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Edited Transcript of WBC earnings conference call or presentation 21-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 WABCO Holdings Inc Earnings Call

Piscataway Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of WABCO Holdings Inc earnings conference call or presentation Friday, April 21, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Fife

* Jacques H. G. Esculier

WABCO Holdings Inc. - Chairman of the Board of Directors and CEO

* Prashanth Mahendra-Rajah

WABCO Holdings Inc. - CFO

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Conference Call Participants

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* Brian Lee Colley

Stephens Inc., Research Division - Research Associate

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Joel Gifford Tiss

BMO Capital Markets Equity Research - MD and Senior Research Analyst

* Joseph D. Vruwink

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* Lawrence T. De Maria

William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure

* Neil Andrew Frohnapple

Longbow Research LLC - Senior Analyst

* Robert Cameron Wertheimer

Barclays PLC, Research Division - Director and Senior Industrials Analyst

* Ross Paul Gilardi

BofA Merrill Lynch, Research Division - Director

* Timothy Thein

Citigroup Inc, Research Division - Director and U.S. Machinery Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the WABCO Holdings First Quarter 2017 Earnings Conference Call. This call is being recorded. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the call over to Christian Fife, Vice President, Investor Relations and Treasurer. Sir, you may begin your conference.

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Christian Fife, [2]

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Thank you, Liz. Good morning, everyone, and welcome to WABCO's quarterly conference call. Today, we'll present our first quarter 2017 results. And with us this morning, we have Jacques Esculier, our Chairman and CEO; and Prashanth Mahendra-Rajah, our CFO. As a reminder, this call, webcast and the presentation that we're using this morning are available on our website, www.wabco-auto.com, under the heading WABCO Q1 2017 Results. Replay of this call will be available through April 28. As shown on Chart 2 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 these factors can be found in our company's 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 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 will now turn the call over to Jacques Esculier.

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [3]

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Well, thanks, Christian. Good morning, good afternoon to you all, and welcome to our call. Before we jump into detail of the performance of our first quarter, I'd like to kind of frame the beginning of this year and how we see the rest of the year unrolling. We all got the news lately that the IMF sees a much more optimistic path for the economy globally in 2017 with a GDP growth overall at the level of 3.5%, which is healthier than what we have seen for a while. And this is, obviously, good news for the world, good news for our industry, and certainly, a very positive news for WABCO as well. However, at this early stage of the year, I would still take this news with a little bit of a grain of salt given the challenges and even I would say, potential threats that are crystallized around some political milestones and still fairly kind of serious geopolitical kind of development going on. From the political standpoint, obviously, we have 3 major elections taking place in the later -- later this year in France, in the U.K. and in Germany, each one of them having the ability to be quite disturbing to an already fragile and meager growth in this part of the world. From a geopolitical standpoint, nothing has really improved except that we have added another source of concern around the Korean Peninsula that could potentially deliver some real disturbance to the region and potentially, obviously, to the rest of the world as well. So anything along those fronts could unfortunately, certainly, dent this very -- or at least more optimistic view of the world, but obviously, anything along a growth in the global economy is more than welcome. And the first quarter was actually reflective of this continuous uncertainty and volatility of markets. Western Europe has continued to grow at a very meager pace. Russia has actually surged with a 47% year-over-year progress in the number of trucks and bus deals. The U.S., I think, is kind of on a wait-and-see type of attitude, still seeing some erosion in the commercial vehicle production level. However, I think, we are bottoming up and we see some change of trend on the horizon. India, which is still benefiting from a very, very solid growth at GDP level, you will see that because of some disturbances that were created last year by the demonetization triggered in the last quarter, this year of the introduction of new emission standards in April, we're talking about the Euro IV line type of level as well as still a little bit of uncertainty around the implementation of a standardized, harmonized goods and services tax, which we believe would -- should be implemented in July. It will benefit the overall industry -- industrial world and particularly, ours because, as you know, up to now the GST structuring system was siloed by state and when goods were transported from one state to another, taxes had to be paid. So all this stuff will be lifted. And GST level will be harmonized. And that will enable in the medium to long term, obviously, more solid, efficient logistic infrastructure that will benefit our industry.

But you will see that unfortunately, again, because of those disturbances, this year, we're not expecting much of a growth in this -- in our markets. And then, China, which again, has seen another exceptional quarter with close to 50% of growth related to the implementation or the enforcement, I would say, of a rule that had been implemented quite a while ago, but never really enforced, related to the overloading and oversizing of vehicles on the road and that created a demand as it was enforced for trucks and trailers, in addition to which we can mention that there has been apparently a focus on increasing energy on the building of infrastructure. The concern we have is that we see the second half much lower than the first half in China, resulting in a year-over-year market evolution that could be actually, fairly flattish overall.

So that's the market and within this, again, kind of wide swings and volatility, we'll show, again, that WABCO has been able to nicely outperform the markets as well as continuing to transform this top line growth into nice contribution to the bottom line.

So moving to the Slide 3. Our sales are at 11% year-over-year in local currencies. Performance operating income grew a healthy $10 million from $101 million to $111 million in a year leading to a performance EPS of $1.47, $0.10 higher than last year. And a performance free cash flow of $58 million or 70% conversion rate that we've entirely returned to shareholders through the repurchasing of 538,000 shares.

Going to Page 4. And again, looking at the top line evolution, again, 11% at constant FX and by channel, we grew a healthy 15% in the OE category propelled by, obviously, a healthy market growth, particularly around China, even though the content per vehicle in China as we all know is the lowest in the world. So when the industry grows 45%, 48% in China, it does not mean the same thing as if it would grow in the other countries in terms of revenue impact for WABCO. And we continue to increase share of market and penetration of our technologies in emerging markets. Aftermarket was actually at a surprisingly low level. We haven't seen that level for quite a while. We have to put that in perspective. First, we have seen a very unexpected major drop from Middle East, particularly from Saudi Arabia, that is a major source of revenues. And very promptly, this source almost dried up during the quarter as well as from Turkey, which, as we all know, has been under kind of a very unstable and complicated political environment. But when you look at the last quarter where we ended up at 9%, in the next quarter that we anticipate to be close to 10% as well, the average of those 3 quarters is still falling in that 7-ish percent type of guidance and the performance that we are used to. Now looking at the evolution of our revenues versus production of commercial vehicle, Truck & Buses by region, starting Europe, we ended up with a growth of 8%, whereas production was up 10%. However, I remind you that the production increase was mostly coming from Eastern Europe with 47% progress year-over-year. And the content per vehicle meaning regional mix is unfavorable when the growth comes from that part of the region. And that costed us 2% of our performance. And the other thing is, we've started to see the phasing out of an old technology at a major gearbox manufacturer in Europe, and that's 3% of our performance. That's what it cost us. So those 2 major events costed us about 5% of our performance, meaning the rest of the picture is pretty -- still pretty solid. North America, we actually eroded revenues by 20% in a market that went down 16%. However, heavy utility truck went down 19%. And then, we had a fairly low level of sales from AMT. We don't believe that there has been any decrease in adoption of AMT at our customers. We believe it's more of an inventory rationalization that we are dealing with. South America, we saw nice growth with the further penetration of some actuators. Japan, Thailand, Korea, we had nice growth, mostly driven by a favorable vehicle mix and also vehicles that have high content per vehicle for domestic usage. China, market grew by 48%. We were able to outperform it by a very healthy 29%, and that's driven by the continuous adoption of ABS, of which we have the highest market share in the region, and also some favorable customer mix because of the focus on construction and (inaudible) being stronger in that segment.

And then in India, production eroded 2%, and we were still able to outperform by 4% even though we had to face a certain unfavorable vehicle mix. So I'm going to let Prashanth drive you through the detail of our financial performance. Prashanth?

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Prashanth Mahendra-Rajah, WABCO Holdings Inc. - CFO [4]

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Thank you, Jacques. Good morning, everyone, and let me add my welcome to our Q1 call. We started 2017 off strong with good top line growth, profit conversion and cash generation. If you can turn to Slide 5, I will take you through the detail.

In the first quarter, we had double-digit revenue growth of 11% in local currencies, benefiting significantly from the strong markets in China. And despite the unfavorable channel mix, as Jacques just discussed, on a performance basis, our gross profit margin of 31.7% was 17 bps higher year-over-year. We gained $22 million through additional volume and better absorption and an additional $21 million from material and conversion productivity.

We set a new record for conversion productivity at 8.1%, confirming the high expectation for 2017 that we communicated in our February guidance call. OpEx investments were close to $9 million year-over-year, of which roughly half within R&D to support recent business wins and the rest primarily composed of investments in the front-end as well as about $1 million of increase in pension costs.

All of this results into an operating income for the first quarter at 14.9% of sales and a solid incremental margin of 17%, with a year-over-year margin expansion of 31 bps. Following the 19% decline in U.S. heavy-duty vehicle, the income from our joint ventures is down by $1.5 million year-on-year. As a reminder, our JV income is principally driven by our partnership with Meritor to supply the U.S. market.

Now let me take a minute to comment on our pension costs. In 2016, we incurred $44 million of pension-related expenses. And for 2017, we guided to a year-over-year EPS headwind of about $0.18, albeit, noncash. For 2017, we have elected to early adopt the new accounting guidance, ASU 2017-07, which is compensation, specifically retirement benefits. The numbers presented in our Q have been retroactively revised in accordance with this new accounting standard update.

Perhaps an easy way to think about this change is that our nonservice costs are now reclassified below operating income, and this is also where you will find the majority of the year-over-year increase that we guided to. I also want to refer you to Slide 15, where you will find a comparison of the pension cost presentation under both the old and the new standard.

And while the full year pension P&L expense will be a bit north of $50 million, remember that our full year cash outflow is expected to remain stable to last year at $22 million.

If we can move onto tax. Quarterly performance tax rate was at 19.3%, which is just below our full year guidance. Our U.S. GAAP tax rate was at 15.9%, largely stemming from the inclusion of nonperformance expenses, which are recorded in higher tax jurisdictions.

So after excluding the nonperformance items, you see that our earnings per share is $1.47 for the quarter, which includes us absorbing about $0.09 of incremental pension expense and still represents a gain of $0.10 versus prior year.

On a U.S. GAAP basis, we reported $1.48 for EPS.

If we can move on now to Slide 6, I'll cover the cash flow generation for the quarter.

You will see that we converted 72% of our performance net income into performance free cash flow. The strong growth in China, where we have longer payment terms, compounded our usual seasonality in working capital, driving a larger than typical increase. CapEx spending of $4.4 million -- excuse me, $14.4 million, is a bit lower than expected, but that's purely due to timing. And through our share buyback program, we repurchased 538 million (sic) [538,000] of shares at a cost of $59.7 million. We remain committed to completing the share buyback authorization from our board of $600 million by the end of 2018.

I would now like to turn it back over to Jacques to provide an update on our view of the markets.

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [5]

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Thank you, Prashanth. First, we're going to review our achievements around the 3 pillars of our strategy, starting with the introduction of a new product at Laydon Composites, which is our latest acquisition from last year. It's an AutoTail product that allows the aerodynamics of the trailer to be improved to the level of 3% to 5% of fuel consumption. Then, the trucks -- the Tata trucks rating as we did for the last 4 years in Delhi in March was featuring all our products, including, this year, and that's the first time our air disc brakes, and I think it was really a superb way to showcase, again, our technology in that part of the world. We also celebrated our 10th anniversary of the launching of this OnGuard Collision Mitigation System in the U.S. I remind you that WABCO was the first one to introduce this concept over there. It resulted in the sale in a volume of 130,000 systems that have demonstrated an amazingly compelling contribution to the improvement of the safety of commercial vehicles on the road of the U.S. and other areas of the world adopting this technology.

We also announced last week that in the last 4 quarters, we accumulated $1.2 billion of new business, of which $746 million will be -- will help the top line growth in the coming 5 years. Volvo Eicher has made a press release, actually even a press event, in India to announce that they are adopting our OptiDrive modular automated manual transmission system on all their buses and medium-duty truck platforms. Then we officially opened our new facility in the U.S., in Charleston, South Carolina, to meet the fast-growing demand in air disc brakes -- for air disc brakes in this region of the world. And then we announced 2 days ago that we have closed a joint venture agreement with a company called G7, which is the largest telematics supplier to the Chinese market. They have close to 85% of the market. And we both believe that the combination of G7 positioning in the market with the technical capability we have on trailer, unique technical capability we have on trailer as well as a very rich and wide access to data on both the trucks that will feed this FMS system, will actually altogether deliver superb value in the coming years in that region of the world.

From the execution standpoint, we won an incredibly prestigious award in the industry that is delivered every year by Daimler. And then, as Prashanth went through it, we have -- we continued to drive a very healthy performance in productivity, both material as well as through our factories.

Moving to the next page we're going to review by market as we do every quarter, how we see the dynamics kind of rolling out for the next quarters. First, the new registration of heavy-duty trucks in Europe -- in Western Europe was up 4% for the first 2 months of the year. It's still expected to end up flattish for the full year. Production level for this first quarter in total Europe, including Eastern Europe, was 10% up, with Eastern Europe up 47% versus the first quarter of last year. Sequentially, the production level is up 1%, and we don't change the forecast for the full year. We still see Europe ending up with a fairly timid and modest growth in the 0% to plus 5% range.

Moving to North America. Production was, again, down by 16% in the first quarter and by -- but up 7% sequentially. Class 8 was down further to 19% versus a year ago. And class 5-7 was actually down 12%, which is surprising. Usually 5-7 are -- is a segment of the market that stays more flattish. We still had some inventory reduction in the first quarter, but we think we are now done. The inventory level will stabilize around 40,000 to 43,0000 trucks, meaning that the level of production should now match the level of demand. And we still foresee the production level ending up in the minus 8% to minus 3% range with class 8 to be slightly worse.

Going to China. Again, a healthy production increase of 48% year-over-year, but down 11% versus this peak that we reached in Q4 of last year. And that's due, again, to the enforcement of this loading and sizing limits regulation that had been taken quite a few years ago, but never really enforced. Now it is, and it has created this very strong demand in the short term to add capacity to the supply chain. However, looking ahead, we still see some growth, probably single digit, in the second quarter, but we see some readjustment in the second half going from a 300-plus thousand trucks per quarter down to more of a 250,000 per quarter in the second half.

And we -- meaning that we -- it leads to a prediction, a forecast of production levels in the minus 5% to plus 5% range.

In India, Q1 was actually fairly disappointing. Again, production down 2% year-over-year, but still up 30% versus last quarter. You'll remember that last quarter was incredibly affected by demonetization. So it does recover from demonetization. It does to a certain extent benefit from this pre-buy, but again, it's also affected by this still uncertain kind of GST implementation ahead. So we believe the markets will not grow much, if anything, at all for the full year that we expect in the range of minus 3% to plus 3%, even though there is behind still a very strong supported growth in the overall economy.

China (sic) [ Japan ], Korea, the first quarter production was down 1% year-over-year and was up 3% versus the last quarter of last year. It came from a 16% healthy growth in South Korea, offset by a 11% softness in Japan due to a lower level of exports. And this region, we expect will end up also fairly flattish in the minus 2% to plus 3% range.

Moving to Brazil. Finally, Brazil is up year-over-year and up sequentially 3% and 4%, respectively. We see some indicators of potential economic recovery kind of firming up. So it also we -- I think we ended -- we are ending up now with a stable inventory that we still kind of cleaned up last year. The level of production last year, I remind you, was 11,000 trucks lower than the demand. So this is order inventory at the right level, meaning that, again, level of production will match level of demand leading to a production outlook at this point between of 10% and 15% up.

Aftermarket, as I said, had a very disappointing and surprising 2% only growth year-over-year. We currently expect for the full year, aftermarket growth to match the normal rate of 7% growth.

In trailers, production was up 4% year-over-year, 3% down sequentially. And we have seen, obviously, very strong growth in China, some growth in Europe, offset by actually, strong erosion in North America. And we expect, overall, for the full year, trailer production to be down minus 10% to minus 5%.

Moving to the next page, and reviewing our guidance. Actually, we don't change it at this time. There is some good news on the horizon, but I think it's too early, as I said in my introduction, to move our guidance. We still project to be within the framework of these elements that we shared with you today. The only thing that changed is actually the performance operating margin in view of the adoption of this new regulation that Prashanth shared with you before. And I remind you that this year, we have to face a pension and tax headwind of $0.40 EPS versus 2016. That is, obviously, impacting the overall performance APS -- EPS, sorry.

And then, the last slide has a summary. Obviously, we are still dealing with a fairly unstable, hard to focus and volatile market, but within this environment, we continue to outperform. We continue to drive top line growth into healthy contribution to bottom line improvement. We continue to drive productivity. This year, we again, reached a new record in productivity within our factories. We continue to generate strong cash flow that we return to our investors. And we continue to generate a healthy new business to feed the pipeline of our performance for the coming years.

Before we end up this presentation, I would like to move actually to the next slide, which is an announcement of an Investors Day that we will organize on the 22nd of June at the New York Stock Exchange. It will be a nice celebration, because that's going to be the 10th anniversary of WABCO being spun out from American Standard. We were spun off in July of 2007. There we will, obviously, talk about our industry, talk about our markets, talk about the way WABCO continues to perform. And we will also discuss how we see the evolution of these strong trends in technologies that will definitely impact the way our industry will invest and drive technology in the future. I'm talking about autonomous driving, electrification, digitalization, and we will share with you how we will maintain WABCO at the leading edge of that trends. So I certainly look forward to sharing all that information with you and establishing a healthy constructive dialogue around our franchise. And this closes our presentation. And I will turn now the session for questions. Thank you.

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Prashanth Mahendra-Rajah, WABCO Holdings Inc. - CFO [6]

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Liz, while you're collecting questions, I just needed to make one clarification for the transcript. I was a little ambitious when I talked about the share buyback. I said 538 million shares. We only repurchased 538,000 shares in Q1.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ross Gilardi with Bank of America Merrill Lynch.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [2]

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I just had a couple of questions. Jacques, maybe you could just give a little bit more color on the China situation and totally understand what you're saying in terms of some of the drivers there. But are you actually seeing the big slowdown in your order book now? Or is this just still more of a forecast of things to come? Because I think if you take your forecast at face value, you guys are -- the rest of the year, down close to 15 -- or the market is down close to 15% for the last 9 months.

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [3]

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No. It's a forecast. Obviously, it's looking into discussions with top-level management of OEs over there. It seems that there is an alignment. First, you eliminate this kind of artificial peak that we have lived through in Q4 and Q1 of this year. There is still remaining growth in the second quarter year-over-year. But I want to remind you that actually on the 1st of July, there is the implementation of Euro V for all heavy-duty trucks. So one would think that there is some pre-buy in the first half of this year, in addition to, again, this kind of implementation of this overloading measure. But then after the pre-buy, we believe that the level of demand will go back to that 250-ish thousand trucks per year -- per quarter, which leads to 1 million trucks per year, which we believe is already a very good healthy level for China. I don't think that this 300-plus is sustainable, at least in the short term. So that's why overall the industry sees second half slower than the first half.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [4]

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Okay. And then, could you just talk about the political scenarios in Europe a little bit and how it's factoring into your guide? I mean, should we think about, sort of, the low end of your guide being more in a scenario of what happened -- obviously, a lot's happening in the France over the weekend and the next couple of weeks. Is that just more of one of the extreme candidates would win, that you'd be more at risk towards the lower end if one of the moderates wins? Or you -- would you think you're more biased towards the -- to the high-end of your guide at least? Would you at least be willing to commit to that?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [5]

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Unfortunately, I don't think I'm equipped to really address a question like this, which is a very complex question to address, not only for industry, but for the overall economy of the European region. But I would say that we have not -- that's why we don't want to overstate a start of the year that could be a little bit better than what we have anticipated. And that could have raised the question as to whether we should increase guidance or not. And very promptly, I think it's too early, one of the arguments being that there is still a lot of uncertainty floating around key regions like Europe.

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Operator [6]

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Our next question comes from Jeff Hammond of KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [7]

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Jacques, can you just speak to the recent announcement from Eaton and Cummins on their JV and how you think that changes or doesn't change the AMT competitive landscape?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [8]

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Well, interesting question, Jeff. Because, obviously, this combination of Cummins and Eaton is competing against the integrated powertrain offered by Volvo and Daimler that are equipped with our AMT. So one could say, while it will be taking some share of that market, I look at it from a completely different angle, because I think it's a very strong addition to Daimler and Volvo promoting the value of AMT. At net-net, I see it actually more -- as a more positive angle. It will continue to drive momentum, not only at heavy-duty truck, I think it will also address this medium-sized segment, which is not now invaded by the powertrain, particularly of Daimler, with our AMT. And I think if it creates more and more interest into that segment of AMT versus manual transmission of -- or AT, I think it will create, ultimately, a lot more momentum for our products as well. So again, I certainly welcome this initiative and see it as a very positive outcome, not only for the market, but also for Volvo -- WABCO, I'm sorry.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [9]

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Okay, great. And then, just real quick, Prashanth. Any update on the tax dynamic with Belgium and maybe just give us an update?

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Prashanth Mahendra-Rajah, WABCO Holdings Inc. - CFO [10]

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Thanks for the question, Jeff. We were hoping that we would have something to share with investors today that would remove some of the uncertainty. We have not heard anything that allows us to make a change to the tax guidance yet. We do expect to hear very shortly, but unfortunately, nothing new as of today. But I remain very optimistic that for the Q2 earnings call, we'll be able to share some good news, but can't just do it yet.

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Operator [11]

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Our next question comes from David Leiker with Baird.

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Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [12]

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This is Joe Vruwink for David. I want to revisit new business awards that you announced last week. If North America is a third of the total, it would seem like most of the year-over-year dollar increase actually comes from new wins in North America. Any specific product or customer or even segment, I guess, versus truck and trailer that's driving the increase?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [13]

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Well, yes, there are quite a bit of activity in North America. For example, we have won a new slice of business for AMT, I'd say, at Daimler growing the objective of volume way beyond what it was so far. We have won some further business on actuators with a major OEM for which we actually took 100% of the market share. We continue to drive some ECAS activity in the U.S. as well. And then, some brake chambers for some trailers in the U.S. So overall, a lot of momentum gain there. I can announce to you -- actually it's pretty fresh off the prints, because it was announced last week -- I mean, it was not announced. Actually, it was concluded between us and a major OE in the U.S. that we will be added to their option list for both our braking system and our collision mitigation system. And we haven't been on that option list at this particular OE for more than 10 years. So it's a good news. It's not included in this $1.2 billion because that happened in April, but it's kind of furthering the growth that we see in the coming years for that important part of our market.

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Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [14]

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That's great. And then, just the dynamic with this legacy gearbox customer in Europe and having some revenues wind down. It seems like the natural evolution of your business is WABCO invents a product, you then accrue a lot of new business on that product for a period of time. Your peers eventually catch up, and then you go through this process where there seems to be some traction. Is there any change in that evolution relative to history? Are you inventing more, coming out with more, so the growth rates are better? Or are the peers at all stronger? And any changes maybe in the competitive landscape?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [15]

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Well, very good question. Actually, the kind of loss that we are in, the phaseout that we are seeing today is a contract that we lost about 10 years ago to a competitive -- to a competitor. And since then, we have won basically everything. And that's quite a bit, against this competitor and others, I'll remind you that we also had lost 10 years ago or so, 40% of the volume at Daimler and we are now back to 100%. So net-net, we are going through, again, what resulted from a loss of 10-plus years ago. But in the last years, we have -- we won basically everything. So we are back with incredibly enhanced technologies capabilities. That makes the AMT actually very, very close now to the AT in terms of comfort, shifting time, noise, vibration and all this still at an incredibly lower cost, lower price. And obviously, incredibly lower weight and increased fuel savings. So I think we are on for a nice path -- continued nice path actually, with this AMT product on road.

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Operator [16]

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Our next question comes from Tim Thein with Citigroup.

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Timothy Thein, Citigroup Inc, Research Division - Director and U.S. Machinery Analyst [17]

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Maybe just continuing on the last point, Jacques, and just as we think about outperformance, and I know it's not something you specifically guide to but is that -- should we think about that kind of 2-point or 3-point gap that you highlighted for that phaseout in Europe, is that -- will that continue in subsequent quarters? Or is that more of kind of a onetime hit just, as again, thinking about the broader outperformance opportunity in Europe this year in the context of that?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [18]

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Yes, first of all, let me tell you the 2% is for the outperformance in the European region, not at the global level, obviously. It will continue for a little while until the -- all kind of -- a transition has been made out of this phaseout product. But what I can tell you is we are aiming to end up this year well into the range of -- that we guide to and that we focus on ending with our outperformance. So we should not see it as a reason to depart away from our guidance on that important element of the value which we deliver to shareholders.

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Timothy Thein, Citigroup Inc, Research Division - Director and U.S. Machinery Analyst [19]

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Okay. Got it. And then, I guess, switching gears on the FMS, the JV that you announced in China. I'm curious if that has any implication in terms of -- or relative to your thought process for the opportunity in Transics -- not Transics, specifically, but it sounds here to for us it's kind of been more developed market focused. And does this maybe signal any kind of shift in terms of where you see the broader opportunity for telematics, i.e., more of an emerging market opportunity?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [20]

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Well, it's interesting. It's not instead of, it's in addition to. And it's, obviously, aligned with the concept that we have shared with you, as we took over Transics, which is the leader in Europe and that's a very important market and region for us and for this business, in particular. Since then, we have grown some very nice opportunities in India. We have been nominated actually lately to be standard on all trucks built by one of the key OEs in India. And we see this as a step on the -- towards the momentum that we are building to grow some very significant opportunities there. This latest move is our way to land in China. Unfortunately, the China law does not allow a foreign company to establish a stand-alone capability in the area of telematics, because it's using transmissions and they don't want foreign companies to master this technology. So we had to team up with someone. And actually, it's a win-win situation because we -- I think we teamed up with a very, very attractive franchise, G7, which, as I said, has 85% of the market. So access to fleets. And the value we see there and actually in all markets is that as you start selling this FMS technologies that drives and connects to the world of big data, digitalization, you also sell your brands. And it's very connected to rolling out and enforcing -- further enforcing the brand of WABCO in those emerging markets, which will have indirectly also an impact on all of the other things that we are selling. So we will be more present on a day-to-day basis, not only at OE because that's still the major component, but more importantly, now also invading fleets that can pull from OE, but it can also, obviously, select WABCO beyond FMS, beyond trucks equipped with WABCO to the aftermarket flow of opportunity, obviously. So it's overall a very important step in my own view in this important part of the world and an important market for us.

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Operator [21]

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Our next question comes from Jerry Revich with Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [22]

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Jacques, in your prepared remarks, you mentioned you would touch on electric vehicle opportunities in your business at the Analyst Day. I'm wondering if you just give us a bit of a preview in terms of what are the incremental opportunities that you folks have that maybe replaces the lower aftermarket opportunity on braking systems if electric vehicles gain traction?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [23]

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I'm sorry, Jerry, I don't exactly -- you were a little bit interrupted in your speech. Could you repeat the core of the question, if you don't mind?

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [24]

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Sure, Jacques. Yes, so in your prepared remarks, you mentioned you would discuss the company's strategy around electric vehicles at the Analyst Day. And I'm just wondering if you could just give us a little bit of a preview to talk about what incremental content opportunities you folks might have on electric vehicles since the braking system aftermarket opportunity is presumably going to be significantly lower?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [25]

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We have 2 stages of opportunities, Jerry. The first one is the obvious kind of movement of our portfolio to support electrification. And that would be, for example, kind of transforming -- transferring the air compressor that is right now linked to the combustion engine to an electric compressor that is on a stand-alone basis still compressing air because you will always need compressed air onboard electrified vehicles. The second one is the blending and optimization of the entire braking function into the electrical concept and system. Because, as you know, the electrical system will try to absorb as much energy as possible to transform it back into electricity. So you don't want to use braking because that's waste. You transform energy into heat. But you won't -- but you sometimes you need to because there's not enough absorption through the electrical powertrain. So that's what we call blending it or optimizing these things. We have been the first one, and we may still be the only company that offers this functionality included in our EBS system. So that's a second kind of area of opportunity we have. Now the second leg to this question, which is obviously a much bigger opportunity, would be whether we want to take part of the electrification through the systems of controlling batteries, controlling electrical motors or whatever else. And that's a reflection we have at the strategic level that would obviously lead some -- to some either partnership or acquisition of companies that would have this capability.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [26]

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Got it. I appreciate the color. And then, can you talk about which regions you expect to drive out growth in your business in the back half of '17? I guess, we've got production disruption potentially in China that you mentioned that's generally a headwind for your outgrowth. I'm wondering if you could just frame out for us which regions do you expect to see accelerating outgrowth to compensate?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [27]

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Well, I think that Western Europe will continue to produce some nice growth. I think Eastern Europe as well. South America, hopefully, will continue to drive some momentum on their recovery path. And India could become -- we should potentially see some negative growth in the first half. We saw already a slight negative growth in the first quarter. We believe that following the Euro IV implementation on the 1st of April, second quarter will be a pretty significant erosion. And then, we will recover in the second half. And that's where we end up -- that's how we end up actually fairly flattish for the full year. And all these markets, I think, should continue to fuel some nice growth taking over from, obviously, the Chinese drivers that we have seen -- that we would have seen in the first half. Also, I wanted to mention that we have this stability control mandate that is triggering in during the second half of the year for the U.S. market. And that's going to also help us drive outperformance in growth in the U.S.

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Operator [28]

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Our next question comes from Neil Frohnapple with Longbow Research.

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Neil Andrew Frohnapple, Longbow Research LLC - Senior Analyst [29]

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Following the 2% aftermarket sales growth in Q1, I mean, what gives you confidence that revenue will accelerate over the remainder of the year to achieve the 7% growth rate? I mean, do you anticipate that some of the headwinds you cited to be more of just a first quarter issue? Or will the step-up be driven by maybe some new business wins you have visibility into?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [30]

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Well, I would more talk about what happened this quarter. Again, there was some kind of a real drop in -- and probably significant rationalization of inventory, I guess, in certain areas of this Middle East region, particularly Saudi Arabia, which probably cannot keep lasting like this. But also reflects a slowdown in demand over there that has probably lasted for quite a while and that has led to this rationalization. But we believe that, again, given the momentum we see in the order book, the activities that we're seeing, actually the impact of all the different strategic levers that we've been activating for so many years around invasion of space, adding manpower in many remote area of the world, adding a new brand. I remind you that we have launched a couple of years ago this brand ProVia to address a segment where we were absent before to connect to the world of workshops and distributors to a digital world. All that stuff should continue to deliver nice growth. And again, we see right now a reasonable path to, again, a kind of level of 7% growth overall for the year.

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Neil Andrew Frohnapple, Longbow Research LLC - Senior Analyst [31]

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Okay. That's helpful. And then, pertaining to your off-highway braking system business. I know, it's a smaller part of the portfolio. Have you started to see a significant improvement in order activity around the world? Or any other granularity you can provide on trends in this business?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [32]

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Yes, we do see some change of trend there. But we also see with enthusiasm the opportunities that are offered to us now that we are equipped with both a hydraulic system that we inherited from MICO as well as the thematic capability that we have been building ourselves internally. And we are the only ones to combine both. And we can certainly enhance the technology, enhance the cost of products developed and manufactured by MICO by using the frugal engineering capability of India because we see that their systems are sometimes a little expensive to build by design. So overall, I think we can grab more market share. I think we can really satisfy a lot of demand for cost improvement from customers around the world, thereby taking over more market position in that space. So I think the strategy that we, obviously, embarked in as we took over this company seems to be firming up very nicely for us in the future.

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Operator [33]

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Our next question comes from Joel Tiss with BMO.

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Prashanth Mahendra-Rajah, WABCO Holdings Inc. - CFO [34]

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Joe, you may be on mute.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD and Senior Research Analyst [35]

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No. I don't think so. Can you hear me now?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [36]

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Now we can.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD and Senior Research Analyst [37]

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I'm struggling -- just for, Prashanth quick. On -- if the gross profit is up $25 million, you got $21.5 million from productivity and another $6 million from streamlining, minus the $6 million for pension and minus $1.5 million for equity income. I don't -- I'm struggling to figure out how the performance EBIT and the net income are only up about $3 million?

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Unidentified Company Representative, [38]

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(inaudible) something's missing.

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Prashanth Mahendra-Rajah, WABCO Holdings Inc. - CFO [39]

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Did you include the $12 million of price erosion?

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD and Senior Research Analyst [40]

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$12 million of price...

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Prashanth Mahendra-Rajah, WABCO Holdings Inc. - CFO [41]

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Yes, broadly, if we take last year, Q1 at $1.37, give yourself roughly $0.20 approximately for volume, roughly $0.05 from improved share count, and then headwinds from pension, the $6 million you referred to that we have detailed on Page 15 gives you another roughly $0.08 of headwind, $0.03 of FX and then, other, primarily is the Meritor WABCO impact for another $0.04. That will get you to our $1.47.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD and Senior Research Analyst [42]

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Okay. And then, are acquisitions included -- what was the impact in the quarter on the revenues of acquisitions?

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Prashanth Mahendra-Rajah, WABCO Holdings Inc. - CFO [43]

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1% outperformance.

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Operator [44]

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Our next question comes from Robert Wertheimer with Barclays.

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Robert Cameron Wertheimer, Barclays PLC, Research Division - Director and Senior Industrials Analyst [45]

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I just had a question -- on the China, the G7 deal. Can you just talk generally about what you bring and what they bring? And then do you have to staff up dramatically? Or is this sort of levered of off current technology/platform? And what do you think about the margin opportunity near term and long term? I mean, is the big investment to get there, or is it the big fleet.

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [46]

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We're going to leverage existing things. So it's not major developments but we still will create a company, the joint venture. And we're going to staff it, not with a huge amount of people, but with still sufficient resources to drive some further development as well as sales and promotion. What they bring is, 85% of the market of telematics for tractors, for trucks. What we bring is a unique technology related to telematics for trailers. So that we will be again a unique source of truck, trailers combination within that space of telematics. What we also bring is that connectivity to the flow of data that we generate through our systems, which are absolutely insightful on performance of the truck, of drivers' behavior, around safety, efficiency. And then, obviously, all the data related to maintenance for our systems. We also have access to an onboard diagnostic systems that does not only establish a diagnostic of our systems, but all systems that are electronically driven, including engines and whatnot. So all that stuff will be accessible by the JV. And then, we also have all the functionalities that are certainly more developed at Transics than they are right now in China. I'm talking about the flow of information that are connected to the ERP systems at the fleets and all this value for position that is so attractive in the U.S. and Europe that is not yet mature in China, but that obviously will grow there. And we're going to be able to provide all our experience there. So I think that, again, without really being in a position to establish a very solid forecast in revenues, even less in profit, I think there is really a huge amount of value to tap from -- in the future.

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Robert Cameron Wertheimer, Barclays PLC, Research Division - Director and Senior Industrials Analyst [47]

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So I assume even on the current fleet, there are sort of a multi-year curve as you either get connectivity devices on trailers or broaden out the suite of things people are willing to pay for, I suppose. So would you expect it to be an initial revenue pulse, or would you expect it to be more a couple of years out?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [48]

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I think it should start a flow of revenue pretty rapidly. I wouldn't say it was going to be gigantic revenues at the beginning. I would be probably a little bit more humble and modest, even though I have a lot of expectation behind that. I think it should be profitable fairly rapidly. As you know, this industry is both generating onetime sales and profit around hardware and then leading to recurring revenues that are incredibly powerful to establish because: first, it's very sticky revenues; second, it's very high margins as well. So I think it will take a little while to just kind of gain the proper momentum, but again, I'm very enthusiastic about the expectation from this new joint venture.

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Operator [49]

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Our next question comes from Larry De Maria with William Blair.

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Lawrence T. De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [50]

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Just sticking with the FMS in China for a second and the commercial opportunity. I get that it starts soon and slow, but can grow. Could this potentially be a needle mover in '18? And is the bigger opportunity specifically for the financials around this? Or is it for WABCO to bring in other WABCO products that you kind of referenced earlier, I think?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [51]

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Well, it's everything, Larry, as I said. Obviously, it's very complicated to quantify the direct impact it will have on how more efficient or furthermore efficient we will be to sell products to first OEs, with the pull from the fleets. And second, directly to fleets through our aftermarket channel. But it will have a positive impact, that I'm convinced of, plus this business generation through revenues and recurring revenues directly relate to FMS. But again, it's nothing new. It's kind of trying to duplicate that model that we have already very well owned and matured in Europe to other regions of the world, particularly to emerging markets where it's still young enough to establish grounds and powerfully position ourselves as the market is not yet growing fast, but will grow rapidly in -- at very significant levels. And then, we will have established vintage at the right time ahead of others. That's why, I think, we wanted to rush into positioning WABCO in this part of the world. Now also attached to this FMS -- trailer FMS capability is us selling EBS instead of ABS. And that's a major step-up in revenues, because one is basically twice as much as the other. And you need EBS when you are on an FMS -- under an FMS coverage because EBS is a digital source of data as well as EBS can control all activities -- functional activities that we kind of sell like apps. We have like 41 different little functionalities like apps that we sell to trailer manufacturers that are all rooted in the digital world of EBS and all connected to FMS because the information we get from these apps are transmitted to the fleets, to the workshop, to whatever. So that's this kind of overall value proposition that this will unleash in the future.

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Lawrence T. De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [52]

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And has that worked -- Jacques, has that worked so far with Transics to get that incremental product pull? And secondly, with Transics, in the Middle East, you've got some wins there the last couple of years, but obviously, the aftermarket was weaker there. It sounds like that was more an inventory thing than it was about Transics, if that's right?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [53]

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Well, Transics is established in a very mature market. We have already access to all fleets. We have already, obviously, major access to all OEs. So this kind of indirect pull from fleets using Transics, I think, is not as compelling because of the brand. It will be more and more compelling because when we will be able to link the FMS world to the aftermarket and service world whereby, for example, once you establish a diagnostic onboard a truck or trailer, you can immediately inform a workshop to be prepared to receive the truck or the trailer for a repair. That will, obviously, keep kind of establishing more and more penetration in that world and securing the anchoring of our aftermarket business. Transics is demonstrating its power because we use the WABCO infrastructure to sell the Transics value proposition beyond originally what was more focused on the Benelux, Southern Europe, now we bring it to the more northern part of Germany and all that. And it creates that double-digit growth that we have been sharing with you in the last 3 years. It also, again, prepared that platform for digitalization, for kind of harvesting in the future revenues from the big data. And we are starting to really gather an awful lot of data. We have already created lately a cloud platform. We have hired some analysts -- data analysts who are looking at all those data, trying to establish [ scores of ] values that we can already start monetizing and this is ongoing. And Transics will help us do that because without an FMS platform, you don't have access to it. With an FMS platform, you can have -- you can enter this world of amazing business opportunities that you can credibly launch, but still only pioneered by just a few.

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Christian Fife, [54]

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Liz, we shall be taking one final question and apologies for anyone else who is left in the queue.

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Operator [55]

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The last question comes from Brian Colley with Stephens.

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Brian Lee Colley, Stephens Inc., Research Division - Research Associate [56]

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So wanted to ask about M&A activity in the market, and how that's trended year-to-date? I mean, are you still seeing a lot of opportunity? And any commentary on valuations and how those have trended would be appreciated as well.

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [57]

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Well, just, Brian, I would say that we have more opportunities in the pipeline right now that we are looking at than we have had for quite a while, I would say maybe ever. We're looking at all different corners of our portfolios that are really kind of reinforcing the different strategic opportunities that we shared with you along the years. And we stay away from overpriced assets. We are still incredibly demanding and filtering opportunities that would not keep fitting and growing the value that we bring to shareholders that would be actually helping and enhancing the overall value generation that our franchise would present. But I'm telling you that we're gaining momentum there. But I can't announce anything to you at this point beyond the G7 kind of opportunity that just popped up few days ago, but we'll see in the future. As I said before, stay tuned.

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Brian Lee Colley, Stephens Inc., Research Division - Research Associate [58]

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Well, I appreciate the color there. That's helpful. And then, just as a follow-up. I wanted to talk about air disc brakes in the U.S. I know you're excited about the new version for the U.S. market. But could you talk about when that could potentially materialize into incremental revenue? Is this something that you think can occur in the next year? Or do you think it will take longer than that?

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Jacques H. G. Esculier, WABCO Holdings Inc. - Chairman of the Board of Directors and CEO [59]

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I think it will be kind of ramping up nicely between now and probably, the end of this decade and it's going to accelerate thereafter because of the introduction of the latest kind of technologies that we have shared with you that brings the payback well below 2 years for the fleets, which I think will be the compelling kind of edge for that will hopefully bring the fleets to switch from drums to air disc brakes.

Okay. Thank you all, and thanks for your continued interest and confidence in our franchise. And look forward to seeing you on the 22nd of June at the New York Stock Exchange. Thank you very much, and have a good day. Bye-bye.

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Operator [60]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.