Wabco Holdings Inc. (WBC)

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WABCO Holdings Inc. (WBC)

Q3 2012 Earnings Call

November 2, 2012 9:00 a.m. ET


Jason Campbell - Director, Investor Relations

Jacques Esculier - Chairman and Chief Executive Officer

Uli Michel - Chief Financial Officer


Alex Potter - Piper Jaffray

Jeff Hammond - KeyBanc Capital Markets

David Leiker - Robert W. Baird

Robert Kosowsky - Sidoti & Company



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.

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