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Executives

Jason Campbell - Director, Investor Relations

Jacques Esculier - Chairman and Chief Executive Officer

Uli Michel - Chief Financial Officer

Analysts

Alex Potter - Piper Jaffray

Jeff Hammond - KeyBanc Capital Markets

David Leiker - Robert W. Baird

Robert Kosowsky - Sidoti & Company

WABCO Holdings Inc. (WBC) Q3 2012 Earnings Call November 2, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to WABCO Q3 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 today's conference is being recorded. I would now like to introduce your host for today’s conference call, Mr. Jason Campbell, Investor Relations Director. You may begin, sir.

Jason Campbell

Thank you. Good morning, everyone and welcome to WABCO’s quarterly conference call. Today, we will present our third 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 Q3 2012 Results. A replay of this call will be available through November 30.

Also, as shown on chart two of the presentation, certain forward-looking statements that we’ll make today are based on management’s good faith expectations and beliefs concerning future developments. As you know, actual results may differ materially from these expectations as a result of many factors, examples of which can be found in our company’s Form 10-K and quarterly reports, including our third quarter 2012 Form 10-Q which was filed with the SEC this morning.

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

I’ll now turn the call over to Jacques.

Jacques Esculier

Well, thanks, Jason. Good morning, good afternoon to all of you. Before we jump into the numbers of Q3 I would like to put things in a little bit of perspective of the market dynamics, particularly as we have seen a change during the third quarter.

We entered 2012 sharing with you that we thought it would be a year of transition, actually it kind of end of marking the end of the short-cycle that has left it only three years. We saw in late 2008 with an episode of crash that happened in 2009, 2010, 2011. So very, very intense up trends. And actually we think that some of the things we are seeing and we have to deal with another downturn.

When you look at numbers year-to-date, year-over-year truck deals sales globally is down 10%. Q4 on the year-over-year could be as high as 17% down. Now if you look at Q3 sales, sequentially Europe and U.S. together which obviously represent important part of our business, is down 15%. China is down 11% sequentially as well. While actually we have to recognize that Brazil and India have built more trucks in Q3 then they had in Q2.

Now it seems that shorter and more abrupt and more intense cycles could be the new dynamics of global industry which would be nothing but reflective of the world economy that now grows increasingly interconnected whereby changes in one area of the world spread faster to the rest of the globe. Now in this environment we believe that franchises that want to continue to succeed would have to demonstrate key attributes like flexibility, adaptability, agility and also globality, as this is an important contributor to our performance of markets.

Now we think that actually at WABCO we have a focus on working on these attributes for quite a few years and we will continue to focus on those actually. And I think we did it with a certain level of success that is reflective of Q3 results. If you look at the top line, it has seen a decrease in revenues of 7.2% at $588 million of revenues. While the global markets in Q3 was down year-over-year by 12.3%, number of trucks built. Actually we are able to grow our performance gross profit margin by 1% from 29.1% to 30.1%.

All together we generated a performance operating income of $76.4 million or 13% of margins versus $94.5 million a year ago at 13.4% of margins which leads to a decremental margin excluding impact of FX of around 15%. That led to a performance EPS of $1.02 per share versus $1.19 a year ago. We continued to generate strong free cash flows this quarter and we are seeing $90.2 million once we exclude free cash flow, excluding streamlining and separation payments in the quarter. And that leads to a converted rate of 136% for the quarter. And when you look at it year-to-date it’s 102%.

Of which we will return close to $50 million to shareholders with repurchase of close to 900,000 shares. And as we will see we will adjust our 2012 guidance obviously taking into account this new kind of dynamics of the market just starting in Q3. Overall, we maintain a fairly robust margin in an environment again kind of demonstrating the sudden market decline.

Next page shows again the dynamics of the market and how it’s rooted through our business and channels. Starting with OE channel, that went down 13% year-over-year again reflecting these sudden slow down in key markets. It fell down -- the OE business is down 10% sequentially versus Q2 and as I said you look at U.S. and Europe alone in sales 15% down sequentially. Aftermarket was up a healthy 7% breaking a new record for quarterly revenues with growth in all the different regions of our business. It was supported actually by a program that we are running together with one European OE right now that is pursuing a field campaign to replace some of our competitors air disk brakes with our air disk brakes for quality reasons.

Then sales to our JVs was at 4%, but sequentially down 5% versus Q2 2012 while actually the production of North American truck and bus as I said before was down 16% sequentially. Now looking at the dynamics of our sales versus the production of truck and buses. Starting with Europe, market down 11% in production and we were down 15%, but again we have to look at Europe being 13% down sequentially as well. And the sudden drop in production leads to significant rationalization of inventory or parts at the truck manufacturers which certainly more than explains the 2% difference between our performance and the market.

Same, thinking of our North America, we are down 3% where the market was down 2% only year-over-year, but with a 16% drop sequentially leading to again rationalization of inventory. South America was down 32% year-over-year and we are down only 31%. Japan and Korea up actually 1%, we were down 17%. Sequentially, actually, Japan/Korea was down close to 10%. And also we have to remember that last year was kind of a special quarter in Q3. After the tsunami they had to rebuild the rate of production and built up inventory. So when you compare year-over-year, our sales to those customers obviously skews the overall performance.

China, we were up 29% versus the production estimation of minus 17%. Here again we have to remember that last year they had a very significant inventory rationalization because that was the beginning of a strong slow down in their production levels. But we should not either -- we should not ignore the fact that we also continue to gain some market business and some content per vehicle over there which obviously contributed to this hefty 29% of performance.

And finally India. Production dropped 11% we dropped 14% and we have seen in the drop a heavier decrease of production of heavy multi-axle trucks as well a slowdown in the production of engines for military vehicles. All this having more content per vehicle average. So overall, again, 7% drop in revenues in a market that overall the number of trucks built [on earth] is down more than 12% year-over-year.

And we will let Uli bring you through the details of our financial performance. Uli?

Uli Michel

Thank you, Jacques. Good morning and everyone and thank you for joining us today. I will take you through our financial results for the third quarter of 2012. Turning to slide five. I will walk through the details from sales to earnings per share for the third quarter, looking at both our targets and performance numbers. Performance numbers are adjusted to remove operational streamlining and separation costs as well as discrete and other tax items. In addition, comparison to 2011 has been adjusted for currency translation effect.

Our sales in the quarter decline 7.2% in local currency versus last year. This was a 6% sequential decline revenues from the second quarter. As you can see the slowdown in our markets has resulted in a reduction in our order book of 5% compared to the second quarter of 2012. The decrease in sales versus last year includes price reductions to customers of 0.6% which continued at very low levels for our business.

Although our gross profit declined 3.5%, our gross profit margins improved by 117 basis points compared to last year. Our productivity initiatives keep delivering at high levels. Material productivity project delivered 5.3% which was partially offset by commodity inflation resulting in net materials productivity of 4.6% for the quarter and a reduction of material cost by $11.5 million. Conversion productivity was 6.1% for the quarter, saving $5.6 million in conversion costs.

Overhead absorption and other costs had a negative impact on cost of sales and the in the amount of $8.6 million, while the inflation on labor and other factory costs added approximately $4 million to our cost of sales. This resulted in a performance gross profit margin of 30.1% this quarter. In operating expenses we continue to increase spending in research and development and activity to support our globalization strategy, which this quarter altogether added $2.2 million.

Labor and other costs inflation added another $2 million in cost. We were able to offset $3.6 million through reduction in incentive compensation and other cost saving initiatives as part of our (inaudible) profit improvement action. All in all, this resulted in a small net increase in operating expenses of $600,000 in the third quarter versus a year ago, which represents an erosion to margin of 133 basis points. All together we generated operating income of $76.4 million or 13% of sales, on a performance basis representing a drop of 16 basis points in margins on incremental based on margin of [15.4%] on a 7.2% sales decline. This shows how well we were able to mitigate the impact of the sudden sales decline on our margins.

Continuing down the income statement you can see that this quarter equity income was $4.1 million, which is down slightly from a year ago primarily driven by a decrease in our North American joint venture of $400,000. Additionally, the expense to minority shareholders amounted to $2 million this quarter compared to an expense of $3.1 million a year ago. Our performance EBIT this quarter was $78.1 million or a margin of 13.3%.

Moving to taxes, you will see that our reported U.S. GAAP tax expense for the quarter was actually a benefit of $3.3 million. In the quarter we benefited from several discrete tax items totaling approximately $15 million, of which $4.1 million are related to the filing of our 2011 U.S. tax return and $11.2 million are related to certain government filings that we did in January 2012.

Excluding these onetime tax items, our performance tax expense was $11.5 million which reflects a full-year performance tax rate of 16%, a slight improvement from our previous estimate of 16.5%. After excluding the non-performance items, net income attributable to the company was $66.3 million. With regards to earnings per share this translates to $1.02 on a performance basis versus $1.19 last year.

In summary, we are pleased with the levels of profitability for the quarter considering we experienced a 7% sales decline and an 11% weakening of the euro.

Turning to chart six. I will now take you through our cash flow for the third quarter of 2012. You can see that working capital had essentially no impact on our cash flow in the quarter, as the reduction in payables was largely offset by reduction in receivables and inventory. Our days sales outstanding had slightly increased in the prior quarter, while past dues, days payables and inventory turns had reached a comparable level.

Changes in assets, liabilities and other non-cash items were favorable by $13.7 million. Biggest drivers were tax items, compensation related expenses and accruals as well as changes in supplier deposits and notes receivable. All this resulted in a net operating cash flow of $112.6 million. Net cash used for purchases of property, plant and equipment and computer software totaled $26.7 million for the quarter. In local currencies this is at similar levels to last year. We continued to support the growing region and new business we have won with increased investments.

Therefore, our free cash flow was $85.9 million or $90.2 million when excluding the streamlining and separation payments made throughout the quarter. Resulting in a conversion rate of 136% on our performance net income attributable to the company of $66.3 million. This brings our nine months year-to-date cash conversion to 102%, a very strong result so far this year. Under the share buyback plan that we implemented back in June of last year, we had repurchased another 365,000 shares in the third quarter at a cost of $48 million. And we have also repurchased another $11 million in the month of October, bringing the total shares repurchased since June 2011 to $6.4 million at a total cost of approximately $340 million.

As you likely saw in our press release earlier this week, our board of directors authorized an additional $400 million of share buyback that will be available through the end of December 2014. This new authorization combined with what is remaining from the original authorization, allows us for up to $460 million of share repurchase until the end of 2014. For the time being we intend to keep returning free cash flow back to our shareholders through the buyback program.

In addition to the buyback, we also put approximately $5 million of free cash flow to use with the acquisition of Ephicas, a pioneer of aerodynamic innovation for commercial vehicle. Jacques would tell you more about this exciting opportunity in a few minutes.

Overall, we are pleased that in these uncertain market conditions we continue to generate very strong free cash flow and to use this to enhance shareholder value through the share buyback and the execution of the Ephicas bid.

I would now like to turn it back over to Jacques who will highlight the current market dynamics. Jacques?

Jacques Esculier

Thanks, Uli. Turning to page seven. Kind of again sharing with you a view of the different regions of our growth. Starting with Europe. Registration for heavy trucks were down 14% in September, looking at year-to-date it was down 8% year-over-year. Actually when we look at our order book from OE truck and bus from Europe obviously, it’s actually down 3% when we compare it to Q3 sales. But obviously we are not at the end of quarter yet.

2012 production, our latest kind of guess would be between down 7% and down 10%. It’s actually an adjustment as compared to what we had shared with you three months ago which was a bracket of minus 5% to minus 10%. Now looking far ahead, on the horizon for 2013 and kind of squeezing a very very initial outlook, we would kind of feel like we would see a double-digit drop in H1 compensated by a better H2, simply having to take into account the pre-buy effect ahead of the introduction of Euro 6. So overall for the ’13 we wish ourselves to get a flat to down 10% rate.

Moving to North America. Again, another sudden reversal of market trends. We were growing at a very very strong pace, steady pace for few quarters. But Q3 had stopped it. We are actually down 2% versus a year ago and down 16% versus Q2. We expect actually a further decline during Q4 which could amount up to 7% sequentially versus Q3. Now looking at 2012 estimate, we would refine it from up 8% to 11% from the previous estimate of up 12% to 17%.

Again, trying to risk ourselves into a guess for 2013 we would say flat to down 5%. But again for Europe and the U.S. it will very much depend on the ability to rebuild some growth in the economy.

Moving to China, production was down 17% year-over-year in Q3 and 11% lower sequentially. The biggest decline was in heavy truck as we normally see it, particularly in long haul trucks. Our new estimate for 2012 would be a minus 21% to minus 24% bracket which is worse than what we had shared with you in July which was minus 15% top minus 20% in our first outlook just because we really don’t have much of an idea. It’s overall sluggish. Even though we have to respect the fact that there have been lately some positive signals that would indicate that the industrial activity is back on the increase path.

India, production of Q3 down 11% year-over-year and up 8% versus Q2. We see some good macroeconomic things that should kind of help 2013. We should end up 2012 with a production down 5% to 8%, which is better than what we had shared with you three months ago which was down 8% to 13%. And our initial outlook could be flat to up 5%.

Moving to the next page, starting with Japan and Korea. As we shared with you, Q3 was up 1% versus last year but 9% down sequentially. The growth had actually been this year so far driven by exports, particularly of medium truck which unfortunately carry less content for WABCO parts and systems. So updating our view of 2012, we would see it now up 15% to 18% which is better than the 10% to 15% bracket we had shared previously. Then looking at 2013, we are guessing a down 3% to 8% because of some slowdown in exports as well as obviously the pressure on the economy.

Brazil should end up Q3 -- ended up Q3 actually with production down 32% year-over-year, but up 18% from the previous quarter. Actually the second half of 2012 should end up 18% versus the first half as we probably have caught up and brought the production level back to the level of demand for truck and buses. It doesn’t seem that there will be any inventory left in this market very soon. Which means that revising our estimate for 2012, we think the market will be down 32% to 35% versus 2011, which is actually about 3% to 5% more than the 27% to 32% bracket we had shared with you in July.

Looking ahead to 2013, we see an uptrend of 10% to 15% which is actually the mechanical alignment of production with demand of trucks and actually obviously if the demand would rise beyond what it was in 2012 than the estimates for production would grow beyond that 15%.

Going to aftermarket, as I said 7% solid growth in Q3, helped by the campaign. Our outlook for the overall year would be about 5% with an initial guess of 2013 around 5% as well. Moving to trailers production in Europe, it was down 13% in Q3 in Europe and down 11% sequentially. Globally, we kind of estimate the trailer production to go down 5% to 8% which is a little worse versus the flat to minus 5% estimate we had shared previously with you.

And looking ahead at 2013, we see this market basically flattish overall globally with Western Europe and North America slightly down compensated by the rest of the world. Now when you look at this 2013 kind of very initial guess and you know you add reasonable level of our performance, actually we could anticipate that WABCO could end up generating some growth in 2013. But again we are talking about very initial estimates.

Moving to the next page. We are going to rapidly kind of run through where we are at in adapting WABCO to the current level of market demand. First, just to remind you that as of today about 25% of our employment in high cost countries is flexible and 50% is flexible in best countries which by itself would represent more than 70% of our labor workforce.

We have triggered in the last week actually a mitigation action plan to offset pressure on top line when you look at the last six months of the year compared to the forecast that we had shared with you in July, we would have saved $30 million of expenses, $23 million above gross profits that covers many actions and improvements including the adoptability of the workforce to the current capacity -- to the current demand, I am sorry. And that represents about 260 positions and then $7 million of those savings would be in profits and that’s by postponing or canceling about 90 positions that we had planned to fill in the last six months of 2012.

Moving to the next page where we review, as we do every quarter, our achievements along the three pillars of our strategies. Starting with globalization. We got a nice contract from GAZ which is the second largest truck manufacturer in Russia for ABS systems. We also opened a second site of our factory in Mahindra City where we would manufacturer compressors for the global market.

Then under new technologies, as we said, acquired a company called Ephicas that is specializing in enhancing the overall quality of aerodynamics for trucks and trailers that I will discuss with you a little bit later. Then we had introduced our solution for lane departure warning which would become a mandate in Europe by 2013 but also will probably be in demand in the U.S. and the rest of the world. And then we introduced a new ABS system for hydraulic trucks. This will be the first and unique actually ABS system in the hydraulic environment including electronic stability console, and that again will become actually mandated in Europe for those trucks in 2013 but will also probably bring great demand from Americas and Asia.

In execution we won a top quality award from Paccar for our braking components supplied to DAF. And that we continue to generate very strong productivity in our supply chain.

Turning to the following page, we give you some highlights of this acquisition of Ephicas. It’s a small company which was spun out from the technical University of Delft and that is specialized in designing devices to have the truck and trailer combination to be more efficient aerodynamically. The first step was introduction of the SideWing that will cover the bottom of the side of the trailer with a very clever and innovative design that includes the wing shape kind of fairing. And that wind shape actually is taking advantage of the airflow underneath the trailer to generate a forward moving thrust that will pull actually the trailer forward. And that kind of contributes to the overall fuel savings of up to 5% and it is today actually the best solution and the most efficient solution we know of in the market. So we see it as a very promising source of success and for the revenues.

Page 12. Moving to the adjustment of our guidance, starting with top line. We estimate our revenues to go down minus 4% to minus 5% which is obviously a degradation of 4% versus the prior guidance. Performance operating margin, we are actually lowering the range to 13.4%-13.6% from the range of 12.8%-13.8%. And I think that’s really a good news because what we are saying even though our top line may decrease 4% to 5% we will retain margin as it was last year at 13.4% which at that time was a record margin for WABCO. And we actually could even grow a little bit higher than that breaking potentially another record in 2012. Leading to a performance EPS of $4.28 to $4.38, so again we narrowed the band and we had to come to $0.02 below the lower estimate of $4.30 we had shared with you in the prior guidance.

A quick actual comparison, if you look at the strength of our cash flow year-to-date, we believe we would end up at around 90% of conversion. Again, you see the input is all depending on the exchange rate as usual, including the $30 million of expense improvements. Annual price erosion staying below 0.8%, inflation and material below 1.2%, strong productivity at a tax rate that has stabilized at around 16%.

Turning to the last page. And in summary I would say that, you know as we had anticipated, shared with you, we seem to face a scenario of fast changing and unpredictable market that again requests from companies like ours a very strong level of flexibility and agility. And we have already taken some measures in this direction by aligning our capacity to market demand and by triggering some cost savings. But overall we are able to preserve the fairly robust margin maybe even beating last year’s record even though the demand overall for the year 2012 will end up 4% to 5% lower than last year.

And we continue to generate heavy cash flow. We announced that the board obviously approved this share buyback which we still think is a very very good way to return value and cash back to the shareholders. And we are obviously, we would say full open to any improvement in the economy which happens to be kind of possible. And that would rapidly support an increase in demand for trucks, for buses, and that would have obviously a positive impact overall on the Street and on WABCO.

So now I would like to open the session for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Alex Potter with Piper Jaffray.

Alex Potter - Piper Jaffray

So I have a question first of here on margins. As you mentioned, very strong performance here. I am trying to understand what the margin leverage could be. Historically, you had spoken about margins, you can expand them so long as you are hitting a certain level of sales growth. But here, clearly over the last several quarters your sales have been contracting yet margins have been increasing on a year-over-year basis like you were saying.

So what I am trying to understand is, looking out forward to 2013 if we assume a better sales environment, is it reasonable to assume that that operating leverage continues and could potentially drive materially higher margin next year?

Jacques Esculier

Actually, we would not modify the overall framework that we had shared with you a year ago. Right. Meaning that 3% to 5% growth means kind of flat margin. Below 3% growth, slight erosion, that would increase obviously with decrease of revenues and above 5% growth, we start to incrementally enhance or margins. That’s the framework that we would still kind of stay behind. Now we have to admit that this year obviously as I said, we would probably keep the same margin or maybe slightly enhance it even though we had a full 5% decrease in revenues. And there are few things that obviously helped us this year.

One is we continue to enhance our overall cost for quality. You know the warranty cost. It’s going to end up being between 1% and 1.2% and we used to be at 1.5%. We have seen the improvement of freight cost because as you remember 2010-11 was very challenging for us in terms of pace of growth and recovery and our suppliers were even more challenged so we had a lot of emergency freight that we had to pay for. And that has obviously significantly come down. So that began to kind of provide us with some help in the margin. And then some kind of, I think some exchange rate effect as well that has been providing some tailwind this year.

So overall that’s the framework plus some savings here and there and special events here and there and what not. But overall this is the core of who we could justify that this year we departed from the overall model that we had shared with you. I would say that 2013 we would anticipate something aligned with again this model.

Alex Potter - Piper Jaffray

And then I was wondering too if you could comment on the market share gains in China. You know clearly you are outgrowing the market there pretty considerably. Just wondering what it is specifically that’s driving that and whether you think that can continue?

Jacques Esculier

You know market share is also constant. It’s mostly constant for vehicles. And you know we have had some successes of ABS replacing a competitor for very nice market share at one key manufacturer, and I am sorry I cannot share with you at this point because there is some sensitivity here. But overall we see that WABCO continues to kind of build that momentum of added content per vehicle in that market. Unfortunately, again, the mix can be dynamic so the market itself is not helping. But there are still a lot of things to -- lot of new technologies to introduce and to further grow into China.

Operator

Our next question comes from Jeff Hammond from KeyBanc Capital Markets

Jeff Hammond - KeyBanc Capital Markets

Jacques, if you could, I know these are preliminary but if you could frame kind of how you came up with the flat to down plan in Europe. Is this initial feedback from your customers? And maybe within that, how you are quantifying or thinking about pre-buy what's in that? Is what you were pre-buying included or is it pretty limited?

Jacques Esculier

Well, Jeff, again this is kind of a difficult exercise and there is not much of a scientific background behind this. But I would say (inaudible). One had to admit that Q1 order book actually would not support that scenario but we have experienced the current quarter’s order book but not the next one. Right. So having a Q1 that would support actually a certain growth for me is not a reliable source of information. But I have to mention it anyway.

What we see though and what we hear like you do, is kind of important news from some of the manufacturers in Europe that announced a decrease in production capacity. You know sometimes up to 20%. Right. So I think we have to be realistic and kind of seize this pieces of information because those are not customers that have the reputation of accepting lots of market share and I don’t think that they would certainly for whatever reason loose share versus the others. So it has to be reflective of something. Right.

And when you look at the dynamics of the market in the last quarters, actually it’s going down. You know look at Western Europe, year-over-year, you are at minus 6% in first quarter, minus 8% in second quarter, minus 11% in third quarter. We expect fourth quarter to be actually even worse than minus 11%. So it’s not like we are seeing a kind of progressive change of trend. Right now we are still in the trend of seeing a slowdown in the market. Right.

So that’s why we kind of estimate that the first half would be double-digit slow down versus 2012 compensated by the second half that would again under our scenario see some good pre-buy effect prior to the introduction of Euro 6. Now again, Jeff, this is so preliminary and you know how sensitive it is to any kind of overall macroeconomic news coming from Europe, from the U.S., that to kind of like we are even close to what will happen, would I think be foolish. But we have to kind of share with you what we take as of possible scenario for next year and that’s what we gave.

Jeff Hammond - KeyBanc Capital Markets

That’s very helpful. And then clearly there was a lot of destocking going on and that impacts the outgrowth. But if you just kind of take your initial view in the ’13 and it seems like you have certainly some growth areas and some decline but maybe a pretty median environment. I mean how should we think about outgrowth in the ’13 within kind of your longer-term framework?

Jacques Esculier

Well, again, Jeff, the environment when market declines we certainly cannot hang our hat on these 8% to 10% because what we have shared with you already, there is inventory adjustments like we have seen one in Q3, that will continue to take place because OEMs have to align their inventories with the rate of production and all this. And also because usually when the economy kind of doesn’t report a growth in trucks it does penalize heavy trucks segments more than it does on the medium truck segment, and it does penalize overall the content of vehicles average for WABCO.

So I would say, we probably in that kind of scenario we would not like we told you as we entering 2012 we would not probably reach that 8% to 10%. But I would certainly anticipate to be kind of a 5%ish type of out performers in this kind of environment. That’s why I said you know you take whatever midpoint out of this guidance, you add kind of 4%-5% of performance that may bring you to actually a positive growth of sales for WABCO in 2013.

Operator

Our next question comes from David Leiker with Baird.

David Leiker - Robert W. Baird

Just a follow up on that Jacques. If we take the context of (inaudible) performance versus the market and some growth in 2013. Given what's happening with respect to the first half, it could be down considerably, the second half up and that’s end up being up a little bit. Is that the right way to look at it?

Jacques Esculier

Well again, we are saying overall down that it would (inaudible)....

David Leiker - Robert W. Baird

Your revenue.

Jacques Esculier

I mean down a little bit and up a little bit, very frankly, I would not enter into a debate with you, David. I could be up a little bit, it could be down a little bit. We really have no clue. But what we will anticipate again, risking a guess today, is that the first half could be down double-digits and as you said kind of compensated by a second half that would be a lot more favorable. And overall, net-net, for the full year, well we said minus zero to minus 10 but you would say a little bit up, maybe, I don’t know.

David Leiker - Robert W. Baird

Okay. And then if we look -- how much inventory ends up in the channel between what's in transit and what's your customers have at their facilities normally? Is there any growth down there?

Jacques Esculier

Inventory, you mean our products with the customer or you mean the customers inventory in his truck?

David Leiker - Robert W. Baird

Your product. So that as they pick build on how much (inaudible) do they need to work off you to normal for that production rate?

Jacques Esculier

Well, it would decrease. You know actually it depends on the exit rate of production at the end of next year. But if you kind of say it goes down first 10% and it kind of maybe barely catches up, we should end up at a rate of production that basically is kind of what it is today. We usually feel like our customers carry average because it’s an average, about a month of production. You know three to four weeks of production. So you can kind of make your calculations here, I think. That’s between raw material, what they have on the line and you know in their whole [game].

David Leiker - Robert W. Baird

And then one last item here. As we look forward, are there any particular headwinds or tailwinds that we can look at for margin as we look into the first half of ’13 versus where we are running today?

Jacques Esculier

Not particularly that we know of at this time, David. Again we are in the middle of building our budget for next year. We don’t see anything kind of particular that’s why, again, I would stay kind of aligned with the model that we shared with you on margins.

David Leiker - Robert W. Baird

So if we take you can do for Q3 margin performance and we look that margin contribution, margin at a year-over-year, if we look at it sequentially then that would seem to be a pretty reasonable exercise?

Jacques Esculier

Well, David, we are not giving 2013 guidance and we are surely not guiding you on quarter-per-quarter for 2013. Right.

David Leiker - Robert W. Baird

Yeah. I wasn’t trying to go down there really. Just trying to think of your margins, what you can see here in Q3 for margin. Is it something you have considered normal for this level of volume and that’s kind of a base to use as we look forward.

Jacques Esculier

I think we told you that we think in an environment where we could be slightly up and we expect we need 3% to 5% top line growth to keep the margins flat in this exchange rate environment. Now I think you know the midpoint of our full-year guidance drives to 13.5%, 13.4% to 13.5% and you take this as a basis. And you model off of this for 2013 with what we told you, this is everything including what we know today.

Operator

Our next question comes from Jerry Revich with Goldman Sachs.

Unidentified Analyst

[Robby Gill] on for Jerry. Can you talk more about whether you saw any outgrowth in your car products business? Specifically, can you give us an update on when you expect to ramp up production for the GM gasoline direct injection product line?

Jacques Esculier

Actually we have started to deliver, it was what two-three months ago. And we continue to ramp up as we speak. So those are kind of revenues that would progressively help us along the path. But in the meantime you know that the car business is itself not doing extremely well. So overall we are going to have to see what comes from the kind of ramp of our revenues versus what could happen to the overall automotive industry in the coming quarters.

Uli Michel

This quarter it was not a help.

Jacques Esculier

Yeah, this quarter we had seen actually a decrease of revenues from cars because we have see a postponement or slowdown of our deliveries to all the car manufacturers.

Uli Michel

And we saw declines in car production also in Europe.

Unidentified Analyst

And then how is penetration of automated manual transmissions tracking for customers in North America?

Jacques Esculier

North America is continuing to do well. Actually, we mostly deliver to Volvo and we know that there are some other manufacturers that have plans like now to introduce it as it becomes available to them for that market. Because it seems to be now well anchored a very desirable technology including on your truck. And same thing for Brazil by the way.

Unidentified Analyst

Thanks. And then just finally, can we talk more about when you expect a tailwind from lower commodity costs as they flow through your cost structure and once we do see that tailwind, should we think of an offsetting move in your price realization?

Uli Michel

Well, tailwind has already started. It actually is a good part of the commodity prices that we benefit from it when the economy slows down, because we usually don’t share the impact nor the benefit of it with customers. So that could obviously be one of the things that helps us to mitigate the pressure on margins as we come down in revenues if we continue to see some decrease in market demand. In terms of the raw materials, overall they were up for still a headwind this quarter. In fact they [ate] about .08% into our raw materials. But it’s less than what it used to be. Right. And I think at the current we would probably still carry some increase of raw material cost into next year, year-over-year. I don’t think we are at the point....

Jacques Esculier

Well, we are three to six months late in actually implementing the price changes that’s part of the contractual agreements we have with our suppliers. Right. So it’s an instantaneous alignment of what we pay and the price evolution. So we are always three to six months late behind the price evolution. So we would still enter 2013 with some lag in recognizing that some prices are really kind of moving down.

Operator

Our next question comes from Robert Kosowsky with Sidoti & Company.

Robert Kosowsky - Sidoti & Company

As far as the European aftermarket, you had some pretty good market out growth there and I wonder if you can kind of quantify what maybe your share gains were versus kind of how the market was doing. And then also kind of any evidence of an (inaudible) on the aftermarket or revenue that you are seeing?

Jacques Esculier

Well, again, we kind of declared a pretty healthy 7% growth in aftermarket but I also mentioned the special projects we benefit from right now as we replace some air disc brakes from our competitors that has some quality issues. If you take that out, the revenue growth for the quarter, actually we would see a revenue growth around 3% only, which again is not too surprising given the fact that we are in a market downturn. I have not heard anything kind of drastic around the under utilization of trucks in Europe but I have heard that some trucks are parked right now. And when you question fleets at this point, they are more pessimistic then they have been in the last two years.

They are obviously not even close to the pessimism that they had back in 2008-2009, but we see that they kind of recognized that they are struggling more to find business.

Robert Kosowsky - Sidoti & Company

And then also with regard to China, the deceleration that we saw in build rates. Were you surprised that given the stimulus measures that they did earlier this year and do you see any hope that some stimulus can get the market going in 2013.

Jacques Esculier

Well, this is confusing. I am going to China next months and I am going to kind of try to figure out better what's going on over there. But to tell you truth, there are so many conflicting news coming from that market. Yes, their stimulus packages that have been triggered earlier in the year but they have been also lately kind of slowed down or at least what people would have called a flat industrial activity and even talking about some slowdown overall, which obviously also impacts the truck level. And as I said, we see a large, more impact on long haul trucks which are the trucks that transport goods versus construction trucks which are the trucks that have -- kind of construct roads and railways and what not.

So I think once China will be back to generating a solid industrial growth and it seems again that lately they have been recognized as kind of having turned a corner and starting to generate some industrial growth. I think we are going to see progressively, potentially some improvements for our industry. It’s a very competitive market and it’s a very kind of complex situation over there at this point.

Robert Kosowsky - Sidoti & Company

Okay. Sure. And then also as far as the new product launches, I am wondering if you can give a little bit more color about that hydraulic anti-lock braking system and kind of what the potential impact is of the regulatory share increase and also just your ability to gain share in the market to with this new product.

Jacques Esculier

Well, we don’t have yet revenue estimates. But the only that that we know is that the medium sized truck environment in the U.S. uses a lot of hydraulic trucks. And that we are the only ones that offers electronic stability control. Obviously if the legislation in the U.S. would follow the European, you know legislation that was started to be implemented last year and mandate ESC, that would be an unbelievable source of opportunities for us under those circumstances.

So it’s very hard -- and you know we think that actually the North America, U.S., will mandate ESC probably next two to three years. So that’s kind of how we see shaping up some good potential demand for these products.

Operator

Our next question comes from [Ted Wales] with Buckingham Research.

Unidentified Analyst

I just wanted to kind of go through some points on, that have been asked before. But if I go through your (inaudible) and very helpful end market comments for next year. And put in a 5%ish outgrowth. It seems pretty easy to me get revenues up in the range of double-digits. And you seem to be talking about very modest revenue gain as a way to think about it. Now what am I missing if I do that math?

Jacques Esculier

I don’t know Ted, because we overall with the assumptions that we took I think we have been -- again, our assumptions with all the limitations that we again want to make sure everybody understands, we would see probably overall market decrease for WABCO, you know weighted. Because, again, a truck in Europe doesn’t carry as much as truck in China or India or what not, or Brazil. So that slowdown in Europe, right, then kind of flat to down North America at [5%], it’s weighting a lot. It is not even close to mitigated by Brazil up 10% to 15%. So overall we think that we are going to end up with a certain kind of overall market decrease. And when I talk about market, at this point is weighted with the revenue in different regions.

It’s with the outperformance you know that 4% and 5% kind of thing that I discussed, which is not yet completely finalized either on our side. We would see us potentially expecting this kind of low single digit growth. But again with that, I mean this is -- don’t take that as a commitment at all, please. Okay?

Unidentified Analyst

No, I understand. And on the inventory, customer activity on inventories in Europe and North America, I think you highlighted those are coming down. Do you think that the inventory as we sort of operate here in the fourth quarter, adjustment is completed or you think there is going to be more inventory adjustment taking place in the fourth quarter this year?

Jacques Esculier

Well, again, it is hard to say except that Q4 should show us further kind of erosion of market overall sequentially.

Unidentified Analyst

And you might undershoot the markets in the fourth quarter like you did in the third quarter?

Jacques Esculier

Expect for Western Europe, it’s in the U.S. that it’s going down. In South America. China, a little bit again. But Europe, no. Europe is kind of flattish to slightly down. So Europe should be stabilized. We would see further potential, further evolution in North America, China. But some of them is also kind of seasonal. You know first quarters shut down sometimes so like the production level is down, it’s like quarter-over-quarter sometimes they have a shutdown of their facilities at the end of the year. But in any case what we shared with you in terms of that minus 4% to minus 5%, that is the line with the market scenarios that we also kind of discuss with you today. And that takes into account all those different kind of adjustments in inventory and what not. And also respective of the order book overall.

Unidentified Analyst

And lastly, you talked about 16%, maybe as a stabilized tax rate. Is that how we should think about the future?

Uli Michel

Well, this is how you should think about this year and we (inaudible). This could potentially be slightly better. You know it depends on -- as we have explained before, our tax rate is sensitive to the geographical distribution of our income and we do have a few other planning items we are looking to act. So for this year 16% or a little bit below, right.

Operator

(Operator Instructions) I’m not showing any further questions at this time. I’d like to turn the conference back to over to Jacques Esculier for closing comments.

Jacques Esculier

Okay. Well, thanks for attending our call today and I wish us all a good fourth quarter and I will talk to you in early 2013. Thank you.

Operator

Ladies and gentlemen, that concludes today’s presentation. You may now disconnect and have a wonderful day.

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