TRW Automotive Holdings Management Discusses Q2 2012 Results - Earnings Call Transcript

Jul.31.12 | About: TRW Automotive (TRW)

TRW Automotive Holdings (NYSE:TRW)

Q2 2012 Earnings Call

July 31, 2012 8:30 am ET

Executives

Mark Oswald - Director of Investor Relations

John C. Plant - Chairman, Chief Executive Officer and President

Joseph S. Cantie - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Patrick Nolan - Deutsche Bank AG, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Operator

Good morning, and welcome to the TRW conference call. [Operator Instructions] And as a reminder, this conference call is being recorded. Presentation material for today's call was posted to the company's website this morning at trw.com/results. Please download the material now if you have not already done so. [Operator Instructions] I would now like to introduce your host for today's conference call, Mark Oswald, Director of Investor Relations. Sir, you may begin.

Mark Oswald

Thank you, and good morning. I'd like to welcome everyone to our second quarter 2012 financial results conference call. This morning, I'm joined by John Plant, our Chairman and Chief Executive Officer; and Joe Cantie, our Chief Financial Officer.

On today's call, John will provide an overview of the current automotive environment and its impact on TRW. John will also provide a brief summary of the financial results and discuss other related business matters, including our outlook for the remainder of the year. After John's comments, Joe will provide an expanded review of the financial information. At the conclusion of Joe's comments, we will open the call to your questions.

Before I turn the call over to John and Joe, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to Slide 2 of the presentation for our complete Safe Harbor Statement.

The Risk Factors section of our 2011 Form 10-K and our first quarter 10-Q contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2011 10-K and 2012 quarterly SEC filings by visiting the Investors section of our website at trw.com or through the SEC's website at sec.gov.

On a related matter, we expect to file our second quarter 10-Q within the next day or so. Once filed, the 10-Q can also be accessed through either website.

In addition to financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations to these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials, which are posted on the Investors section of our website at trw.com.

Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given our permission for any other recording of this call and do not approve or sanction any transcribing of the call. This concludes my comments. I'll now turn the call over to John Plant.

John C. Plant

Thank you, Mark, and good morning, everyone. As you can see from the results posted this morning, TRW continued to build on the solid performance achieved earlier in the year despite the negative conditions that continue to weigh on the industry, particularly in Europe.

During the second quarter, our sales were $4.2 billion, an increase of over 8%, adjusting for currency and divestitures. This is a positive outcome and evidence of the increasing demand for TRW's technologies considering the decline in the European vehicle production and the negative impact of currency movements between the 2 periods.

Operating profit and margin before special items was $339 million and 8%, respectively. Included in our Q2 operating profit is an accrual for the fine to resolve the U.S. antitrust investigation. This accrual pertains not -- only to the Department of Justice investigation. At this point, the company cannot estimate the financial impact resulting from the European Commission's investigation. We will evaluate developments in this matter on a regular basis and will record an accrual as and when appropriate.

Net income was $221 million, and earnings per share were $1.72 on the same basis. This EPS outcome represents a 5% year-on-year increase compared to last year's pro forma adjusted results. Joe will walk you through this comparison in a few minutes.

And finally, also in line with company expectations, the company generated cash from operations of $191 million during the quarter.

I'll also point out that during the course of the quarter, the company continued to repurchase its common stock, reaching its authorized limit for the year at 2.3 million shares. Total cash of about $102 million was used in completing the repurchases this year. Joe will discuss our cash flow and the enhancements we continue to make to the capital structure in detail in a few minutes.

Combining TRW's solid second quarter performance with Q1 results provides a firm foundation for TRW to reach its full year goals as we head into the second half.

I will expand on the year-to-date results in just a few moments. First, just a few additional comments on the second quarter.

In North America, vehicle production remained robust and continued to partially offset the year-on-year decline in vehicle sales and production in other regions of the world, most notably in Europe. Overall, North America production was up 27% compared to the second quarter of 2011. On a sequential basis, compared with the first quarter, production was about even.

Within the quarter's vehicle build and in line with expectations, the Detroit 3 manufacturers lagged the overall growth for the region with production up 7% year-on-year. We expect this trend to continue in the third quarter, although to a lesser degree.

Even though the second quarter's seasonably adjusted annual selling rate of about 14 million units moderated compared with Q1, consumer demand appears to support the current level of production. New vehicle introductions planned for the second half of the year are expected to keep consumer demand at a healthy level.

In contrast, Europe remains weak as the prolonged debt crisis, high unemployment and banking concerns capture the headlines and weigh on consumer confidence and vehicle sales. For the quarter, total European vehicle production was down about 7% compared with last year's second quarter. Sequentially, compared to the first quarter of the year, vehicle production was down about 300,000 units.

Decelerating demand within Europe was the primary driver of the production decline during the quarter as flat to modest gains in vehicle registrations in Germany and the U.K. could not offset large declines in Italy, Spain and France. For TRW, the negative impact of the low production level was softened given the company's favorable customer and product mix. Volkswagen, for example, held up relatively well with Q2 production up 2% year-on-year.

In China and Brazil, the vehicle industry continue to be somewhat sluggish, prompting the governments within those countries to implement actions to spur demand for auto sales. For TRW, sales within those markets remain robust and continue to outpace the industry. Combined sales for China and Brazil accounted for about 17% of TRW's total second quarter sales.

I'll also mention that as sales rose in the rest of the world regions and North America and fell in Europe, TRW's European exposure dropped to only 43% of sales during the second quarter. Long-term prospects are bright in both China and Brazil. And in fact, as we look to the second half of the year, production is expected to be stronger in both of those markets compared to the first half. And this is good news as we progress through the balance of the year.

With respect to our year-to-date results, we remain on track. Sales totaled $8.4 billion, an increase of 7%, excluding the impact of currency movements and divestitures. Operating profit excluding special items for the first half of the year was $672 million on sales of $8.4 billion and operating margin of 8%. Net income on the same basis was $432 million, and earnings per share was $3.34. The performance achieved through June provides a solid foundation for the remainder of 2012 as our operating results allow us to further position the company for long-term success.

Moving on to the second quarter's business developments. Product launches during the quarter continue to strengthen TRW's diversity and leadership in intelligent safety solutions. A few examples include driver airbag modules, electric power steerings, seatbelts and steering wheels on the new Ford Escape in North America. In Europe, Ford launched its B-Max with TRW's airbag modules, electric power steering, foundation brakes, seatbelts and steering wheels. And Mercedes launched its A Class and B Class vehicles with TRW's front and rear caliper brakes, brake actuation and Electric Park Brake.

As a result of our ongoing quality and Six Sigma programs, we continue to launch products with world-class quality. For the quarter, our initial delivered quality averaged 3 parts per million across all products and customers worldwide.

In addition to the broad range of products launched during the second quarter, TRW recently announced certain new business awards and launches that will further position the company for long-term success. A few examples include business awards with 2 major North American-based vehicle manufacturers for TRW's next-generation Electric Park Brake. This is exciting news as the EPB shipment [ph] rates continue to expand in North America due to its many advantages, which include additional safety features, great freedom in design for vehicle interiors and reduced weight and complexity. Given the growth prospects over the next few years, EPB should continue to be a significant driver for the company's Chassis segment.

The company is also launching its latest-generation electronic stability controls across the 4 major global automotive regions. The EBC 460 slip control product family offers enhanced value, performance and compatibility across a wide range of powertrain configurations.

Looking beyond the near-term challenges the industry is facing, we remain confident of a bright future that lies ahead for TRW when you combine the products of today and tomorrow with our world-class quality, low-cost base and global reach. This excitement is magnified when you can see the opportunities and benefits that are expected upon completion of the company's growth plans in late 2013 and as we move through 2014.

And speaking of the growth plans, overall, we're pleased with the progress of our buildout. Of course, a lot of work lies ahead with management focused on executing a series of quality launches.

Before I turn the call over to Joe, let me comment on our expectations for the third quarter and the remainder of 2012. For the remainder of the year, and similar to the trend established in the first half of the year, we expect global vehicle production levels will be influenced by the overall macroeconomic environment, relevant to each of the major regions.

In North America, slow economic recovery is supporting a healthy level of consumer demand for vehicles in production. As mentioned earlier, although the pace of sales has moderated slightly, production remains strong.

Third quarter production is estimated at 3.4 million units, up 8% compared to last year. However, since TRW's business performance in the region is more correlated with movements in the Detroit 3 production, I'll point out that within that estimate, the 3 manufacturers are only expected to post a modest increase of about 3%. On a sequential basis compared to Q2, production will be down about 270,000 units.

For the full year, we expect production to total 14.9 million units, an increase of about 14% compared to 2011. Similar to the third quarter, we expect production with the Detroit 3 manufacturers will differ from the overall region's growth forecast and increase about 6%.

In Europe, we continue to be cautious and see the potential for further weakening as negative economic conditions within the Eurozone places downward pressure on vehicle demand and production within that region.

During the third quarter, vehicle production in Western Europe is projected to be about 2.7 million units, down about 10% compared with last year and down roughly 470,000 units compared with Q2, as the market weakness and seasonality have had a negative effect. Total European production is forecasted at 4.1 million units.

For the full year, our forecast for production is 18.8 million units for total of Europe -- total Europe. Within these estimates, Western European production is 12.4 million units, which is a decrease of about 8% compared with 2011 and down slightly compared to our previous guidance. As you would expect, we'll continue to monitor carefully the production plans of our customers and make any necessary adjustments to our operations accordingly.

Beyond North America and Western Europe, we expect vehicle production levels in China and Brazil will be stronger in the second half of the year compared to the first 6 months as both countries have implemented the variety of actions to spur economic growth. This sluggish start, however, has resulted in lower full year expectations for both markets. Long term, we remain confident that both markets offer substantial growth opportunities for TRW.

Based on the forecasted production estimates, revised currency assumptions and our first half performance, we now expect full year sales of approximately $16.2 billion to $16.4 billion. Sales in the third quarter are expected to be approximately $3.9 billion.

We still expect that capital spending for the year will be in the range of $650 million to $700 million primarily due to the incremental capital associated with our high-growth areas and continued expansion of our technologies.

With regards to restructuring, we expect 2012 restructuring expense to be about $40 million, which will be at the high end of the guidance provided earlier.

Similar to last year, we expect a significant proportion of the charges to occur in the second half of the year. And as you might expect, they will be primarily concentrated in Europe.

In summary, we expect a lot of hard work lies ahead. Our team is focused on protecting profits, generating cash and executing our growth strategy while managing through the near-term challenges. We remain confident we're executing the correct strategies to ensure the long-term success of TRW. Our solid balance sheet, innovative technologies and strong market position will enable TRW to continue to build on this positive momentum. With that, I'll now hand the call to Joe to discuss our financial results in further detail.

Joseph S. Cantie

Thank you, and good morning to everyone. I'll start my comments the same way John did. We had an outstanding quarter despite the negative industry conditions, most notably in Europe. The company did a good job of mitigating the effect of sharply reduced production volumes in Europe and the stress of increased volumes in North America while effectively managing the demands of our growth investments, primarily in China, which as you know, is an important part of our future.

Just to reiterate some of the key highlights for the second quarter, sales were $4.2 billion, about even with last year's level despite lower production in Europe and the negative impact of currency and currency movements and divestitures.

Operating income, excluding special items, was $339 million for an operating margin of 8%, a good level and in line with our comments made during the first quarter earnings call back in May.

In this year's quarter, earnings per share were $1.71 on a GAAP basis and $1.72 after excluding minor charges for restructuring.

And finally, the company's capital structure continues to be in great shape as gross debt reached a new low for the company at quarter end.

Although we're pleased with our performance to date, we also recognize that the negative industry conditions experienced in the first half of the year are not likely to diminish anytime soon, especially the situation in Europe. Rest assured, we remain focused on managing through and mitigating these headwinds to ensure we reach the company's 2012 goals. I'll expand on our full year outlook shortly. But first, let me review our second quarter numbers in a bit more detail.

Starting with the income statement for the quarter, we reported sales of $4.2 billion, an increase of $5 million compared to the same period a year ago. Currency translation had a $305 million negative impact on sales during the quarter as the euro-to-dollar exchange rate averaged 1.28 this quarter compared with 1.44 last year. In addition, divestitures completed at the end of 2011 resulted in a decline of $23 million of sales in this quarter. Adjusting for currency and the effect of the divestitures, sales were a real bright spot for us, improving over 8%, which compares favorably to our customer and geographically-weighted vehicle build for TRW.

We had an operating profit of $337 million in Q2 compared to $368 million in the 2011 period. Both periods contained special items. The current period includes $2 million in restructuring charges, while the 2011 period included a $19 million gain related to a favorable resolution of a commercial matter. Excluding these items from both periods, operating income in the second quarter of this year was $339 million compared with $349 million last year.

Consistent with our expectations as we began the quarter, planned cost increases to support future growth and net commodity inflation, which together, impacted the quarter by about $25 million, were the primarily drivers of the year-on-year decrease, which was partially offset by other positive net variances in the company.

Moving down the income statement. Interest expense totaled $27 million, which compares to $30 million last year. The reduced expense is reflective of our cash flows and reduced levels of debt between the 2 periods.

Just a reminder, last year included a loss on retirement of debt totaling $10 million.

Finally, tax expense was $92 million in the current quarter compared with $34 million last year. Similar to the first quarter, the increase in expense year-on-year is attributable to the higher effective tax rate in the current period resulting from the reversal of the company's valuation allowance on deferred income tax assets in the United States that occurred in late 2011. In addition, last year's period included a net tax benefit of $20 million, related to favorable resolution of tax matters in foreign jurisdictions.

At the bottom line, we posted GAAP net earnings of $1.71 per diluted share compared with net earnings of $2.21 in the prior year. Excluding special items from both periods, earnings were $1.72 this year compared with $1.99 in last year's second quarter. On a comparable tax rate basis, the prior year's earnings per share would have been $0.35 lower or $1.64 per share. And therefore, and I realize this is a bit painful to get there, but a deep understanding of our results would actually show an improvement of about 5% in our earnings per share for this year's quarter compared to last year.

As a reminder, we've included in our slide deck today a schedule that provides 2011 pro forma results by quarter, adjusting taxes as if the U.S. valuation allowance had been eliminated prior to 2011 in order to help you with earnings comparisons as we move through 2012.

In terms of EBITDA for the quarter, we had $444 million, excluding special items compared with $461 million in the prior year measured on the same basis.

Moving to a brief review of our first half results. We reported sales of $8.4 billion, which is an increase of $104 million compared with the previous year. Increased vehicle production in North America and continued growth resulting from our portfolio of safety products were almost entirely offset by production declines in Europe and the negative impact of currency movements between the 2 periods. Excluding currency and divestitures, our first half sales improved an impressive 7%.

Our operating income in the first half of 2012 was $668 million, which compares to $740 million last year. The $72 million year-on-year decrease was primarily the result of higher mix of lower-margin business, planned increases in cost to support future growth and the negative impact of higher raw material prices. I'd also add that the negative impact of currency movements between the 2 periods also contributed to the decrease, but to a lesser degree.

Below operating income, interest expense was $56 million compared to $64 million last year. In the prior year first half period, we had a $20 million loss in retirement of debt compared with a minor $5 million loss this year.

Tax expense for 2012 was $185 million, which compares to $90 million in 2011. As I mentioned earlier, the company's increased tax expense results primarily from the valuation allowance reversal.

At the bottom line, we reported GAAP net earnings of $3.30 per diluted share, which compares to GAAP net earnings of $4.34 last year. Excluding special items, earnings were a very solid $3.34 per share for the first half of this year.

And finally, in terms of EBITDA, we had $883 million, a very good result considering the difficult conditions in our largest market.

Let me shift now to our cash flow and capital structure. First, on operating cash flow for the quarter, we had $191 million, which compares to $271 million in 2011. Free cash flow, which I'm defining as operating cash flow less capital expenditures, was a positive $87 million this quarter compared to $171 million last year. The year-on-year decline is primarily attributed to higher working capital requirements, higher cash taxes and other minor variances.

For the first half, we had an outflow of $111 million compared with an inflow of $185 million in 2011. Capital expenditures at $200 million during the first half of this year were $33 million higher compared to last year's level.

Despite the year-on-year decline in free cash flow through June, which is consistent with our internal projections, the company continues to expect a strong cash flow result for full year 2012. At the end of our second quarter, our total gross debt was $1,472,000,000, while net debt outstanding was $506 million, both in great shape. In fact, TRW's gross debt outcome at the end of the quarter marked a new low for the company.

As we discussed in the past, we will continue to evaluate our capital structure as we progress through the year with the goal of moving it to a more efficient position once we gain clarity on a few business issues, the most prominent being Europe and antitrust.

Although our results today include an accrual for the fine to resolve the U.S. antitrust investigation, which can be viewed as a positive step forward, no additional developments have taken place with regard to the European Commission's investigation.

In essence, there has been no change to the timeline we communicated to you previously regarding next steps on our capital structure. In the meantime, we continue to opportunistically use our cash to better position the balance sheet. During the second quarter, the company repurchased just over 1.4 million shares of its common stock, bringing the first half total shares purchased to 2.3 million shares, definitely a positive outcome as we continue to make incremental enhancements to the capital structure.

Switching subjects now to the third quarter and the remainder of 2012. As John discussed, TRW's full year 2012 production forecasts are for 14.9 million units in North America and 18.8 million in Europe. Based on the revised production forecasts and our latest currency assumptions, full year sales are now forecasted in the range of $16.2 billion to $16.4 billion. At this time, we're expecting third quarter sales of about $3.9 billion, which is about flat compared to last year's level.

Similar to the quarter just ended, currency is expected to negatively impact the year-on-year comparison. At this point, that impact is estimated at about $280 million.

For completeness, we expect capital spending to range between $650 million and $700 million, which is consistent with our earlier projections. With regards to restructuring, our plans remain on track. And similar to last year, most of the actions will occur in the second half of the year. Full year guidance is about $40 million, which is at the high range of the guidance provided earlier.

Full year interest expense is expected to be in the range of $110 million to $115 million, no change from last time.

Ancillary costs associated with our growth plans, namely engineering, development and infrastructure costs, are tracking as planned at about $50 million to $70 million for the full year. And although difficult to predict, we still expect net commodity in [ph] headwinds will impact our full-year results by approximately $50 million in 2012.

Despite headlines relating to falling prices for certain commodities, other commodities such as castings, for example, continue to escalate. As you would expect, we'll continue to work hard to mitigate the negative impact of these rising costs.

Finally, given our expected results by geographic location, you should continue to assume a full year 2012 effective tax rate of between 30% and 32% for modeling purposes.

In closing, we're pleased with our first half performance as it's established a good foundation for us to build on as we head into the second half of the year. Our focus and commitment to growing the business, generating substantial cash and strengthening our market position have served us well in the past and will continue to drive long-term success for the company. We'll now move to the question-and-answer portion of the call..

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from the line of Rod Lache with Deutsche Bank.

Patrick Nolan - Deutsche Bank AG, Research Division

Pat Nolan on for Rod. First question is for Joe. Joe, so core sales increased by $330 million in the quarter -- $333 million, actually. So if we'd use your typical 22% incremental margin on that, we would've thought EBIT increased by 73, but it actually came down by about 10. I know there's a number of headwinds, but could you kind of go through them with us?

Joseph S. Cantie

Sure. I think again, contribution margin on our -- for the company, we've always said, is somewhere between that 22%, 23% range. So I can see what you're doing there. We had a level of our increased sales pertain to our module business, which carry lower margins. So the $333 million, you can't just take the 22% to 23% of that given the increase in modules that we experienced, so a little bit lower there. So you had the currency effect, which we gave you. Divestiture is about $23 million. You come back to the $330 million. About $150 million of that $333 million were the module sales, carrying lower margins. And then you can piece together the rest of it, Pat, from the commodity inflation growth investment, the $25 million we gave you there. Remember, we had a legal accrual of $5 million. And I think if you piece that together, you can get to the walk down to the $341 million or the $339 million operating profit.

Patrick Nolan - Deutsche Bank AG, Research Division

Got it. That's actually helpful. Next question is on the cash distribution. The comment you made was helpful. But could you further expand on your expectation of timing? And has the uncertainty with some of your customers in Europe kind of pushed that out a little bit as far as cash return to shareholders?

John C. Plant

No, nothing's changed. The plan that we said we would execute is that sometime during the fourth quarter, starting with the current quarter, we will be announcing those plans. I would say that, of course, we don't have the clarity on Europe yet that we would like. Having said that, one of the things that we were weighing into that was the antitrust matter, which one of the jurisdictions is now being completed. So we're sort of gaining further clarities on that. And we're basically on track. So sometime during the next 4 quarters between now and the summer of next year, we'll be laying those plans out. There's really nothing I want to add to that in terms of timing today.

Patrick Nolan - Deutsche Bank AG, Research Division

If I could just sneak one more in. Any changes in what you're saying as far as European mix and/or pricing in the back half of the year?

John C. Plant

No. Same pattern, we think, should be the -- first, I mean, none of us know absolutely what's going to occur in Europe, but our assumption is pretty much the same pattern as before with -- for us basically, I'll say performance in Europe, being counterbalanced by good performance elsewhere in content growth.

Patrick Nolan - Deutsche Bank AG, Research Division

Got you. So you're actually seeing basically no real change in the pricing strategy by some of your customers in Europe?

John C. Plant

No.

Operator

Our next question is from the line of Chris Ceraso with Crédit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

I wanted to start, I guess, on the cash flow, if you could help us fill in a couple of the items if I missed them in the statements. What were the adjustments in the quarter for pension and OPEB and deferred taxes?

Joseph S. Cantie

For pension and OPEB for the quarter is $124 million for the full year -- or for the first half. So for the quarter, I'm going to say roughly half. And Mark will check that on me and call you back if it's not exactly half.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And that was a good guy, right? Or that's going the other way? That's negative...

Joseph S. Cantie

That's going the other way in the cash flow statement, Chris.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And then the deferred tax?

Joseph S. Cantie

The deferred tax was $51 million in the quarter.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And that's favorable?

Joseph S. Cantie

Yes, it is.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And is it fair to kind of run rate those for the year?

Joseph S. Cantie

I would think, yes.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And what about working capital?

Joseph S. Cantie

Working capital for the quarter, obviously, we had an outflow. We should see the same seasonal pattern we see every year, which is a big reversal in the fourth quarter. So I can't give you an exact amount of what we're expecting. It depends on what happens with the sales in the second half of the year. But if you look at the seasonal pattern by quarter, we have an outflow in the first and second quarter, and then it reverses in the fourth quarter. I think in our second quarter, just as a reminder since you brought it up, we ended the quarter on the 29th as opposed to the 30th. And believe it or not, that 1 day does matter. So again, that should also contribute to a good positive fourth quarter working capital inflow for us.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then the next item on the increased costs to support future growth. I think you said that was going to be $50 million to $70 million for the year. How much was that in the quarter? And maybe just give us a little bit more color on specifically what that is. Is it engineering folks that are going in place in China and Brazil? And when do you expect that spending rate to diminish, at some point in '13? And because I'm interested in the mismatch between spending levels for all this new business and when the revenues actually show up.

John C. Plant

Basically, the profile, Chris, has been, 2012 -- 2011 was a heavy year. We said it would moderate somewhat in 2012. The last quarter was in the range of about 15 million plus or minus. And we see that further moderating as we go through '13. So hopefully, by the second half of '13 is that, that excess cost that we've been incurring begins to disappear and then the revenue starts for that element increasingly in that last part of 2013 to '14. So we're exactly on track with where we thought we were. Our new business cadence is good in terms of order intake and maybe nothing to really add to that. You're right in terms of a lot of that expenditure is in the developing markets. You're aware of the buildout of manufacturing plants in China in particular. I mean, we are putting one to -- and we have put an additional one in Mexico. And those plants are all coming up during the next few months.

Joseph S. Cantie

Chris, just to reiterate, there is the mismatch, obviously, because if you think of our products, we will win award and we actually won't ship a product for sometimes 3 to 4 years as we work with the car manufacturers to design in and develop into their platforms.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And no slippage or change in the timing on the new business that's coming up over the next few years?

John C. Plant

No.

Operator

Our next question comes from the line of Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

I guess my first question is on the aftermarket. I think if I remember well last quarter, one of the things that had impacted the conversion was that there had been some destocking in your LucasVarity business, which I think was relatively high-margin stuff. What's the status of that? How did that behave this quarter?

John C. Plant

Well, first of all, we don't have a thing called the LucasVarity business. So I need to correct that one, Patrick. We have a TRW Aftermarket and the principal brand we sell under is TRW. The Aftermarket continued to be weak in the second quarter, albeit not probably quite as weak as in this first quarter. Basically, I'll say less miles are being driven in Europe in particular. Within our overall perspective is that probably it will remain the case in the second half. But again, the destocking effect, which has occurred, has, I think -- you obviously don't destock twice to the dealer networks and warehouses, so that will begin to moderate.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And my second question is, can you give us a bit of a sense of -- appreciate the color you gave on the outlook for European production. What is your sense of inventories at the OE customers? Is a number of the changes that you're forecasting in the balance of this year really driven by your best expectations for changes in the demand? Or are vehicle stocks also something that need to be corrected in Europe in your opinion?

John C. Plant

Within our guidance that we've given, there's some elements of correction of inventory, principally in the weaker manufacturers -- the strong manufacturers, which also have really high brand, high penetration in the markets which are selling well. And of course, the premium brands, basically, are all in good shape.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. And on that, John, can you just remind us what -- I know you've given this out before, but just what your exposures are relative to the German premium guys versus some of the volume players within Europe.

John C. Plant

I'm going to look to Mark for that. I know we've done it. We explained it to you, the relative percentage. I'm sure that if you look at Europe, you've seen that I commented in my earlier comment that Europe was about 43% of our revenues. And within that, not surprisingly, the premium brand, and let's say, particularly beyond the premium brand into VW as a higher proportion of that 43%. But I'm not sure exactly what it is. So, you've got it, Mark? Or do you want to...

Mark Oswald

Yes. No, Patrick, I'll give you a call back. But in an earlier slide deck, back with our fourth quarter and full year results, we actually included a slide that actually broke Europe out by manufacturer. So that should give you a good representation of that customer mix, as well as country mix.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

And basically, during the first half, it's evolved because the guys, which are the weaker ones, are going to be a smaller percentage. And inevitably, the strong guys within that 43% of the Europe exposure is going to be higher.

Operator

Our next question comes from the line of Ryan Brinkman with JPMorgan.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Could you maybe elaborate a little bit more on some of the investments that you're making now to support future growth, which could have impacted comparability of performance in the quarter on a year-over-year basis? For example, how is R&D trending year-over-year or the extent to which other SG&A spending might have been impacted by your expansion plans?

John C. Plant

Engineering is up year-on-year. I think we've talked around about $30 million, around that number, plus or minus for engineering. There's associated program management and loyalty costs [ph] that go with that on top of it. So that gives you a year-on-year comparison. We also commented, Ryan, in previous calls about the number of new manufacturing plants that we have after it [ph] changes with time. But I think the correct number will be 9 new manufacturing plants, of which -- and a couple of expansions, the majority of those are in China. Inevitably, you're carrying some costs in cost of goods sold because of you're paying varying property taxes, infrastructure costs, people costs, which are not necessarily producing at full rates but starting up. On SG&A, not a lot. I don't see there's much in SG&A at all in terms of, say, cost drag year-on-year. So it's mainly in that cost of goods sold.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

And then just on cash flow. I know you're still expecting a strong performance for the full year and that the fourth quarter is really very key. But can you talk about some of the drivers, what appear to be these year-over-year headwinds impacting your working capital performance just in the past 2 quarters and maybe how you see this trending going forward?

John C. Plant

We tend to have a seasonal pattern. I mean, last year is exceptional except for the vehicle profile. It's all tied up with the assumption on the quarterly sales rates. You also need to take account of Joe's comments regarding the second quarter for us finished early. And if we would have had the same cadence of calendar year or rather the quarter end in Q2, then the cash flow would have seemed to be stronger in the second quarter. So you need to look at cutoff in terms of the date. And then, of course, that cash that's -- which was in last year, it just dropped to the second half of this year. So we'll be generating cash again in 2012, just the same as we've generated in every year. I mean, we've already commented and guided you in terms of sort of where you could expect it, I think. Although we never give an exact profit or cash number.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay. And then just to finish up on cash flow, last question. You're guiding, I think, I guess, to $650 million to $700 million of CapEx this year. But you've done $200 million year-to-date. What accounts for the large step up in the back half of the year? Or is that potentially conservative?

John C. Plant

It's facilitization of the new manufacturing as equipment comes in to meet what we've talked about in terms of future revenues. And of course, you have to do -- then build your reduction validation parts and those, I'll say, fully fledged assembly and machine lines. And then there's a dwell period between that and start of production for those things. So basically, it's the cadence of launch, which dictates the profile of capital spending -- expenditure.

Joseph S. Cantie

And Ryan, I would say that again. It's nothing unusual versus seasonal patterns. Both your question on working capital and CapEx, if you were to lay out for the last 3 years by quarter, our working capital and our CapEx, you'll see the pattern that shows fourth quarter working capital always a big inflow, fourth quarter always our largest CapEx out quarter, and CapEx also trends up in the third quarter as well. So again, there's nothing unusual about what you're seeing so far in our cash flows for the first half of the year.

Operator

Our next question comes from the line of Brett Hoselton with KeyBanc.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Given some of the weakness in Europe, some of your peers have taken, let's say, a more aggressive approach to restructuring their operations in Europe. And I'm wondering if you've given any consideration along those lines.

John C. Plant

We are, on record, year after year regarding the profile of our restructuring. We maintain a line of sight of 3 years for our restructuring plans. We rarely vary that because we prefer to keep with the cadence of looking when it's most efficient in terms of costs to restructure any activities, in terms of the volumes that are going to those plants, we tend to always do it this way. It's maintained a very efficient cost-to-benefit ratio on our restructuring if you were to look over the several years now. Brett, you would see that, that's the case. And we might change timing a little bit, but it doesn't change the fundamental. So we've already planned out '13 and '14 by way of what we think we would restructure. What we did say to you on this call was that we're going to be at the higher end of prior guidance. And we're going to aim the majority of that firepower at Europe. And so -- because I don't know what you're really referring to by other suppliers' plans, but we've given you pretty good -- so we'll maintain our existing plans. We might accelerate at the margin. The money will be higher than we previously said, in terms if you took a midpoint of prior guidance. And we've explained to you it's going to be aimed at Europe.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

And regarding the investigations, do you believe there is any sort of readthrough interpretation on the DOJ versus the EU investigation?

John C. Plant

We really don't want to comment at all. We feel as though the process that we've gone through has served us well. We told everybody that we will be taking a very rapid and diligent view -- review of all the activities. We commented that we actually spent a very high amount of legal costs during last year, particularly in the second half, to move through this process. Again, I think that has served us well. We chose, and we're very clear that we are not going to comment on it during the whole time, and we didn't do so. And you've seen the outcome of what we've done here in the U.S. And we will maintain the same pattern, is that we won't be commenting on Europe as we go through this. And of course, as soon as we can be clear on the terms of an outcome, and of course, we'll be informing you.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Okay. And then finally, during the fourth quarter, you talked about your 2013 outlook, sales accelerating, margins potentially rebounding somewhat. And I guess what I'm wondering is given where we're at today in the market and so forth, how do you feel about the thoughts you had back in the fourth quarter regarding your sales outlook and margins into 2013?

John C. Plant

Basically, first, for '13, obviously, we'll be happy to take account of the profile of vehicle production. So it's hard to get particularly enthusiastic about Europe at this point in time until we have further clarity. Of course, the developing markets and the content growth associated with some of the rulemaking, which has been occurring there, is going to serve us well. North America remains to be -- again, considered relative to this year. But what we said before was that as we move through the back end of '13, not the start of '13, what we said is the back end of '13 going to '14, that increase in cadence of revenue enhancement would occur. And also, we were optimistic that, that would also result in a good bottom line. Now in terms of where we are today, we feel exactly on track. Nothing is changed. And you've seen our margins for 2012 the year-to-date at 8%, and so everything is in order at this point.

Operator

Our next question comes from the line of Matthew Stover with Guggenheim Securities.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Most of my questions have been asked, but I'd like to just clarify a couple. If I think back to the first quarter, your commodity costs were running at 15. You're at 10, it looks like, in this quarter. What are the thoughts in the second half?

Joseph S. Cantie

Yes. For full year, we indicated that we still expect the headwind to be somewhere around $50 million, give or take. So just by doing simple math, it will tell you that we still expect headwind in the second half.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

I thought that was -- that number that you quoted, Joe, was for both commodity and RD&E for growth?

Joseph S. Cantie

No.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

No. Okay. So second question is on the idea of shareholder return. John, did I hear you right when -- did you say that your existing share repurchase authorization had been fulfilled?

John C. Plant

Yes. What we said, that we would pick up this year any effect, any dilution of the last year experience, that's now complete. The next time we'll be talking about this is when we're making some announcements, I said, in the fourth quarter, sometime during the time between, I said, summer of 2012 and summer of 2013. So sometime during that period. And we've commented on the major factors within that, were going to the resolution of the antitrust matter and -- which you've seen that's been partially dealt with. And the second item is going to be our view of Europe and the development, I would say, that really has not yet been dealt with because we all know that the sovereign debt crisis seems to continue and continue. So I think once we feel a bit more confident we're in a zone regarding that, then we'll be positioning ourselves to say something and then executing some form of capital structure program.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

That sort of gets to my second question. I'm sure you've been getting a lot of questions about the timeframe for any kind of repurchase or restructuring your capital structure. But if I step back and think about the European debt crisis, and at least in my experience with some of these antitrust investigations, I have a hard time feeling like we're going to have a great degree of clarity on the outlook for Europe even a year from now. And this seems to be a much bigger and long-term issue that Europe and the rest of world are going to have to deal with. And if I think about some antitrust investigations, those things can go on sort of without -- they can go on without comment for a long period of time. And I just would like to sort of -- give us your sense of these issues? Because these 2 issues seem like they can be bound by uncertainty for a long period of time.

John C. Plant

I don't think that we will have to wait until you have an outcome on both because we actually won't know what an outcome is. So I think one is the degree of confidence and certainty. And so if you think about Europe, if we feel that we're in a certain zone, so I mean, nobody's going to pinpoint an exact level of anticipated vehicle production. But if you could be convinced, for example, that the euro itself was not going to crack and fragment back to all the individual currencies because over several years now, we have established our manufacturing strategy, our supply chains, all assuming a common currency in the West part of Europe and obviously feeding into certain of our Eastern European plants, I think once you're convinced that at least certain steps might be that the euro doesn't crack, but you have a confidence within a bandwidth of production and sales level, then, well, you don't have what I call an outcome because you'll never get an absolute certainty of outcome. You're in a bandwidth where you feel as though you can maneuver. At the moment, if you take our current net debt, having experienced the outflow of working capital in the first half, which of course, we've commented that, that will begin to inflow, if you look at basically the balance between the cash taxes of fundamentally lower than our actual book taxes, which offset some of the other items, and just the cadence of what we've got, we said we'd generate cash in the second half of this year, which would generate cash for the year. So if you take out net debt post the share repurchase we've done and look forward, then you can see that our net debt should be reducing significantly. And again, I won't say it will be positive or negative because that would give you at least a cash flow guidance, which we're not going to give. But it's going to be clearly less than we have now and clearly less than we had at the end of last financial year. So our capital structure is really in a great shape. Maybe you can argue too great of shape. So I think that we're going to be able to get a little bit more comfortable than where we are today. We don't need to have an outcome of the 2 matters, but convinced we are in a certain bandwidth. And I think that we can afford to have a more efficient capital structure, and that in itself will lead us to basically long-term shareholder-friendly actions. And we've ranged those share buyback through dividend. And obviously, we'll take account of all the factors in making those evaluations. Plus obviously, we shall make the assessment of what cash we have on hand relative to our bond maturities that we have in '14 and the just rest of the capital structure at the same time, Matt.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

I mean, supposing let's just sort of fast-forward here 6 months and if we're muddling along on both of these issues, could you envision the board allowing for the initiation of a new authorization program, perhaps something not dramatic but something reasonable?

John C. Plant

We've already been engaged with our board over the last 2 board meetings and positioning, in fact, at our next one, which is actually is coming up in August. We're going to be talking about this subject again. And it's hard to imagine whether it is -- sometime during the next 3 board meetings, if we just play it out over the timeframe I've given you, then we shall be moving from talking about it to making a firm and clear proposal. And once we've done that, then we shall make an announcement.

Mark Oswald

Mandy, I'm showing that we're out of time. If you can please move to conclude the call, it'd be appreciated.

Operator

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

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