WABCO Holdings (WBC) Jacques Esculier on Q2 2016 Results - Earnings Call Transcript

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WABCO Holdings, Inc. (NYSE:WBC)

Q2 2016 Earnings Call

July 20, 2016 9:00 am ET

Executives

Christian Fife - Vice President, Investor Relations and Treasurer

Jacques Esculier - Chairman & Chief Executive Officer

Prashanth Mahendra-Rajah - Chief Financial Officer

Analysts

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Charles Stephen Tusa - JPMorgan Securities LLC

Seth R. Weber - RBC Capital Markets LLC

Ross P. Gilardi - Bank of America Merrill Lynch

Lawrence De Maria - William Blair & Co. LLC

Tim W. Thein - Citigroup Global Markets, Inc. (Broker)

Joel Gifford Tiss - BMO Capital Markets (United States)

Operator

Good morning and welcome to the WABCO Holdings Second Quarter 2016 Earnings Conference Call. This call is being recorded. There will be a question-and-answer session after the presentation. Could you please limit yourself to one question and, if need be, a short follow-up question so that more participants get a chance to engage with management. Thank you.

At this time for opening remarks and introductions, I'd like to turn the call over to Christian Fife, Vice President, Investor Relations and Treasurer. Sir, you may begin your conference.

Christian Fife - Vice President, Investor Relations and Treasurer

Thank you, Ashley. Good morning, everyone, and welcome to WABCO's quarterly conference call. Today, we'll present our second quarter 2016 results. And with us this morning, we have Jacques Esculier, our Chairman and CEO; and Prashanth Mahendra-Rajah, our CFO. As a reminder, this call, webcast and the presentation that we're using this morning are available on our website, wabco-auto.com, under the heading WABCO Q2 2016 Results. A replay of this call will be available through July 27th.

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 these factors can be found in our company's Form 10-Q, which was filed with the SEC this morning and in our Quarterly Reports.

Lastly, some of our remarks contain non-GAAP financial measures as defined by the SEC. Reconciliation 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.

You would have noticed that we've made some changes to our press release filed this morning in application of new and revised Compliance and Disclosure Interpretation that relate to Reg G and are reporting in the non-GAAP financial measures issued last May 17 by the SEC Staff.

I will now turn the call over to Jacques Esculier.

Jacques Esculier - Chairman & Chief Executive Officer

Well, thank you, Christian. Good morning, good afternoon to all of you and welcome to our second quarter investor call.

Before I jump into the detail of our performance for the quarter, I'd like to take a few minutes to take a step back and reflect on a few things. First, I think one of the key highlights of our results this quarter is an ability to generate a double-digit growth at the top-line in spite of everything that's going on around our industry, around WABCO around the world.

We have actually 11.5% growth year-over-year, excluding the impact of foreign exchange. And we have been able to achieve this in spite of, what I would call, a couple of distractions, distractions for the world, for our business, industry and for our company as well.

The first one is obviously related to the decision from the United Kingdom to leave the European Union. Obviously this news has taken the world by surprise and has created a significant level of anxiety across the business community that led to fairly hectic and rapid drop in stock markets.

As of today, now that some dust has already settled down, I think we all realized that the Brexit is actually more of a slow burner. And the stock markets have accordingly recovered, basically to where they were prior to the announcements or even for, in some cases, even ahead. Only few stocks have been lagging this recovery, one of which is WABCO, with obviously a large percentage of our revenue rooted in Europe.

And I could only explain this lag by referring to what I would call an extreme sensitivity of the U.S. investor community to any kind of disturbing development coming from Europe, and we have experienced this quite a few times in the last years. Now, I obviously look forward to seeing this gap progressively closing and to the performance of WABCO continuing to prevail.

Second kind of distraction is disturbing factories more related to our markets, environment market dynamics that have seen some hectic movements starting with the U.S., another significant drop quarter-over-quarter, year-over-year. In one year, the industry has lost one-third of its volume of Class 8 production in the U.S. And that is obviously penalizing for companies like WABCO.

In the meantime, the level of production in China has seen a significant jump in the second quarter, sudden jump, that is actually hard to rationalize and understand through macroeconomic events or factors, but that's what was reported, and we'll see that a little bit later.

Now, again, before I jump into the numbers, I'd like to also highlight the fact that in June, WABCO associated with ZF, have unveiled another industry – first in the industry breakthrough in technology that is an important milestone on the past two autonomous driving. And this breakthrough consists in connecting the very rich and powerful world of control capabilities of WABCO covering braking systems, autonomous emergency braking system, electronic stability control systems, and to connect those to the steering capability coming from ZF.

And that has allowed us to basically take full control of commercial vehicles longitudinally, which we have been historically mastering at WABCO, but now also naturally through this connection to the steering system. And we're going to talk a little bit more in detail later in the presentation.

So, now let's kind of go to page three. Sales, as I said, went up 10.8% reported, 11.5% in local currency. Performance gross profit went up 11% in Q2. Performance operating income was up 13% from $103.8 million to $91.6 million (sic) in this quarter as well, leading to a performance EPS of $1.43 per share versus $1.40 per share a year ago, driving a performance free cash flow of $98.8 million in the quarter, and we'll see that it leads to a very, very strong conversion rate above 100%. We returned $64.3 million of cash through buybacks. And as we will share with you later, we will upgrade our guidance for the full year.

Turning to page four, here is the profile of the evolution of sales in the last quarter with, as I've said, an 11.5% growth, excluding impact of foreign exchange. By channel, we have seen the revenues from OE going up 19% through obviously continuous increase of content per vehicle, particularly in Europe, in India, and in Brazil this quarter. One has to highlight though that the contribution of the two acquisitions that we announced earlier in the year, MICO and Laydon, have contributed 2.3% of total revenues in the top line growth.

Aftermarket has continued to grow a healthy 6%, with some tailwinds in Europe and South America, except for Brazil, and obviously some offsetting headwinds in the U.S. and in APAC. Sales to JV, which mainly represents our sales to the U.S. market through the joint venture with Meritor, that's down 27% in a market environment that it fell down 19%, however, again, insisting on the fact that we have a very unfavorable mix, the level of Class 8 production is down 32% year-over-year.

Now looking at the evolution of our revenues by region as compared to the market dynamics. Starting with Europe, market grew 9%. We outperformed it by 6%, adding content per vehicle around AEBS, which was mandated starting in the last quarter of last year, as well as launching air disc brakes at Daimler and as well as increasing our share of market up to 100% of AMT at Daimler.

North America, we underperformed by 8%, a market that, again, is overall decreasing by 19% but specifically for Class A decreasing at 32%. South America is still eroding demand even though we believe that we have reached the bottom, and we see a change in trend as we speak. But year-over-year, we see another 10% erosion, and we were able to outperform by a healthy 24%, adding a couple of new business wins around TRISTOP, which is an actuator for braking system, as well as APU system.

Japan and Korea eroded another 6%, and we outperformed by 2%, again adding a couple of products there.

Now, China, as I said before, has seen a very, very strong surge of 27% year-over-year, but 19% sequentially. This is a little intriguing for us because we don't see exactly the rationale rooted in any kind of announcement around macroeconomic factors or evolutions. However, we still grew a healthy 20%, but we underperformed the market by 7%. Overall for the year, we will probably slightly outperform the market. And again, to put that in perspective, I'll remind you that the full year 2015 has seen WABCO outperform in China by 24%. So it's still overall average a very healthy double-digit level.

India growing another healthy 23% year-over-year for the quarter and we outperformed the market by 57%, continuing to benefit from the introduction of ABS as a mandate that started in the last quarter of last year as well as some further gains in conventional products.

I'm going to let now Prashanth bring you through the details of our financials. Prashanth?

Prashanth Mahendra-Rajah - Chief Financial Officer

Thank you, Jacques. Good morning, everyone. In summary, we had a great quarter. Strong sales growth, double-digit operating income growth and disciplined cash conversion.

If we can now turn to slide five, I will take you through the details. As usual, I'm going to focus on performance numbers. As a reminder, these are adjusted to exclude items that may cloud the underlying operating results such as separation and streamlining items, acquisition-related costs or extraordinary tax items. Jacques has already given you some context on the revenue growth of 11.5%, so let me move down the P&L.

On a performance basis, our gross profit margin is 31.6%. Operating income for the second quarter is at 14.2% of sales, and that's up $13 million year-over-year at constant FX. And when you exclude the faithful (13:32) impact of transactional FX of $3.5 million, our incremental margin is at a solid 13%.

Despite the strong growth in operating income, this is shy of the levels we target and our incremental margin framework. I had mentioned in our prior earnings calls that we had anticipated this lower incremental margin to continue across the remainder of the year. The drivers for this again include pricing concession on ABS systems in India where the ABS mandate increased our sales volume by 10x as well as market share gains in air disc brakes where the OE margin will be lower before the aftermarket revenue kicks in.

Moving on to productivity. We delivered another strong result of $21 million from 5.4% gross materials and 6.4% conversion productivity. We expect to see the impact of our two European factory closures begin to flow savings in the subsequent quarters as the production transfers begin.

In Q2, our OpEx increased by $10 million year-over-year. Our streamlining programs in OpEx more than offset inflation. The net increase is primarily driven by a little over $3 million from the consolidation of our two recent acquisitions, MICO and Laydon, as well as net new investments, primarily in the front end.

Following the 32% decline in U.S. heavy duty production, the income from our joint venture was down by $2.7 million year-over-year. As Jacques already mentioned, our JV income is principally driven by our partnership with Meritor supply the U.S. market.

Our performance tax rate picked up a bit versus prior quarter to 20.8%, and our U.S. GAAP tax rate is 18.9% excluding the one-time provision resulting from the EC decision on the EPR. We'll cover tax in more detail in subsequent slides. So, after you exclude the non-performance items, you can see that our earnings per share is $1.43 for the quarter. On a U.S. GAAP basis, we recorded $1.33, which represents a gain of $0.21 versus prior year.

And if we can now turn to slide six, I'll update you on our tax rate. As you may remember, from our Q4 earnings call in February, we advised you that the European Commission decided that a long-standing tax incentive program in Belgium was considered state aid and deemed illegal. Thus, in the first quarter 2016, we booked a tax liability of $86 million related to the benefits that we had received over the past four years from this program.

We've also mentioned that in March, Belgium has appealed the European Commission state aid decision and I can now share with you that we also intend to appeal the EC decision during the third quarter. Separately, on July 12, we have successfully obtained an approval from the Belgium finance ministry to participate in a tax incentive program, referred to as a patent income deduction or PID.

This will improve both our GAAP and performance tax rate for 2016. We will partially recover the one-time tax liability that we booked in Q1 and this will also lead to an updated performance tax rate of 17% for the full year and a similar improvement for the U.S. GAAP rate. Since the PID approval was issued just after the quarter closed, this is a subsequent event as noted in our 10-Q and will be reflected in the Q3 results.

For 2017 and beyond, we maintain our previous guidance for performance and U.S. GAAP tax rate to be at the high teen, however, once again, we want to emphasize that the level of scrutiny by many, if not all jurisdictions, to ensure that they are receiving their fair amount of tax revenue is the highest it has ever been. And while we are fully in compliance with all tax regulations, we do continue to monitor the legal arena for new development.

If we can now go to slide seven, I'll cover cash flow generation for the quarter. Excluding streamlining and acquisition-related payments, our performance free cash flow for the quarter is at $98.8 million, which represents conversion rate of 123% of performance net income.

We continue to expect our full year CapEx spend to be around 10% below prior year. And as a result of the strong first half as well as our expectations on improving inventory levels during the second half, we are increasing our guidance for full year cash conversion to now be greater than 90%.

The other notable item for Q2 is the acquisition payment we made for Laydon. Jacques already covered our share buyback program progress on page three. But just to repeat, we repurchased 626,000 of shares at a cost of $64.3 million.

Let me now turn it back over to Jacques who will take you through our updated view of the market.

Jacques Esculier - Chairman & Chief Executive Officer

Okay. Thanks, Prashanth. So, turning to page eight. As we do usually, we're going to give you a certain view of how we see our markets evolve by each of our region, starting with Europe. Year-to-date registration in Western Europe for heavy duty truck is up 17% versus a year-ago and for the full year, we expect to end up at around 8%.

When we look at the total Europe production level, that's including Russia, the production is up 9% versus a year ago and 16% sequentially. Actually Russia itself is up 21% year-over-year, and 54% sequentially. I'll remind you that the first quarter was particularly low because at that point they had not renewed the incentives started last year, and now it seems to be renewed, so the demand is cranking up again. For the full year, we expect production levels to range from 0% to plus 4%.

Moving to the U.S. Production is down 19% overall in the quarter versus a year ago with heavy duty down 32%, and overall level down 6% sequentially. Inventory levels of finished goods at dealers seem to remain high, and we don't see much of an improvement in the coming couple of quarters that leads us to expect a full year level of production ending up down minus 15% to minus 20% for the full year range with flattish 5% to 7%, and obviously Class A being more around 30%.

In China, Q2 production up, as I said before, 27% year-over-year and 19% sequentially. We believe that one explanation could potentially be that this sudden growth is starting to address the replacement of that high level bubble of production that was built around 2010. We had, at that time, reached 1.5 million trucks for that year. And so, we think that six, seven years later, it's time for those trucks to be replaced. And that could be an explanation of the surge, even though it was very sudden. So, for the full year, we expect production in China to end up in the 5% to 10% range.

India, still driving a very comfy 23% improvement year-over-year and still seasonally – no, I'm sorry – actually going down seasonally 9% versus Q1. And this is supported by continuous favorable macroeconomic factors. In Q4, we expect to see some pre-buy ahead of the introduction of a new emission control standard called BS IV which is the equivalent of Euro 4 for Europe, leading to other strong year forecast falling in that plus 15% to plus 20% range.

Moving to page nine and addressing Japan and Korea, production was down 6% year-over-year, down 9% versus Q1, with Korea being down itself 26% due to a continuous drop in exports, particularly to Middle East and Russia. So, altogether, including Southeast Asia which is attached to Japan, we would expect the production in that region of the world to drop by minus 2% to minus 7%.

Brazil had a second quarter production level down 10% year-over-year but up 16% sequentially. There is a continued weak environment. I think they have started to evolve out of the locked situation they were in politically, with still an uncertain outlook. However, we think we may have reached the bottom and we see some signal of a potential change of trend. But for the full year, we expect the level of production would still be flat to minus 10%, with recovery in the second half.

Aftermarket has seen a growth of 6% for the second quarter with continuous strong IAM channel overall and some continuous headwinds from the OES channel, particularly in China and NAFTA. Transics, our fleet management system company delivered again a double-digit growth – will deliver again a double-digit growth in 2016. And all together for the full year, we expect this part of our business to generate a healthy 7% improvement in its revenues.

And finally, trailers production was up 1% year-over-year and up 3% sequentially with Europe and India, healthy production being offset by China and North America. For the full year, we expect production to be kind of flattish in between minus 2% to plus 3%, with obviously a negative impact from North America and to a certain extent, China. China being a strong source of exports of trailers to the U.S.

Going through page 10, and as we do every quarter, we're going to refer to the highlights of what happened during the second quarter around the three pillars of our strategy starting with globalization. We have seen some two interesting contracts enhancing our position in India and China on vacuum pumps. We got a contract from Geely, which is the owner of Volvo, as well as a contract from Mahindra & Mahindra, which is one of the largest manufacturer of automotive in India.

We also continue to see a strong increase in the adoption of electronically-controlled air suspension, WABCO still being the first and only supplier of those system over there. Then, as I mentioned upfront, and we'll talk a little bit later about it, we have this joint development with ZF that was announced in June, and that led to the demonstration of Evasive Maneuver Assist capability.

After we have acquired LCL, we have seen the company sign two very strong contracts with two major fleets in North America to equip them with those aerodynamic systems that decrease the fuel consumption of the combination truck-trailers.

And then in execution, we're very proud to have received an award from Hino Motors which is part of the Toyota Group for Excellence in Quality and On-Time Delivery. And as Prashanth went through, we have seen another quarter of strong productivity.

Moving to page 11, you see here a couple of pictures that come from the session that was organized by ZF with WABCO to unveil this association that we had, leading to this capability of connecting WABCO's control of the longitudinal energy and dynamics of the truck together with the lateral ability enabled by ZF's steering.

And we have demonstrated to 120 journalists around the world this new Evasive Maneuver Assist capability. When you actually squeeze a truck in an extreme situation for this advanced emergency braking system, like kind of forcing the truck to react on very slippery road or actually launching the truck at full speed with a traffic jam around a steep curve, that actually push again this ABS system at an extreme corner, then you are not able to absorb the full energy of the truck avoiding completely a collision. And this EMA capability allows the truck, at the last minute, to bypass the traffic and avoid the collision. And by the way, doing this with also controlling the full connection of truck and trailer that could, obviously, be destabilized by the sudden kind of change of lane and that stability control capability we have allows to maintain control of the combination.

So, again, it's a very important step on our path to autonomous driving. It's an industry-first technology and it proves again our continuous ability to lead the industry in unveiling new technologies.

Page 12 gives you an update of our guidance. So, sales growth will now fall in the range of plus 7% to plus 10%, with reported sales from $2.78 billion to $2.86 billion, with the performance operating margin in the range of 13.5% to 14%. Performance EPS, $5.60 to $5.90, up from a $5.30 to $5.80 original guidance. And a free cash flow that we estimate to be over 90%, so we also upgrade this dimension.

Some key inputs. We believe that annual price erosion will actually be around 1.8%, so it's the worsening of our forecast for price erosion. Raw material deflation will be of 0.3%. And you can read the rest. But also including the performance tax rates, as Prashanth explained to you, down to 17%.

So, as a summary, we have seen another strong quarter in terms of top line growth, in terms of bringing this top line growth to healthy contribution to the bottom line, very healthy cash flow with very strong conversion rate. So, overall, the WABCO machines continue to work well.

On the following page, I just want to highlight the fact that, as we do every two years, we will join this IAA exhibition in Hannover. And we certainly welcome and warmly welcome you to join us. During this fair, we're going to demonstrate technologies. We're going to have visits of our factory, because one of our main factory is in Hannover. And obviously, with some interfaces with top management.

So, that closes our presentation and I would like to open the session for Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. Our first question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Hey. Good morning, guys.

Jacques Esculier - Chairman & Chief Executive Officer

Good morning, Jeff.

Prashanth Mahendra-Rajah - Chief Financial Officer

Good morning.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

I just want to dig in on Europe. One, what, if any, have you seen any impact from Brexit? What do you think happens? And then within the 0 to 4%, which I think you downticked, at least at the top-end, it seems like the only change is that Russia is maybe getting better. So, why are we not moving that up?

Jacques Esculier - Chairman & Chief Executive Officer

Actually, Jeff, well, Brexit will most probably not have any real impact on 2016. As I said, I think the peak of anxiety happened at the announcement level because nobody was really expecting it. I think now we realize that the process, to start with, will be long, at least two years. And some people started to reflect on the real impact it will have overall on the UK and on Europe. And there are some obviously issues but there are also some positive outcomes that could be generated by this. So, long term, I don't know exactly what the impact will be. What is being mentioned today is fairly limited, 0.1% to 0.2% of decrease overall GDP growth in Europe next year. So this is not very severe.

The other thing is we were more towards the end of the range for Europe during our last interface with you. I would say that, as I said the kind of positive contribution and evolution of Eastern Europe may have kind of displaced us a little bit more towards the mid or upper range of that forecast that we share with you. But nothing drastically that would – nothing drastic that would allow us to really upgrade the overall range versus what we had shared with you again three months ago.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Okay, great. And then just a quick follow-up on the margins. It looks like you did 14.1% in the first half and you're guiding 13.5% to 14%, so it implies a low 13%s in the second. Can you just speak sequentially to why those margins would be lower in the second half?

Prashanth Mahendra-Rajah - Chief Financial Officer

Sure, Jeff. This is Prashanth. It's actually very consistent with what we did last year which was also 14% and a bit in the first half and 13% in the second half. And that reflects a little bit of the seasonality that we see with the reduction in activity during the summer months, as well as the holiday season where we don't' have quite the same amount of production volumes that we have in the first half.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Okay. Thanks, guys.

Jacques Esculier - Chairman & Chief Executive Officer

Okay. Thanks, Jeff.

Operator

Thank you. Our next question comes from David Leiker of Baird. Your line is open.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Hi. This is Joe Vruwink for David.

Jacques Esculier - Chairman & Chief Executive Officer

Good morning, David. Good morning. How are you?

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Hi. Good, good. Jacques, based on your comments at the beginning, there seems to be a little consternation that the equity markets have rallied back, and WABCO is still sitting close to its post-Brexit lows. So, with just that in mind and your performance is still very strong, you're obviously raising guidance, would you maybe look to be more aggressive with a buyback authorization in the near term?

Jacques Esculier - Chairman & Chief Executive Officer

Not really. We have committed. It's not the first time we see those kind of ups and down, and we certainly modulate kind of locally. When price is attractive, we may be buying a little bit more, and a little bit less when it's less attractive. But marginally around a major kind of commitment we have to – that was actually approved by the board to buyback at a rate of about $250 million a year. And we'll continue to do this to again maintain access to gunpowder in case we would find attractive M&A opportunities, and we have some interesting that we're looking at right now in the pipeline.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

And that actually leads me into my new question. Just your updated thoughts on M&A. There's been a lot of news in the industry recently. Obviously, Haldex has gotten some interest. Even Knorr made an acquisition of Bosch's AMT assets in the quarter. So, just with a little more activity going on, I don't know if that closes the door because valuations moved too high or that kind of pulls forward your own timeline to get deals done sooner, any thoughts there?

Jacques Esculier - Chairman & Chief Executive Officer

No. We ourselves acquired a couple of companies this year that, I think, nicely complemented our portfolio and geographical reach. Obviously, other companies do have their own strategy and has to acquire companies. What I would say is what our competitor has acquired that probably fits obviously their strategy was not attractive asset for WABCO because it was not in line with our strategy.

I think it's interesting to see Haldex being, right now, aligned with SAF. I don't think it's any more threatening than Haldex standing alone because SAF is mostly focused on manufacturing axle for trailers. So, I don't think it's going to probably provide much opportunity to accelerate whatever Haldex strategy would have to step into the world of trucks and busses. So, I think probably SAF has a good move but, again, not very relevant from WABCO's standpoint.

But we have, again, our strategy at looking and maybe intensifying, as we have shared with you a few quarters ago, the scrutiny of opportunities in the market leading to those two acquisitions. We also continued to really kind of scrutinize good opportunities to further penetrate this digital world, particularly around this Fleet Management System capability beyond Europe. Anyway, more news to follow.

Operator

Thank you. Our next question comes from Steve Tusa of JPMorgan. Your line is open.

Charles Stephen Tusa - JPMorgan Securities LLC

Hey, guys. Good morning.

Jacques Esculier - Chairman & Chief Executive Officer

Good morning, Steve.

Charles Stephen Tusa - JPMorgan Securities LLC

Or good afternoon. Just on Europe, under the assumption that the economists are right about what happens over there. How would you compare the state of the truck market there versus prior – I'll call it just prior I guess – it's not really a recession, but I guess just kind of a soft recession. How do you think the truck market there is kind of positioned either different or the same versus prior moderate downturns? And what would be kind of the deleveraging of the truck market on a recession like that?

Jacques Esculier - Chairman & Chief Executive Officer

Well, Steve, I think it's at this stage it's around assumption on GDP moving forward because as we all know the correlation between sales and production of trucks and buses is very much correlated to GDP growth. Very frankly, we haven't seen anything. There has been no rush to modify orders or truck kind of volumes of orders at WABCO. And it's nothing surprising because there is really nothing that would disrupt the economy and industrial activities immediately.

However, the only thing that we can observe is the forecast from IMF and other sources that kind of assume because I don't think we know any better at this point that the GDP of Europe could be impacted at the level of 0.2%, moving forward in 2017 and that would, obviously, impact the level of forecast that we would anticipate for 2017. But it's still a pretty kind of consistent 1.5% type of percent of growth, which is again, nothing major in terms of drop or changes.

So, from my standpoint, right now it's for WABCO a non-issue. It's potentially slight changes, slight downturn versus what would have been the course of things with a continuously increasing GDP growth in the coming years. Potentially, a little bend to that, but I don't think we see anything more alarming moving forward at this point.

Charles Stephen Tusa - JPMorgan Securities LLC

Right. And there is no inventory – this is not like kind of 2008, 2009 where you're coming off of a booming type of market any way, right? I mean, it's a pretty – it hasn't been that robust of a recovery to begin with, so should we think that there's not really a destock or something like that coming?

Jacques Esculier - Chairman & Chief Executive Officer

Well, there is nothing. The news is pretty fresh. So, it would be very unusual and very extreme if we would already report some major changes in inventory levels. One thing though, Steve, is that the average age of the fleet is still one year above what it has been historically. So, there is still a fairly significant reserve of opportunities for growth to, at least, start kind of bringing this aging of the fleet back to where it belongs.

The level of production today, as we see it at the end of 2016, would still be 20% below what it was in 2008. And 2008 was the peak but remember that the fourth quarter 2008 was already significantly down, so 2008 peak was not exaggerated. Nothing to compare to the 2006 peak that we had seen in the U.S. ahead of the introduction of emission control standards caused by pre-buy. There was no pre-buy in Europe in 2008.

So, meaning that I think that we are pretty safe to see, as you said, a continuous kind of slow but sure improvement of GDP growth, potentially locally affected by this Brexit situation. That's the way I would kind of guess it could be but that's again at this time, I think a discussion that it would be worth having a round of good glass of beer, I guess, because we don't know better.

Operator

Thank you. Our next question comes from Seth Weber of RBC Capital Markets. Your line is open.

Seth R. Weber - RBC Capital Markets LLC

Hi. Good morning, everybody. I wanted to go back to your comments on China. Your expectations that you're going to flip from the underperformance here in the second quarter and I guess first quarter was pretty much on par to outperformance in the second half. I guess, can you give us some color on what gives you that confidence? Is there a customer change or a mix change that you see on the horizon that would enable that outperformance to flip in the second half? Thank you.

Jacques Esculier - Chairman & Chief Executive Officer

Yeah. First, Seth, kind of framing this – what happened this quarter. There has been a strong surge but in particular, a very strong growth of one customer, FAW which happens to be one of the two leading manufacturer there. They had seen a major drop because of internal issues last year, and they have caught up, and they grew 70% year-over-year in Q2. While it happens that this is not the customer where we have the largest content per vehicle, and that obviously impacted our outperformance overall. But because the other manufacturers are very much more in line with kind of normal, I would say, growth rate. But again when you have FAW at plus 70%, that's what obviously kind of lifts the whole thing up significantly.

Now, in the second half, we are starting to deliver ABS to the light duty trucks. As you may know, there is a mandate to start equipping light duty vehicles/trucks with ABS. And we have already signed some pretty good contracts that will allow WABCO to, again, position itself very strongly along that opportunity. And that's what will, among other smaller things, what will kind of lift the level of our performance.

We don't believe we're going to end up the year with a very strong outperformance, to be fair. But again, we have to put that into perspective, what happened last year was a very, very, very healthy 24% outperformance. So, overall, we're going to be at like 12%, 13%, 14% average over two years, not bad.

Seth R. Weber - RBC Capital Markets LLC

That's very helpful. Thank you. And I guess, just a follow-up to that, with more mandates in China and the market maybe perhaps coming off the bottom, are you starting to see any increase in local competition – local competitors for the market?

Jacques Esculier - Chairman & Chief Executive Officer

Well, I mean, obviously, first, we have had a lot of respect and we have scrutinized and we continued to observe local competitors in their development and strategic movement. And I think we have to continue to do this because we believe that competition has been going up and growing up, and I think it will continue to do so. So far, we have been able to always stay ahead of competition and keep very strong market share even in very traditional conventional products. But again, it's a constant battle and we have to always find ways to differentiate our value proposition versus competition.

Operator

Thank you. Our next question comes from Ross Gilardi of Bank of America. Your line is open.

Ross P. Gilardi - Bank of America Merrill Lynch

Hi. Thanks a lot.

Jacques Esculier - Chairman & Chief Executive Officer

Morning.

Ross P. Gilardi - Bank of America Merrill Lynch

Morning. Just a couple of questions. Jacques, just wondering what your latest thoughts are sort of on the multi-year outlook for WABCO outgrowth. Should we still be thinking about like an 800-basis point type number? And what was WABCO's actual outgrowth in the second quarter? I'm not sure if you said it this time.

Jacques Esculier - Chairman & Chief Executive Officer

Well, it's consistent. I mean, we made an announcement back in April that we still commit to reach that 800 basis points over a certain period of time. Obviously, we always insist that it's not really interesting or even relevant to track outperformance by quarter, even by year, because in a quarter or in a year, a lot of things happen that disturb the overall logic. When you introduce a product, it will really impact significantly a quarter, a year, and then – so what we're saying is, over five years, we would see an outperformance level of about 8%-plus average.

Now, obviously this quarter has been – we had few things that happened. We had some tailwinds obviously in the gross, driven by those small acquisitions, and we shared with you that it represent about 2.3% of total revenues. So that was kind of headwind to outperform the market. But in the meantime, one has to recognize that the impact of this sudden and significant drop in a major market of WABCO of 32% for Class 8 in the U.S. has been very impactful, because it does provide a very strong headwind, 19% for the full range of trucks but 32% for those trucks on which we have a lot more content, so that really provides enormous amount of headwind. And then, we had this kind of a sudden raise of production in China that, as explained, did not help either.

So, net-net, you could say that we have had some tailwinds through those little acquisitions that helped, in addition to all the list of things we have kind of – we have gone through at every call, the list of air disc brakes, AMT and things like this. We have added this tailwind from acquisitions but with some headwinds. So we end up about – when you look at it – for the full year, we're going to end up probably in that 8% range.

Ross P. Gilardi - Bank of America Merrill Lynch

Okay. Thank you. And then, I just want to clarify, I mean, is the revenue – is the bump to the revenue guide all FX driven, given that the organic outlook is essentially unchanged? And is the EPS revision all – basically all tax driven, given that you've taken the margin outlook down by 30 basis points?

Prashanth Mahendra-Rajah - Chief Financial Officer

Yeah, Ross. That's essentially the – you take the new tax rate and that will give you roughly the delta that you got there on the EPS change, although FX is a little bit favorable for us as well. And then on the revenue side, you have the adjustments we've made to the markets. But for the most part, you have the translation of the result with the strong currencies.

Operator

Thank you. Our next question comes from Larry De Maria of William Blair. Your line is open.

Lawrence De Maria - William Blair & Co. LLC

Hi, good morning.

Jacques Esculier - Chairman & Chief Executive Officer

Good morning, Larry.

Lawrence De Maria - William Blair & Co. LLC

Hey. Good morning, guys. Jacques, you spent some time obviously talking about the autonomous driving capabilities. Can you discuss maybe a bit more of the commercial impact and the timing from the active braking and steering, the timeframe especially? And as I understand it, you didn't previously have the steering component, and I think Bendix recently made an acquisition there. So does this partnership with ZF solve that problem?

Jacques Esculier - Chairman & Chief Executive Officer

Yes. Actually we believe that it's a powerful association to link up to large providers of those steering systems. And the acquisition that you are referring to is actually connecting our competitor to what we see as a much more limited manufacturer in terms of volume and technology. So we have selected the path of connecting with those players, and obviously this situation here we have really been strongly associated with ZF to develop this prototype.

In terms of monetizing it, it will take some time. This is really a pre-prototype of proof-of-concept, I would say, that has demonstrated a very interesting first functionality, this evasive maneuvering capability. There are many others, platooning will be enabled by – obviously integrating steering into longitudinal energy management. But also, those yard maneuvering whereby you enter into the premises of a factory or warehouse, and you let the truck by itself kind of go connect to the dock, connect to trailers, disconnect, and all that stuff is done without drivers, which obviously is very impactful in terms of cost and overall efficiency of fleets.

But it will take some time before we're going to see that fully developed, fully validated and made available in the market. I think it's a matter of probably quarters.

Lawrence De Maria - William Blair & Co. LLC

Okay, thank you. That's really helpful, Jacques. And then, just secondly, you mentioned the frustration, I guess, with the stock performance. Just curious if – as far as capital allocation goes, would we ever think about proposing to the board maybe a dividend to help investors that are searching for yield in this environment? I know there has been a lack of appetite to do that in the past.

Jacques Esculier - Chairman & Chief Executive Officer

Well, the arguments that have favored buybacks versus dividends are still very relevant, and we continuously review this question with the board. And I can't speak for what decisions will be made moving forward, but at this point, we still think that it is in the shareholders' best interest, and it resonates with some very key shareholders – the main shareholders of WABCO seem to be very satisfied by this strategy. So, as of now, I don't think I can announce any real major change in our approach.

Operator

Thank you. Our next question comes from Tim Thein of Citigroup. Your line is open.

Tim W. Thein - Citigroup Global Markets, Inc. (Broker)

Great, thank you. The first question is just on the – you alluded to your framework in terms of incremental margins being a bit soft, and what you've guided to in the past. I'm just – as you move beyond some of these factors that are weighing on the margins, would you still endorse the framework that you put forward in the Investor Day in terms of the, call it, 5% to 10% growth trends leading into a mid to high teens incremental margin? I'm just thinking of a rough framework for 2017 and beyond. Would you still endorse that?

Jacques Esculier - Chairman & Chief Executive Officer

Yes, yes. And thanks for the question. Absolutely, I mean, I think we are committed to the incremental margin. I remember that is a framework that we provide over a period of time, although it can get applied by folks to try to look at it on a quarter-to-quarter basis. We do try and look at it over the course of the year. And that is very much what the WABCO operating system is about and driving the productivity that we do focus on such as the difficult decisions that we took last year to close a couple of manufacturing operations is all about identifying ways to fuel that incremental margin framework. So we absolutely would continue to commit – that's the goal we strive for.

Tim W. Thein - Citigroup Global Markets, Inc. (Broker)

Okay. Got it. And then just, Jacques, maybe on your comments earlier on in terms of the desire to want to build on the Transics deal and expand that FMS solution out of Europe. We have seen some bigger interest from some of the bigger tech companies, and I think one of it, the large telecom providers even just in the last month or so, announced an acquisition there. So I'm just curious, obviously Transics came in at, I think, a pretty attractive price. How would you – just kind of give us an update in terms of the M&A environment and especially the valuations that you're seeing out there on the FMS side.

Jacques Esculier - Chairman & Chief Executive Officer

Well, Tim, a couple of things. First, obviously, valuation and sometimes, in our opinion, excessively high valuation has been delaying a move. Second, we see obviously these movements from other companies that start invading that space as well as interesting move and building a new world of competition.

However, we still believe that there is a very strong differentiation in a company like WABCO expanding into this world with, I think, a very legitimate kind of differentiation in value proposition, because we connect the world of sending, transmitting, managing data to the world of generating and controlling data because we basically control a lot of very, very important systems on board to truck particularly systems related to safety efficiency. We gather the data. We know how to connect and exploit those data on top of, again, sharing them, sending them, managing them, exploiting them.

So we believe that we have a legitimate position, but we are looking at opportunities to expand into this world without having to pay a specific amount of money.

Operator

Thank you. Our next question...

Jacques Esculier - Chairman & Chief Executive Officer

Ashley, I think we have time for one more question. So this will need to be our final question.

Operator

All right. Our final question will be coming from Joel Tiss of BMO. Your line is open.

Joel Gifford Tiss - BMO Capital Markets (United States)

I slid in there. How's it going, guys?

Jacques Esculier - Chairman & Chief Executive Officer

Good morning, Joel.

Joel Gifford Tiss - BMO Capital Markets (United States)

Two really quick. On the tax dispute, is it focused more for now on recouping your fund or is it focused more on lowering the tax rate, the structural tax rate going forward?

Prashanth Mahendra-Rajah - Chief Financial Officer

So, it's both. So we have the new program, which I mentioned, with the Finance Ministry approved in July, which lowers our rate under a new program. And then separate and independent of that, we have made the decision to appeal the ruling. And should we be successful in that and win that, then we will expect to be able to recoup more of our losses. So, absolutely both items are on our focus.

Joel Gifford Tiss - BMO Capital Markets (United States)

Okay. And then, if I'm just trying to sort of ballpark on this Geely win of the vacuum pumps, and then trying to think about the auto mix as we go to like 2020, can you just give us an order of magnitude? Is it more of a $100 million piece of business far out like 2020 or 2022 or is it more like a $50 million? And just roughly, what do you think about the auto mix further out? You think it's going to be about the same or it's going to creep up a little bit?

Jacques Esculier - Chairman & Chief Executive Officer

Well, right now, it's getting closer to $200 million. And we see a lot of very strong success not only in the area of vacuum pumps, but also actually more importantly along the product lines that we have in electronically-controlled air suspension. We have won some very significant businesses, and we continue to develop very, very differentiating technologies that make the overall system more efficient, fuel efficient, and less bulky and actually lighter overall.

So we continue to feed that pipeline with technology breakthroughs, and it continues to deliver some very strong growth opportunities for us. I don't know what the mix will be because it depends on the growth of that business, which seems to be solid, but it also depends on the growth of the rest of the business, which also has some pretty good driving momentum. But overall, the revenues generated from the car business will rise nicely in the coming years.

Joel Gifford Tiss - BMO Capital Markets (United States)

Okay. Thank you very much.

Jacques Esculier - Chairman & Chief Executive Officer

Okay. Thank you very much.

Jacques Esculier - Chairman & Chief Executive Officer

Well, thanks to all of you. Wishing you very good summer holidays for those who takes them. And looking forward to talking to you and potentially meeting with you at IAA in September. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a wonderful day.

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