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

WABCO Holdings Inc. (NYSE:WBC)

Q1 2008 Earnings Call

April 30, 2008 8.00 am ET.

Executives

Michael E. Thompson Ph.D., Vice President, Strategy and Investor Relations

Jacques Esculier, Chief Executive Officer

Ulrich Michel, Chief Financial Officer

Analysts

Patrick Bowman - J.P. Morgan

Ted Wheeler - Buckingham Research

Abhishek Rathod - Neuberger Berman

Frederick Ziegel - UBS

Jeff Hammond - Keybanc Capital Markets

Operator

Good day everyone. Welcome to the WABCO First Quarter Earnings Result Conference Call, today’s conference is being recorded. At this time I’ll like to turn the conference over to Mike Thompson, Vice President, Strategy and Investor Relation. Please go ahead sir.

Michael Thompson

Thank you, Melissa. Good morning everyone, and welcome to WABCO’s quarterly conference call. Today we will present our first quarter results, and answer any questions that you might have. With us this morning is Jacques Esculier, our Chief Executive Officer and Ulrich Michel, our Chief Financial Officer. Jack will start the call of with the perspectives on the quarter, and Ulrich will follow with more detail on our financial performance. We will then open the line for your questions.

Before we begin I would like to remind you of a few things. First this call webcast and the presentation that we will be using this morning are available on our website www.wabco-auto.com under the heading WABCO first quarter results. Replay of this call will be available through Tuesday May 6th. Second as shown on chart two of the presentation certain forward-looking statements that will make today are based on management's good faith expectations and beliefs concerning future developments.

Actual results as you know may differ materially from these expectations as a result of many factors including relevant examples of which are set forth in our company’s recently filed Form 10-K. Lastly, some of our remarks contained certain non-GAAP financial measures. Reconciliation’s of the non-GAAP financial measures to the most comparable GAAP measure are attached as an appendix to this presentation and to our press release in this morning both of which are posted on our website. With that I will turn the call over to Jacques Esculier.

Jacques Esculier

Well, thank you Mike, and good morning everyone and welcome to our earnings call. This March our third quarter, since WABCO was spun up from Amercian Standard, but before we go through the details of our Q1 achievements I would like to take the opportunity to put this quarter’s results into perspective. Three year ago we made a major commitment to transform WABCO, adding significant focus on execution and globalization on to a strong platform beyond on technology innovation and as we review Q1 today, you will recognize significant progress on all fronts.

To begin with, we’ve maintain a very strong focus on developing new technologies and launching new products, and this allows us to continue to outperform all markets across the world by increasing WABCO’s content per vehicle. Even in Europe, our most material markets as you will see, we were able, In our most material market, we were able to outperform the market gross by 2%. Second, we are increasingly successful at expanding as a global company, accelerating growths in emerging markets like Asia and particularly China.

We will show you later, that our revenue from Asia are increasing year-over-year at a 36% pace, and when looking only at China by 87%. Third, we dedicate significant resources and energy then we keep adding more, on execution across value chain including implementation of our WABCO operating system and it increasingly delivers improvements in productivity and in quality, allowing us to raise our profitability and this quarter alone we have generated a record $28 million of productivity. Given the momentum with beyond this quarter and given our increased confidence in the market for the next two quarters. We have decided to upgrade our guidance for the year, as we will describe later in the call

And now let's look at the results more closely. On chart three as you can see our quarterly sales exceeded $705 million the highest level it ever reach at WEBCO. This is an increase of 26% versus first quarter of 2007 as reported and an increase of 12% in local currencies. It is driven by our continued ability to outperform the fast growing global market in all regions of the world.

Operating margins for the quarter was 11.9% reported and 13% we adjusted for operational streamlining and separation costs and improvement of 157 basis points versus Q1 2007. The significant improvement that we have achieved in our operating margins is the result of acceleration in materials and manufacturing productivity more than offsetting the impact of price erosion, inflation and commodity price increases. It also demonstrates that we have overcome the operational headwinds that we discussed in Q3 and Q4 of last year.

It is further testimony that our business transformation initiative embedded by our WABCO operating systems are delivering significant resource across our value chain. Our earnings per share continues to grow and showed outstanding improvement for the quarter as well coming in at $0.91 per share reported or $1.04 on a performance basis, an increase of 55% versus the same quarter last year. In addition to the excellent operating performance for the quarter, our earnings per share also benefited from reduction of our performance fluctuates to 22% for the quarter and a reduced share account resulting from our ongoing share repurchase program.

For the quarter we generated a $33 million of free cash flow and our share repurchase program continue throughout the quarter, and we will purchase over 730,000 shares of our stock for $32 million. In total, we have repurchased so far nearly 3.3 million shares from September of 2007 and that represents about 4.7% of the diluted shares outstanding we had at the time for our spin off. In summary the first quarter was our best quarter ever taking us a step closer to another record year. Now turning to Chart 4, let’s review our sales and market drivers for the quarter.

As I mentioned our sales were up more than 12% in local currencies over Q1 2007. Growth this quarter was again fueled by our OE truck and buss business, which grows 17% in the quarter, OE grows continues to be driven by increased commercial vehicle production, content per vehicle, global expansion, and new applications. Sales to our joint ventures were down 23%, which primarily represent sales to our Meritor WABCO joint venture in North America and the decline reflects to continued weakness in the U.S. market that we have seen for the last few quarters.

During the quarter, our aftermarket grew at a 6% rate versus Q1 of last year. This is lower than we typically expect for aftermarket, but the drivers argue to distribution channel dynamics rather than our individual performance or ability to deliver. We were also impacted by having two fewer working days in March of this year due to Easter holiday representing by sales around 2% of low growth. When our independent after-market distribution channel performed as expected in original equipment supply channel, so it temporarily dropped in demand and this is due substantially to inventory reductions in physical consolidations in the OES channel.

We expect this impact to be minimal of fully abated in the coming quarters. Sales in Europe, our largest region were up 12% excluding currency translation compared to 2007. With European truck production up 10% we outperformed the market by 2%. A significant part of these gross continues to be driven by the strong economic development in Eastern Europe translating into increased need for heavy duty, Western European-style commercial vehicles. Western Europe itself continues to see growth in fright that is above GDP growth.

Sales in North America were down 14% in the market were truck production were down 27%. We are able to achieve this market out performance due to growth in compressors JV which commenced. Sales in South America were up 20% for the quarter, which was 6% higher than the growth of truck and bus in that region. Turning to the Asia Pacific region our sales was 36% for the quarter significantly outperforming the overall production growth of 6%. China continues to be an exceptional growth story for WABCO with sales increasing 87% for the quarter while vehicle production growth slowed at 3%.

We continue to benefit from the success of our new compressor introduction to the market, as well as increasing the penetration of our anti-lock braking systems and for now more mechanical and transitional products like air valves. Simply stated this was a great gross quarter for WABCO. We said another record for quarterly sales and net income while outperforming the market in every region of the world. Now I will turn it over to our CFO, Ulrich Michel who will take you through the details of our financial performance. Ulrich?

Ulrich Michel

Thanks Jacq. Good morning everyone and thanks again for participating in our earnings call. Turning to chart five we’ll walk through the details from sales to earnings before interest and tax for the quarter looking at both reported and performance numbers. Performance numbers for 2008 are adjusted to remove operation of streamlining and separation cost. In addition comparisons to 2007 are adjusted for currency translation effect. As Jacq mentioned, sales growth for the quarter 12% in local currencies.

This includes the impact of pricing pressure, which was 2% for the quarter and at the lower end of the range we typically see for our business. Gross profit grew at 13.4%, with adjusted gross profit margins expanding 34 basis points compared to last year. Operating expenses expanded at a rate of 3.4%, but decreased as a percentage of sales by 122 basis points, as we were able to more efficiently leverage our operating expenses across the increase volumes for the quarter. Operating income increased over 27% for the quarter, with adjusted operating margins increasing by a 157 basis points.

As you can see this margin expansion what enabled by positive volumes, mix and productivity benefit of nearly $45 million offsetting the approximately $27 million negative impact from pricing erosion, labor inflation, operating expense investments and transaction of foreign exchange. As you can see excluding the effects of transaction of foreign exchange we would have realized operating margin expansion of roughly 275 basis points for the quarter. Performance EBIT exceeding $89 million for the quarter with margins expanding 117 basis points. Our EBIT was impacted by a decline in equity income of over $4 million from Q1 of 2007.

This was due to the continued reduced equity income from all America WABCO joint venture, resulting from the all -- overall U.S market declines as well as a loss recognized for our Indian joint venture, SCL. While the brakes related portion of a SCL continue to perform well, there were losses encountered by the non-brakes business. Overall we recorded Q1 equity income from SCL at the loss of $500,000 versus a gain of $2.9 million in the first quarter of last year. Cost related interest, our plan to separate the brakes and non-brakes businesses on track and WABCO-TVS should be listed as an independent company in India by this coming June.

Once this occurs we will begin increasing our ownership of WABCO-TVS and reducing our ownership of the non-brakes business over the next two years. In short this was an outstanding quarter for our results show that we had essentially addressed all of the operation headwinds that we faced in prior quarters. As a result we are now, realizing much improved leverage from additional volumes as demonstrated by the significant margin expansion we’ve achieved in the quarter.

Turning to chart six, we can walk through the remaining financial details for the quarter. As you can see our reported EBIT were impacted by streamlining and separation costs of $7.8 million for the quarter, down from $12.1 million in Q4 of 2007. Net interest income was $600,000 as interest income more than offset $1.2 million in expense. We were able to achieve the performance tax rate for the quarter of 22% excluding separation and discrete tax items.

Thanks to the efforts of our tax team, this is a reduction of more than 2% from our full year performance tax rate in 2007. As a result our reported net income for Q1 was $61.3 million removing streamlining, separation and onetime in this pretax items. Performance net income was $70.3 million versus $46.4 million in of Q1 last year, an increase of 52%. Likewise, earnings per share on a reported basis was $0.91, while performance earnings per share for the quarter was $1.04 versus $0.67 a year ago, an increase of 55%.

Turning to Chart seven, let's know considered our cash flow for the quarter. As you can see, working capital increased by $67 million for the quarter. This was due to an expected increase in receivables and inventory resulting from our increased business volume in the quarter, as well as a lower than normal payable balance. The low payables balances reflected here is simply due to the last day of the quarter falling on our weekly payment day resulting in up to a weeks worth of additional payments being recorded in Q1.

Operating cash flow was also impacted by separation related payments made during the quarter. We paid indemnification liability we had assumed in the separation from Trane of approximately $11 million. Next, you can see that the net cash provided by operating activities of $50.9 million and net cash used in investing activities of $17.9 million combined to give at free cash flow of $33 million for the quarter. While this seems to net income conversion rate of 54%, assume the payables timing fluctuation and separation related payments, free cash flow conversion would have been in our normal range for the quarter.

Moving past free cash flow we spent nearly $32 million repurchasing $734,000 shares of our stock during the quarter. 28 million of which were settled during the quarter. In total, we have repurchased 3.3 million shares or 4.7% of the diluted outstanding shares. Since ours has been up in August of last year. In Q1, we again paid dividends to shareholders in the amount of $4.7 million yielding a total of nearly $33 million of cash return to shareholder for the quarter.

Turning to Chart eight, we thought it would be appropriate to update your on the logic of our existing credit facilities and liquidities strategy. During the quarter we were successfully in finalizing the credit facilities to support the liquidity plans that were shared with you last year to cover our needs related to the payment of the potential is defined, general business needs, potential small acquisitions and other liabilities inherited from Trane at the time of the spin off. On the left hand side of the chart you can see each of our existing small credit facilities.

Through March 31st, we had utilized about $150 million of our 800 million facilities to support our share repurchase program. In addition to these credit facilities we will shortly have available to us a receivables securitization program that will free up an additional $225 million of cash. You will see an 8-K being filed for this program in the next few days. Combined with our available cash on deposits, this yields a current liquidity of about $1.4 billion when you reserve 100 million of available liquidity to comply with the governance of our credit facilities.

This level of available credit is consistent with the intensions we have expressed since our spin-off. Review having excess to this level of credit, as prudent financial management as it represents what we believe would be a worse case scenario for the pending European Commission sign, and leaves room to finance the growth of the business, and continue the stock buyback program. Further, each of these credit facilities, has been established with great rates and conditions comparable to the $800 million 5-year facility that we have put in place during June of last year.

We think the execution of this credit facilities, is a great achievement given the current difficulties in the credit markets. Considering the potential worse case you see fine scenario, we need to plan for a worse case sign of about $900 million. We also much consider potential payments of roughly $100 million in the next 12 months to 18 months due to other indemnifications and obligations resulting from our spin-off. Lastly we expect to repurchase another $170 million of shares during 2008 all combined, these result in the potential need for about $1.2 billion of liquidity in a worse case we see fine scenario.

Comparing this to the available liquidity shown on the chart we would then have an additional $200 million of available credit and our future free cash flow that could be used for general operating purposes or potential small acquisition. To be clear, we have no new information regarding the size of the time, so the actions we have taken to put in place these additional credit facilities, represents what we believe to be good and prudent financial planning for the company. By doing so we are in no way extracting an expectation of a worse cases time. Turning to chart nine, let’s review an update of our financial projections for the year.

Based on the current strength we are seeing in the European market, we now had more certainty regarding demand levels in Q3 of this year. Also we continue to expect solid growth in other regions of the world especially emerging market. North America we expect to continue to be weak this year with some possibility of improvement in the last part of the year. All considered, we now expect our sales for 2008 to grow between 9% and 12% in local currency, debts up 1% from our prior guidance.

Performance earnings before interest and tax should also reach a higher range of $339 to $351 million up from prior projection of $336 to $348 million. Even now our improved performance tax rate of 22% and average outstanding diluted share of 66.9 million for the year. We now expect earnings per share to range from $3.91 to $4.05 up $0.18 from our prior projection. Now I will turn it back over to Jacques for his summary and conclusions about the quarter. Jacques?

Jacques Esculier

Thank you Ulrich. Turning to our chart 10, lets summarize. We just added another remarkably successful quarter delivering outstanding results on all levels. We keep driving foreign growth innovation and technology as well as global expansion. We also continue to improved execution across our value chain through our WABCO Operating System and all this resulted in a significant improvement in our sales and profitability.

As I have said putting this quarters momentum together with better visibility on the next two quarters. We have decided to raise our full year projection for sales growths and earnings, setting the stage for 2008 to be another outstanding year for WEBCO, with that we conclude our presentations and we open the lines to answer any questions, Melissa.

Question and Answer

Operator

(Operator Instructions) We will go first to Patrick Bowman with J.P. Morgan.

Patrick Bowman - J.P. Morgan

I had a question on guidance and on your margin projections. If you could just give us some kind of sense on the quarterly progression, because when I look at EBIT margins in the first quarter, and it were 12.7% and if I look at your full year guide it looks likes you are guiding to 12.1% and 12.2% on year just doing the math there, so, why should we be assuming I guess that the second half will be down materially from the first half and then if you could comment also on commodity price in our exposure there -- what the typical lag time we would see in a change in pace. Steel or aluminum costs that's impact on your results?

Jacques Esculier

Well, Patrick it sounds it's a actually very good question because its based on a performance on the first quarter that it is really pretty good and then of 13% operating income, but when you think about it we want to be, certainly realistic and fair projects, but we want to also constitute some headwinds that could potentially kind of impact the overall profitability at the bottom line and I would mention things that are more kind of operational for example, the bulk of our salary increases is generally hitting us during the second half over the year. The timing of price increases is also kind of more moving towards the Q2, Q3 and the Q1. So, we could see little, additional impact there and then as you said, we are -- I think we have to review the projection that we had on the impact of commodity. Our prices are very definitely issue around the price of steel for example. We think that the price of aluminum will grow, just kind of about 5% to 6% beyond where it is today where we had planted. Now, steel is definitely going to be basically, around 30% more than at the last quarter, last year. So, altogether, that’s going to represent probably around, $7 to $8 million of potential headwinds as well and then we have that kind of usual again timing of reimbursement on -- from customers and activities in our product developments area and all kinds of things we drop it so, altogether what I am saying Patrick is without being overly conservative, that without we’re staying in a fair level of forecasting. We think that the projection that we give now is again a good way to look at the third – the next three quarters ahead of us. Right…

Patrick Bowman - J.P. Morgan

Okay and just -- just I mean if you look at something’s that might be going your way on the flip side you have 4X, which are probably be less of a headwind to margins as we go out, and it was in the first quarter and the second quarter and we also have the JV income that obviously started to going down last year, might come back a little bit later this year. So, yet some stuff going back your way as well, is that right?

Ulrich Michel

Maybe on the foreign exchange this is at constant rate, we do not assume, we keep it at 147 which is the same rate we gave you before and this does not include further gains or losses from fluctuation of currency

Patrick Bowman - J.P. Morgan

Okay.

Jacques Esculier

And - and from the equity income Patrick actually we see that more of the headwinds because since we discussed our projections three months ago obviously we have seen slight worsening from the U.S. market standpoint and also we have had some kind of review and revision in the flow of income coming from our JV in India. So that would be more of a headwind, but on the other side we have some kind of tailwind to compensates that through the tax rate improvement, which represented sales of about $0.10 of tailwind but again equity income would represent about minus $0.10. So, both do a same kind of cancel each other.

Patrick Bowman - J.P. Morgan

And then the aftermarket sales, 6% in the first quarter. Do you expect that to pickup later this year, because that - I mean that’s much more profitable revenue as well than the early sales, right?

Jacques Esculier

Yeah. Actually, really [Inaudible] again, you think about it we lost two days in the quarter, which represent about 2% by itself. So, we can think that actually with it, to kind of look at it quarter-to-quarter and it would be more than the 8% versus 10% that we give our sales as an objective for the year, now I can tell you already that we are just kind of on verge of closing April and we have very good news in terms of right the -- the performance of this month’s versus last years April. Because, first of all we have two more to add this year, because Easter actually fell in April last year, so, we kind of recuperated that 2% already in April, and again we definitely maintain our objectives to generate 10% year-over-year in 2008 versus 2007.

Patrick Bowman - J.P. Morgan

Okay. And then I just have one last one, and I will hop off. Just in terms of 2008, it is looking like it’s can be really strong year and I just want to get, I know it is early but some thoughts on what ’09 might look like? I mean first your comments on guidance suggest. Not really sure you meant by uncertainty in orders in 4Q. Mostly OEM’s this quarter still reported book-to-bills above one obviously, or is done for record high levels, but I guess if you look at ’09, how should we expect WABCO sales to perform in event that European truck market is flat to down 10% or so next year, just by looking about you guys having the pipe in terms of increasing your content per vehicle in Europe, growth in the emerging markets, new aftermarket offerings etc. Things going in that nature that enables you to outperform on a year-to-year basis.

Jacques Esculier

Well, Patrick again this is another very interesting and important question. We certainly don’t want at this stage, at the end of Q1 2008 to start speculating on how 2009 could shape up for WABCO. The only thing I would kind of say is there is a certain very strong positive dynamics in the industry right now. Order books are obviously very, very flat -- very flat and actually our customers, if you want to order a truck today at some of those manufactures you have to wait for at least twelve months to take delivery of it, that’s for Europe and we thing that that the fundamentals that are really kind of a supporting that growth, that we have seen in the last two three years, are still in place in we will continue over a certain number of years when you think about it on -- in Eastern Europe itself which is really at the origin of a significant amount of that growth there are numbers floating around like $150 billion being invested between 2010 and 2013 and improving infrastructure of those new of those country that newly kind of joint the European Union and to accomplish all those kind of, before that works give me trucks and the second thing is no matter what happens, I think the migration of industrial activity from west to east will continue. So, again the basic fundamentals for us really to Eastern Europe, are still in place and I don’t think that we are going to see a certain kind of changing that environment. Western Europe seems to actually still kind of funds away to keep a fairly good GDP growth projections from next year may be a little bit slightly down, but nobody is talking about any kind of recessive environment. Now, leaving Europe, the rest of the world is pretty interesting again kind of projecting our sales now almost a year down the road China is in itself has, highest production of 850,000 trucks and that the number of trucks over there is actually fairly relevant what is in point to us is that we continue to regularly introduce some new products, new technologies over there that allows us to more than outperform whatever growth or even kind of flattening rate we would find in the market itself. South America continues to grow double-digit, South American factories for our customers are actually feeding South America countries that are by themselves. Brazil is going 5% GDP, and I don’t thing there is any reason why which slowed down, but more important they increasingly actually served either markets from South America. So, we think that this is a market that has more, potential ahead of us and then the U.S. and the U.S. is at almost historically low level and in 2010, we have the introduction of a new regulation on emission. So, there must be some collusion of that pre-buy for 2007 -- for 2010 plus really, kind of starting to bring some new trucks in the system because again I understand people probably right now don’t want to venture into, kind of buying those big ticket items, but they don't really have to start because we are at very low level. So, altogether we really see that 2009 should be a good year for the U.S., so gain a kind of rapidly going around the world I think there is a lot of good fundamentals for us to believe that WABCO in this environment should still do very well.

Operator

We will take our next question from Ted Wheeler with Buckingham Research.

Ted Wheeler - Buckingham Research

I want to ask a couple questions and some of them are partially answer earlier. But, just so I can kind of clarify a couple of things. In the fourth quarter in Europe, are you addressing a visible lack or downturn in orders and conversation or is just a normal this is as far as we can see six months out and we don’t really want to comment beyond?

Jacques Esculier

Well I think Ted, again we have strong visibility on Q2 to Q3 now and those are two quarters that, kind of we think we are aligned in self nicely which what we have seen in the last month. Now, the reason why we put a guidance of nine to twelve is precisely to kind of keep a certain flexibility around the last quarter given the fact by the way that the last quarter of toward '07 was exceptionally high. Right, so all together I mean, nine to twelve will allow you to kind of play run with growth that could falling to the single-digit world in the Q4 if you know there is an impact coming from the U.S. that could effect the market dynamics as early as Q4 2008, but let me tell you we’ve reserved that 12% to just kind of recognize that the market will stay where it is, we are actually a lot continue to align itself with the very strong order books that our customers have in their pocket. So -- I mean that’s what we want to send out. We are prudent and fair again in our guidance that my heart would definitely kind of strongly growing and hope for that 12% greater than the 9.

Ted Wheeler - Buckingham Research

Okay. Thank you. On the joint venture -- on the India joint venture I think you commented the headwind for the equity income could be as much as $0.10 a share. I guess a little bit of that U.S. but its sounds like most of it is the – is the India situation now. When that ownership change occurs in June, what would you expect to be more of a normalized earnings -- earnings outlook from the India joint venture and when do you think that normalized contributions or dynamic. When would that normalized situation actually occur? I mean will it take some quarters to be realized or would be a rapid?

Jacques Esculier

Okay I can answer it. Now the first thing is that in June WABCO-TVS India will be listed but the ownership percentages will be the same in both companies. So, at the end for us and our equity income nothing will change in -- in June. We will still get our -- the same 39.17% share of both of them and then only over the course of the next two years will we stat increasing our ownership in the brakes business and decreasing our ownership in the non-brakes business. How long it takes for us to gain control and consolidates the brakes business and finally get out all together for the non-brakes business we do not know. We have given ourselves in our agreements a two year time period to execute this. Now talking about the business of our joint venture partners, they are investing heavily in building us a new factory and a new business presence for their motorcycles business in Indonesia. So, they are having significant start up losses and investments in Indonesia. That will continue for few more -- more, more quarters but as we progress at some point that this is going to be a profitable business that will, a definitely contribute to the income of the TVS Motors business. Then the headwinds they saw also go back to the availability and the cost of consumer credits in the India markets, they have been impacted by the credit crisis as mainly other countries have and so they saw really low demand in the first -- third quarter. Now, is this going to readily change from the North, but overtime we would assume that the availability of consumer credit will comeback and they should see a recovery, and then they had a but of hiccup on the introduction of a new model, which was delayed by about three months in the first quarter, but now this is in the market, its selling well. So I think they should -- that the business in India are should comeback over the next quarter. It still all together significantly down from our last forecast and you know we did…

Ulrich Michel

And one thing Ted is, the cost of that business, which is responsible for those you know revision of the equity income forecast is on the non-break side. For break side. The piece of that company that we will kind of gain excess to and control in anytime between the end of this year and a year and a half later. This one is healthy is actually doing even better than we thought. So, that's not the piece that is responsible for those unfortunate, kind of a situation.

Ted Wheeler - Buckingham Research

Well, that's kind of why I want to go over it. It sounded like there was a fairly dramatic change if you’ve cleared all of this is away and it kind of got back to normal. I mean I guess it felt like may be it’s about $0.03 penalties in the first quarter and you have kind of your guidance doesn't expect too much change during the course of this year, if I may interpreting it correctly?

Ulrich Michel

A little bit up in improvement but still compared to the last guidance we gave, it had a penalties.

Ted Wheeler - Buckingham Research

No. If you thought that, it might be better a return on your cash to buy, shares in the joint venture to achieve at more rapid consolidations, say relative to buying your own stock, could you do that I mean could you just go very fast to making this change or the regulatory barriers?

Ulrich Michel

I think the process is driven by a contract that we have assigned with all partners over there and if that kind of a very formal kind of path that is set up, it's not that we don’t have the cash to immediately buy their shares its kind of a complicated kind of a process that allow us to at the end of the day, kind of inherit their share of the brake business and kind of give them and give it a kind of a very complex environment and give them to non-brake share that we have in our portfolio. So, its not a matter of cash debt its not a matter of just not having the resource to do it faster, it's a complicated formal process that we have set, and it took us quite a rough you talk from the legal standpoint, good it is complicated. That we have set and we have to obviously go through that process.

Ted Wheeler - Buckingham Research

Great, thanks. I guess one other question that I had you commented pricing being a little bit less than normal in the first quarter. I guess given all of the kind of inflationary trends around the world I am wondering why that would be. Is there some particular issue about pricing that would prevent you from, I guess having what you would expect to more normal pricing environment?

Ulrich Michel

Now, more normal means we have to give higher price decreases to our customer. We said that the lower end of the more normal range we entered a fairly favorable environment at the moment for us.

Jacques Esculier

Again we have only seen this. I said we only seen 2% price decrease this quarter whereas we usually kind of expect something between 2% to 2.5%. So, that’s why Ulrich said it’s on the lower range of -- of our kind of normal situation.

Ted Wheeler - Buckingham Research

That’s okay and I could continue I guess with the commodity price.

Jacques Esculier

Well, I mean we keep working with our customers to minimize the price erosion but, we are not saying today that we will asset 2%, what I’m saying is there is a certain kind of timing, across a year in terms of when, each contract triggers closes really to price decrease in those kind of things. What happened at Q1, through the efforts that we are continuously putting into trying to avoid or stay away from that price erosion and the triggering of those long-term contract we were at 2%. But, over the year we still think we are going to kind of end up being between 2% to 2.5%.

Ted Wheeler - Buckingham Research

Thank you. One last one the comment on the aftermarket distribution anomalies in the quarter and then the April pick up I mean I guess that’s some -- somewhat calendar days but, is that disruption that you saw in the first quarter completed now, or is it still somewhat abnormal?

Jacques Esculier

The two days, we missed them in first quarter and we got them in April and again we can see at the end of this months already that we more than recovered the two days that we had lost in the first quarter. So, it’s a wash, right. Now, in terms of the channels again it happens that right now mostly in Western Europe our OES customers, right. The parts that we sell to our OE customers to feed their channels, this is kind of slowing down significantly because we believe talking to them, that they are trying to rationalize their inventories and -- but obviously the independent aftermarket channel are still extremely healthy and growing as we were expecting. So, you cannot -- we could not imagine that the OES channels well kind of stay very long at this low level of growth. We think that we are going to see recovery in the future months.

Ted Wheeler - Buckingham Research

But, you probably didn’t see that recovery in April.

Ulrich Michel

Ted it’s the one time effect where they take out inventory of the distribution channel, lower the level, and then they are back to a normal growth rate and what we see now, is that we’re back to a normal growth rate.

Ted Wheeler - Buckingham Research

So it has improved in April?

Ulrich Michel

Yes

Ted Wheeler - Buckingham Research

Thank you, fine quarter? Thank you.

Operator

We will take our next from Abhishek Rathod with Neuberger Berman.

Abhishek Rathod - Neuberger Berman

My first question has to do with the tax rate, it’s -- you brought it down to 22%, I presume that’s the guidance for the year?

Jacques Esculier

Yes.

Abhishek Rathod - Neuberger Berman

Okay. A number of European companies have noted that there was a tax law change in Northern Europe during the first quarter and that had effect on the tax rate. Is that true for WABCO as well?

Jacques Esculier

Now for us the tax rate changes were positive. Germany lowered their tax rate, which is part of reason why our overall rate is down.

Abhishek Rathod - Neuberger Berman

Okay, and that is -- that’s incorporated to the new 22% guidance?

Jacques Esculier

Yes, yes, all that -- all the enacted tax rate changes has been incorporated in our forecast.

Abhishek Rathod - Neuberger Berman

Second, in your comments regarding corporate liquidity you may note that the --you may provision for $170 million in the share repurchases during the course of 2008?

Ulrich Michel

That’s from now – or the end of March until the end of 2008. We have already bought about 30 million in the first quarter, so that will take us to the 200 million we had told you on the last calls.

Abhishek Rathod - Neuberger Berman

Okay, great. That would be the budget for the – for 2008?

Ulrich Michel

Yes.

Abhishek Rathod - Neuberger Berman

200 million?

Ulrich Michel

Yes.

Abhishek Rathod - Neuberger Berman

Okay, so another -- so you are making that the commitment at this time?

Ulrich Michel

Yes.

Abhishek Rathod - Neuberger Berman

Okay. Okay, the – and then you also made comments regarding liquidity about the small acquisitions. Are you looking actively to start to acquire and…

Jacques Esculier

I mean we are quietly discerning the landscape what’s out there in possibilities but we do not want to comment how far we are on any given -- given opportunity.

Abhishek Rathod - Neuberger Berman

Would it be fair to say that the prospecting the business development activity has accelerated in recent months or?

Jacques Esculier

Yeah. That’s fair to say. I mean if you look at what's being offered, I think the fact that a lot of the private equity companies and the people who use to have a lot of liquidity now, maybe little more who are willing to sell their investments such as I would say increase at least what's been offer to the strategic fire. So, we have been looking a more things over the last few months than you were last year I would say that’s fair to say.

Abhishek Rathod - Neuberger Berman

And lastly, I congratulate you to offer the wide margins have developed and I guess if we look back to September, October of last year, and in -- and they were and the company has confronted had certain issues regarding supply chain. As and -- and the factory relocation and others. Could you sort of update us on where you are in the recovery process from those issues or as we – or is it – or do we don’t have to worry about that anymore?

Ulrich Michel

Well, I would say much as this we mentioned the fact that we believe overall that we have kind of recover that 130 basis points that we had mentioned at that time as being kind of a headwinds coming from the shortage of capacity that we had across the supply chain to support the fast growing market. So, overall we think we told you already at the end of Q1 that we had recovered about a 100, out of the 130 basis points and I think we can definitely today say that, overall is these kind of issues are behind us. Now, we keep having, to stretch ourselves, because the growths are in the next quarters is still kind of sustainable and we have to keep increasing capacity, but it’s better planned, it’s more structured. We still have, to carry some overtime and but again I think that would be certainly not at all at this scale that we had seen in the third quarter, impacting our profitability's fairly 1significantly.

Operator

We will take our next question from Frederick Ziegel with UBS

Frederick Ziegel – UBS

Good afternoon, gentlemen. Good afternoon and hope you are well. I had a question, I hope you haven’t discuss this already, because I have been on and off the call, but could you -- is there demand reason for you're more cautious view on the second half of the year Q3, Q4 or the ’09?

Ulrich Michel

It is now more cautious than our last view, it is more optimistic than our last view and which Jack said before, I think our customers order books and their flat forecast to us are strong but yet to keep in mind that the fourth quarter last year in 2007, we saw over 18% growth. So -- if it overall gives you a little bit of slower growth rate year-over-year for that full year, that doesn’t mean that we see a big fall of in the fourth quarter.

Frederick Ziegel – UBS

Okay, great. So, that it's not that you are saying to us that the demand will be pullback in more health call...

Ulrich Michel

We had not seen any of this.

Frederick Ziegel – UBS

No, excellence. Thank you.

Operator

(Operator Instructions) Our final question is from Jeff Hammond with Keybanc Capital Markets.

Jeffrey Hammond - Keybanc Capital Markets

Just a lot of questions on JV income, can you just give us what -- what your expectation as for the year versus what you were previously expecting?

Michael Thompson

Do you want to say the number, Mike?

Ulrich Michel

Weill we’ll just fairly $0.10 basically, $0.10 down to our last expectations.

Michael Thompson

Yeah, $0.10 of headwinds Jeff.

Jeffrey Hammond - Keybanc Capital Markets

Okay. That’s helpful and then just a clarification, the order growth of 19% is that an organic number enrolling?

Jacques Esculier

This is in local currencies, and just our normal, we would we don't know we have said this before our order book does not mean customers can’t change delivery date, but this what they had put as orders in on our factories, and on us and that is up 19% in local currencies.

Jeffrey Hammond - Keybanc Capital Markets

Okay. Perfect. And then, and can you just remind…

Jacques Esculier

And it’s a reflection of the long visibility. If you talk to our customers, they have never had order books that reached out that long. I think in the truck industry, three to four months has been considered a normal order book. Now they have 12 months of order books and that’s also reflected in our long -- in our long visibility.

Jeffrey Hammond - Keybanc Capital Markets

Okay. Great and then, can you just remind us you mention these this 100 million of other liabilities that you are indemnifying American Standard for, can you just remind us what's in there?

Jacques Esculier

Okay. Now, you know we have assumed the responsibility to so to speak pay the tax bill to reorganized American Standard in order to be able to spinoff WABCO and sell to be in B&K business and that is part of it, then we've taken on the obligation to indemnify the purchaser of the Bath and Kitchen business, which is now banned for any tax audit risks this in this number. Then we had some smaller, environmental indemnifications we have given, and that reflects these -- these 100 million, which it just guess of what we seen how much might have, I would say a cautious guess of what we have seen, how much might have to be paid in the next 12 to 18 months. The total liabilities are higher, that we had assumed. We have in total, we have to about 60 million of pension related liabilities that we were assigned, which do not stand from WABCO employees, that I have not included because that’s, way out and then a lot of these, taxing liabilities that we have assumed. They are not likely to happen within the next 18 months. So I would say the 100 million is pay a prudent look at what might has to be paid within the next 18 months of these total liabilities that we have assumed.

Jeffrey Hammond - Keybanc Capital Markets

Okay, great and then just final question you mentioned in the Q1 highlights the number of wins a new product. Can you just kind of give us within that scene or what you most excited about and maybe give us a sense of the market opportunity and this collision mitigation system?

Ulrich Michel

Yeah, Jeff I don’t want to into the list of all the wins, but I would say they are some important ones that we win through, one of our key customers in Europe has awarded us a contract to actually equate their new trucks that we are starting the year 2011-2013, with our EBS systems combined with our stability control systems. As you know it most probably, will be mandated, starting in 2010, we could own your trucks with a stability control. So that was a very, very important contract that we just got this quarter. We have got a lot of other kind of smaller contracts. We have launched the kind of automated manual transmission on the new generation of gear box at Mercedes on the Actros truck. We have again kind of launch this collision mitigation system, which is by itself a major breakthrough in technology, because that is the first time, that one of those systems will go further than just warning the driver it work interface with the engine retarded -- with the Engine ECU and with the braking system to apply a 7% of the braking power if the system kind of seas necessary. We will actually launch it first in the U.S. this time and we had a formal launching platform in Florida in January. Our first major customer will be American -- is American and has already 7000 systems ordered and we are going to launch that's toward this third quarter of this year and then we are going to [Inaudible] it obviously introduce as will in Europe. I can’t comment today on that kind of potential revenues it could represent, but I think its going to be a very attractive options for on those trucks.

Jeffrey Hammond - Keybanc Capital Mkts

Okay. Thank for the color.

Operator

It appears we have no further questions at this time. I would like to turn the conference back to Mr. Esculier for any additional or closing remarks.

Jacques Esculier

Now I just want to thank you all and you have a nice day, thanks for attending the call.

Operator

Once again that does conclude today’s call. We do appreciate your participation. You may disconnect at this time.

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 Incorporation Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts