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WABCO Holdings Inc. (NYSE:WBC)

Business Update Call

September 8, 2011 9:00 AM ET

Executives

Jason Campbell – Director-Financial Reporting & IR

Jacques Esculier – Chairman and CEO

Ulrich Michel – CFO

Analysts

Jeffrey Hammond – KeyBanc Capital Market

Peter Chang – Credit Suisse

Stephan Tusa – JPMorgan

Operator

Good day, ladies and gentlemen, and welcome to the WABCO’s September 2011 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference Jason Campbell, Investor Relations Director. You may begin, sir.

Jason Campbell

Thank you, Jen. Good morning everyone and welcome to WABCO’s September investor conference call. With us this morning is Jacques Esculier, our Chairman and CEO and Uli Michel, our Chief Financial Officer. As a reminder, this call, webcast and the presentation that we are using this morning are available on our website wabco-auto.com under the heading WABCO September 2011 conference call. The replay of this call will be available through September 22.

Also, as shown on chart two of the presentation, certain forward-looking statements that we’ll make today are based on management’s good faith, expectations and beliefs concerning future developments. As you know, actual results may differ materially from these expectations as a result of many factors, examples of which can be found on our company’s form 10-K and quarterly report.

Lastly, some of our remarks contain non-GAAP financial measures as defined by the SEC. Reconciliations of the non-GAAP financial measures for the most comparable GAAP measures are attached as an appendix to this presentation, which is posted on our website.

So now I’ll turn the call over to Jacques.

Jacques Esculier

Why thank you, Jason. Good afternoon, good morning to all of you and thank you for joining this call today. But before we jump in the core of our discussion, I would like to frame this exceptional dialogue that we have triggered with you today and really share the purpose of it with you.

In the last couple of months, we have seen a significant increase in the level of uncertainty around the economy, around our industry that have raised significantly also the level of anxiety across the market. This has resulted into a fairly significant dive in the stock price across the board, particularly for companies in our industry and even more particularly for those companies in our industry that have strong roots in Europe.

Naturally, we have received a lot of request from shareholders and analysts lately to provide valuable and material information on the status of our business and the status of our company. But as you know, we are not in a position to exchange that kind of information without doing it as part of a formal, official framework like this call. And actually this is the purpose of this call today to do it with you, and we’ll do it by first sharing information in our current view on our markets, then we’ll provide some insights on a couple of, what WABCO’s considered to be leading indicators for the markets. Because those indicators were actually very useful to us back in 2008 as we anticipated the significant drop in truck manufacturing in our industry, six months ahead of that drop. And then we’ll provide you with a view of our order book, which is actually, certainly reflecting the way our customers are anticipating the evolution of production of trucks in the coming month.

Actually, you will see that after reading all this data, it leads us to confirm the 2011 financial guidance that we have upgraded and shared with you during our last quarterly call back in late July. And actually, we also share with you that we decided that it was in the best interest of our shareholders to accelerate our buyback program that we have started in early June. And actually today – as of today, we have already purchased back $400 million of WABCO’s shares.

Now, again, before we proceed and to be clear, the purpose of the call is not to eliminate the uncertainty around the economy, around our industry, around WABCO. That is to share the relevant and timely information that will allow you to make the best informed decisions.

So turning to next page, as I said we’re going to share with you our current view of the market and more specifically of our truck manufacturers, and we’re going to start with Europe; as Europe, as you all know, still represent a significant share of our revenue base.

On the graph we share with you here, which shows the index level of order intakes for the four key European manufacturers that are public companies and that actually cover, very frankly, a large portion of the European builds for trucks and buses. You see that this level of order intake peak back in 2007. That during the first half of 2008, we already witnessed a significant drop, that this truck actually further amplified in the second half of 2008 to reach the deep level that we have – that has created the crisis in our industry. So that’s the profile of those order intakes back one year before the triggering of the recession in our business.

In contrast to that, we also share with you the evolution of order intakes. Since the beginning of 2009, you can see that actually that level of order intakes has been gradually increasing, that increase has been fairly smooth and consistent across the board and has continued during the first half and the last month between January 2011 and now.

So, again, when you look at this, the profile of order intakes, as we have seen it in the last couple of years, is very different from what has actually set this stage for the previous dramatic crisis that we had to face back in 2009.

One information that is also worth noting is that the 2011 level of production, as we forecasted, would still be 21% below the 2008 peak, which leaves some very comfortable room to further grow our industry; then I’d like to share a few information, communication coming from our customers in Europe in the last weeks, starting with an announcement by Daimler, announcing that they were hiring an additional 1000 employees at their factory in Germany to cope with a very strong order book and to, accordingly, crank up further their capacity.

The second one is this report that global produces regularly about the level of deliveries that stated that available of deliveries in July 2011 was up 18% year-over-year globally, was a growth of 36% of their deliveries in Europe and 44% in the United States.

Finally, I’d like to share some information that we received from the customer, major truck manufacturer in Europe that had organized last week an interface with their suppliers. They shared with us that inventories of finished goods at their dealers what was at a normal level that they had a normal three months lead time for new trucks meaning you order a truck today, you won’t take delivery of it before mid-December. That they expect actually to raise their production level between now and the end of the year and that they, consequently, do not perceive any sign of crisis on the horizon.

Also, I’d like to share some information that we get through our dialog with some fleets that we consult with regularly. And interestingly now, they indicate that the used truck market in Europe still shows the high level of activity with pricing that stayed pretty high as well. So across the board, all signals seem to point to market that is under continuous recovery with some more room to grow.

Moving to the next page. We would like to share the status of two other key markets where WABCO – namely Asia and North America. Starting with Asia, truck production in China seems to have bottom out in August actually had a high level than anticipated. And we see now, I shared with key players over there – I was in China couple of weeks ago. We see the market actually recovering slightly faster again as compared to what we had shared with you by late July. And we see an incremental increase in the truck production of 5% sequentially between Q3 and Q4, adding a little bit more than 30,000 trucks to the production forecast that we had again shared with you back in July.

Japan/Korea production level, as anticipated, recover in Q3 from the low level which in Q2, and as anticipated continue further recovery in Q4. And the outlook for India is at this time fully aligned with what we had again share with you during our last call. So, overall, Asia should not be the source of shortcomings in revenues in the coming months.

Now moving to North America; again, the evolution of the market over there is very consistent to what we had shared with you back in July, replacement demand continues to drive demand for new trucks, orders for Class 8 trucks is still and continuing to show increasing trends, including in the last month. For Class 5 to 7, orders seem to be at a stable level like it has been for awhile. And very frankly, the limit in the production of new vehicles is actually right now be constrained from the supply chain.

Again, it’s worth noting that the level we expect for the production of trucks in 2011 is still 42% below the peak that we reached back in 2006, leaving again comfortable room for further growth out there. So, again, we should not see a source of expectation – of changing expectation from the market standpoint coming from North America.

Turning to the next page. Again, we’d like to share with you the status of a couple of indicators that we at WABCO consider as leading indicators to the vitality of the commercial vehicle production level.

Starting with trailers. We track the sales of WABCO products to the trailer manufacturers. And when we look back at 2008, our sales to these customers started to strongly decline five to six months ahead of the drop in truck production. Now looking at 2011, actually across the first months of the year, the sales of WABCO to these people have continued to increase in as of today our order book to the trailer manufacturers is 23% higher than what it was on the 1st of January of this year. Also as we regularly connect with our trailer manufacturers and customers, we identify a pretty good level of confidence about their order book for the second half of 2011.

So in our logic, we think that this indicator does not point finger to any significant alteration of the truck production in the coming month. Now the second indicator that we track again is the level of our sales to the aftermarkets. When we look back to the evolution of that level of sales, in 2008, we see sales dropping significantly two to three months ahead of the drop – truck – drop in truck production. When we look at our current order book, it is actually at a record level and it continuous to increase every months including in the third quarter. And the order intakes again remain consistent in line with our previous expectations.

So, again, the fact that aftermarket is continuing to generate good orders and good sales, indicate from our standpoint that there is no major drop in trucking and transport activity at this time.

Then looking at the view from WABCO’s standpoint, and we are focusing here on the evolution of our order book. Starting with the global OE order book, if we index the evolution of this order book with 100 corresponding to the level it had as we entered the year 2011, you can show – you can see, I’m sorry, a clear constant consistent increase in this order book was actually a certain acceleration in the last couple of months. In July and August, we have seen indeed this order book grow by a additional 7%.

Now when you look at this order book that restricted to European OE, you see basically the same thing. With that acceleration as well in the last two months, August was flat to July, but that’s the seasonal effect because as you know a lot of Europeans take vacations at that time, but in the last two months, again, we have observed an increase of the order book from these customers, up 6%.

So our business logic that supported our 2011 focus, we think should remain at this stage unchanged. And all-in-all, I think we are in a position to confirm the upgraded guidance that we had shared with you back in July of this year.

Turning to the next page. This is again the guidance and the elements of the guidance that we have shared with you in July with a sales expectation trend up between 22% to 25%, performance, operating margin in a 13.2% to 13.8% bracket, leading to a performance EPS in the range of $4.55 to $4.80 per share. And a free cash flow conversion rate between 80% to 90%.

Going to the last page, that summarizes all those key messages. I would say that even though a fundamental uncertainty remains in the economy since we started the recovery back in early 2010; there is no indication at this point in the industry that points towards an imminent disruption in the way we anticipated the commercial vehicle industry to grow in 2011.

And from there, I would like to open the session to your questions and comments. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jeff Hammond from KeyBanc Capital Market.

Jeffrey Hammond – KeyBanc Capital Market

Hi, good morning, guys.

Jacques Esculier

Good morning, Jeff.

Jeffrey Hammond – KeyBanc Capital Market

So just to be clear, the full $400 million buyback is complete?

Jacques Esculier

No, no, no, it’s $100 million.

Jeffrey Hammond – KeyBanc Capital Market

Okay, $100 million.

Jacques Esculier

Not yet. But you know, as you remember, Jeff, we started in June; we had planned $400 million over the next two years, i.e. about $50 million average per quarter, right? And as of basically today, beginning of September, we have already repurchased for $100 million out of the $400 million.

Jeffrey Hammond – KeyBanc Capital Market

Okay. And is the view that as long as the stock in your mind stays depressed, do you want to run at a faster rate?

Jacques Esculier

Well, it’s all kind of a matter of balance. As you know that we have shared with you that we didn’t want to borrow a lot and leverage the balance sheet to do those things because we want to have enough reserve to be able to drive acquisition. I would say that if things kind of stabilize, I think the $50 million type of level per quarter should be basically what we keep driving. Again, depends what’s going to happen with the overall stock market and particularly with the level of the WABCO stock.

Jeffrey Hammond – KeyBanc Capital Market

Okay. And then – so if I look at what’s changed, it seems like you bought back a little more stock, maybe that doesn’t move the needle on share count this year, but helps next year. And then China seems on the margin better and everything else on the margin is unchanged. Is that fair?

Jacques Esculier

Well, that’s what we are saying right now, Jeff, I mean pluses and minuses here and there. But, again, overall, what I just shared with you is exactly what we are seeing out there in the market.

Jeffrey Hammond – KeyBanc Capital Market

Okay. And then just in terms of the market outgrowth discussion of 8% to 10%. If we see an environment where global truck production flattens out, doesn’t go materially negative, but flattens out, we should still get that market outgrowth and how should we think about incremental margins in a more kind of muted scenario?

Jacques Esculier

Well, there are two elements to your question, Jeff, if I may. First one is this kind of a level of outperformance of the market, which again we have shared with you to – and committed to a level of 8% to 10% in the next five years. As we have already indicated and shared with you, this level is an average over the next five years, actually very frankly, we should end up this year much closer to 10% than to 8%. But it varies and there are different parameters that kind of influence, up or down, favorably or less, the level year-over-year, so that’s why we kind of look at a five-year perspective to give an average.

So the market flat next year could be out above 8% to 10% or below 8% to 10% depending on some things. It can, for example, depend on the product mix, you know that we actually put more products on heavy trucks than on medium trucks, depends on where the growth takes place, we certainly put more products on trucks in Europe and all that stuff. So – and there are some other factors. So, overall, this commitment has not to be taken as a yearly commitment but again as an average over the next five years.

Talking about incremental margin now, we kind of always says that we would be in that 25% to 35% range if we would be able to generate a growth level between 15% to 20%. Now if we kind of want to broaden the range, we would say kind of in that 20% type of range of incremental margin, if growth would go down to something around 10% for us. Right? So that’s one additional point on the picture.

Jeffrey Hammond – KeyBanc Capital Market

Okay. Great. Thanks guys. I’ll get back in the queue.

Jacques Esculier

Thanks, Jeff.

Operator

Thank you. Our next question comes from Peter Chang from Credit Suisse.

Peter Chang – Credit Suisse

Hi. Thanks for taking my question for hosting this update call. Jacques, it might be helpful if maybe you could parse the difference in terms of where OEM and channel inventories are between now and where Europe was heading into the 2009 downturn.

Jacques Esculier

Hi, Peter. And yeah, we don’t have kind of a updated and current information on – systematic information on the level of inventories of our customers at this point. The only kind of information we got, again, was information coming from this customer, who I am not in a position to reveal, that who last week shared with us that the level of inventory at their dealers was actually less than half of what it was at the time of the crisis, when the crisis started to hit back in late 2008, and also commenting that the current level of inventory is actually very normal, maybe slightly lower than normal.

Peter Chang – Credit Suisse

Great, that’s very helpful. And I don’t know if – are there some kind of statistics that you guys track in regards to the age of the truck fleet over in Europe and truck utilization that you could potentially share with us?

Jacques Esculier

Yeah. Truck age, we certainly track it. What I think is important here is the increase in truck registration, Peter, if I may, because we have seen year-over-year, this year so far about 48% more registration in Europe and that’s the hard number that is at the basis of a lot of other kind of calculations or estimations that we make, so meaning that we have a very strong activity out there to kind of bring new trucks to the market that will ultimately certainly lower the overall age of the fleet.

Peter Chang – Credit Suisse

Got you. Great. And one more thing, do you have an update on the anti-lock braking system adoption in China, has that penetration rate increased?

Jacques Esculier

Yes, interesting question, Peter. Actually there is some case it has increased because, as I shared with you, we are still seeing basically a doubling of our sales as compared to last year. However, as the penetration was not extremely high, kind of just short of 10%, we think it remains short of 20%.

I don’t know exactly what’s going on, there was this kind of formal new commitment from manufacturers apparently in the early part of this year to the government that they would implement it, obviously they made an effort because it doubled the level of penetration, but it doesn’t seem to, at this stage, go much further than that with the fact that the industry has pretty strongly suffered so far this year due to limitation of credit with this kind of trigger, a certain level of tolerance from the central government to postpone again the real enforcement. I’m sorry; I don’t have information on that.

What I can tell you is our market penetration has not dropped at all. So the fact that we haven’t done more than just selling – doubling the volume as compared to last year comes from the fact that these customers are not yet again fully committed to enforcing the law.

Peter Chang – Credit Suisse

That’s fair enough. So if I could just squeeze in one more, and back to Europe, Jacques, do you have a sense of what a general replacement demand level would be in Western Europe?

Jacques Esculier

Well, Peter, if we see the age of the fleet around, I think it’s about eight years.

Ulrich Michel

That’s U.S., Europe is probably six.

Jacques Esculier

Six to seven.

Ulrich Michel

5.5 to 6 years a fleet.

Jacques Esculier

Okay, six years. So basically that means that you have about 15% to 17% to 16% of the fleet that is changed every year. And, again, as I said in my presentation, that means it represents a very significant portion of the new trucks that are brought into the business because that’s a very sizeable number of trucks. I think there are four, more than four million trucks, can take about 15% to 16% and that gives you a pretty high number of trucks that are dedicated to – that are just kind of built to replace others, i.e. kind of explaining the importance of the second-hand truck market.

Peter Chang – Credit Suisse

Right. Okay, great. Well, thank you for taking my question, Jacques. I’ll let somebody else jump in.

Jacques Esculier

Okay. Thanks, Peter.

Operator

Thank you. Our next question comes from David Leiker from Robert W. Baird.

Unidentified Analyst

Hi. This is (inaudible) on the line for David.

Jacques Esculier

Hi. Good morning.

Unidentified Analyst

As I look at your order book, Jacques, is there a way to somehow relate this to what your revenues might be? So if I maybe factor in lead times and it looks like the order book is up 7%. Does that maybe translate into a 7% sequential gain Q4 versus Q3? Is there any way to relate the order book to top line growth?

Jacques Esculier

No. Obviously, I would – the order book is something that is important but not certainly kind of directly reflecting what you can expect in the coming two or three months. However, I can tell you that the way we look at the profile of our revenues between now and the end of the year, we should see Q4 generating the highest level of revenues by quarter for 2011 as well as seeing a slight sequential increase between Q3 and Q4.

Unidentified Analyst

Okay, great. Just spending a little more time on the European truck market, there is obviously a lot of macro concern about the region which would impact domestic truck sales. I’m wondering if you can give a sense of what export volumes have been like and what type of support that can provide in the event domestic Europe begins to weaken?

Jacques Esculier

Well, we don’t I don’t see any kind of change in the profile that we had shared with you before and we kind of think that this year there will be about – like a quarter of the trucks deal that will be exported. I think we shared that with you earlier this year, so we don’t change that profile. What we can see though is that there is some very strong activity right now in the eastern part of Europe, particularly in the aftermarket from – so, but again no more details, certainly not more details today as compared with what we had shared already back in late July.

Unidentified Analyst

Okay, and then one last question. In North America what’s the new stopping distance requirements? I’m wondering if just that being out there and I know you don’t need air disc brakes per se to comply, but I’m wondering what sort of maybe customer activity you’ve seen in the region, maybe higher interest and what the outlook is on that particular product over the next year or two?

Jacques Esculier

I’m sorry on what product.

Unidentified Analyst

On air disc brakes.

Jacques Esculier

No, air disc brakes would continue again completely in line with what we have shared so far with you. We have been installed – we are being installed on a very important fleet for a trial test. So we are continuing to work with customers out there. I have not seen or perceived any acceleration since the last time we talked about it together.

Unidentified Analyst

Yeah, thank you very much.

Jacques Esculier

Okay, thanks a lot.

Operator

Thank you. (Operator Instructions) And our next question comes from Steve Tusa from JPMorgan.

Stephan Tusa – JPMorgan

Hi. Good morning. Can you hear me?

Jacques Esculier

Good morning, Steve.

Ulrich Michel

Good morning, Steve.

Stephan Tusa – JPMorgan

I hopped on a little bit late and if you already talked about it, I just been curious as you know the thought process around having the call and if you’ve already talked about it I can go back and read the transcript and if you have then my second question would be on China. What is exactly driving the little bit of an uptick from kind of the depressed levels that we saw earlier this year? Is that – are they easing standards behind the scenes or they – the affordable housing projects helping – help the construction pick up, what exactly is driving China would be my second question.

Jacques Esculier

Okay. Well, Steve, briefly, first your first question, again yes, it will be in the transcript but again I want to repeat that this call was created by the numerous requests we had from investors and analysts to provide more information on the status of our business and as we could not really share any material information with any one of you separately, we had to create a call like this, at least we thought that it would be in line with the transparency of our interface with the market. And also I thought it would kind of allow you to receive good information that would allow again shareholders to make good informed decisions. So that’s one.

Second, Steve, I was in China two weeks ago; again, it seems that people are a little bit more kind of a bit again related to this evolution of demand between now and the end of the year. Very funky, I can’t at this point relate it to any change in the macroeconomic environment over there. And those guys were not able either to kind of explain to me, and you know, again, this market is a little special, as you know it goes up and down and has pretty unpredictable kind of changes of trends. But, anyway, it’s consistent at least.

I visited some suppliers of major components for trucks, as well as truck manufacturers, and they are all aligned to consider that the rest of the year should be slightly better as compared to what they had anticipated originally.

Stephan Tusa – JPMorgan

Okay. And then one more question. How important is financing in Europe to the notes of the truck markets?

Ulrich Michel

I think, Steve, it is important and most of the OEs have their own financing arms. But we regularly question fleets in our interaction with them on the availability of financing if needed, whether that would be a constraint. And so far, we’ve not received any feedback that financing is really a constraint for fleets to buy trucks at this point in time.

Stephan Tusa – JPMorgan

Great. Okay. Thanks a lot for the call, appreciate it.

Ulrich Michel

Thanks, Steve

Operator

Thank you. And I’m showing no further questions at this time. I would like to turn the call back over to Jacques Esculier, our Chairman and CEO.

Jacques Esculier

Okay. Thanks, Jen. Well, again, thanks for attending the call. I hope that we have shared today valuable information with you and we are certainly looking forward to our next interface that would take place towards the end of October to report the full detail of our performance during the third quarter of this year. Thank you.

Operator

Ladies and gentlemen, this does conclude your conference. You may all disconnect and have a wonderful day.

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