Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Jason Campbell – Director, IR

Jacques Esculier – Chairman and CEO

Ulrich Michel – CFO

Analysts

Peter Chang – Credit Suisse

Jeff Hammond – KeyBanc

Steve Tusa – JP Morgan

Ted Wheeler – Buckingham Research

WABCO Holdings Inc. (WBC) Q3 2011 Earnings Conference Call October 27, 2011 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the WABCO Q3 2011 results 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 be given at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.

I would now like to introduce your host for today’s conference Mr. Jason Campbell, Director of Investor Relations and Mr. Jacque Esculier, Chairman and CEO. Gentlemen you may begin.

Jason Campbell

Thank you, Evan. Good morning everyone and welcome to WABCO’s quarterly conference call. Today, we will present our third quarter 2011 results. 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 Q3 2011 results. A replay of this call will be available through November 27th.

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 in our company’s Form 10-K and quarterly reports including our third quarter 2011 report, which was filed with the SEC this morning.

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

I’ll now turn the call over to Jacque.

Jacques Esculier

Thanks Jason. Good morning, good afternoon, good evening to you all and thank you for participating in this earnings call for our third quarter results. However, before we jump and describe another outstanding set of results for our third quarter 2011, I would like to kind of frame the way I see the business environments and the global context for our industry and for WABCO in particular.

We came out of this severe downturn in 2009 recognizing that we had to deal with some kind of a new world order or new world disorder call it the way you want. Anyway, the new world order recognizes fully and also integrates now fundamental structural issue in the economy. Our developed countries have year-over-year generated major deficits in their budgets leading to paramount level of debt that affects the ability for the economy to keep growing, generating unemployment.

In emerging countries, this remarkable extraordinary growth is also generating issues that need to be recognized including concerns for the environment, potential social issues also scarcity in resources that certainly contributes to the inflationary pressure over there. But nothing of this is actually new and however in the last three to four months for reasons that are really unclear to me. The political world and the press have depicted more sensationalized scenarios for the economy moving forward that are impacting the morale the sentiment from those businesses and consumers. And then turning more pessimistic obviously those businesses and consumers are revising their decisions in spending money, in investing, in hiring and this leads obviously to an impact on industrial and services activities.

I am very work on the actually the agreement that was reached in Europe within this context because I hope it will come down the successive pessimism and avoids deceitful feeling downwards spiral that could lead nowhere but to add recessive pleasures. Now looking at WABCO in this context, in the last two years we have more than fully leveraged to be coherent in our industry practically doubling our revenues. But we have increased capacity with the full awareness of the increased uncertainty (Inaudible) the global economy. We have indeed generating a super flexibility in our labor force. We have also pursued a strong build up of a strong infrastructure in emerging markets also diversifying the sources of revenues.

In other words, we have built a very resilient franchise WABCO that can anticipate and adapts to market fluctuations. After we go through the details of the third quarter achievements I’m going to share with you some very preliminary thoughts and assumptions around the market dynamics in the different regions of our world. And then I will share with you how this resilient company that we have built along the last two years can cope and adapt to market fluctuations.

Now looking at the first page on those results again we ended up the third quarter with a very solid growth up 30% reported 20% as we eliminated the impact of foreign exchange. Foreign exchange had a significant impact this quarter, leading to the performance gross profit margin of 29.1% versus 27.7% a year ago. Performance operating income of $94.5 million versus $56.4 million at the performance level and that translates into an operating margin of 13.4% just down from an all time record that we had seen during Q2 at 13.6%.

Performance EPS reached $1.19 per share versus $0.71 a year ago. And we generated a strong free cash flow of $83.1 million excluding streamlining and separation payments leading to a conversion rate of 101%. We also had a very strong repurchase of 1.6 million shares for $80 million of cash so we returned good cash to shareholders this quarter. And we will see that we are maintaining our full year 2011 guidance because we see Q4 shaping up as another good strong quarter for us in sales and profit.

Moving to the following page, as usual we kind of give you a structured review of our sales performance and sales growth starting with revenues from OEMs, which went up 25% year-over-year with continuous increase of content per vehicle and obviously still benefiting from very strong growth in developed markets. Aftermarket continued to grow at 3% however, we recognize that 3% is weaker than what we have been used to in this area of our business. But we have to put this in perspective if we look at it year-to-date we have grown more than 10% now if you look at actually even further integrate in 2010 into picture since we saw it kind of recover we have grown more than 17%.

But I would like to recognize a few headwinds that we had this quarter however. Starting with a shortage of revenues in our newly launched manufacturing activity actually we have here to qualify some important contracts that again have not been good the contribution it was suppose to and that would drive to an impact of 2.5% to 3% of growth for this quarter. And actually we need to also recognize that our distributors particularly in Western Europe are taking some precautionary measures and destocking their inventory leading to obviously some shortage of sales force.

However, we also have to recognize that we are still at a very high level of revenue just below the tough record we had reached in Q2. And we also still enjoy a very strong level of order book. Sales force joint ventures went up 20%, 26% sequentially versus Q2. Now looking at the evolution of our revenues versus production of truck and buses in each region of the world I would start by saying that overall we continued to outperform the global market.

Now looking at by region, in Europe we are performing by 4%, North America for the first time in many quarters we have actually underperformed. However, again let’s put that in a certain perspective at year ago we were at that time outperforming the market by 30% and I think we have there excessive inventory at our joint venture that we have now to destock. Now when you kind of look at the overall performance or outperformance of this part of the world over the last couple of years since the beginning of the recovery, actually we outperformed the market by 10%. Just this year actually I think when did this destocking in the third quarter we still outperform by 4%.

South America, continued strong growth in production and also a very healthy level of outperformance, Japan and Korea, surprisingly are at very high level of production 8% above what it was last year so completely recovering and more from the eventual disaster that Japan had to face in the earlier part of this year. And we again strongly outperformed that market.

Now China for the first time in history we have underperformed and again it worst an explanation and certainly putting that in perspective. But you look at the industry that has slowed down the last two quarters from the rate of production of 400,000 trucks in Q1 down to 265,000 trucks in Q3 that obviously must lead to a very strong destocking and inventory slowdown at our customers, which is the major driver for this performance this quarter. It does not come from any loss of market or market positioning we have still a very strong and actually a consistent market positioning in China so things will go back to order as the market stabilizes.

Now let’s put it again in certain perspective, we have year-to-date even included this major destocking we have outperformed the market by 7%. India we continue to nicely outperform and the production is continuing at this quarter at a single digit level. So again overall WABCO has done well at the top line and still outperforming the markets globally overall.

Now I’m going to let Uli drive you through the details of our performance and results for the third quarter. Uli?

Ulrich Michel

Thanks Jacque. Good morning everyone and thanks again for joining us today. I will take you through our financial results for the third quarter of 2011. Turning to chart five, I will walk through the details from sales to earnings per share for the third quarter looking at both our reported and performance numbers.

Performance numbers for the quarter are subject to remove operation of streamlining and separation costs as well as discrete and other tax items. In addition, comparison into 2010 has been attached for currency translation effects. Our sales in the quarter increased 19.8% in local currency versus last year. Although the seasonality of our business resulted in a 3% sequential decline in revenues from the second quarter, you can see that our global order book has increased during the third quarter by another 8% since the end of Q2. The increase in sales versus last year includes price reductions to customers of 0.7% which is the lowest value we have seen in our business.

Gross profit increased 26.1% with an adjusted gross profit margin that has improved by 145 basis points compared to a year ago. Gross profit was driven most significantly by higher volumes which contributed $18.4 million. Our productivity initiatives continued to deliver good results, including 4.9% through our material productivity project partially offset by 1.8% of commodity inflation. The result was the net material productivity of 3.1% for the quarter.

Our conversion productivity for the quarter was 6.3% which is a record for WABCO. We also generated $11.4 million of benefits for more efficient absorption of overhead costs this resulted in a performance gross profit margin of 29.1% this quarter. In operating expenses you can see an increase in the third quarter versus a year ago since we have increased our spending on research and development projects by $6.5 million to support our strategic initiatives around new technology and product development. Additionally, labor and other cost inflations added $1.7 million in cost.

Even considering the spending increases in operating expenses we have limited the overall increase in operating expenses to less than half of our sales growth resulting in margin expansion of an additional 161 basis points versus a year ago. So altogether we generated operating income of $94.5 million or 13.4% of sales on a performance basis. Just below the record result last quarter. Compared to Q3 last year we are have extended operating margin by 306 basis points delivering a strong 29% incremental operating margin on the sales increase of 20% in local currency. Also similar to what we said last quarter if we were to exclude the effects of commodity inflation and transactional effects we would have generated an incremental operating margin above 30%, which is in line with the structure and margins that our business is designed to generate at these levels of growth.

Continuing down the income statement you can see that this quarter equity income was $3.9 million, which includes an improvement in earnings of $0.5 million from our North American joint venture. Additionally, the expense in minority shareholder accounted to $3.1 million this quarter compared to an expense of $3.2 million a year ago. Our performance EBIT this quarter was $95.1 million or a margin of 13.5%.

Moving to taxes we have slightly reduced our outlook for our full year performance tax rate to approximately 14.5% with the (Inaudible) year-to-date taxes recorded at a rate of 15% we record at a rate of about 13.5% for the third quarter to adjust the year-to-date amount to 14.5% resulting in a performance tax expense of $12.8 million for the third quarter. The U.S. GAAP tax expense of $9.1 million for the third quarter also reflect $3.7 million of decreased benefits mostly related to the filing of the U.S. federal income tax return in September and the settlement of certain foreign tax audits during Q3. After excluding the non-performance items net income was $81.9 million with regards to earnings per share this translates to $1.19 on a performance basis versus $0.71 last year.

In summary, we are pleased to report yet another quarter with a high level of organic growth, continued margin expansion and strong levels of profitability. We are also very pleased to report that at the current levels of profitability we are on track to deliver a return of investment capital of 48% to 49% breaking our record of 46% set in 2008.

Turning to chart six, let’s go through our cash flow for the quarter. As you can see that working capital has a negative impact on our cash flow in the amount of $9.3 million, included in this amount is a slight decrease of $3.5 million from receivables in which we continue to keep our past dues at low levels. Inventory increased in the amount of $8.7 million although the inventory turns remains consistent with the first two quarters of this year.

Additionally impacting these increasing in working capital was the decrease in accounts payable in the amount of $4.1 million. The changes in other assets and liabilities benefited from an increased funding ratio under our asset securitization program and added to a $6.6 million favorable impact for the quarter resulting in net operating cash flow of $103.7 million. Net cash used in investing activities was $29.1 million up from $12.1 million in the third quarter last year. We are currently investing above our reduced levels of depreciation and amortization the investments continue to support the growing regions and new business we have won.

Therefore, free cash flow was $74.6 million or $83.1 million when excluding the streamlining and separation payments made during the quarter resulting in a conversion rate of 101% on our performance net income. Finally, regarding the buyback plans that we implemented back in June we repurchased as Jacque mentioned 1.6 million shares in the third quarter at a cost of $80 million of which approximately $74 million were settled in cash during the third quarter and the remaining $6 million in the first date of October.

In total, as of today we have repurchased almost 2.7 million shares since the inception of the buyback program in June representing 3.8% of our average diluted share outstanding during Q2 of this year. For the time being, we intend to keep returning our free cash flow back to our shareholders through this buyback program. We have no intentions however to leverage up the company in order to buy back stock. In deed we want to maintain our conservative balance sheet in order to have flexibility for acquisitions or other investments should the opportunity arise.

Now, I would like to turn it back over to Jacque who will highlight our market dynamics. Jacque.

Jacques Esculier

Thanks Ulrich. Turning to next page, page seven, here we are going to share with you some actually very preliminary view of the world evolving in as it could evolve in 2012. Starting with Europe, as of end of September the progression of truck registration in Western Europe is up 44% actually it was up 17% in the month of September peak sales. Leading to a confirmation of our expectations for the year-over-year production increase by 30% and that would lead to a level of production of around 240,000 trucks which is equivalent to what we have seen back in 2004 again 20% down from the 2008 peak.

Now, regarding what’s ahead of us particularly in 2012 we received very conflicting signals from the markets starting with this forecast that just came out of global insights that would predict an increase of 18% in the production of truck and buses. I would admit that none of our customers are that optimistic and as they have fortunately reported to you in the last bids some of them would see a slight increase still in the production mixture, some of them start seeing a slight erosion in the market. Ourselves we have witnessed a 4% decrease in order book during the last four weeks still actually seeing a very high level of orders when we look at the orders for Q1 2012 we still see it up 5% versus what it is for the first quarter of 2011.

So now maybe thinking at already conservative but I think it’s a reasonable assumption as of today. We would estimate the production level next year to stay flat to down 10%. North America continues to be driven by the logic of replacing an ageing fleet we should end up the year up 55% versus 2010, which trace to level of production back to where it was 2008 we are 40% short of which stake that it had reached in 2006 and we estimate the production to go up another 15% to 20% in 2012.

Moving to China, we continue to see decline in the production and slow down in the production of trucks and buses Q3 is down 13% year-over-year 17% sequentially versus Q2. Good news is ABS penetration continues to deliver good revenue base for us we’ve doubled year-to-date our revenues versus last year. Our overall estimate for the 2011 level of production is actually down 20% which is better than what we had shared with you during our last discussion when we shared more of a minor swing to 25% actually it could be even down less than 20% in the 18% but the ratio is still slows down but may be not as a pace as severe as what we had anticipate.

Now looking forward as you know China is always the most complicated market to forecast having to take the position we would say flat to up 5% which obviously a first half down versus 2011 taking into account a formidable level of production of 400,000 trucks that we had seen in the first quarter of 2010.

Moving to India, we see next year the continuity of this year. This year it’s up 12% next year up 5% to 10% maybe a slight decrease because there is legal limitation in trading we also see some slowdown in the activity in aftermarket at this point but we see India continuing to generate gross for the industry and for us in particular.

Turning to the next page Japan and Korea as I said Japan very well recovered from the disaster of earlier this year. Korea is also growing this year versus last year. We should end up both region combined with a production level up 5% versus 2010 and looking forward we would see a production level for those two countries at 10% to 15%.

Moving to Brazil, we will again kind of go through a very successful year of growth in 2011 propelled by government stimulus we also will see some pre-buy in the first quarter 2011 ahead of the introduction of this new Euro 5 emission standard in early 2012. So altogether for the year 2012 we see this market continuing to product very, very significant growth up 15%.

However, for next year we start seeing a little kind of pose in the growth actually we would anticipate a slowdown in the area of 10% to 15% particularly taking into account the fact that this stimulus package should be limited and again taking into account this pre-buy effect. The slowdown would be certainly stronger in the first half because of the again pre-buy effect. But again this is not like in China and India questioning the integrity of the growth that we see on the horizon for those regions obviously our industry will grow as these countries continue to generate strong GDP growth. There are some poses in the growth in Brazil and China this year that again should again lead to further growth.

Aftermarket when we witness our fleets all of them are lined to say that we continue to see a normal rate of high utilization of the fleet today. We see and we are told by our distributors that they destock as a precautionary measure. So overall for the year 2011 we would expect a growth of around 8% in our initial outlook for 2012 would be between 5% to 10% taking into account the fact that the overall economy may lead to a softening in Europe.

Moving to trailer production in Europe and U.S. are at very strong level and we will remain that way Q4 most probably but slightly lower than we had anticipated. The overall growth for 2011 estimate 22% versus 2010 with 45% growth in Europe, 68% in North America. However, we are noticing lately in Europe a set of orders placed on shorter notice meaning that the overall order book is going down and people really order at the last minute. We also have been told by some manufacturers particularly in Germany that they are slowing their production rate. So we would kind of see ourselves staying flat to down 5% in 2012 versus 2011 those two leading years for us trying to supporting again and supporting our assumption of a potential softening of our truck and bus business in Europe.

Moving to the next page, we want to share with you how resilient our company is to those potential market fluctuation starting with a remarkable level of flexibility we have built in our direct labor. We have above 30% of our employees that are temporary in high cost countries and we have above 50% of flexibility in best cost countries. We also have (Inaudible) initially a very strong cost efficient footprint in best cost countries with more than 60% of our manufacturing work force, 40% of material source and 40% of our engineers in those regions of the world. Now looking at the assumptions that I just went through with you in terms of market expectation for 2012 or initial market expectations including you know the continued ability of WABCO to outperform the global market we would see that this would still to some revenue growth for WABCO in 2012.

Now looking at it from the profitability standpoint, actually we are going to share information that we do not typically disclose because it’s pretty sensitive and proprietary but obviously in the current several senses given the uncertainty we think it’s relevant and actually timely to share that with you and we see in our company maintaining margins that very high level of margins we have which with the market with the revenue of WABCO grow only 3% to 5%. Below 3% growth in top line we would see start seeing margin erosion and evolve 5% of growth we would see further expansion of our margins. So as you see you know we have a franchise that needs well prepared to address any market situation and certainly kind of driving sales very powerfully in this uncertain environment.

Next page very briefly going through the key achievements along the three pillars of our strategy. We want a good solid ABS business at KAMAZ in Russia. We won two prestigious awards at TATA Motors in India around technology innovation and excellence in quality. We wanted good business for India including our breakthrough stability control ESCsmart system. We want new European global customers with our breakthrough clutchable compressor technology. We introduce our new tire monitoring system at a conference in Moscow in September. We also got an award from Dave for our sustainability in Brazil and finally as Ulrich said our WABCO operating system continues to generate very healthy levels of productivity.

Turning to page 11 we want to again conserve and to present to you the guidance that we had shared with you initially back in July this year. Sales growth is 22% to 25% now given the fluctuation and uncertainty in exchange rates we are giving you what it means in terms of dollars for two different exchange rate this time, at 1.4 and 1.42 and you get read by your sale. We maintain 13.2 to 13.8 target in operating, performance operating margin. EPS between $4.55 to $4.80 and free cash flow conversion between 80 to 90.

Now I would say that given what has happened in the last month in the last four weeks actually I kind of reported to you that we have seen a decline in order book of $4 million actually it’s a decline of 8% for the Q4 revenues coming from Europe which amounts to $17 million that we take out of our initial forecast. I would say that we cannot expect or we would not expect at this time to end up at the upper end of the dry pitch I would say that we are really not expecting either as the lower end of the dry pitch you need (Inaudible) today is what we know and what we see we should be more to meet our plus rent of these (Inaudible).

Turning to last page and as the summary, again continued remarkable delivery of performance at top level due to good growth transformed through an exceptional internal margin of 29%. You know 29% again it’s without any exchange rate impact because otherwise it doesn’t mean much 29% is kind of the incremental profit of our incremental revenue all these cleaned of translational effect 29% is the second largest highest level of incremental margin we have seen so far. So delivered again good profitability at the bottom line, good cash flow conversion we maintain our guidance because we see a good strong fourth quarter ahead of us.

We have built a good flexible, resilient franchise to address and face potential market fluctuation and we are continuing to buy back shares and return the cash we generate to you. So that concludes the summary the presentation. But as next quarterly conference call will be in the New Year I want to take this opportunity to wish you all a very happy and successful year end and also again thank you for your continued interest and confidence in our company.

Thank you now I open this session for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) and our first question comes from Peter Chang of Credit Suisse.

Peter Chang – Credit Suisse

Hi good afternoon gentlemen and thanks for the well wishes Jacque on the rest of the year and thanks for taking my question.

Jacques Esculier

Good morning, Peter.

Ulrich Michel

Good morning, Peter.

Peter Chang – Credit Suisse

So Jacque you gave a lot of good details on 2012 I just had a quick question on the business update call you and you touched up on this in the prepared remarks about how the trailer and aftermarket businesses are leading indicators. And the European uncertainty looks like it’s driving some softness in that business for next year. How should, is that pretty much all Europe that’s bringing that down?

Jacques Esculier

Well actually we see right now more of a kind of, more optimistic world in the Northern part of Europe and certainly a more affected kind of environment in the Southern parts as you can imagine. So obviously we talked about Western Europe as a whole but you are right there is probably a little bit more optimism in the North and not big optimism in the South and we still see the Eastern Europe part fairly upbeat actually.

Peter Chang – Credit Suisse

So, my understanding it’s about 25% or 20% of our revenues are out of Western Europe actually get exported out. Is most of that ending up in Eastern Europe?

Jacques Esculier

Well I don’t know it’s complicated it kind of varies. But that would be I would say Eastern Europe, Russia and Middle East Africa they are all they are kind of traditional places where those trucks seems to end up. There is also marginally some trucks going to Asia actually but the bulks is I think you know the non-European Eastern Europe and Russia and Middle East.

Peter Chang – Credit Suisse

Okay great. Thank you and you know we’ve heard from a lot of your large Western European OEM customers that they are cutting production either at some time in the fourth quarter of this year. Do you have a sense of what kind of effect that might have on your particular production like are they, are they going to be burning out of inventory of your product for the first quarter of ’12 and should we think about first quarter ’12 being a little bit weaker in Western Europe and picking up throughout the year or how should we think about that?

Jacques Esculier

Well Peter you know at this point it’s very hard to again fully comprehend what each customer is doing they are obviously for some of them clearly sharing a slowdown of production. But to be fair they had also probably kind of raised the level of production maybe too far. So actually we kind of estimate today that maybe a lot of 10,000 types of trucks in inventory as we kind of see it ourselves. Now the only thing we can really kind of take as a reference to answer your question of the impact it will have or it could have on our Q4 revenues is the order book. And as I said we have seen a adjustment of 8% of our Q4 order book for our Western European customers corresponding to kind of $15 plus million of revenues that we would be missing as compared to where it was just four weeks ago.

Peter Chang – Credit Suisse

Okay, great.

Jacques Esculier

Yes, just talking let me kind of emphasize this talking it is an important thing that you know we sometimes forget. It’s true enough that when the market starts contracting a little bit or maybe not maintaining the pace of growth then there is an adjustment is inventory. And that has to happen sometime you are right and that also you know ahead of a question that I know we are kind of come up later that will kind of impact our ability to outperform the markets. That obviously is something that comes against the ability to outperform a market in a growth, growing environment. So we probably would see that under a scenario of a slowdown our performance next year may be below or could be below what it has been in the last couple of years no question about it.

Peter Chang – Credit Suisse

Okay, great. Over the five years you still I imagine you are sticking with your 8% to 10%.

Jacques Esculier

Yeah, 8% to 10% for me is kind of more longer term five years type of average. They can we have certainly outperformed last year that we think we are going to very nicely meet this year. But again I would say next year may not be as compelling as it has been the last couple of years. But I’m going to tell you we are going to still outperform. That it would take a lot for WABCO to step outperforming globally the markets.

Peter Chang – Credit Suisse

Well, thank you for taking my questions. I will get back in queue.

Jacques Esculier

Thanks Peter.

Operator

Thank you. Our next question comes from Jeff Hammond of KeyBanc.

Jeff Hammond – KeyBanc

Hi good afternoon guys.

Jacques Esculier

Good morning Jeff.

Ulrich Michel

Good morning Jeff.

Jeff Hammond – KeyBanc

My question on the margin and I appreciate your sensitivity you gave us but how should we think about kind of geographic mix. If you have you know the sharper declines in Brazil and Europe and yet you get out growth and growth in some of the other markets. Did the varying geographies give you much change in the margin mix?

Ulrich Michel

Well Jeff, you know we really usually refuse to answer those types of questions and very frankly if I may the question would then also have to expand on the type of trucks whether it’s heavy or medium size the type of products. The level of adoption of options you know because we sell something that are optional and obviously also when you potentially go into a slowdown or less growth in the economy less adaption of options so it’s a question that you can stretch way beyond just geographical and very promptly I would rather not kind of go into this I would bring you back to what we say here which I think is clear it’s powerful and it’s suppose to take into account of all those things.

Jeff Hammond – KeyBanc

Okay, that’s helpful. And then fourth quarter I guess you have a couple typically fourth quarter seasonally stronger. These just, how should we think about seasonal production in Europe 3Q to 4Q versus kind of these production cuts later in the quarter. Have they kind of just flatten out production levels?

Jacques Esculier

Sequentially it could be a little slower if I remember.

Ulrich Michel

Just work on this we have checked on it. Normally the fourth quarter is the (Inaudible) usually in the third quarter.

Jacques Esculier

Actually, it is slightly up actually it should be up 2% to 3% sequentially.

Jeff Hammond – KeyBanc

So maybe that’s tampered by, that’s tampered by maybe destocking and production cuts late in the quarter?

Jacques Esculier

Well all that stuff again you know yeah I mean there is all kinds of complexity behind that. But again you know what I would say is then back to the guidance I gave you and you know I would say right now we see us kind of to meet our plus rents.

Jeff Hammond – KeyBanc

Okay, and then just on the issue of destocking it seems like there were some pretty cautionary destocking. Is the signal you are getting from your customers that they continue to want to destock? And then if you sit back from maybe the near term a little bit just how would you characterize inventory levels at the dealers your customers et cetera versus say the last downturn.

Jacques Esculier

Again Jeff how yet you may again certainly admitting that we don’t have hard wired data behind this but in the methodology that we account, we use to account for trucks built and sold and registered and what not. We would see a small inventory buildup of 10,000 to 12,000 trucks as we speak.

Jeff Hammond – KeyBanc

During the course of this year?

Jacques Esculier

During the course of this year, so we would end up the year with potentially you know let’s just say around 10,000 which is nothing compared to what we had to unfortunately recognized at the end of 2008. Right, I remind you that it was more towards the 100,000 than the 10,000. Now destocking at our distributors which affects our revenues in aftermarket at the end of that those guys are like us. They are just waiting to see what’s on the horizon and right now it doesn’t seem that there is any slowdown again in the activity of trucks existing in fleet they are all busy, it doesn’t seem that the fleet are really slowing down on maintenance expenses, they are careful but not slashing maintenance like we have seen them do in 2008, 2009.

I think the distributors are again taking precautionary measures and just kind of waiting to see where this whole thing is going to end up. And if it ends up where again but if they continue to be (Inaudible) probably will have to be I mean they certainly will have to probably restart next year and we were going to then stop seeing the impact of destocking unfortunately if it goes the other way obviously we are going to probably maybe further to see, further destocking and certainly not recovering what we have lost this quarter.

Jeff Hammond – KeyBanc

Okay great and then final housekeeping item. Can you give us ending diluted share count as of the end of the third quarter and did you buy any stock, if you bought into the fourth quarter here?

Ulrich Michel

Jeff the number I gave you 2.7 million shares is as I said as of today. As of today we’ve bought back altogether 2.7 million shares since the inception and we continue to buy throughout the quarter.

Jeff Hammond – KeyBanc

Okay and what would have been ending diluted share count for 3Q I suppose.

Jacques Esculier

We are calculation.

Jeff Hammond – KeyBanc

Okay, you can take other questions and if you want to just answer that as you get it.

Ulrich Michel

67.5 million.

Jacques Esculier

We calculate fast.

Jeff Hammond – KeyBanc

Thank you.

Jacques Esculier

Okay, thanks Jeff.

Operator

Thank you. (Operator Instructions) Our next question comes from Steve Tusa of JP Morgan.

Ulrich Michel

Hi Steve.

Jacques Esculier

Good morning, Steve.

Steve Tusa – JP Morgan

Hey good morning. Can you just maybe talk about what you are seeing in China and what you are hearing about next year what kind of macro dynamics underpin that flat to up forecast for next year?

Jacques Esculier

Well at this point Steve we see China leaving 2011 with a production rate of about 250,000, 260,000 trucks right quarterly. That we are trying to stay in sales into 1 million tucks. We think that at this point comparing to putting into perspective of what was built in 2010 of 1.5 million trucks I think there is a little excessive slowdown. Now this year the government has taken very, very abrupt and strong actions to limit access to credit. And also to decrease the level of construction particularly driven by government entities and it obviously has translated into a major defect, in our industry that was really unexpected at least the picture was not expected.

Remember that we had entered this year with a very, very healthy first quarter unexpectedly high at that time. So all this said you know again it could vary from it could in way because China reserves a lot of surprise and we have been witnesses in the last, witnessing in the last years. But again if you are have to take a event China needs to keep generating a healthy 7% to 8% GDP growth so we know why. And 8%, 7% to 8% GDP growth we believe we don’t need a substantial level of manufacturing of new trucks. Alright, I also remind you that those trucks are not ageing as much as our trucks in Western, in the Western world do. You have to replace trucks you know every three years for construction trucks, more than 5 plus years for transportation trucks. But that kind of creates a very strong kind of continuous demand for new trucks right it’s not only related to just GDP growth it’s also relating to pure replacement.

So all this together Steve you know again best estimate you would ask me if I would have kind of used a crystal ball for this I would have said almost to some extent yes the corner of the crystal ball because it’s very complicated. Our customers have no idea what’s going to happen that would not at all push back on the track that things should do better. Now to be fair as we shared with you in September we already see some kind of improvement as compared to what we had forecasted at the end of the second quarter. We were minus 23 between, minus 20 to minus 25 now for 2011 second half we would have more kind of slowdown meaning that we would end up the year at probably minus 17, minus 18. So for me anchoring as we enter 2012 to see that at least we are doing better than what we had anticipated as an industry.

Steve Tusa – JP Morgan

Alright, I appreciate the comments. On the aftermarket you know it looks like as peers talked about you are kind of tweak that down and I think the growth rate is in the fourth quarter lower than what you are kind of expecting for next year. Is that a reacceleration there that you are expecting or is that share that you share gain why does that reaccelerate from the fourth quarter rate in 2012?

Jacques Esculier

Well Steve again you know the logic of the fourth quarter would probably be fairly similar to what we just of shared with you. You know we have again kind of we are impacted by outsides things like destocking and what not but again to be fair we also missed the step because we did not generate the kind of contribution of our manufacturing business that we were expecting and we are going to have to correct that. And obviously once we have corrected this and demand will again contribute the level it was suppose to contribute to the overall continuous growth of aftermarket business.

Steve Tusa – JP Morgan

Okay and then one last question just on price. I think it was little bit less a headwind than it’s been so far this year. You know is that a trend or is that something that you know kind of where it will flow around that 1.5% to 2% level because I think it was negative 0.8 this quarter?

Ulrich Michel

Well actually Steve I will not leave you with the impression that we can keep that level obviously we work hard and harder at trying to contain this issue and this leak. However, we have proven at least in the last two to three years that we are able to maintain this below 2%. I will still kind of see that 1.5% to 2% as a reasonable assumption moving forward and as your point as an exception which is kind of seasonal in between two series of price increases at different customers.

So but I would not take it as a new reference for us. But believe me that could be good target for us and that always is a target that I’m pressuring the team to reach but you know it’s not you know but that went out. We also have to recognize that we have been successful actually lately to pass through and kind of negotiate a lower price decrease or price increase in certain instances because of this commodity price pressure that we have witnessed in the first half and then on first half of this year and that also is reflected in that 0.8%.

Steve Tusa – JP Morgan

Alright thanks and by the way whether it’s the disclosure you gave on the September call or all the tremendous detail around you know 2012. Once again I think you’ve differentiated yourself from the pack as far as providing investors with tremendous detail at a very uncertain time. So whatever happens here in the economy we really do appreciate that.

Jacques Esculier

Alright thanks Steve. I appreciate it.

Operator

Thank you our next question comes from Ted Wheeler of Buckingham Research.

Ted Wheeler – Buckingham Research

Yes hi, good afternoon.

Ulrich Michel

Good morning Ted.

Ted Wheeler – Buckingham Research

Thanks for the disclosure. On the incremental margin framework that you laid out how should we think about kind of the I guess we’ve seen it on the upside you can generate pretty solid incremental margins as revenues come in on the high side. Do you think you can steam the intuitively you think about an accelerating decremented margin if revenues are worst than sort of the framework you see. Do you think you can mitigate the decremented margin as if we should decline in say 5% to 10% in revenues or should we?

Jacques Esculier

Yeah.

Ted Wheeler – Buckingham Research

I hate the first view on detail when you give in so much terrific details but I’m just curious.

Jacques Esculier

Well thank you but Ted I will represent the performance that we have driven during 2009 during the last recession when we lost up to 42% of our revenues proving that we were able actually to limit incremental margin to minus 23%. So now obviously this incremental or decremented margin don’t make sense for very low kind of erosion of growth. Because that becomes extremely sensitive so I would not play with incremental or decremented margin in the very low gross or erosion of our top line.

But as you kind of penetrate into more kind of stronger growth for stronger erosion. Again we have proven in 2010, ’11 we are able to drive strong incremental margin but we have also proven in the past that we are able to limit the impact at the bottom line of a very strong slowdown of our revenues. And we again demonstrated 23% of decremented margin.

Ted Wheeler – Buckingham Research

Well I think if I can recall through that period you did some structural you took some structural actions it may lead to even better let’s hope we don’t have this conversation but an even better performance going forward. I mean is that reasonable with the actions taken?

Jacques Esculier

Well I don’t know because it’s all relative you know it’s incremental year-over-year so whatever you have done 2 years ago will not affect your incremental or decremented margin really as much but yeah we had obviously less flexibility in 2008 we had I think more than 10% lower flexibility in labor force as we entered the crisis in 2009 as we have today. Again as you said, hopefully we don’t have a crisis perhaps is not at the order of this magnitude ahead of us. But we have more flexibility in the amplitude of in excess of 10%.

Ted Wheeler – Buckingham Research

Okay, thanks for that and just lastly do we still think about a 15% tax rate next year.

Ulrich Michel

I mean look we had 16% in 2010 we are coming down to 14.5% now. So I think the magnitude is not unreasonable and look 1% tax rate is $0.04 or $0.05 a share. So it’s also not such a big impact on our earnings per share.

Ted Wheeler – Buckingham Research

Thanks.

Ulrich Michel

Okay.

Ted Wheeler – Buckingham Research

Thanks guys. Great performance.

Jacques Esculier

Thank you.

Ulrich Michel

Thank you.

Operator

Thank you. That does conclude our Q&A session for today I would like to turn the call back to Mr. Jacques Esculier for closing remarks.

Jacques Esculier

Again I just wanted to thank you. Wish you again a happy year end and we will talk to you in early February. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.

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

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

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

Source: WABCO Holdings CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts