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

WABCO Holdings Inc. (NYSE:WBC)

Q2 2012 Results Earnings Call

July 27, 2012 9:00 AM ET

Executives

Jason Campbell – Director, Investor Relations

Jacques Esculier – Chairman and CEO

Uli Michel – Chief Financial Officer

Analysts

Peter Chang – Credit Suisse

Alex Potter – Piper Jaffray

Jeff Hammond – KeyBanc Capital

Jerry Revich – Goldman Sachs

Joe Vruwink – Robert W. Baird

Tim Denoyer – Wolfe Trahan

Robert Kosowsky – Sidoti

Larry De Maria – William Blair

Operator

Good day, ladies and gentlemen. And welcome to WABCO Second Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Jason Campbell, Director of Investor Relations. Sir, you may begin.

Jason Campbell

Thank you, Sam. Good morning, everyone. And welcome to WABCO’s quarterly conference call. Today, we will present our second quarter 2012 results. With us this morning is Jacques Esculier, our Chairman and CEO; and Uli Michel, our Chief Financial Officer.

As a reminder, this call, webcast and the presentation that we are using this morning are available on our website, wabco-auto.com under the heading WABCO Q2 2012 Results. A replay of this call will be available through August 27th.

Also, as shown on chart two of the presentation, certain forward-looking statements that we’ll make today are based on management’s good faith expectations and beliefs concerning future developments.

As you know, actual results may differ materially from these expectations as a result of many factors, examples of which can be found in our company’s Form 10-K and quarterly reports, including our second quarter 2012 Form 10-Q which was filed this morning with the SEC.

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

I’ll now turn the call over to Jacques.

Jacques Esculier

Thank you, Jason. Good morning, good afternoon to everybody and welcome to our Q2 reporting call. We are now actually half way plus this year 2012, and the second quarter proved again that 2012 was a year of uncertainty, what I called during our first call in Q1 a year of transition.

When you look at the this Q2, the global reduction of trucks across the world was down 9% year-over-year, actually production levels in Europe and North America were slightly adverse to what we had forecasted and what really surprised us is a very strong decline we have seen in emerging markets, particularly you look at minus 38% production levels in Brazil versus 2011 Q2, minus 23% in China, minus 13% in India.

So I would be happy to say that the stronger leadership that WABCO has built around the years in North American markets this time and obviously for the first time negatively impacted our overall growth performance.

But as you will see today in this environment WABCO has made actually new records, new quality records in margins, gross profit margin, operating margin and EBIT. So now going to page three and looking at things in little bit more detail.

So looking first at the topline, our revenues were down 4.5% in local currencies versus a year ago. It’s actually down 1% again in local currencies sequentially versus the first quarter of 2012.

We generated again record high gross profit margin of 30.8%. Our performance operating income reached $92.8 million which hits to the margin -- record margin again the 14.6%.

Our performance EPS ended up by $1.19 per share versus $1.23 a year ago, generating a free cash flow of $56.6 million, leading to a conversion rate of 72% for Q2 and when you look at the first half we also saw a 87% conversion rates. We return the majority of that cash $52 million to shareholders, we do repurchase of 963,000 shares. And although at this stage we are maintaining our full year 2012 guidance.

Turning to page four, as we do usually we are full of deep dive a little bit more into sales and markets dynamics. Starting with the channels. Revenues from the OE channel went down 9% year-over-year, 5% sequentially versus Q1 2012, mostly driven again by the strong decline of production in emerging markets.

Aftermarket was up only 1%, having to actually compensate a 7% decline in Europe and that’s again mostly when taking Southern Europe. And that was again offset by growth in other parts of the world like Americas, India, China. Sales to joint venture was up 39%, [exceeding] and supporting the growth of our commercial vehicle production in the U.S.

Now looking at the evolution of revenues fro WABCO versus the dynamics of the markets in the main regions of our world, starting with Europe, production in Europe was down 7% year-over-year, but up 7% sequentially versus Q1.

In the meantime our revenues were down 9% and this 2% underperformance was actually with the two main shorter causes, one is, the fact that last year we were still manufacturing in Europe and economy fell in Europe from pressures that were shift to North America to support one of our old customer, this year we have actually transferred production to North America and those revenues are accounted for now in North America not in Europe anymore.

And second one is that actually we are seeing the impact this quarter of the decision made one of our European OE customer that the decision made in 2005 to drive a partial dual sourcing of EBS.

Now North America production was up another 23% and we are performing by 2%. South America, as I said, was down 38% year-over-year and we able to see nicely outperformed.

Japan/Korea we believe was an operation at least Korea if I may, up 45% and that’s driven by Japan that was up 78%, Korea being down actually 5%, and this operation comes obviously from the impact on the overall production of commercial vehicles in Japan after the tsunami in 2011.

Now it shows a strong outperformance and thus again we beginning to see operation because last year as the production of vehicles was particularly stopped in second quarter we were still shipping goods and products that were received by our customers, so last year very low producing with still some revenues recognized over there, this year actually we have not lost any share of the market, however, kind of compared to the level of revenues that we generated a year ago is still not as high as this 78%.

China was down 23% in market, we again nicely outperformed by 15%. India again the surprising drop of 15% year-over-year and we already dropped revenues 10%.

I’ll ask Uli to go through the details of financials with you. Uli?

Uli Michel

Thanks, Jacques. Good morning, everyone and thank you for joining us today. I will take you through our financial results for the second quarter 2012. Turning to chart five, I will walk through the details from sales to earnings per share for the second quarter, looking at both our reported and performance numbers.

Performance numbers are adjusted to remove operation streamlining and separation cost, an impact from the U.K. pension adjustment, as well as discreet and other tax items. In additions, comparisons to 2011 have been adjusted for currency translation effects.

Our sales in the quarter declined 4.5% in local currencies versus last year. This was 1% sequential decline in revenues from the first quarter. As you can see, our order book has remained stable at the same level as of the end of the first quarter 2012 and is 5% up versus Q2 of 2011. The increase in sales versus last year includes price reductions to customers of 0.6%, which continued at very low levels for our business.

In local currency we generated the same amount of gross profit as last year with an adjusted gross profit margin that was 139 basis points higher than a year ago. Our productivity initiatives keep delivering at high level.

Materials productivity projects delivered 5.4%, which was partially offset by 1.1% of commodity inflation. The result was a net materials productivity of 4.3% for the quarter and a reduction of material cost by $11 million.

Conversion productivity was 7.3% for the quarter, also a new record for WABCO, savings $7 million in conversion cost. Overhead absorption and other costs had a negative impact on cost of sales in the amount of $9.7 million, which resulted in the performance gross profit margin of 30.8% this quarter.

In operating expenses we continued to invest in research and development, and in globalization, which together added approximately $2 million in cost this quarter compared to Q2 211.

Labor inflation added another $2 million in operating expenses and reduce incentive compensation expense of around $8 million more than offset this increases, which resulted in a net decrease of operating expenses by $4.5 million in the second quarter versus the year ago.

This decline is slightly less than our sales decline and therefore costs us about 15 basis points in operating margin. So, all together, we generated operating income of $92.8 million or 14.6% of sales on the performance basis setting a new record for operating margin at WABCO.

The exchange rate movement in Q2 resulted in transactional FX again from the revaluation of monetary assets and liabilities on our balance sheet that helped our operating margin in Q2. Even if we exclude this part of the transactional foreign exchange impact we still reach approximately 14% operating margin in Q2.

Continuing down the income statement, you can see that this quarter equity income was $4.8 million, which is up from $3.8 million a year ago, driven by an increase in our North American joint venture.

Additionally, the expense to minority shareholders amounted to $3.3 million this quarter compared to an expense of $1.3 million a year ago. Our performance EBIT this quarter was $94.2 million or a margin of 14.8% of sales.

Moving to taxes, you will see that our reported U.S. GAAP tax expense for the quarter was approximately $17.6 million, excluding one-time and pre-tax items our performance tax expense was $15.5 million, which is in line with our estimate for the full year performance tax rate of 16.5% that we shared with you on our last call.

After excluding the non-performance item net income attributable to the company was $78.2 million. With regards to earnings per share this translate to $1.19 on a performance basis versus $1.23 last year.

In summary, although, we experienced the sales decline of nearly 5%, we are pleased to report quarter with strong levels of profitability. The negative impact on earnings and profits from foreign currency translation has basically been offset by favorable impact on margin from transactional FX.

As we had highlighted to you before, our business model has to a large extent a natural hedge between translational and transactional FX exposure. At the EPS level, the net of all foreign exchange impact this quarter cost us about $0.02 per share versus last year.

Turning to chart six, I will now take you through our cash flow for the second quarter of 2012. You can see that working capital had a negative impact on our cash flow in the amount of $8.6 million.

Our days sales and part use have increased again compared to last quarter, whereas our inventory turns have remained at the same level. The changes in other assets and liability were an unfavorable amount of $4.4 million, mainly related to the non-cash adjustment pertaining to the one-time U.K. pension plan adjustment resulting in a net a net operating cash flow of $75.2 million.

Net cash used in investing activities was $21.7 million which is slightly above our depreciation and amortization for the quarter. Our investments continue to support the growing regions and new business we had won.

Therefore, free cash flow was $53.5 million or $56.6 million, when excluding the streamlining and separation payments made throughout the quarter, resulting in a conversion rate of 72% on our performance net income attributable to the company of $78.2 million. This brings our six months year-to-date cash conversion to 87% within the range of our full year expectation.

Under the share buyback plan that we implemented back in June of last year, we repurchased about 963,000 in the second quarter at a cost of $52 million, bringing the total shares purchased till June 2011 to $5.4 million shares at a total cost of $282 million.

This represents nearly 8% of our total shares outstanding last May before we began the program. For the time being, we intend to keep returning our free cash flow generation back to our shareholders through this buyback program, which still has approximately 180 million remaining under the current board authorization.

Now, I’d like to turn it back over to Jacques who will highlight our market dynamics. Jacques?

Jacques Esculier

Thanks Uli. I’m going to page seven, as we again do, every quarter we’re going to kind of update our view of the different market for commercial vehicles across the world starting with Europe.

We actually got yesterday the latest figures related to registration of heavy duty truck in Europe. For June it was a minus 4.6% leading to an overall down trend of 6% for the first half of 2011.

Our order book is fairly stable, slightly below where it was in April, but there is still a very strong level of uncertainty in the market as of today. The prediction that we have -- the estimate that we’d give for 2012 year would be in the range of minus 5% to minus 10%, which is a 2% improvement versus what we had shared with you at the end of the first quarter.

The net improvement comes from the fact that actually the trucks produced in Europe by exporting to other parts of the world are actually not as much down as what we had anticipated. Now, just for your information, when you look at the first half production versus the peak back in 2008, we are at this stage 30% down.

Going to North America, Q2 production of 23%, up 2.5% sequentially versus Q1 2012 are actually the overall kind of a slowdown in GDP growth that we had anticipated at 3% that’s now looks more like half of it for the rest of the year is obviously impacted the level of production and the rates of growth for commercial vehicle in that part of the world.

We are still above our estimate is actually 2% improvement was before, because the level of production in Q2 was slightly above what we had anticipated, so our current estimate would be between 12% to 17%. And again, the level of production as of today for the first half of 2012 is 20% below the peak that was reached back in 2006.

Going to China, production down 23% year-over-year, actually it went down to 20% sequentially. Good news is that we continue to grab market share and add value and vehicles penetration of ABS is up 10%. Our market positioning and our market share in ABS production is growing. We grew by 30% in market penetration and one of the very largest truck manufacturers in the last weeks.

Our estimates overall for the year is down, actually 5% versus our previous view and it’s at minus 15% to minus 20% level for the second half with a kind of a forecast of Q3, Q4 levels being flat through Q2. And again, China, our volumes for the first half is 30% down versus the peak it reached back in 2010.

India production levels were down 13%, that’s really a surprise. But is kind of following and tracking the overall slowdown in the economy over there. Our revision of the estimate now is basically 13%, is predicting a level of production down 8% to 13% for the rest of the year, hopefully the overall year.

Going to page eight, moving to Japan/Korea. Again, the second quarter levels and numbers are very skewed by what happened last year in Japan. Q2 ’12, our production levels are on Q1 levels, which flat across the two quarters.

Korea is slightly down by 5% as I said, with a mix effect that is unfavorable to a record because actually the number of heavy duty truck delivered locally are down further and the number of vehicles exported is up, with net content per vehicle on those little ones, so the content average per vehicle is decreasing, impacting our performance over there. Now, for Japan/Korea combined, we maintain the forecast was up 10% to 15% for 2012.

Moving now to Brazil, again production was still very low minus 38% year-over-year down, up 9% versus Q1. We think that we will reach a slight recovery in the second half of the year that is to an estimate for us for the overall 2012 production levels to be down 27% to 32% for the overall year.

Going to aftermarket, again we grew by little 1% this quarter, mostly impacted by Europe macro economic issues and we think that the aftermarket growth will be up 5% for the year, which is at the low end of the bracket that we had shared with you at the end of first quarter.

It is still important to notice that actually, when we compare our revenue evolution to the industry index that we track over there, we are still a global truck industry index meaning that we outperformed the market.

Finally, closing with the trailers, production in Europe was down 9% during the second quarter, but up 5% sequentially versus Q1 and we maintain our forecast for the production level to be slightly down 5% versus 2011.

Going to page nine and again kind of blanking to the highlights of our strategic achievements, starting with the few contracts that we won, we won the ABS systems for IVECO in South America, starting delivering in 2013.

We won a nice contract with Chrysler cars to support their business in North America and Europe and Asia with vacuum pumps. We signed the contract with Daimler North America to deliver our new breakthrough technology, air disk brakes using MAXXUS.

We actually are nicely expanding our ABS market penetration in the U.S. by winning a standard position at Navistar on couple of their leading platforms. And then, we won a contract with Kogel, which is one of the longest trailer manufacturers in the world with our telematics technology TrailerGUARD.

Then from an execution standpoint, we won a very prestigious award from Ashok Leyland in India, recognizing top service quality and zero defect in our braking products and braking systems.

And then finally, our WABCO operating system, as we said continues to generate very strong growth material productivity and generated top records, conversion productivity in our factories.

Turning to page 10, as I said, we maintain guidance as it was presented to you a quarter ago. Sales ending up between minus 2 and plus 3, operating margin between 12.8% and 13.8%, leading towards a performance EPS in the range of 4.3% to 4.8%, and maintaining free cash flow conversion in the 80% to 90% range.

I would say as of today, is that we see our sales ending up probably slightly less of the mid points, our operating margins probably in the upper range -- upper end of the range and our performance EPS today falling basically kind of in the middle of the range. But, again, this is an indication that can be significantly challenged up or down in the last six months of the year but it is the best view that we have as of today.

Now, a couple of things that we want to share with you in terms of updated assumptions to support this guidance.

First, our annual product erosion, which is now below 1% because we have a pretty good second quarter and raw material headwind, we think it’s going to be actually below 1.5% because again, the overall level of cost of material is not as challenging as it was anticipated to be at the beginning of the year.

Now looking at the last page, in summary, I would say that the WABCO machine is working well. It’s flexing, it’s bending to adapt to those market pickups. When we look at the second half of the year, I would say we expect more of the same with, obviously, these additional seasonal impacts that we see in Europe related to summer vacations.

But we still, however, face what I would call a capricious market that is basically reacting to the political and economy uncertainties around the world. But, in particular, we are all waiting for European leaders to basically clear up those political and economical uncertainties, which overall is a very big hurdle for the world economy.

As you know, I think since that those guys are making very nice progress overall and I’m very optimistic actually that they will set the stage for a rebound in 2013, which together with these pre-buy affect that we expect ahead of the introduction of Europe safety standards in early 2014 should kind of provide probably nice landing for us next year.

And, while in the mean time, WABCO keeps kind of flexing up or down, taking advantage of any uptick in the market demand or flexing down for this appointments and overall continuing to maximize its returns to shareholders.

Thank you. Now, we will open the Q&A session. Sam?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Peter Chang of Credit Suisse. Your line is now open.

Peter Chang – Credit Suisse

Hi.

Jacques Esculier

Hi.

Peter Chang – Credit Suisse

Good afternoon, gentlemen and congratulations on a good quarter.

Jacques Esculier

Thank you.

Uli Michel

Hi, Peter.

Peter Chang – Credit Suisse

Hi. My first question is on the back half implied operating -- performance operating margin, that you guys have put out there. It -- I mean it’s applied around somewhere in the lower 11% to the low 13s%. You’ve got aftermarket sales, look like they are set to accelerate price erosion, our pricing is -- erosion is not getting worse and raw material inflation is also improving. Why is performance operating margin in the back half guided to this lower range than what you did 14-ish percent you did in the first half of the year?

Jacques Esculier

Thanks Peter for your question, which again gives us the opportunity to obviously kind of highlight a few things. Number one, as I said, we probably would expect the topline to be affected in Q3 by this European vacations, right. This is something that belongs to the second half of a year, obviously, not in the first half.

The second thing is, right now the price level -- the price erosion level overall for the first year is actually much lower than what we indicate from the overall year, meaning that they are some programs and some commitment of price decrease as some key customers that would take place in the second half of the year. So, overall, plus we as Uli said, we did exceed this quarter about roughly 5.6% of tailwinds related to FX movements, that’s balance sheet kind of impact.

But we don’t anticipate in second half because we don’t have a clue what the exchange rate will do. So all these things together kind of lead to the indications that I shared with you relating to how we see us -- ourselves ending up, across the different elements of our guidance.

But, again, let’s put it this way, the margin at the upper end of that bracket, which still in an environment that is incredibly challenging our topline would still be a remarkable accomplishment because it would a nice progress versus last year in this kind of great pressured revenue kind of environment.

Peter Chang – Credit Suisse

Yeah. I don’t necessarily disagree. You guys are doing a good job of managing your operations. My second question was actually on, you gave a little bit of some color on the outlook for 2013. You talked a little bit towards a pre-buy. But in the event, if Europe truck registrations and sales actually remain flat.

I mean, maybe you can talk to some of the contracts you won over the past several years that could give us some kind of indication of market outlook in that geography. And then if you could talk maybe a little bit about where you expect the Europe market outlook in sort of China and Brazil for ’13 and then, I’ll jump back in queue?

Jacques Esculier

Well, Peter, I mean, if the overall demand for commercial vehicle is stable year-over-year. Again, that doesn’t mean that the overall demand is really strongly down because that would -- because of these pre-buy that would be no matter what happened, because the step in the costs of a truck at €5 to €6 is pretty steep and we expect a fairly decent kind of revised effect.

But, again, if you say, demand is flat, I don’t know, we have not -- we don’t list all the different things that happened plus or minus. What we would say is that, we would expect, probably, as usual 1%, 2% our performance overall in Europe.

Again, end of the year, we will stop cracking these economies emerged in braking systems that would bring some additional content per vehicle. But that’s about what I would say from the top of my head.

Looking at emerging markets, again, very complicated to read the crystal ball. But obviously, when you look at the level of production in South America, for example, right now if you look at the first two quarters we are up about 40,000 trucks. I mean, we are coming from basically above 60,000 last year, so we are really strongly down.

If we consider that South America would at one point kind of recover in line with what we hope, Europe will do and the overall economy will do, I think this kind of level is not sustainable.

I would expect those places and those emerging markets to basically rebuild growth from there. Same thing with China, I mean, it was 13% down versus the 2010 peak, 1 million trucks kind of predicted at the end of this year, Q1 was 300,000, Q2 at 245,000. We expect the second half to be about 245,000 to 250,000 truck.

But I would say, it’s probably not sustainable as soon as China will rebuild growth in economy, they immediately will trigger demand for trucks. Remember that the life cycles of truck is very short over there, so it’s not like these can keep trucks for huge amount of time like they do sometimes in Europe or in the U.S.

And then India it’s kind of more positive situation here is, the first decline in the Q4, very long period of time. Again, first half of first quarter, we had 70,000, this quarter we had 75,000. So it’s unusually and we believe that India cannot keep kind of running additional level of economy plus officially a low level of commercial vehicle production.

So I would say make sure that we -- if we fixed the European problem right and unleash all the pending demand that’s in there because the fleet is starting to age. I think it’s going to lead to also some good news from the emerging market and that could create a very nice platform for our industry, particularly for WABCO.

Peter Chang – Credit Suisse

Thank you. That’s great color.

Uli Michel

Thanks Peter.

Operator

Thank you. Our next question comes from Alex Potter of Piper Jaffray. Your line is now open.

Jacques Esculier

Good morning, Alex.

Alex Potter – Piper Jaffray

Good morning. I just had a follow-up question. I agree that was really a great color on those developing markets. I was wondering if I guess, you could elaborate on how easily you sleep at night when it comes to trying to predict those developing markets because I guess, I mean, you’re looking right now at Europe and North America, which are the two largest contributors to revenue, increasing your expectations there for production this year.

While at the same time, in the same breath, basically taking down the expectations surprisingly as you start in these developing economies. Would you say that your ability to predict those markets, given the uncertainty there is somewhat weaker and you could just deal with the upside surprises that you have, downside surprises?

Jacques Esculier

I commented Alex but I did not exactly understand the essence of your question but let me try this. We are slightly upgrading our view of the world which was, I think, a little bit conservative on both Europe and the U.S., not only conservative actually but still slightly, couple of percent.

China, our prediction right now is still for a fairly steep decline, minus 16% to minus 20% and same with India. Also I’ll remind you that we were probably one of the only companies to predict pretty strong value in Brazil at the early part of this year and actually we are even kind of worsening our focus at this point.

So I would say that it would be very surprising to me if those emerging market will grow actually even further down beyond this -- but I would go fairly reasonable, may be, a little conservative forecast for the second half. So again, anything can happen. But at this level of forecast, I would be surprised if the demand over there would actually even be worse than that.

Alex Potter – Piper Jaffray

Okay. So that’s very helpful. And then I was wondering if you could elaborate a little bit on what some of the specific initiative are that you have in place to be driving this sort of operational performance. Clearly, with topline declining and margins expanding at the rate that they have been expanding, it implies that it’s synergy due get some sort of topline expansion, the amount of leverage that you get on the bottomline could be somewhat impressive.

I’m just wondering if you could elaborate on what the specific initiatives are that are driving that performance. And then how sustainable you think this performance is going to be?

Uli Michel

Obviously, there are kind of several elements to an answer because that’s kind of cut across all sources of expenses and activity and so of the company but I would stop this, everything related to production. We, as you know, have the strong flexibility and capacity and in employment.

As you know, we had built up way past 30% of flexibility in Europe and even more actually outside of Europe and we put that at use. And this is what allows to basically on weekly basis, really completely stick to the evolution of demand. So we don’t really waste money by carrying cost that we should not in that area.

The second one is related to the OpEx and again, it’s kind of trucking cost, managing cost. We do it very tightly, without actually respective pricing, any investment because as you know, it was noticed earlier, we are continuing to invest in R&D. And those things that continue to be on top of the success of WABCO, but we do it with a certain level of discipline. Also this quarter, we benefited from the fact that as compared to last year, our level of accrued bonuses is low.

So it obviously creates good price and selling as well. And then, one thing is we have also seen progressively and we share again the cost of poor quality, the cost of -- that quality of cost go down meaning that the fact that we enhanced the quality, our costs been consistent, we delivered to our customers, well, it cost us less to launch it. And that kind of also helps us to kind of mitigate that pressure on the top line.

So I’m sorry that’s a very kind of high level restriction of things but that’s what I would say, probably that highlights that we’re doing at this point.

Alex Potter – Piper Jaffray

Okay. That makes sense. And then the final, I guess, one last component of that, would you say that it’s fair to assume that if and when you eventually do return to some top line growth that these improvements that you mentioned could drive even further margin expansion?

Uli Michel

So Alex, I tell you, we provided to you guys a model of how we see the incremental margin in a world of rising demands. And I would stick to it because I think it’s already fairly aggressive. We have proven that we are able to meet those targets. And I would say if we see this kind of production growth next year, we will again continue to be on top of margin and product line levels along that model that we shared with you.

Alex Potter – Piper Jaffray

Okay. Perfect. Thanks guys.

Uli Michel

Okay. Thanks, Alex.

Operator

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

Jeff Hammond – KeyBanc Capital

Hey, good morning, guys.

Uli Michel

Good morning, Jeff.

Jacques Esculier

Good morning, Jeff.

Jeff Hammond – KeyBanc Capital

So just back to the pre-buy because I think in past calls and conversations, you guys downplayed any kind of pre-buy and you seem to mention that here as a possibility. What’s kind of change in that view or you’re having more conversations with people that are suggesting that’s more probable into 2013. Maybe just an updated view on how you think about pre-buy?

Jacques Esculier

You’re right Jeff. That’s something that -- you're right, we are kind of more, maybe more up (inaudible) 2013 for a couple of reasons. One is we think that the cost of EURO VI engines versus EURO V, exactly higher than what we had anticipated.

The second thing is it seems that the fuel consumption relate to EURO VI may actually be penalizing more than helping. And so that could kind of read to fleets, we’re trying to buy into that EURO V technology.

And again, it seems that there is some kind of a consensus across the industry that we would see linearly with more of a pre-buy effect in Europe than we have in the past situation like this one.

Jeff Hammond – KeyBanc Capital

Okay. That’s helpful. And then historically, you’ve talked about trailers and aftermarket being lead indicators and I was just a little surprised by the add level of aftermarket weakness in Europe. And kind of relative stability where everybody has talked about in Europe truck builds. So what’s going on with aftermarket and how do you think of that as lead indicator?

Jacques Esculier

Well, I would say Jeff, aftermarket is kind of going through pretty hectic movement, I would say, when you kind of, looked right across the last quarter. And then you have certain weeks with very strong demand, certain weeks, where demand is kind of conservatively low. And I’m still of the opinion that 7% decrease overall for the quarter indicates something.

According to me, it’s kind of points finger to uncertainty, also by the way, it’s strongly rotating southern Europe, as you know southern Europe has real problems right now in economy. So it probably leads to a slower usage of the fleets overall. And also those fleets are trying to save money probably more than ever. But to me, those kind of indicators, kind of, keep pointing finger to an extremely nervous, uncertain market that you’re expecting to see something happening at the political level and we can make sure. So I think it postponed expenses, investments.

That’s the way I would read at this point, Jeff.

Jeff Hammond – KeyBanc Capital

Okay. Thanks so much guys.

Operator

Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Your line is now open.

Jacques Esculier

Good morning.

Jerry Revich – Goldman Sachs

Good morning. Can you gentlemen talk about the ABS penetration you’re seeing in China? Are enforcement levels picking up and they just frame regulatory angle for us if you don’t mind?

Jacques Esculier

Yeah. Actually, it is about one third of the fleet of trucks right now that you stay quick with ABS and that kind of covers basically that first slide that the government has targeted. So it seems that right now the regulation is pretty much enforced.

There was little bit of a gap that is 10% sees that this gap is now basically closed. So one-third of the trucks coming out of lines over there quick with ABS. That’s one piece. The second piece -- and then buses are also -- I think it’s about two third of the buses that are covered by ABS.

Now, also one of the, piece of news I share with you is, one of the leading manufacturers of trucks in China has actually enhanced our penetration value about 30% of their own business. So I talked about this 10% improvement in the market base because of this further introduction and innovation of the regulation as well as these kind of gains that market position for record products.

Jerry Revich – Goldman Sachs

Perfect. And on the SG&A side, excellent cost control on the quarter. Can you just frame the reduction for us? How much of that is volume driven or incentive-payment driven versus an outright fixed cost reduction? Can you frame that for us?

Jacques Esculier

Yeah. On SG&A, I mean, if you read our Q, there is a lot of disclosure in the MD&A on it. But to frame it for you roughly again, we’ve invested or we’ve increased our cost to the tune about 2 million in the area of products development and globalization of our capabilities. We suffered about 2 million from -- just normal labor inflation and then we had to decrease or we had less expenditures for incentive compensation of about $8 million. So the net of all this is a decrease of $4.5 million.

Jerry Revich – Goldman Sachs

Okay. And I’m wondering, if you’d be willing to talk about the sales performance of your car product business, perhaps frame before us the same way you do for the truck and bus business versus production on slide four?

Jacques Esculier

Yeah. car -- car business, actually has suffered this quarter versus last year because of a certain drop in activity from our customers, particularly in Europe. We’re talking about whole Europe.

The account had more this time related to diesel engines, so it’s more of a European type of revenue base, even though we’re expanding this through direct injection engine that now will affect kind of [after recover all the world] that at this time, the business is still very much anchored in Europe and the slowdown of the car production overall in this part of world has actually made us to -- actually impart 7% decline in revenues this quarter.

It doesn’t -- it is not reflective of the perspective that we have relate to this segment of our revenues because as we again announced that we have won some very, very attractive contracts with General Motors and now with Chrysler for fairly significant volumes related again to those direct injection engines that we thought of fairly production as we speak.

So there won’t be a ramp-up progressively of that volume that would actually end up being very superior to what we have seen in Europe so far. And that will create, I think a nice growth for this business.

Jerry Revich – Goldman Sachs

Thank you very much.

Jacques Esculier

Thank you.

Operator

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

Joe Vruwink – Robert W. Baird

Hi. Good morning.

Jacques Esculier

Good morning, David.

Joe Vruwink – Robert W. Baird

Hi. This is Joe on the line for David.

Jacques Esculier

Okay. Good morning.

Joe Vruwink – Robert W. Baird

Just want to touch on your North America truck forecast because I’m a little surprise that is actually moving up and a lot of the OEMs are talking about needing to cut their production rates. So I’m just wondering, is that a function of the first half finishing a little stronger than you thought it would be and your second half outlook is basically unchanged?

Jacques Esculier

Well, actually, as I said we are -- actually are growing a little bit 2%. The forecast because the second quarter is actually a little bit better than what we had anticipated. We see actually second have been lower than the first half. So I think we are very much adhering to the view of others on revolution of the market. It’s just that we had a little bit kind of lower forecast in Q2 than what happened and that’s the adjustment that we brought. Otherwise the second half was -- looks about the same. And again down versus the first half.

Joe Vruwink – Robert W. Baird

Okay. Great. Just in terms of the new products you announced this quarter, looking at air disc brakes with Daimler and then ABS with Navistar. One of, I think it’s been sort of a struggle with Bendix being an American supplier, kind of, gaining ground versus them. And It seems to me like you’re doing that. Is there something you can say whether it would be OEM reception of your products, whether it’d be new products, whether it’d be more attractive value proposition, that’s helping you gain share at some of these customers.

Jacques Esculier

Well, as you know, I mean, first, WABCO is a very strong supplier to the U.S. market. We have further, kind of, enhanced our presence over there. We sent Nikhil Varty who is one of our key Vice President to lead that business and we’re putting more purpose over there as you know, we have invested for quarter one to increasing our engineering over there. And overall, I think we start seeing some positive impact of these additional focus on this business.

I think we have probably sold more ABS. I’m not completely sure in volume probably more ABS than any body over there, (inaudible) years. So we are strong supplier in this part of the world and we continue -- actually we further accelerate the penetration of our product and technology in that market.

Joe Vruwink – Robert W. Baird

Okay. And then just one last one from me. If we look at your guidance for the full year and I plug in your end market outlooks, and I compare that against your revenue guidance. It looks like that level of outperformance that you talked about, it’s going to be a bit below the 8% to 10% that you target. And I understand that’s an average of several years.

I guess my question is, if we’re going to do cost side of the 6% in '12 that means that a year in the future needs to be above the 8% to 10% to sort of level out. And I’m wondering either it’s specific markets, where you definitely see that coming or certain of your product categories may be at the aftermarket may be its light vehicle that help you do that?

Uli Michel

So, first of all you’re absolutely right. We would not reach that 8% and that’s something we have kind of shared with you, all along particularly at the end of the first quarter. And actually we probably will end up sales at 5% overall this year. Now, unfortunately this market has not been very favorable. You look at this significant decrease in emerging markets that are obviously the strongest contributor to our performance overall.

You’re looking at a significantly lower gross in aftermarkets. Actually, lower gross in car business and all those guys being obviously nice contributor to our performance. So unfortunately, every thing kind of converges naturally because there is a major problem of volumes across trucks and cars. Every thing converges to challenge the integrity of our model. Now if you enlist growth back into the market, again we have proven back in 2010 that we were out performing like 13%, right.

So, I can tell you that this will be next year in two years whatever, but the pendulum has gone very much to the left, when its going to go to the right, it’s going to create the kind of reverse impact at least that’s the way we see it. And again, it doesn’t kind of what’s going on right now that insurance, the integrity of our object is to generate 8%, 10% average the future years.

Joe Vruwink – Robert W. Baird

Okay. Thank you very much. And congratulations on a quarter.

Uli Michel

Okay. Thanks.

Operator

Thank you. Our next question comes from Tim Denoyer of Wolfe Trahan. Your line is now open.

Uli Michel

Good morning, Tim.

Tim Denoyer – Wolfe Trahan

Good afternoon. Can you talk about European truck orders in the second quarter, now that most of the OEMs have reported? It seems like overall they’re pretty stable, down modestly, but relative to North America, where orders have dropped off materially and emerging markets where demand has been surprisingly weak? It would be that the European demand is surprisingly strong at the moment on a relative basis. Does that say anything to you about -- does that improve your conviction on the pre-buy discussion?

Jacques Esculier

I was kind of -- at this time probably unleash the pre-buy, which I think would probably affect 2013 more than 2012, with the current -- according to order levels. But it seems to me that the quarter orders -- particular orders actually nicely higher than the Q1 orders, which we raise enormous amount of concern at that time.

And that’s what actually overall, we have a great the European kind of forecast from our standpoint by 2% because Q2 has kind of 70% compensated the storage that we had seen in Q1. The overall level of orders is 70% than what it was a year ago, but again it seems that our customers in different ways are kind of supporting overall the range that we are sharing with you it terms of where Europe would end up at the end of 2012.

Tim Denoyer – Wolfe Trahan

Okay. And different question, I mean you talked the vacuum pump program with GM early in the call. Did you say you were in pre-production now and do you expect any programs going on -- going into next year?

Jacques Esculier

Yeah. We are actually just starting production right now. I mean a few weeks ago, and we’ve progressively went up to a pretty nice volume all the way to 2016. So, the volume should kind of grow up across the month and quarters. And again, its pretty nice volumes. We can share any numbers with you at this time, but it’s a good program and a solid kind of driver of growth for this business.

Tim Denoyer – Wolfe Trahan

Okay. Okay. Kind of big OEM, and lastly, can you talk about the North America plant that you -- I think referred to on a call last quarter, that you were talking about adding some more capacity in North America. What’s your progress there?

Jacques Esculier

We’re still kind of thinking about it. Obviously, we’ve kind of dependent -- it’s kind of we need to see a conversions of 34 volume in air disc brakes being other products that, which again justify these investments from -- at this point, we deliver air disc brakes from Europe, that at a certain level of volume and orders that we anticipate, we will have to make that moving and trigger this activity.

I think its going to come in the coming quarters. I think it’s in the logic of things. But very frankly, we don’t want to do it too early, because obviously it’s a significant investments and no need to not kind of optimize the way we manage capacity.

Tim Denoyer – Wolfe Trahan

And just one additional on that same topic, with the electronic stability control mandate in the U.S. in the public commentary at this point. Give us sense of what point that might be implemented and obviously, how does that play into the decision?

Jacques Esculier

I think, talking about it, we kind of understood that it could be going to 2014, '15 type of range.

Tim Denoyer – Wolfe Trahan

Yeah.

Jacques Esculier

And we are obviously well-positioned to support whatever standard they are ending up with whether it’s full stability control or maybe only low stability control, we have here. And obviously, these – all those technologies where brought to light to the commercial vehicle by WABCO. So we are obviously very interested to make suppliers for those products.

Tim Denoyer – Wolfe Trahan

Great. Thanks a lot.

Jacques Esculier

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Robert Kosowsky of Sidoti. Your line is open.

Robert Kosowsky – Sidoti

Hello. Good afternoon, guys. How are you doing?

Jacques Esculier

Good morning, Rob.

Robert Kosowsky – Sidoti

I just wondering if you look at the PMI, it’s coming out of Europe. It looks the continent weakening and did you see a decline in the aftermarkets for the quarter and maybe until July, and if it’s declining, why would that be a kind of older fleet out there?

Jacques Esculier

But we had decline in aftermarket as we said in Q2, which really went down about 7%. The biggest driver behind this Southern European country, where there is really a lot of transportation need. I know, you’re reading in the news these economies are shrinking dramatically at the moment and trailer fleet are not being use. So there is no repair. And business behind this 7% decline at the moment. So we can sell in July I think -- our now expectations that we shared with you for the rest of the year.

Robert Kosowsky – Sidoti

Okay. But did they get worse throughout the second quarter?

Jacques Esculier

Try to remember whether how we developed a month-by-month. I think what now it seems that we have a very good sustainable -- sustaining kind of flow of order. I mean if we are in those common periods where the order book is actually being kind of nicely supported by the market.

Robert Kosowsky – Sidoti

Okay. That’s helpful. Then also any comments on just like credit conditions for people that want to buy truck or the banks lending money, kind of, how’s that unfolding?

Jacques Esculier

So we look into this a last quarter, when the question came, we checked with a few fleets and our people out in the field and somewhat we occur in the credit at least in the mature European market was not the issue, fleets could get credit, even need to buys trucks and vehicle. Let me show you right now. In India, distributors in India, they are tightening money supply to side inflation.

It has been an issue in China for a while, although what I see here at the moment is also heating in China. But in Europe, based on the intelligence we gather, this has not be an issue through the last few quarters and there is no issue at the moment.

Robert Kosowsky – Sidoti

Okay. So no issue in Europe but then just the expected using I guess in China and Brazil, I guess you’d expect that to happen as kind of the monetary actions take place right?

Jacques Esculier

I mean Robert that mostly say that if you look at certain fleets in Southern Europe, who revenues are dropping dramatically that they might not have an issue getting credit right. But the general availability of financing for commercial vehicles in Europe is very well.

In fact, people, basically every OEM has the financing arm. Many of the big banks provide financing and leasing opportunity. So this is not holding back the growth at the moment. It’s really the demand for our trucks and transportation.

Robert Kosowsky – Sidoti

Okay. That’s good to hear. And congrats another good quarter and best of luck of the back half guys. Thank you very much.

Jacques Esculier

Thank you.

Operator

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

Jacques Esculier

Good morning, Larry.

Larry De Maria – William Blair

Good morning, guys. Thank you, most question have been answered. But I didn’t mention much that I heard anyway on the acquisition front and if anything is interesting and how the pipeline is given the obviously evaluation to presume, but lower now, the capital allocation seems to be going more towards share repurchases because this was up to discuss, what you are seeing on the acquisition front, anything interesting here?

Jacques Esculier

Actually, to be fair,-- we were just finalizing an acquisition and through due diligence we realize that there was an issue that environmental issue that was not acceptable to us and that was generating and expecting fair bit of risk that we want to take. So we just unfortunately pulled plug.

But it gives us even more courage to keep digging and we have few things in the pipeline that we continue to drive. So again, we told you every time that we are actively scanning the market for good opportunities to utilize a cash of some shareholders and we keep doing it.

Actually, Nick Varty, who was nominated as head of the U.S. business is also the head of our M&A activity, now kind of adding high management power on it. So I think hopefully we will find some good opportunities that we will realize and that we will kind of keep driving additional success to that position.

Now, relating to the buybacks, yeah, we kind of ended up the quarter $52 million. As we said, we have $83 million enough to support another two quarters at this level of buybacks. However, we will go back to the Board’s probably in October to ask for authorization to keep buying back beyond $200 million (inaudible) we got 14 months ago, right.

So, we have been very active and we want to continue to be active. But we want to have the freedom to accelerate things. So, there is about 120 left, 180 is left probably original $400 million we also right in (inaudible) May.

Uli Michel

So, we don’t want to be kind of pushing the quarters so we would ask for the Board in October to renew another slice of authorization, kind of, a very good company to buyback shares from.

Larry De Maria – William Blair

We will agree. That’s very good quarter. But the initial one position fund with respect to that obviously you guys they want took us all the information and that turnout, but could you give us handle on what kind of size stuff that’s interesting to you. I mean obviously, technology is important part, but is it also to regional focus now for you guys, any further clarity just to give us handle on what do you expect so nobody is surprised, would be very, very helpful?

Uli Michel

Yeah. I could tell you this one was just kind -- it just short of $100 million. So that was one specific case that we not only look at that we were kind of pursuing activity. But I can’t give you anymore information that.

Larry De Maria – William Blair

Okay. We will cross to $100 million or $100 million in revenue, in current revenue?

Uli Michel

We crossed it.

Larry De Maria – William Blair

Very good. Thank you very much.

Uli Michel

Well, thank.

Operator

Thank you. At this time, I’m not showing any further questions. I’d like to turn the call back to Jacques for any further remarks.

Jacques Esculier

Okay. Thanks a lot guys. Have a nice summer and talk to you in October. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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

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

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

Source: WABCO's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts