TRW Automotive Holdings' CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: TRW Automotive (TRW)
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TRW Automotive Holdings (NYSE:TRW) Q4 2011 Earnings Call February 16, 2012 8:30 AM ET


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


Himanshu Patel - JP Morgan Chase & Co, Research Division

Rod Lache - Deutsche Bank AG, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

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

John Murphy - BofA Merrill Lynch, Research Division


Good morning, and welcome to the TRW Fourth Quarter and Fiscal Year 2011 Earnings 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 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, 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 Fourth Quarter and Full Year 2011 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, consistent with our previous calls, 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 look to discuss other related business matters, including our outlook and planning assumptions for 2012. 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 2010 Form 10-K and our first, second and third quarter 10-Qs contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2010 10-K and 2011 quarterly SEC filings by visiting the Investors section of our website at or through the SEC's website at On a related matter, we expect to file our 2011 Form 10-K within the next day or so. Once filed, the 10-K can also be accessed through either website.

In addition to the 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 for these non-GAAP measures to the closest GAAP equivalent can be found on the conference call materials, which are posted on the Investors section of our website at

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 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?

John C. Plant

Thank you, Mark, and good morning, everyone. As you can see from the results post this morning, TRW's fourth quarter performance solidified a highly successful year for the company. During the fourth quarter, sales, which totaled $4 billion, were 7% higher compared with the prior year quarter.

Operating profit before special items was $307 million. Net income was $238 million and earnings per share were $1.84 on the same basis.

Regarding cash, after making $100 million of discretionary contributions to our pension plans, the company generated cash from operations less capital expenditures of $341 million. And finally, gross debt and net debt reached historic lows of $1 billion and $32 million and $291 million respectively.

The strong performance achieved in the fourth quarter and for the full year enabled the company to fund its aggressive growth plans, continue its efforts to further strengthen its balance sheet and actively manage its legacy liabilities, namely the company's pension obligations.

Making discretionary contributions of $100 million to the company's pension plans, actively managing the pension obligations and healthy asset returns were instrumental in limiting and more than offsetting the negative impact of the historically low discount rates at the end of the year.

Through active management, the unfunded status of the company's legacy liabilities improved by about $350 million compared with the end of 2010. In addition to being at a very manageable level, we also believe that we are well positioned to take further and additional actions as the opportunities arise to reduce our exposures.

Beyond the financial performance achieved in Q4 and for the full year, TRW's world-class quality metrics, expanding regional diversification and continued success at winning new business provide evidence of the overall strength of the company.

Combining the operational and financial accomplishments achieved in 2011 positions the company for future long-term success.

I'll expand on the full year results in just a few moments. I will add a few additional comments on the fourth quarter. During the quarter, global production volumes were in line with our expectations and those of most industry observers. In North America, overall vehicle production was up 16% compared with the fourth quarter of 2010.

On a sequential basis, compared with Q3, production was up about 250,000 vehicles. The quarter-on-quarter increase was primarily driven by improved production schedules at the Japanese vehicle manufacturers as they continue to recover from their earthquake-related constraints.

The fourth quarter annual sales rate, which averaged in the mid-13 million unit range in North America, was a bright spot as we exited 2011 and supports the current production expectations.

In Europe, vehicle production was in line with the expectations established at the beginning of the quarter. Production for total Europe was down about 2% compared with last year's fourth quarter. This marked the first quarterly year-on-year decrease during the 2011 year.

Consumer demand decelerated sequentially during the quarter, with Germany's growth representing the only positive data point coming out of any of Europe's major markets. The moderation in European sales had a modest negative impact on vehicle production in the region.

Sales in China and Brazil continued to advance as TRW outpaced industry production in both markets. Combined sales in these 2 markets accounted for 17% of TRW's total fourth quarter sales. Although the pace of growth has moderated in these markets, the outlook for vehicle sales and production remains robust given the rising demand within the region.

With respect to full year results, we are pleased with the performance. Sales of $16.2 billion established a company record and were 13% higher compared to a year ago. Operating profit excluding special items for 2011 was $1,278,000,000 and marked the second consecutive year of record operating profits. Net income on the same basis was $971 million and earnings per share were $7.42, both of which also set records for any full year period for TRW.

Joe will discuss these and our financial highlights in more detail in a few minutes.

In addition to the record financial performance, TRW continue to advance its strategic priorities of innovative technologies, the highest quality, lowest cost and leveraging our global reach. Throughout 2011, TRW continued the pace of development and announced a number of exciting innovations across the breadth of our product portfolio.

The company's revenue diversification was further strengthened as we made progress in capturing growth in the high-growth regions of the world, namely China and Brazil. We expect this to trend to continue over the next several years and beyond. And as you know, we are currently investing in these regions to ensure we capture our share of these markets.

Restructuring charges, primarily for Western Europe, provided evidence of our continued focus on executing a multiyear plan to enhance and reposition our manufacturing footprint to low-cost countries. These priorities will continue to serve as our compass points and remain the foundation of TRW's future success.

Moving on to fourth quarter business developments. Product launches during the quarter continued to strengthen our diversification and leadership in intelligent safety solutions. A few examples include the driver and passenger airbag modules, seatbelt systems, steering wheel and suspension controls on the BMW 3 Series newly launched in Europe.

Fiat launched its Panda vehicle with TRW's driver and passenger airbag modules, front seatbelt systems, steering wheel, brake actuation and safety and sensor electronics. And Audi's A6 in Asia was launched with our side impact airbag module, front electronically-active control retractor seatbelt mechanism, our brake actuation and electronic park brake rear calipers.

Products launched in the fourth quarter as well as early this year were delivered with world-class quality as a result of our ongoing quality and Six Sigma programs. For the year, quality averaged 4 parts per million across all products and customers.

In addition to these recent product launches, during the fourth quarter, TRW announced certain contract wins, and highlighted a few of its innovative technologies that will enhance our safety portfolio and solidify our strong market position going forward.

A few examples include the first contract of TRW to win a video camera sensor to a major European commercial truck manufacturer to support a range of sensing capabilities, including lane departure warning and automatic emergency braking.

TRW will begin to supply the camera technology in late 2012 in advance of the European Union mandate, which calls for the installation of lane departure and automatic emergency braking systems for new heavy-duty vehicle model launches sold from late 2013 for all new trucks in Europe. Also within the Electronics segment, TRW announced plans to expand its vehicle access portfolio to include advanced Passive Entry systems and has secured initial contract awards in North America.

Passive Entry systems take account of the benefits of the traditional Remote Keyless Entry and move it on a step further to enable the car doors to be automatically locked and unlocked as the driver or passenger approaches the vehicle without any need to press the key fob buttons. Integration with Tire Pressure receiver functions into a single control unit makes such functionality much more affordable.

Within occupant safety, the company unveiled its next generation of adaptive frontal airbags. The dual contour passenger airbag is capable of adjusting both the airbag pressure and the size of it to tailor protection according to the occupant's size and other variables of a crash.

It's exciting to look to the future given the new and recent product launches and the innovative products that are in the pipeline. Of course, to meet the needs of today and tomorrow, the company remains committed on building out its growth strategy, which as we previously discussed, includes building or expanding manufacturing plants and increasing engineering and infrastructure support to ensure that resources are deployed to support our contract wins.

TRW's leading market position will be even stronger once this investment strategy has been implemented. We expect our ability to grow revenue, in excess of vehicle production, will accelerate as we exit 2013 and move into 2014 and beyond.

We expect that any temporary compression in operating margins we have recently experienced will reverse. And TRW's trend of significant cash generation and flexible capital structure will support not only the needs of the business but also shareholder-friendly actions, which are being considered as part of TRW's broad capital structure strategy.

Together, we see the investment being made today driving a great outcome for the company and will ensure its long-term success.

Turning to 2012, let me comment on our expectations and planning assumptions. Overall, the fragile, broad economic environment has resulted in a weakening of the global vehicle markets. Although recovery remains headed in the right direction in North America, the near-term outlook for Europe is moderating due to the continued sovereign debt concerns, which has resulted in a tightening credit and weakening consumer confidence in that region.

In North America, we expect first quarter production to be roughly 3.6 million units, an increase of about 7% compared to the first quarter of 2011. However, within that estimates, we expect Detroit 3 production will only post a modest increase of maybe 2% to 3% year-on-year. For the full year, our planning assumptions are based on a 13.9 million unit build for North America, representing a 6% increase compared with 2011.

So much to our Q1 forecast. It's important to note that we expect production for the Detroit 3 manufacturers will differ from the overall growth forecast and actually remains close to flat year-on-year as production schedules at the Japanese vehicle manufacturers improve and account for the majority of the increase within North America.

As you're aware, our performance in the region is more correlated to the movement in the Detroit 3 production due to the TRW content on these vehicles.

In Europe, we're cautiously watching the negative macroeconomic conditions within the Eurozone, which has already resulted in negative implications for production in the region. Although exports from Europe remain strong, they will likely be inadequate to offset the moderating demand currently taking place inside Europe.

During the first quarter, vehicle production in Western Europe is projected to be about 3.3 million units, down about 11% compared with last year. However, the impact on TRW is expected to be less than that due to the strong customer and product mix that we have. For example, production for VW, which is TRW's largest customer, is expected to be down a modest 2% year-on-year in the first quarter. This, as well as TRW's high level of content on premium brand vehicles, which are expected to hold up well, should help offset the overall region’s weakness.

For the full year, our forecast for production is 18.4 million units for total Europe. Within this estimate, Western European production is 12.5 million units, which is down roughly 7% compared with the 2011 levels.

Obviously, reduction in production is not welcome, especially in our largest market. However, we feel the magnitude of this decline is very manageable and will flex our operations to offset the negative impact. As you would expect, we'll continue to monitor the production plans of our customers closely and make any necessary adjustments to our operations.

Beyond North America and Western Europe, we expect full year production levels in the high-growth markets such as China and Brazil to continue to increase compared with 2011. Based on the forecasted production estimates and currency assumptions, we expect for TRW sales of approximately $16 billion to $16.4 billion in 2012. Sales in the first quarter are expected to be approximately $4.1 billion or about equal with the prior year. Capital expenditure for the year is expected to be in the region of $650 million to $700 million as we continue to build out our infrastructure in the strategic high-growth areas such as China and Brazil and support our continued expansion of the newer innovative technologies.

Consistent with prior years, TRW will continue its trend of cash generation in 2012 despite the increased level of investments. With regard to restructuring, we expect for that to be in the range of $30 million to $40 million in our historical range.

In summary, we're pleased with the record performance achieved in 2011. However, the focus is now on 2012 and beyond to ensure that the current positive operating momentum is sustained. We are enthused as we look towards the future and remain confident we're executing the right strategies to ensure long-term success of the company.

With that, I'll now hand the call to Joe to discuss our financial results in further detail.

Joseph S. Cantie

Thank you, John, and good morning to everyone. As John mentioned earlier, our results for the quarter sustained the strong operating performance that was established in the first 9 months of 2011 and propelled the company to its second consecutive year of record results for most of our key financial metrics.

A number of special items impacted our fourth quarter results, most notably the reversal of the valuation allowance on the company's deferred income tax assets in the United States. However, after adjusting for the special items, you'll find that the core results were impressive.

A quick recap of the key highlights for the quarter included sales of $4 billion, the highest level of sales for any fourth quarter in the history of the company, an operating profit and margin of $307 million and 7.7%, respectively, after excluding special items. A very solid result despite the increased level of investments for future growth and a higher amount of legal fees associated with the company's ongoing antitrust investigation. And continuing our trend of debt reduction, net debt declined to $291 million as a result of the quarter's strong free cash flow of $341 million. A great outcome, considering that this was after making $100 million of discretionary contributions to certain of our pension plans, which I'll discuss later in my comments.

For the year, despite challenges we've discussed over the last 12 months, we finished 2011 with record sales, record earnings and achieved historic lows for the company's gross and net debt levels. And we improved the net unfunded liability position of our pension and OPEB plans.

We plan to carry the positive momentum and high performance of last year into 2012. However, there are continuing challenges that face our industry. Rest assured, we remain grounded and focused on positioning the company for future success.

I'll expand on our 2012 outlook in just a few minutes. But first, I'll just move through our fourth quarter and 2011 results in a bit more detail.

For the quarter we reported sales of $4 billion, an increase of $273 million or 7% compared to the same period a year ago. Currency translation had only a slight negative impact on sales during the quarter, about $23 million compared to the prior year. For the quarter, we had an operating profit of $280 million, which has decreased from the prior year level of $293 million.

Included in the 2011 and 2010 fourth quarter operating profits were restructuring charges of $27 million and $35 million respectively. The 2010 period also included $18 million of net favorable pension-related items, primarily a gain relating to the curtailment of the company's salaried pension plan in the United States. Excluding these charges from both periods, operating income was $307 million in the fourth quarter of this year compared with $310 million last year.

The profit contribution from the higher level of sales between the 2 quarters was essentially offset by increased raw material prices and planned increase -- planned increases in engineering development and infrastructure costs, which together impacted the quarter by about $40 million. In addition, higher legal fees of approximately $11 million also contributed to the negative year-on-year comparison.

One final comment on operating income. Included in the current quarter results is approximately $8 million of gains related to the 2 divestitures that were finalized at the end of the year.

Moving down the income statement, interest expense totaled $28 million, which compares to $37 million last year. The reduced expense is reflective of our cash flows and reduced levels of debt between the 2 periods.

The current quarter included a minor loss on retirement of debt, $1 million, as we purchased only a minimal amount of our bonds in the fourth quarter given market conditions. The prior year's fourth quarter included a $13 million loss.

Finally, the company recognized a tax benefit of $174 million in the current quarter compared with a tax expense of $36 million last year. Now the 2011 period includes $217 million of net one-off tax benefit items, the most significant of which was associated with the reversal of the valuation allowance on the company's deferred tax assets in the United States.

Excluding this benefit and special items of $9 million in the prior year, tax expense in the fourth quarter of 2011 totaled $43 million compared to $45 million last year.

The reversal of our valuation allowance position in the U.S. is obviously a positive development in the maturity of the company since the LBO in 2003. It means that the company has been and expects to continue operating on a profitable basis in the United States. The reversal also means that we expect that our effective tax rate going forward will be closer to the statutory rates around the world. For 2012, our initial guidance is for approximately 32%, which we'll update you on as we move through the year.

Just a reminder, despite the P&L impact of this event, TRW will not pay cash taxes in the United States for many years, given our existing tax NOL position.

At the bottom line, we posted GAAP net earnings of $3.27 per diluted share compared with net earnings of $1.56 in the prior year. Now excluding the special items I've just discussed from both periods, earnings were $1.84 per diluted share this year compared with $1.72 in last year's fourth quarter. You can find a reconciliation between the GAAP and the adjusted results I've just referenced in the schedules included in our press release this morning.

For full year 2011, we reported sales of $16.2 billion, which is an increase of $1.9 billion or 13% compared with last year and also sets an all-time sales record for the company. Continued growth resulting from our portfolio of safety products increased global vehicle production, and the positive impact of currency movements accounted for the year-on-year increase.

Our operating income for 2011 was $1,260,000,000, which compares to $1,184,000,000 last year. Our results for 2011 included restructuring charges of $27 million, a gain related to a favorable resolution of a commercial matter earlier in the year totaling $19 million and a charge relating to the termination of a service contract, again, earlier in the year, totaling $10 million.

In comparison, 2010 contained restructuring charges of $45 million, as well as an $18 million net gain primarily related to the curtailment of our U.S. salary pension plan.

Excluding these charges from both years, our operating income in 2011 was $1.3 billion, which compares to $1.2 billion last year. The resulting margin of 7.9% is a very solid outcome, considering the increased level of investment during 2011.

The $67 million increase between the 2 periods was primarily a result of our operating leverage against our higher level of sales between the 2 periods, partially offset by higher raw material prices, increased costs to support future growth and higher legal fees.

Below operating income, interest expense was $118 million compared to $162 million last year. Both 2011 and 2010 included a net loss and debt retirements totaling $40 million and $15 million respectively.

With regard to taxes. For 2011, a tax benefit of $47 million was recognized compared with the tax expense of $166 million in 2010. Excluding the special benefits from both periods, which were referenced earlier in my comments or in prior quarters, tax expense was $190 million in 2011 compared with $198 million last year. Excluding the special items, we had earnings of $7.42 per share, which compares to $6.57 per share in 2010.

Returning for a moment to our tax situation. I provided guidance for our 2012 effective tax rate a few minutes ago. In order to help you with future earnings comparisons as we move through 2012, we've included in our slide deck today a schedule that provides 2011 pro forma results, adjusting taxes as if the U.S. valuation allowance had been eliminated prior to 2011.

Let me shift now to our cash flows and capital structure, an area we're proud to highlight given our continued accomplishments. First, on operating cash flow, for the quarter, we had $608 million, and that's after making $100 million in discretionary contributions to certain of our pension plans. This compares to $362 million in 2010, which included $170 million in pension contributions.

Free cash flow, which I'm defining as operating cash flow less capital expenditures, was a positive $341 million this quarter compared to $236 million last year. The year-on-year improvement in free cash flow is due primarily to a decrease in discretionary pension contributions and improved working capital partially offset by the significant increase in capital spending between the periods in support of our future growth.

Just a quick comment on the discretionary pension payments. As John indicated, we view our ability to manage our net unfunded pension and OPEB liability position as another success for the year and feel confident that these liabilities are contained at manageable levels. When filed, our Form 10-K with complete financials will show that our unfunded status for our pension and OPEB liabilities decreased by $346 million compared to last year despite lower discount rate assumptions.

Back to cash. For full year 2011, the company generated $549 million of free cash flow compared to $758 million in the prior year. Although lower than last year's historic mark, this outcome is very impressive, considering the increased level of investment the company deployed in our high-growth areas. For all of 2011, capital expenditures were $571 million compared with $294 million last year.

At December 31, our total gross debt outstanding was $1,532,000,000, which declined $314 million compared with last year. Now during the course of the year, we used approximately $426 million of cash to repurchase over $341 million of face value debt. Our net debt ended the year at $291 million given our cash on hand and improved gross debt level. The net debt is a historic low for the company, as is our net debt to EBITDA ratio of just about 0.2x based on our trailing 12 months of EBITDA. A further sign of improvement in our capital structure can be seen in our debt to capital ratio, which was 33% at the end of the year compared to 45% last year.

At this time, we recognize that our capital structure can be viewed as modestly inefficient. As you would expect, we have been formulating our plan of action to ensure that over the long term, we run with a more efficient capital structure. During 2012, we hope to gain clarity on a few key business issues that will then allow us to implement our plans to improve the efficiency.

First, we need clarity on production and the economic uncertainties within Europe. Second, our ongoing antitrust investigation. And finally, to a lesser extent, we'd like to get a better line of sight on our bank agreement and maturing debt, as well as opportunities to further reduce our legacy liability exposures.

As far as timing, we expect to gain clarity, not resolution, on these issues as we move through this year.

Switching subjects now to our expectations for 2012. As John indicated, TRW's full year 2012 production forecasts are for 13.9 million units in North America, 18.4 million units in Europe and growth in the rest of the world regions. Based on our assumptions for production levels and currency rates, our guidance for 2012 sales is for a range of $16 billion to $16.4 billion.

Currency is expected to negatively impact the year-on-year comparison by an estimated $550 million as a result of the strength and value of the U.S. dollar against major currencies. For example, the euro to dollar exchange rate averaged 1.39 in 2011. However, our planning assumptions are based on a rate of 1.3 for 2012. In addition to currency, the year-on-year revenue comparison will also be negatively impacted by the $100 million of revenues associated with the 2 divestitures finalized in December of last year.

Capital spending is expected to be in a range of $650 million to $700 million in 2012 as we continue to execute our investments in strategic high-growth areas. Ancillary costs associated with our growth plans, for example, engineering, development and infrastructure costs, are expected to moderate compared with 2011 levels. For modeling purposes, these costs are expected to be about $50 million to $70 million in the current year. And although difficult to predict, we expect net commodity headwinds will be about $50 million in 2012. Even though commodity prices have fallen off the highs reached last year, the annualized effect of the higher prices experienced in 2011 will impact 2012 primarily in the first 3 quarters.

We continue to see inflation in nontraditional areas across our supply chain. Unfortunately, commodity inflation is not going away despite the overall economic weakness we are seeing.

John mentioned that restructuring will be more in line with our historical levels of $30 million to $40 million. Interest expense is forecast at about $110 million given the cost and level of debt for the company. With respect to taxes, as I've discussed before, based on our expected results by geographic regions and the reversal of the U.S. valuation allowance that took place in Q4 of last year, you should assume a full year effective tax rate around 32% for modeling purposes.

In terms of the first quarter 2012, we're expecting sales of about $4.1 billion, which is about equal to last year. As you may recall, last year's first quarter was an incredible quarter that benefited from a very favorable mix of sales. We expect this year's first quarter to more closely resemble the quarter just completed from a mix and margin perspective.

In addition, the first quarter year-on-year comparison will also be impacted by the negative effects of currency movements between the 2 periods.

In closing, we're pleased with our record results posted in 2012 but realize a lot of hard work lies ahead. Our strong underlying business performance, cash generation and outstanding capital structure provide a firm foundation for the company as we begin 2012 but, more importantly, positions the company for long-term success.

Carmen, we'll now move to the question-and-answer portion of the call.

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Himanshu Patel with JPMorgan.

Himanshu Patel - JP Morgan Chase & Co, Research Division

Just a couple of questions. The commodity hit of $50 million implies about 30 basis points of margin pressure. Is that, Joe, kind of the only major area of margin pressure you're seeing for 2012, or are there other items, whether it's structural cost growth or something weird with how the FX drops through that would also kind of impact the percent margin?

Joseph S. Cantie

Yes, we're -- we face constant pressures to the margin level. You mentioned the 3 that are the most prevalent that we're talking about. There's the net commodity piece, which is obviously lower than last year but there's the annualization effect, that's the $50 million. In my comments, I mentioned $50 million to $70 million of continuing, what I'll call investments in the growth areas, things like engineering, infrastructure, program management, all that kind of good stuff as we continue to ramp up especially in China. The currency -- typically speaking, the way currencies go for the most part, when we either suffer or benefit on the sales line, there normally is not a material either benefit or decrement at the profit line. It never works out to be perfectly 0, Himanshu. We may take a few million loss for currency in a given quarter. Nothing material. My guess is where the currencies are now, we'll see a little bit of pressure on the operating line there but nothing material to speak of.

Himanshu Patel - JP Morgan Chase & Co, Research Division

Right. No, but, I mean, that’s a pretty big point, right? $500 million if there's no drop-through on that, that would actually help your margins, right?

Joseph S. Cantie

That's right. And what I was trying to indicate is that we probably will have a little bit of weakness on that one. But again, nothing to speak of in terms of margin either benefit or pressure.

Himanshu Patel - JP Morgan Chase & Co, Research Division

Okay. So kind of the $50 million on commodities and you're thinking the $50 million to $70 million on kind of growth investment costs, that's -- is there any sort of internal offsets there or that pretty much is a bite into margins as well?

Joseph S. Cantie

Those are the 2 areas that we highlight. And again, I mentioned the currency one. Other than that, we constantly have pressures from other areas, be it fixed costs or other things around the place. But we work to get cost reductions in the place as well. And we all, we've -- at this point, we're considering that to be sort of a net against each other.

Himanshu Patel - JP Morgan Chase & Co, Research Division

I mean, not to beat a dead horse. But just when, I mean, you look back at 2011 full year, you had a 50-basis-point margin contraction in a period where you had first time onboarding of legal costs into the second half of the P&L. You had a higher commodity hit than you're talking about in 2012. You had some very high-growth investment costs. Just -- I'm trying to understand the magnitude of what a slight margin pressure means. Is it -- should we think about the kind of hit that we saw in 2011 as sort of what we're looking forward to again in '12? Or is it better or worse than that?

John C. Plant

I don't think we want to get too deep into giving you any percentage margins. I mean, that's giving guidance, Himanshu, which we haven't done.

Himanshu Patel - JP Morgan Chase & Co, Research Division

Okay, okay. And then just a separate question on the pension plan and, I guess, the underfunding status. Just to be clear, it seemed like it was a pretty good performance. That was all just asset returns, net of discount rates and $100 million contribution, there was no kind of planned changes related to pension buyouts or anything like that, that would have affected that number this year?

John C. Plant

Yes. I mean, anything else is minor. Essentially, we suffered from the lowering of the discount rates. I mean, that would be several hundreds of millions adverse. But you'll see when we file our K, I think, very good asset returns. And I know with the monies we've been able to put in has given us this -- I think a really good outcome of actually lowering those net deficits across the pension and OPEB. And in fact, I think, pension's in -- is actually probably breakeven. So what we've done is essentially part of our long-term plan, which was we put money away in '10, did it again in '11, and at some point in the future, we're expecting interest rates to rise. And I think that gives us the opportunity of taking our next steps, which -- some of it we'll probably do before then of defeasing these liabilities.

Joseph S. Cantie

And then we did -- to that point, though, Himanshu, we did make changes to some plans and did do some buyouts during the course of the year. When you see the K, about $100 million of the improvement results from those kind of actions that we took as well. So it's many things that we're doing to come up with that beneficial result.

Himanshu Patel - JP Morgan Chase & Co, Research Division

And Joe, just one last one, I promise. The 100 -- I mean, I understand the global number on pension underfunding improved. But if all of the asset return strength was in your U.K. plan, which is overfunded, it wouldn't seem to help you on reducing prospective contribution requirements. Can you just talk to that like is -- should we think about kind of the cash contributions that you were planning on putting into the plan not really changing despite the better-than-expected year end funded status level?

John C. Plant

I think what you should anticipate is that we're determined to continue with our cash contributions into those legacy liabilities so that we can try to decide the long-term plan to defease them. And what we don't want to do is to stop funding and just leave them where they have been in terms of those liabilities of the company. It's a move that we want to keep current with, keep funding, and then eliminating those liabilities.


Your next question is from the line of Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

I may have missed this. Did you say that FX, you're expecting to have a $500 million impact in 2012?

Joseph S. Cantie

$550 million approximately at the sales level.

Rod Lache - Deutsche Bank AG, Research Division

So your organic growth is something like $500 million historical, incremental margins around 24%, would be about $120 million offset by that $120 million of negatives that you pointed out from commodities and development. Just wondering, can you just be a little bit more specific on what the drag would be? Or can you -- do you have an estimate for what legal fees and pension expense will be in 2012?

Joseph S. Cantie

Yes, we can't and won’t disclose what we're thinking about for legal fees, Rod. And again, similar to what I was speaking to with Himanshu, at this point, $550 million down, we probably will have a negative impact for currency on the profit side. I don't think it will be a big number but it's probably going to be one of the reasons that, that contributed to that. We also, obviously, had the businesses that we sold during the course of last year, $100 million in revenue that had profit in there. We did disclose in my comments that we had some one-off gains relating to the sales of those properties that won't recur, and we don't have anything planned in terms of divestiture activity for 2012. So it's a number of those type of things that are adding up, Rod.

Rod Lache - Deutsche Bank AG, Research Division

What was legal in the quarter? And do you have an estimate for what pension expense does next year?

Joseph S. Cantie

So in the quarter, it was $11 million in the fourth quarter. And obviously, we had the legal expenses in only the second half of 2011. And in terms of pension, net pension I don't expect a significant movement between the 2 years. It might be slightly higher in terms of expense but not material.

Rod Lache - Deutsche Bank AG, Research Division

Is there anything unusual that happened in D&A? Looked like it came off a bit in the fourth quarter versus how it had been running?

Joseph S. Cantie

No, I don't think so. It just though the run-out of when assets stop being depreciated. And thank you for raising that one, because we do expect our D&A to be up as we move into 2012 versus 2011. That's another item that will drag on our margin a little bit. And that pertains to the fact that, as you know, we're building the 11 plants or expansions and some of the other investments that we made. When your CapEx goes up like it has for us, your D&A winds up going up a bit as well.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And then just lastly, can you just elaborate a little bit on what you mean when you say you're expecting to gain clarity on this antitrust investigation this year? What do you sort of view clarity as, at least from an external perspective? And then you commented on this commercial vehicle opportunity. How big is that business today, commercial vehicles for you, and how big is this lane departure opportunity?

John C. Plant

I think Joe said that we hope to gain clarity. I think that's -- obviously, with the passage of time, you gain that. You saw the first step in the reduction of legal fees in the last quarter now that we've disclosed the number. And obviously, we hope for that to continue. Beyond that, we can't say anything further regarding that matter. But just passage of time itself should allow that clarity to begin to occur. And as we tried to describe, that's one of the pieces of jigsaw in really looking towards, I think, we described them as more shareholder-friendly actions. And -- but the other big piece of that was the clarity to be gained around Europe, and hopefully this whole crisis of Greece, Italy and et cetera begins to work its way through in the next 3 to 6 months. So that's what we really mean by that. On the commercial vehicle thing, I mean, it's very interesting for us. But I don't think you should anticipate it to be a significant thing moving the needle for TRW. Commercial vehicles for us, I mean, our whole revenues are probably in that -- I guess, I'm looking at Mark here, about a $400 million revenues of commercial vehicles today. We do anticipate it to increase, but nothing material that's going to really move the needle of TRW's total revenues.


Your next question comes from the line of Chris Ceraso with Crédit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Just one quick housekeeping item and then some questions looking forward. The tax rate, Joe, even after backing out the effect of the valuation allowance reversal, was still pretty low, much lower than the 32% that you're guiding to. What was going on there?

Joseph S. Cantie

Yes. Again, that just comes down to the different regions and geographic spreads. So basically, when in the fourth quarter, I had a very good U.S. market. And Europe was weak for us in the fourth quarter compared to the prior year. So you can take from that, that our U.S. profits were probably a bit higher, and we didn't have a tax associated with that because we didn't reverse the valuation allowance till the end of the quarter, is the way we're displaying that.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay, so that's the end of the quarter effect. Okay. And then maybe just looking forward to 2013, 2014. John mentioned in his comments that revenue will accelerate relative to the market. You won a lot of business in 2010. What was the business win profile in '11? Was it another big year for business wins like you referenced 2010 was?

John C. Plant

Yes, we had again a good year of business acquisition, Chris. I mean, we didn't break the record of the previous year. But again, an extremely healthy year above our historical average.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then also on those comments, John, you mentioned you thought once we got into '13 that the margin compression that we've seen in '11 and '12 would reverse. I think, Joe, you had made comments before about the margin in the business used to be 4% to 5%, then it jumped up to 10%. We're sort of seeing things in the mid to high 7s, maybe it leaks a little bit. But it would seem that 4% to 5% is clearly off the table. Certainly if ’12 is the last of it, and then we start to go back up again. Is that fair?

John C. Plant

Clearly -- I mean, first of all, I want to dispute the 10%. I don't think we've achieved 10%, Chris, that’s...

Joseph S. Cantie


Mark Oswald


John C. Plant

Yes, I think -- yes, I just think in the 8s region. So yes, you're right in terms of -- we've come off a little bit, but that's to be expected with the things we've told you about the -- these expansions that we are undergoing, also the commodity headwinds. And then, as we can see, we stepped out of it and say, just to make everybody clear that our margins are not expected to return to the previous levels and we expect them to accelerate through after this small dip that we've got currently.


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

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

Just a clarification. The $50 million to $70 million investment growth is an incremental headwind similar to the commodity headwind, correct?

John C. Plant


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

Okay. And then your commentary about shareholder-friendly actions, I guess, I'm kind of interpreting that as it doesn't sound like it's a first-half decision. It sounds like it's possibly a low probability event into the back half and you might be pushing out into the 2013 time frame before you actually consider doing some sort of a dividend or share repurchase?

John C. Plant

I don't think you should think of it anything more at this stage -- let me just back up a bit. You should not expect anything in the first half, I don't think. And then sometime in the following 4 quarters, I think you should expect something from us.

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

Okay. And then, as you look at the European production schedules versus where you thought they would be -- in the first quarter versus where you thought they would be at the beginning of the year, are you seeing any particular trend? Are they declining significantly? Improving significantly? Are they about the same?

John C. Plant

Well, I think you would need to take a sweep through the last 12 months of views. I mean, a year ago, I think we expected really increases in each of the major regions and, obviously, commensurate with the emerging unresolved European sovereign debt crisis. Those views moderated and then began to become not just moderations of growth but, in fact, reductions in that. In terms of my expectations, if you’d asked me 3 months ago, I think currently we're actually slightly better than that. And so at the moment, I see this encouraging. And within that, I think, encouraging, as I tried to describe, the mix of TRW's business, as you know, VW and Audi are our largest customer which are doing relatively well, and we are certainly present at the premium brands. And pro rata, we're probably slightly underexposed to, let's say, the Western and Southern countries, where those vehicle manufacturers are, I'll say, the French and Italian manufacturers, just pro rata.

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

And I apologize, just going back to the shareholder-friendly actions. I don't recall, do you have a particular reference for share repurchase versus a dividend?

John C. Plant

We haven't -- we have not sort of settled yet. I mean, if anything, if you looked at language we may have used, I think, in our thought process, we've probably thought more about the share repurchase than dividend. But I don't think they have to be mutually exclusive, I don't know yet. It's really still to be debated through when we regain clarity, as we've said. I mean, at this stage, we've discussed it. We have not got to a point of a conclusion because we're not able to at this point.


Your next question comes from the line of John Murphy with Bank of America.

John Murphy - BofA Merrill Lynch, Research Division

Just a question on Page 33. If we look at the regional mix that you guys have shown here in the pie chart, I'm just curious as we look at that and think about the profitability by region or maybe the capacity utilization by region, I was wondering if you could give us those. And as we think about this, I mean, obviously, there's probably more upside in North America, some risk in Europe. So just trying to understand the capacity utilization by region, and really how we should think about these regions moving as importance to profit generation in 2012 and potentially beyond.

John C. Plant

Well, first of all, in terms of profitability, we're generally profitable in all regions. There's nothing really that much to pick between them. So you can't draw anything from that. In terms of fundamental capacity utilization, as you could imagine, given the fact that we're building so many plants in China and we don't have much free capacity there. And so that's a very high utilization. But generally speaking, if you were to look across our other plants, they're actually all in good capacity utilizations. Clearly, if we do -- I mean, we have referenced some restructuring in Western Europe. We've kept on top of that continuously. So we don't have any deep underutilization there, albeit if vehicle build comes after the 18.4 million level compared to last year's 19.9 million, you could imply some underutilization there. But it's at the margin and, basically, it's -- it’ll be flexed out with labor easily in that area. So you can't draw there’s much fundamental under capacity utilization in Europe either because we've been basically moving our footprint continuously, and we've been basically investing commensurate with our expectations for the market. And our expectations had been for a norm for Europe in that $19 million range. We found 2011 to be healthier than we expected. But we're right in that zone basically.

John Murphy - BofA Merrill Lynch, Research Division

So for North -- specifically for North America, you think you're probably running in the low to mid 90% cap, you would be around that range and that you have the ability to potentially flex up if the market were to surprise to the upside?

John C. Plant

We will flex with labor. We're in a good condition. We don't talk about percentage capacity utilizations. For your information, one of our planned expansions -- is actually we are building a new plant in the North America region because we need to, because of the, let’s say, the business development that we've been obtaining. For us, say, labor’s fairly easy to flex. I think one of the issues we've been grappling with actually is more can we flex our sub-supply base and get that adequately sorted out? And we've been doing that. But it remains something that we're very watchful of.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then on CapEx. It looks like it will be running about 4.2% of sales. I know it's kind of a crude metric to use, but it looks like historically, you guys have run in the 3% to 3.5% range. Should we expect in 2013 and 2014 for the CapEx, as a percent of sales relative to the size of the company, should normalize or do you think you're going to be running at this 4%-plus range going forward?

John C. Plant

Historically, we always talked about a 4% range. We were able to thrift that down into the 3s. And obviously we had a couple of years where it's very -- considerably lower. But I think for modeling purposes, at this point, if you think in that 4 zone, that will be the best area. I mean, it might vary up or down a bit.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then just lastly, Joe, you'd mentioned that you viewed your balance sheet as potentially modestly inefficient. Just trying to understand really what that means, I mean, 0.2x net debt to EBITDA is obviously pretty low. I mean, would you consider taking on a turn or 2 of leverage? Because, I mean, every turn of leverage there is about $1.7 billion. So that's a lot of capital to work with. I'm just trying to understand what 0.2x to something more normal would be.

Joseph S. Cantie

Yes. I think, again, we're going to be careful with what we say in this area right now, John. Obviously, 0.2x is really low, especially when you're sitting with the level of cash that we're sitting on our balance sheet. So I would expect that, obviously, you could expect the 0.2x to change and you can expect the cash situation to change. But we're not yet at the level where we want to talk about what kind of leverage we want to put on the company. Rest assured it's not going to be anything significant and we won't be going back to anywhere near where we were in the year 2003, '04 or '05 time frame. But I think everybody would say 0.2x on a net level is inefficient. So I'm going to punt on that one. Just if you can let us do our deliberations and get the clarity that I talked about in my comments, and then we'll provide you more as we move through the year.

Mark Oswald

And Carmen, I'm showing that we are now out of time. If you can move now to conclude the call.


Okay, thank you. And this does conclude today's conference call. We do appreciate your participation, and you may disconnect at this time.

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