15 per share. Our estimate for pre-tax restructuring expenses is $40 million for the year, and we expect capital spending to be approximately 4% of sales. And finally, we expect a full-year effective tax rate of approximately 42%. In our assessment, we do not expect the industry challenges I mentioned today that they will disperse anytime soon. For this reason, we are focused on operating in an extremely lean way in the first half of the year, with the hopes of mitigating the severe industry conditions that we see in front of us later in the year.

And with that, I will now hand over to Joe to discuss our financial results in further detail.

Joseph Cantie

Thank you, John, and good morning to everyone. As you can see from the financial results we’ve released earlier this morning, our fourth quarter came in better than we anticipated and discussed during our last conference call. However, a number of challenges, both industry and company specific were negative to us in the quarter and will continue to pressure our performance in the first half of 2007, especially in the first quarter.

Emphasized in John's discussion, the challenges including the dramatic decline of customer production schedules, continuing commodity inflation, costs related to the weakened state of our supply base, and the negative performance of our Automotive Components Group. I'll expand on our guidance for 2007 in a few minutes, after I review our fourth-quarter and 2006 full-year results, including some comments on our capital structure and cash flows.

As I look at our 2006 results, it actually shows a very positive scorecard, especially in light of the industry conditions. We grew our sales by 4%; we increased our EBITDA by 8%; increased our earnings per share, after adjusting for onetime items by 22%, and reduced our net debt by about $117 million. Overall, a solid performance, demonstrating another year of resiliency and progress.

For the fourth quarter, we reported sales of $3.3 billion, an increase of $136 million, or 4.3%, when compared to the previous year. Currency translation benefited the year-to-year sales comparison by $157 million. The euro, our most significant translation exposure, averaged 1.29 against the dollar, which was about 8% higher than the average exchange rate we experienced in the prior year. At current exchange rates, a similar positive impact is expected in the first quarter of 2007.

Consistent with previous quarters, while our sales benefited from currency translation, there is no corresponding positive profit impact after considering our net translation and transaction positions. Sales in the quarter also benefited from last year's fourth-quarter acquisition of Dalphimetal, which improved sales by $32 million.

Excluding the effects of currency translation and the impact of the acquisition, sales actually declined by $53 million compared to the previous year. Beginning with the positive factors in the 2006 quarter, we benefited from a higher penetration of safety product sales and a stable European production environment, along with healthy sales growth in the developing markets of China and Brazil. These factors were more than offset by the impact of significantly lower Big Three vehicle production in North America and pricing provided to our customers.

Operating income in the quarter was $126 million, which is down $7 million from the previous year. Within the year-to-year variance, the 2006 quarter benefited from lower restructuring related expenses of $43 million, and the prior year included a onetime gain of $18 million due to a favorable reduction in litigation reserves. Factoring these items out of the comparison, operating income declined by $32 million between the two periods. This decline was driven by a number of factors, including the decline in Big Three production, pricing provided to customers, and the continuing challenges of net commodity inflation and supplier-related issues.

Additionally, the carry-on effect related to the underperformance in the Automotive Components Group also weighed on the results, which had a $19 million operating profit decline before restructuring compared to the previous year. A number of positive items helped to mitigate these factors, including savings from cost reduction actions, benefits derived from restructuring, and the impact of favorable business settlements in 2006.

Restructuring expenses in the quarter were below the level we indicated previously, which was driven by two factors. First, timing of certain actions moved across the year-end close and will now occur in 2007, which is reflected in the restructuring guidance John provided earlier. And second, a certain action anticipated for the fourth quarter is no longer being contemplated, given a change in business assumptions. Below operating income, net interest and securitization expense was $66 million, which compares to $58 million in 2005.

The impact of the four Fed rate increases in 2006, an incremental debt from the Dalphimetal acquisition drove the year-to-year increase. Based on our current expectations, our quarterly run rate for interest in 2007 is estimated at about $65 million, assuming of course no additional Fed activity. I should also mention during the quarter we terminated $250 million of interest rate swaps, which effectively moved our floating-rate debt profile to approximately 71%.

Tax expense for this year's fourth quarter was $32 million, which equates to an effective tax rate of 49%. Taxes in the fourth quarter benefited from several changes that resulted in us being able to recognize a tax benefit for the first-quarter loss on retirement of the Lucas notes, totaling $17 million.

Excluding this benefit, the effective tax rate would have been actually about 75% in the fourth quarter, which is higher than our full-year adjusted rate of 46%. At the bottom line, we posted GAAP net earnings of $33 million, or $0.32 per share. In comparison, we earned $59 million or $0.57 per share last year. As I mentioned previously, the 2006 results included the favorable tax benefit of $17 million related to the Lucas transaction. And of course the prior year included the onetime legal reserve adjustment of $18 million. When excluding these items from our results in both periods, net earnings were $0.16 per share in 2006, which compares to $0.40 per share in the prior year.

And finally in terms of EBITDA, we had $267 million for the quarter, which compares to the prior-year level of $268 million. Moving to a brief review of our full-year results, we reported sales of $13.1 billion, which is an increase of $501 million, or 4%, when compared to the prior year. The acquisition of Dalphimetal positively impacted sales by $336 million, while foreign currency exchange contributed $172 million. When excluding these items from the comparison, our sales were essentially flat year to year. Of course, within this result, our sales were negatively impacted by production losses at the Big Three in North America and pricing provided to customers.

For the second half of 2006, our North American sales were down 12% compared to the prior year. Moving on, operating income for the full year was $636 million, an increase of $83 million when compared to the prior year. On a margin basis, we achieved 4.8% this year compared to 4.4% last year. Excluding restructuring-related expenses from both periods and the $18 million legal benefit from the 2005 results, operating income increased by 3%. The increase was driven by several factors, including operating cost savings and other favorable business settlements in excess of customer pricing, inflationary pressures and supplier-related issues.

Our net cost performance, along with increased safety product sales and the non-recurrence of certain costs in the prior year, more than offset lower net industry sales in the second-half underperformance by the Automotive Components Group. Below operating income, net interest and securitization expense was $250 million, which compares to $231 million in 2005, up 8% given the increased interest rate.

In the 2006 period, we incurred expenses of $57 million associated with the Lucas bond tender transaction. Likewise, we incurred debt retirement expenses of $7 million in the prior year. Tax expense for the year was $166 million. Excluding the tax benefit from the Lucas debt retirement, tax expense was $183 million, which resulted in an effective tax rate of 46% for the year. As a reminder, if you are comparing taxes between years, the 2005 period included a onetime tax benefit of $17 million related to a tax law change in Poland.

Working down to the bottom line, we reported GAAP net earnings of $176 million, or $1.71 per diluted share. This compares the GAAP results of $204 million, or $1.99 per share in 2005.

Net earnings excluding expenses related to the Lucas tender transaction were $2.10 per diluted share. In comparison, last year's net earnings excluding onetime items were $1.72 per share.

And the last item to cover in terms of EBITDA, we had $1.166 billion in the year-to-date period, which compares favorably to the prior-year level of $1.075 billion.

Moving now to our capital structure and cash flows. During the year, we made two moves to deal with inefficiencies in our capital structure relating back to the 2003 Blackstone acquisition. The first was eliminating the Lucas notes. And of course, this cost us $57 million. The second occurred in November, when we repurchased Northrop's remaining ownership position of 9.7 million shares, and on the same day, we sold 6.7 million shares of common stock through a public offering. In addition to eliminating Northrop's ownership position, the net effect of these transactions resulted in a use of $56 million to repurchase 3 million shares. These two moves in total cost us $113 million, but will benefit our cost of capital on a go-forward basis.

We still have work to do in the form of addressing our existing debt and tax structures, which will continue to be a focus for us over the next couple of years. At year-end, our net debt outstanding was $2.4 billion, a decrease of $117 million compared to our position at the end of the 2005, which represents good progress for the year. Excluding the cost of the two moves I just described, net debt would have decreased $230 million in the year.

Fourth-quarter net cash provided by operations was $397 million, or $202 million after capital expenditures. By comparison, net cash provided by operations in the prior year was $380 million, or $158 million after capital expenditures. For the full year, net cash provided by operations was $649 million, or $120 million after CapEx. This compares to net cash from operations of $502 million, or an outflow of $1 million after CapEx in 2005. So as you can see, we made some good progress in 2006.

Full-year capital expenditures totaled $529 million in 2006. This compares to $503 million in 2005. And finally at quarter-end, our revolver and receivables facilities were undrawn, and we maintained liquidity in excess of $1 billion.

Before moving on to our outlook, I'd like to discuss the impact of a recent accounting change relating to our pension and OPEB positions. As required by a new accounting standard, FAS 158 issued this past year, we recognize the funded status of our pension and post-retirement plans on our balance sheet at year end. The adoption had a material impact to our balance sheet, raising our equity balance by $805 million. Unlike most companies, who increase their liabilities as a result of this change, our impact was a positive one as a result of several factors that included the actions we've taken over the last three years to curtail pension and retiree health care costs, which together contributed about $235 million to the adjustment. As a further measure of this change, our debt-to-total-capital ratio now stands at 56% compared to 73% at the end of 2005.

Switching subjects now to our guidance, John provided the overall 2007 sales and earnings outlook that reflect our views on the challenges facing us for the year. Sales in 2007 will benefit from currency translation and a higher level of lower-margin module sales. These two factors will more than offset the sales decline due to lower North American Big Three customer production schedules, and the effect on our commercial steering business of lower Class 8 builds. Unfortunately, the profit effect of these movements is highly negative. This will be especially evident in our first quarter, whereas a result of this negative mix and other factors, we see operating margins only slightly above the level achieved in our 2006 fourth quarter.

For the first quarter, sales should be approximately $3.5 billion, which is higher than the previous year, primarily due to currency. The sales level is based on industry production of about 3.9 million units in North America, and 5.2 million units in Europe, including Eastern Europe.

In summary, 2006 was a very good year for us. The scorecard looks very good. Unfortunately, the pressures that we faced in the second half of last year are front and center in the first half of 2007, and especially in our first quarter. You can expect that we will again look to mitigate the challenges by focusing hard on our cost base, while making the appropriate investments to ensure we grow our business and remain globally competitive in the future. That completes my prepared comments. We will now move to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ron Tadross with Banc of America.

Ronald Tadross - Banc of America Securities

Good morning, guys. Thanks a lot. A couple things here. First, well, two things. Your other automotive segment has pretty much fallen in half since 2004, if I look at the profits from that segment. As you look out to 2007 and 2008, do you think you can recover some of that lost ground?

John Plant

I will take that one first, Ron. It's certainly true that the second half of last year we experienced the, I'll say, primarily launch difficulties I referred to, in fact in detail, on the last call. And that effect we said would drag on into Q4 and the early part of 2007. It has got better. It got better in Q4, but still a drag. We believe that it will get better again in Q1 and Q2 this year. And we expect to be back to our run rate that we had previously in the second half of this year, albeit I'll say not -- obviously it won't be a full year at the same rate as we were historically.

Ronald Tadross - Banc of America Securities

Would you say --?

John Plant

To give you some color on that is that in three of the four business units in that area, we have indeed changed some of the management out, and taken very clear and decisive actions. And those actions are already showing benefit to us. And as I say, we're expecting an improved run rate as we go into the second quarter, third quarter and fourth quarter of 2007.

Ronald Tadross - Banc of America Securities

When you say it will get better in Q1 and 2, are you talking year-over-year or sequentially?

John Plant

I'm talking about sequentially quarter-on-quarter. So we expect that the legacy, I will say launch difficulties we've had, they got better in Q4 compared to Q3 so the impact. And they will get better again in Q1 compared to Q4. So we're seeing those things get better, but I'm not expecting that Q1 of 2007 will show for Automotive Components an improvement compared to Q1 of 2006. So you need -- as an improvement quarter-on-quarter sequentially for that area.

Ronald Tadross - Banc of America Securities

So, like in 2008 and 2009, I guess it's not out of the realm that this is back to like $100 million profit business or segment?

John Plant

Actually, I can't remember the exact numbers, but certainly we see getting back from the what I call relative disappointment and going back to -- if you remember the fact that we had to scrap off some significant tooling and to re-launch and redo all that tooling, and incur the launch pain while those new tools in fact have been gradually brought on. And that’s what’s going on, that is what's going on. And the improvements we're seeing come to bear now.

Ronald Tadross - Banc of America Securities

Okay.

Joseph Cantie

Ron, in 2005 we did about $120 million of profit in that segment. And this year, we're going to somewhere around $74 million or $75 million. So no reason we can't get back above the $100 million mark.

Ronald Tadross - Banc of America Securities

Okay, and just one other quick thing. Your restructuring, you spent about over $100 million in '05 on restructuring. In '06, you were down around $30 million. Why shouldn't I be worried in '07 and '08 or '07 that there is not that potential cushion there from the restructuring savings that you had in '06. Assuming there was the savings you had, the money you spent in '05; you saved money in '06. You didn't spend as much money in '06. Why should I be not worried that that savings cushion is not there?

John Plant

First of all, you never get an instantaneous, one, A equals B on restructuring. It takes time for it to come through. So of the -- I think I mentioned to you we've announced the closure of 17 plants, 12 of which have been done. Not all those happened at one time, and so some of those, in fact, we closed up during the third and fourth quarter of 2006, and therefore they will indeed show benefits in 2007. We went through a significant plant closure program in 2006, some of which is going to happen in closures in 2007 and into early '08. And we expect that from the restructuring program that we have this year, which we say we've called out $40 million, that was $40 million plus or minus a factor, that will take us through into '08 and '09. So the way we look at it is that we have a normalized restructuring in that, I'm going to call it $30 million to $40 million range. So we expect that each and every year we will restructure in that zone. It's parts of the ongoing way of life as we transition from some of the high-cost countries to low-cost countries, and indeed built additional capacities, particularly in Asia. But in 2005, you recall what we said was, we saw the ability not only to afford to be able to take a much more significant restructuring program and grow profits during the course of 2005, but also we thought we would get ahead of the game. And indeed, we think we were ahead of the game. And so we had executed a restructuring program, which is more aggressive than our average, but it paid us well in terms of good operating performance and cost reductions into '06 and '07, and that was ahead of the industry.

Ronald Tadross - Banc of America Securities

Okay.

John Plant

And so basically what we're saying is we're going back to what we think is a more normalized level, and that is exactly where we need to be, because what we don't want to do is to go into any of these knee-jerk reactions, I call them, across-the-board, 10% cuts here or whatever. We are very clear and we have a forward program through '07, '08, '09 in terms of the plants that we're looking at with a view to closure. And so it's part of a multiyear plan, which gives us that consistency.

Ronald Tadross - Banc of America Securities

Okay. Thanks a lot.

John Plant

Thank you.

Operator

Our next question comes from Jonathan Steinmetz with Morgan Stanley.

Jonathan Steinmetz - Morgan Stanley

Good morning, everyone.

John Plant

Good morning Jonathan.

Jonathan Steinmetz - Morgan Stanley

A couple of questions here. You referenced in the release, I quote, 'favorable resolution of certain business settlements.' Can you just discuss a little bit more what that is? Is that customer pricing type of stuff? And what that change in accruals might have been year-on-year in terms of a benefit on a dollar basis?

Joseph Cantie

Yeah, in each and every quarter, and each and every year we constantly have things that we settle out, either with customers or suppliers. In the case of the fourth quarter, we had a level, I'm going to say a net level of about $12 million of settlements that came in for us related to programs that we had previously won at customers, where the customer canceled the program, and we went back and made claims to recover some clear costs that we incurred relating to those programs. So roughly around $12 million net in the quarter. But again, we usually have some amount of that as a regular part of business every quarter.

Jonathan Steinmetz - Morgan Stanley

Do you have any idea what the fourth quarter in '05 would have been relative to - is that a few million and there is some delta between 12 and a fewer, or would that be closer to zero?

John Plant

Yeah, I mean, a few million difference. As Joe said, each and every quarter this pertains to a customer canceling something, and we don't have the revenues for that we claimed for the -- I'll say the tooling costs, etc. But we get those every quarter, with basically the revised cycle plans that we've had here in particularly North America.

Jonathan Steinmetz - Morgan Stanley

Okay. And a couple of cash flow, housekeeping questions. For '07, Joe, can you just review what you are expecting from pension and OPEB expense and then cash contribution? And then secondly, I noticed $97 million of proceeds from asset disposals. I think the number in the third quarter was $33 million. Can you just talk about what accounted -- what was the actual sale that accounted for that delta?

Joseph Cantie

I will take the second one first. We had a number of things that occurred in the fourth quarter or close in the fourth quarter. So we had unwound across ownership position related to our acquisition of Dalphimetal, where we owned shares in Nihon Plast, and Nihon Plast owned shares in Dalphimetal. We unwound that. And the way the cash flow works is you have an amount going through your proceeds, but then you also have an amount going through your acquisition line, so those two net out. So that $97 million number, you really have to net out the other side of that Nihon Plast plan transaction. In addition to that, we sold, you know, we're closing these 17 plants that John keeps mentioning. Well, clearly, as we're closing them and clearing them out, we are trying to sell them, sell the property. And we've had a couple of sales of facilities, plant facilities, in the fourth quarter. And I think we had a sale leaseback transaction. So that covers that one. As far as pension and OPEB, in 2006 we spent somewhere around $240 million in total. So that would include all of our pension contributions, that would include all of our payment of retiree health care. So call it about $240 million. As I look forward to 2007, it should be down slightly, call it around $225 million. What you see going through the cash flow statement there is the difference between what goes through the P&L and cash.

Jonathan Steinmetz - Morgan Stanley

Sure. And if I could just sneak one in, you talked about auto components. I may have missed this, but can you give the segment level EBIT changes for the other divisions as well?

Joseph Cantie

You know what, we will be filing our K probably tomorrow, so you will able to see them, but very quickly here, if I look at the chassis group, and these are after the restructuring charges that would be apportioned to them, you had chassis at $288 million for '06 compared to $273 million last year. And if you look at occupant safety, you had $420 million this year compared to $296 million last year.

Jonathan Steinmetz - Morgan Stanley

Thank you.

Joseph Cantie

Thank you.

Operator

Our next question comes from Robert Barry with Goldman Sachs.

Robert Barry - Goldman Sachs

Hi guys, good morning.

Joseph Cantie

Hi Robert.

Robert Barry - Goldman Sachs

Did you say how much of the expected revenue growth in '07 is coming from FX? Or is there any?

Joseph Cantie

Yeah, I gave an indication that it would be roughly similar, at least for the first quarter, it would be similar to the fourth quarter, so call it $150 million overall for the year next year, if the rates stay right where they are. And it's not only the euro, it's all of the rates. We're looking at probably a couple hundred million to $250 million translation positive.

Robert Barry - Goldman Sachs

Okay.

Joseph Cantie

The biggest brunt of that will be in the first quarter, obviously.

Robert Barry - Goldman Sachs

Okay, right. Could you refresh my memory on these modules sales and what’s happening there? What was the percent in revenue in '06 and what it is it going up to in '07 and what’s driving that increase?

John Plant

We don't call out a segment called modules. We're just noting that there's a small increase year-on-year of modules sales. And that principally pertains to the North American markets, where we've been fortunate enough to win some additional contracts in this area, which will improve our growth, and prospects as we go particularly to '07 and then to '08. As you recall, what we have said to you there is that these modules tend to -- sales tend to be say at a lower percentage profit. But when you look at the capital involved, it's high capital turn, and therefore a relatively good say return on capital for the engagement in this segment of the business. And what we're hoping for, Robert, is in fact, this being happened is where we have these modules sales, then we're able to progressively look forward to increasing added value as part of these modules, which are principally in the chassis area involving braking and steering.

Robert Barry - Goldman Sachs

What’s really driving the margin decline? It looks like the guidance, if I take the midpoint of your guidance, $2, it's down earnings on higher sales. So, that implies margin pressure. What kind of really behind that?

John Plant

I think Joe is going to take the majority of that question. I think you're going to see a little bit of ForEx in there, because as we -- I think the early part was what is ForEx year-to-year. And, I mean particularly the first half of 2006, you were seeing I'm going to say around the 120s, and now you're seeing in the 130s. So essentially, you're getting a higher level of sales, which doesn't really produce much by way of profit. So to a certain degree, it is not really a margin decline, Robert, but it is more of the way we represent that sales on a translated currency basis, but maybe Joe, would like to add...

Joseph Cantie

I think you did a pretty good job with that, you start off with the mix on the sales side. And currency, we really don't get anything down to the profit line on it, so as I mentioned earlier, that could be somewhere in the neighborhood of $200 million, $250 million of sales for that. If you look at the module increase, it's probably going to be close to $300 million between the two years, and you look at the profit effect of that. Then you come down to the fact that we're going to have higher interest costs in '07 versus '06. And then got to keep pointing out that the decline in the North American production, if you look at the decline that we're going to go through in the first quarter, especially Big Three is going to be down at least 10% year-on-year in production, a little bit better in the second quarter, hopefully, but that causes a lot of inefficiency there. So it's mainly those four items that are the principal reason for that guidance that we put out there.

Robert Barry - Goldman Sachs

Okay, and then just lastly, is there some link between the commodity pressure you are seeing or the lack of commodity release in the face of falling spot prices? Is there a link between that and what’s going on in the Tier 2’s and 3’s?

John Plant

I don't subscribe to your premise but you're seeing a lot of, you know a massive amount of relief in the raw material segment at this point, Robert, I mean, you have seen some relief on steels, but you've see increases of nickel. We're not a very large user of copper, so that’s not a relevant commodity for us. I mean I hesitate to say at the moment that you're seeing anything by the way of fundamental change in the resin positions. And so at this point, I think we're taking a relatively cautious stance regarding the underlying materials. And therefore, I don't think you'd expect to see anything through the Tier 2 and Tier 3 part of the supply base at this point. So, I don't think that’s any sort of stickiness on their behalf. Having said that, if the commodities were tumbling, which they are not, but if they were, just the same as I’ll say prices didn't -- we maintain a lot of pressure on those prices or requests as the commodity inflation went up, I would expect some stickiness on the way down, but that is not the current position.

Joseph Cantie

I just want to add, I mean the commodity inflation, it has really been going from one commodity to the next. As John mentioned, aluminum has come down a little. But if you look at, for example, nickel, I mean nickel was $15,000 a ton at the beginning of the year; it’s at $37,000 a ton now. So it has more than doubled. And we're not a big nickel user; our spend is about $50 million. But when it goes up over 100%, that has a bearing. So as one gets some relief, it seems like the next one pops up. So commodity inflation is still high on our list of challenges for us.

John Plant

But I think what we're hoping for, Robert, is some point, anyway, it will happen, is that capacity will be brought on-stream, some of these commodities will begin to decline. And that will be a point which we will hopefully begin to enjoy.

Robert Barry - Goldman Sachs

Okay, thank you.

John Plant

Thank you.

Operator

Our next question comes from Chris Ceraso with Credit Suisse.

Christopher Ceraso - Credit Suisse

Good morning.

John Plant

Hi Chris.

Christopher Ceraso - Credit Suisse

A couple if things. First, Joe, if you could just clarify from the earlier question on the pension and healthcare expense. Was that number that you gave, the 225, was that the P&L expense or is that the expected cash outflow?

Joseph Cantie

That’s the cash outflow.

Christopher Ceraso - Credit Suisse

Okay, what’s going to run through the P&L?

Joseph Cantie

I think it is somewhere around $25 million, $30 million. So our cash is greater than what goes through the P&L.

Christopher Ceraso - Credit Suisse

Okay, so the expense as it runs through the P&L, only about $25 million to $30 million?

Joseph Cantie

Correct.

Christopher Ceraso - Credit Suisse

Okay. Can you give us a little bit more color on the expectations for build in North America, for example, what is the equivalent sales level in the U.S. that goes with that $15.4 million of production? And then maybe if you can break down a little bit the expectation on a first half versus second half year-to-year change in production -- just to give us some more detail there.

John Plant

I don't think we've ever culled out that level of detail, Chris. But I'm handing off to Joe to see whether --

Joseph Cantie

The sales side, I don't have that at hand. We focus so much on production. On the production side, when I look at North America for the $15.4 million, we're expecting first quarter overall to be down about 6%, 11% at the Big Three. Down slightly in the second quarter, Big Three, 8% down. And then the second half of the year, improvement in the third quarter and somewhat flat fourth quarter versus fourth quarter.

Christopher Ceraso - Credit Suisse

Okay, thanks. It’s helpful. On the sales in the quarter, can you give us a rough breakdown, Joe, of North America, Europe, Asia, maybe just on a percent of sales basis for each region?

John Plant

In the fourth quarter, you mean?

Christopher Ceraso - Credit Suisse

Yes, please.

John Plant

North America was about 31% of sales in Q4; Europe 57%; and the rest of world, which is principally Asia-Pacific is 12%. So you actually see, I'll say – obviously, that’s the previous year and basically North America is down 5%, 36% down to 31%. And therefore Europe and the rest of the world are up 5%. That would be the way to look at it.

Christopher Ceraso - Credit Suisse

Okay. And then just the last one, on the module sales. Are those associated with --?

John Plant

Maybe within that, Chris, maybe it is worth calling out for you is that, I mean, to get those relative movements, I mean, sales were down in North America in the quarter. Let's call it double-digit percent. Sales in Europe were up double-digit percent. And then rest of the world, our sales in Brazil and Asia are up in the 20% to 30% area.

Christopher Ceraso - Credit Suisse

Okay.

John Plant

So, you're getting really an indication of, you know, us holding or struggling to hold in the face of the big production cuts in North America. We're getting content growth, but, as I -- struggling to hold on there in the face of those production cuts, but with content growth is good. And then elsewhere in the world, growing I'll say quite strongly.

Christopher Ceraso - Credit Suisse

Okay. Is that module business that you mentioned earlier, is that associated with a particular vehicle program that is launching this year?

John Plant

Yes, but we don't call out anything specific. We never call out production contracts in terms of wins, because we don't think that’s a thing we should be doing. And so at the moment, I'm hesitant, because we haven't announced, say, that production company as it comes in during this -- later in the year.

Christopher Ceraso - Credit Suisse

Okay, fair enough. Thank you very much.

John Plant

Thank you.

Operator

Our next question is from Rod Lache with Deutsche Bank.

Chris - Deutsche Bank Securities

Good morning. This is Chris Derby (ph) for Rod. Just had a couple of quicker questions. One, if you look at TRW historically from a capital structure perspective, and if you look at where the debt capital markets are, is it safe to say we should be potentially looking for a transaction where you guys once again recapitalize your balance sheet this year?

Joseph Cantie

We constantly look at our capital structure; we constantly look at the markets, we analyze, we assess them. There's a lot of the things that go into that consideration, including the net present value calculations. We've been looking at it and we’ll continue to do so. If something looks good, we will move. If not, I think most people know that in 2008 we have the first call on our bonds that are out there. So it's something that we're going to be looking at over the next couple of years.

Chris - Deutsche Bank Securities

A follow-up on the raw material questions. You commented about $50 million buy of nickel, is that going into the year prior to the movement from 15,000 a ton to 37,000 a ton, or is that kind of after that?

Joseph Cantie

It is after. So that was our spend in the year.

Chris - Deutsche Bank Securities

That was the spend in '06 or the expectation for the spend in '07?

Joseph Cantie

That’s the spend for '06, so it already has what I will call an average of the increase. But then we're going to increment up if nickel stays at its current levels.

Chris - Deutsche Bank Securities

Okay, so it sound like it's fairly safe to assume that you guys expect a raw material hit overall, somewhat comparable maybe slightly less than last year?

Joseph Cantie

We clearly are looking for a commodity inflation increase again in '07 versus '06.

Chris - Deutsche Bank Securities

Okay, thanks. That is all I have.

Joseph Cantie

Thank you.

Operator

Our next question is from Himanshu Patel with J.P. Morgan.

Himanshu Patel - J.P. Morgan

Hi two questions, guys. First, are there any assets out there that, either because of the sheer size or the risk profile of the asset, TRW would consider perhaps jointly bidding on them with Blackstone? And my second question actually comes back to John, you commented earlier about how we from the outside would see through the decade and TRW's sales progressing well. I know you don't want to give numbers on that, but I'm wondering could you share with us the mix of sort of, you know what the backlog looks like over the next couple of years, particularly I'm interested in knowing does the penetration or the concentration of occupant safety business, does that increase or decrease or kind of go sideways from the roughly 30% level right now?

John Plant

Well, first of all, going in reverse order. I think we're expecting growth in each of our segments over the next, say, two to three years, Himanshu. If anything at this point in time, I may think that we're probably going to have maybe a slightly higher chassis growth in the '08 year. But as I said to you before, we tend to get one year where it's slightly higher in one segment than the other segment, but overall, we see all the segments expanding, and therefore that is good. We've had a burst in the occupant safety arena the last couple of years, and that has been augmented by the acquisition of Dalphimetal. And then I think it's been fairly balanced over time, but say the one thing I'm thinking about in the '08, some of it around stability control, some of it around the opportunities within the -- maybe some of the North American markets, some of the, I’ll say the changes of profile of players that’s in the supplier base is going on. I think maybe you're seeing some increase in the chassis area. In terms of your first question, of course, I'm of course not really clear what you are driving at, but, we always, I will say, maintain on our radar screen both bolt-on acquisitions, which are easily fundable within our capital structure that we have. And as you know, the last two to three years, in the light of our very significant debt paydown, and also basically, I mean compared to - the leveraged buyout, our EBIT I mean, EBITDA is up by almost a couple hundred million; our net debt is down by over a billion, having done some of the like other work on the capital structure, so, we've put ourselves in a position where we can look at things that would really fit in the same way that Dalphimetal fits. In terms of the broader question, of course, we also maintain our radar screen, other things which should be very significance to us. And whether we’d be able to do that ourselves, but also if it was really the right thing, and we'd also engage our original equity sponsor in Blackstone, this is why there is something here which really makes a difference to us, and it engage them as and when it's appropriate.

Himanshu Patel – J.P. Morgan

Okay. One last question. The restructuring run rate, you guys mentioned $30 million to $40 million. I think previously you were talking $50 million sort of run rate. Am I reading into that a little bit too much, or has there been sort of a downshift in the rate of restructuring spend?

John Plant

I mean, actual fact, what we have been doing is, particularly here in North America, in fact, our actual cash spend last year was actually slightly higher than the P&L spend, which is an unusual way around. And that essentially comes round to the curtailment of some of the post-retirement healthcare liability. So we actually did managed to do more restructuring than is immediately apparent from that P&L charge. And maybe you'll see more of that when you read our 10-K, assuming that you go through all the detail that is in there. In terms of the $40 million we've called out for 2007, I don't see that as any diminution of rate of restructuring. We've seen the way of doing one or two things more effectively. We've also – I’d say the whole program we've had of labor efficiency, working hours and pay rates, particularly relevant to some of the European countries, has also impacted those restructuring dollars. But overall, it's $40 million plus or minus $5 million, or plus or minus $8 million, we have to see at this point in time. So between $40 million and $50 million you can't really call it that close.

Himanshu Patel - J.P. Morgan

Thank you.

Patrick Stobb

Mandy, I believe we have time for one more question.

Operator

Yes, sir. We’ll take our final question from Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

Good morning, gentlemen.

John Plant

Hi Brett.

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

Couple of thoughts here. First of all, on the acquisition front, John, what would be some of the areas that you had looked at? Would it be geographical, would it be technology? Is there a particular hole in your product portfolio or that sort of thing?

John Plant

Well, first of all, by way of immediacy of by way of product, we actually have, we think all of the requisite technologies. So there is nothing, which is missing from our portfolio by way of skill set or technology or from a product aspect to really be, as we set out our ground to be a leader in both the active and passive safety area. So that isn't the requirement. I mean, certainly we look at things which would improve our geographic diversity. And I mean, something which would be, I mean, Dalphimetal was squarely in the occupant safety, it wasn't really a product acquisition. It was more in both the territorial or regional plus customer acquisition. We’d increased our penetration at Renault and PSA in particular, where we have now entered really in the upper reaches of their supply base. And, I mean, if there was something that we saw, particularly in the Asian region, that would be of interest to us, and so those would be the ones that we described to you in terms of bolt-ons.

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

Okay, and just with regards to restructuring, stepping down from $109 million in '05 to about $30 million in '06. And obviously you had a very significant decline in the fourth quarter year-over-year, about $43 million. Pushing some of that off into '07, yet '07 looks like it's going to be about $40 million, and you're talking about kind of $30 million to $40 million in restructuring.

As we look out in the future, my question is simply, why would you not do more restructuring if you had the opportunity to, are there constraints? There doesn't appear to be financial constraints there, but why would you not increase the level of restructuring?

John Plant

I think there is a natural flow to restructuring, which is one where you should look at, I mean first is, what’s the overall economic equation in terms of cost effectiveness? There is also the most opportune timing in terms of a plant closure, where you look at the programs within the runout of the platforms to which that plant serves. And then you look at also, you’ve been directing some of the new business towards the more competitive, I will say plants in maybe lower cost countries so, basically if you're doing it right. And what I mean by right is, you have a very long-term plan, I essentially believe that you commit your restructuring almost as you bid the business out. And therefore, we look at both the profile of the new business contracts coming on, the runout of platforms. We look out at the overall competitiveness of the plant. And then from that, we plan out a long-term, and it's going to be this plant, this region, this product. And it's a very clearly thought-out part of our strategic planning process. And therefore, I think it is much better to do, I measured plant closure program every year rather than say, oops, the industry is in difficulties; let's go restructure. Now what do we restructure? And therefore reach out, as I call them, now these across-the-board percentage reductions and, I don't know, a few plant closures. So, I mean because that’s, I think, the more costly type of restructuring in terms of net return for the dollars expensed. And I think you should look at restructuring just in the same way as you do capital expenditure, and that is with a clarity, which says, I'm going to get this return on it. And again, you should do a measured approach to your capital, just as you do for your restructuring. So I think having that long-term, you know sort of cadence to it, part of your strategic planning process, really is I think pays off great dividends for us.

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

Some of your competitors have talked about restructuring being somewhat constrained by your supply base. In other words, the financial difficulties experience by the supply base and the lack of capital to invest into the supply base, in other words, the supply base moving to look-cost countries and so forth is somewhat constrained or maybe starting to constrain some of the restructuring activities. Are you finding anything similar to that? And really, I guess the bottom line here is, are the opportunities still available or we picked off all the low-hanging fruit and things are getting more challenging going forward?

John Plant

No, first of all, our supply base gives us no problems regarding our restructuring activity whatsoever. That is not a constraint at all for TRW. As I said to you, we have a list of plants that we intend to restructure in '08 and '09; and in fact, we are into '10 at the moment and planning that out. We see a continuing flow; it's within the metrics I've given you. And so I don't see there is any shortage. I mean I've no idea what's going to happen in 2015, but our rollout plants in low-cost countries, I mean that is the case either, because it depends on the labor-capital mix that you have in the product, but when you are highly capital intensive, things will remain where the engineering service are, and maybe in some of the high-cost countries, but basically, no shortage of candidates. And on the supply base, we've been working at it for some years now, getting that supply base to move with us. I mean, when you've got -- I don't know what the number is, 70 odd plants in Europe, 25 plants throughout Asia, I mean we've got an existing supply base well-established now.

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

Joe, very quickly, Dalphimetal, the impact in the fourth quarter?

John Plant

It is in good shape.

Joseph Cantie

It’s in good shape. We don't disclose its profitability separately, but doing well.

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

No, no, the Dalphimetal, the revenue impact in the fourth quarter.

Joseph Cantie

Oh, I'm sorry. I think it was $35 million, somewhere around there.

Brett Hoselton - KeyBanc Capital Mkts/Mcdonald

Okay great. Thank you very much, gentlemen.

Patrick Stobb

Okay, with that, that concludes today's call. Thank you everybody for joining us. This is Pat Stobb. And as usual, if you need further assistance, please feel free to give me a call. Thank you.

Operator

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

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