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WABCO Holdings Inc  (NYSE:WBC)
Q4 2018 Earnings Conference Call
Feb. 15, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning and welcome to the WABCO Fourth Quarter and Full Year 2018 Earnings Conference Call. This call is being recorded. There will be a question-and-answer session after the presentation. Could you please limit yourself to one question and if need be a short follow-up question so that more participants get a chance to engage with management. Thank you.

At this time for opening remarks and introductions, I would like to turn the call over to Sean Deason, Vice President, Investor Relations and Controller. Sir, you may begin your conference.

Sean Deason -- Vice President, Investor Relations and Controller

Thank you, Sidney. Good morning everyone and welcome to WABCO's quarterly conference call. Today, we will present our fourth quarter and full year 2018 results. With us this morning we have Jacques Esculier, our Chairman and CEO and Roberto Fioroni, our CFO. As a reminder, this call webcast and the presentation that we are using this morning are available on our website www.wabco-auto.com under the heading WABCO's Q4 and full year 2018 Results. Replay of this call will be available through February 22nd.

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 these factors can be found in our Company's Form 10-K 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 measure are attached in 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.

Jacques Esculier -- Chairman and Chief Executive Officer

Thank you, Sean. Good morning, good afternoon to you all and welcome to our fourth quarter and year closing call. So before I jump in the details of our performance for the quarter and the full year and obviously introducing you into our framing of 2019. Let me kind of take a step back and look at this last quarter and this last year and kind of again frame how we are entering into this new year of opportunities.

I would say the last quarter had been complex including what I would call also a complex year rich in events. Firstly, 2018 has been a people (inaudible) year in preparing and positioning WABCO to stay at the OnGuard of the movement toward this breakthrough technology that we call ACE standing for autonomous driving connectivity and electrification. As you may remember, at least for those who came and join us there at IAA in September last year, WABCO has unveiled an impressive series of breakthroughs in technology and initiatives, among which I would mention collaborations that we declared with two major players, Baidu in autonomous driving and Nidec in electrification. You may remember that we also unveiled a breakthrough concept and an initial prototype of a fully electrified tractor which we really strongly believe will provide very nice growth opportunities in the future. Lot of good things at IAA, but and also in the fourth quarter we actually evolved our organizational logic to be more I would say structurally aligned with what will be necessary for a Company like WABCO to fully take advantage in the future of the opportunities offered globally by these new breakthrough technologies and among these changes in the organization, we are actually relocating the headquarters of WABCO to Switzerland while this newly created division that now covers Europe, Middle East and Africa will be taking over our Brussels premises.

So where we have been? Again in the last year, decisively preparing for the future, we also faced some challenges. The main one being willing to issues across the industry supply chain that was faced with significant shortage in capacity. I remind you that our industry was booming last year in Europe and US at the same time, but also during this time, the automotive industry itself which is sharing the same kind of basis of supplier, the automotive industry also reached peaks in production and that put enormous amount of capacity challenge across all our suppliers and that affected WABCO in the first three quarters. In the fourth quarter, we have indeed seen this pressure fading out. However, we have to recognize that it has triggered a lot of additional costs across the year and it has also actually quite disturbed the normal flow of activities that need to involve our suppliers and that are feeding the pipeline of material productivity actions.

Now when you look at our material productivity levels in 2018, it shows that we have been mostly been able to mitigate the shortage of activities in the pipeline by triggering one timers, was good for '18, however as we enter '19 and we are very nicely reframing the pipeline of material productivity activities and we are replenishing it. In the meantime, we also have to compensate for these one-timers that we triggered in 2018 and that represent itself $20 million.

Now looking at the market. In the fourth quarter, we have seen a slowdown in two of our key markets. One, is Europe where we have seen a slowdown of 4% year-over-year and the other one is surprisingly, India. It's not that the economical growth has been hacked (ph), actually it is the result of a totally unexpected events that has seen the bankruptcy of a major financial institution that has made access to credit a lot more complicated for fleets momentarily. And this resulted, not only in lower volume produced and lower demand, but also skewed the mix of vehicle produced, favoring smaller truck as well as trucks for exports both of them having a much lower content of our technologies versus the normal (ph) heavy-duty truck that were lower in numbers. So it did affect -- the volume and it also affected as you will see later, our ability to outperform at the level we are used to in India. Unfortunately, that will carry over into the year 2019, will affect 1H and particularly, the first quarter, but we'll see that the second half of '19 India will bring volumes that we'll be offsetting it.

Now, the 2019 from the market standpoint in our own view carries a lot of uncertainty. At this stage, we anticipate an erosion of slightly more than 5% in the number of trucks and buses built globally. However, as we continue to demonstrate our ability to outperform markets, we are planning, as you will see later to generate a positive growth at the top line, actually in the neighborhood of 4%. What is important in 2019, we will also reconnect our operational machine with the incremental margin model except for an exceptional stretch in engineering investments of $40 million. We talk about it later in the call, but I can kind of frame this necessity to add this $40 million this year beyond what we would normally be able to invest in addition to last year's level, driven by topline growth. That $40 million is actually supporting the necessity to develop products. We need two contracts, very nice and strong contracts we have won in the last years. We are at this time developing in parallel four different AMT systems for global customers as well as three braking systems and that's obviously something we had never done in the past, an exceptional level of activities in product development. We're also actually investing next year an additional $20 million, around $20 million of engineering activities in those new breakthrough technologies. So that's framing the business environment.

Now, going to page three and going to the results of the quarter. Sales for the fourth quarter were up 1.4% in local currencies, leading to an operating income of $125.7 million versus $144.2 million a year ago, leading to performance EPS of $2.13 versus $2 in Q4 2017. For the full year, we close '18 at a sales level of $3.83 billion, up a 13.9% in local currencies with an operating income of $545.7 million versus $492.1 a year before, leading to an EPS growth of 14.7% from $6.86 at the end of '17 to $7.87 per share in '18 with an exceptionally high conversion rate of net income into cash at 95%, leading to a free cash flow of $398 million, of which we have returned $300 million to our shareholders through our repurchasing program.

Moving to slide four. Looking at the profile of our topline evolution and again referring to a performance growth of 1.4% for the quarter and by channel it means actually from the OE standpoint a flat revenue year-over-year in a truck and bus market that should decline over 6%, actually 6.3% to be accurate year-over-year. That was mitigated by actually a very significant, continued significant out-performance of our credit business against the market unfortunately in the fourth quarter that was itself down, very healthy improvement of 7% of our topline in aftermarket. Now, looking at the evolution of our truck and bus revenues versus market, truck and bus volumes in Europe went down 4%. We outperformed it by 2% because of some gain in share of market. North America, we have actually seen a 12% growth in our revenues from Truck and Bus in a market that went up 20% year-over-year and that's kind of the due to a few things. Number one, we have seen stock reductions at our customers in terms of AMTs and steering systems and also our main customers seems to have lost them some share of market. South America, we have seen a very healthy out-performance with market share growth in braking system through the implementation of our mBSP as well as continued penetration of the AMT technology. We have seen a flat revenues in Japan, Korea, Thailand versus a production, up 7% because mostly of an unfavorable mix in Japan as well as some phase out of ABS/EBS products at a smaller OEM. In China, market went down to 19%, but our revenues went down 27% and that's (inaudible) kind of looking at it and you bit more in detail.

First of all, last year, we benefited from a reclassification or change of policy in consignment of products at our major customer in China, which generated by itself around $5 million of tailwind, which obviously did not happen this year and then we have seen some more pricing erosion in Q4, as you will see it has not impacted the overall pricing erosion level at WABCO, but in China, it has been an events this quarter that obviously also created some headwind. What is interesting though and you will see it at the full year level as well is when you look at the country, not only in truck and bus built in revenues really (inaudible) but including all revenues from aftermarket off highway traders and whatnot. The revenues year-over-year are more flattish. Finally in India, market went down 2% as I said, very unexpectedly. We were still able to outperform the market by 5%, which is lower than what we have been used to so far and I explained to you already this is due to the fact that medium size trucks were up 4% and heavy-duty trucks down 4% and more of the heavy duty trucks are normal, we sold to export customers with much lower content per vehicle. That may still affect the first quarter -- that will still affect, actually the first quarter of '19, however, you will see later on, we are expecting, still very strong outperformance in India overall for the full year.

Looking at the same slide, but for the full year, generating 14% growth overall at the topline level by channel, 21%, of those 13% of which are driven by acquisition, leaving in net 8% of organic growth in a market that was up 3% which also strong outperformance in trader market, very strong growth in off-highway of 26% year-over-year. Aftermarket was up 18% with the tailwind of 12% from acquisitions, leaving healthy 6% with very strong growth in most of our markets, but having to face headwinds from these areas affected by geopolitical issues. Now when we look at the evolution of our truck and bus revenues versus the level of production of those vehicles, Europe, we also began slightly outperform, driven by higher demand in AMT, actually it seems that our customers are more equipping vehicles that they export out of Europe to other parts of the world. Those vehicles are now more equipped with AMTs as well an increasing level of medium size trucks.

North America, up 49% in the market with growth of 18%, 28% of that growth was driven by acquisition. South America, we again are performing nicely through the introduction of new technologies. Japan, Korea, we outperformed again to continues ramp-up of new technologies. China wind-up the year underperforming by 10% and you know that the main driver of this outperformance across the full year is really to this major change in the mix of tractors versus construction equipment that we have mentioned during the first three quarters and that together represents 10% of headwind to our revenues and to our outperformance, ability to outperformance. And again at the full year level, when you add all other sources of revenues, China is flattish year-over-year, able to absorb this headwind from mix. And by the way the mix, unfortunately, as we see it today will continue in 2019. India was up healthy 10% again. It could have been better if we didn't have to slowdown in Q4, but still an amazing source of revenues and our performance in '18 and for the future.

So I'm going to now let Roberto drive you through the details of our financial results. Roberto?

Roberto Fioroni -- Chief Financial Officer

Thank you, Jack. Good morning everyone and thank you for joining our Q4 earnings call. Looking back at 2018, I must admit that it was a challenging year for WABCO. We faced headwinds related to continued capacity shortages, high material inflation pressure as well as the volatile macroeconomic environment, impacting the global commercial vehicle market, which grew 2.5% versus previous year. In spite of all these headwinds, WABCO delivered solid financial results including record sales level of $3.8 billion. We grew performance earnings per share by 15%, solidly outperforming WABCO sales growth of 14% in local currencies. And we delivered a record performance cash flow by converting 95% of our performance net income into cash. This strong cash generation is a further demonstration of the quality of our earnings.

Now, if you turn to slide six, I will guide you through the details of the fourth quarter financial results. Our sales grew 1.4% in local currencies versus Q4 2017, comfortably outperforming the declining truck and bus market that was down 6.3% versus the same period last year. On a performance basis, our gross profit margin was 30.7%. Fourth quarter price reductions were less than 1% versus Q4 last year, reflecting our strict discipline around prices. This also includes increased price pressure Jack previously referred to in China. WABCO gained $2.2 million as a result of additional volume. Cost efficiency across the value chain resulted in more than $15 million of savings from material and conversion productivity. Conversion productivity of 7.1% is now back to historical levels as we no longer benefit from the plant closure. We also achieved gross material productivity of 5.2%, partially offset by raw material inflation of 1.4%.

Moving to OpEx. The majority of the $13 million increase versus fourth quarter 2017 consists of investments in engineering to support recent contract wins and development of future technologies. As we discussed in our October call last year, this is the second quarter in a row with higher than usual R&D investment. All of this resulted in WABCO delivering performance operating income of 13.8% as a percent of sales for the fourth quarter. Streamlining costs are increasing in the fourth quarter compared to the previous year as a consequence of implementing a new organizational logic, including the relocation of our new corporate headquarters. WABCO achieved a fourth quarter performance tax rate of 3.9% and the US GAAP tax rate of minus 13.4%. I will discuss our tax rate in more detail later on. After excluding the non-performance items, our performance earnings per share is $2.13 for the quarter, establishing a new record for WABCO.

Moving to slide seven, I will summarize the financial highlights for the full year 2018. WABCO's full year sales grew 13.9% versus prior year on a foreign exchange adjusted basis. As Jack showed earlier, the US acquisitions accounted for approximately half of our full-year growth. Our factories were able to generate strong levels of conversion savings at 7.7%, delivering almost $39 million of gross profit, which more than offset labor inflation of $33 million in 2018.

Gross material productivity of 5% translated to a net impact of $36 million to the gross profit. This amount includes a compensation payment of $9 million received in the first quarter for one of our suppliers related to a delayed productivity project. A further $52 million came from volume mix and absorption. Our performance OpEx was at 16.4% of sales, which represents $30 million increase versus prior year, primarily driven by investments in R&D. In 2018, we invested 4.8% of sales in R&D. This is 40 basis points above the 2017 level. Compared to last year, WABCO's US acquisitions contributed to the full-year results by delivering $222 million in sales with $45 million of performance operating income. All of this results in a performance operating income of 14.2% as a percent of sales. As for the exclusion of the unfavorable impact from transactional foreign exchange of almost $8 million, our incremental margin is 10%. WABCO's performance tax rate for the year is 14%, leading to a full year performance earnings per share of $7.87. As previously said, this is 15% versus a year ago, a new record for WABCO. The 10.6% tax rate in the US GAAP basis resulted in a reported earnings per share of $7.43.

Turning to slide eight, I will now cover the cash flow of 2018. Our performance, free cash flow for the year is at a record $398 million, representing a very healthy 95% conversion of performance net income. I am extremely pleased with our management of working capital during 2018. While growing the business we improved all working capital ratios and brought the total working capital to 18% as a percentage of sales, this is down 4% points versus how we ended 2017 and also lower than 2016. This is another data point that reflects the successful integration of the US acquisitions. CapEx of $132 million, slightly above our depreciation expense, reflects the investments needed to increase capacity in 2018. Finally, WABCO is creating shareholder value by continuing to return cash to our shareholders through the share buyback program. In 2018, we repurchased 2.5 million shares at a cost of $300 million.

Before I turn it back to Jack, let me use page nine to give you some color on the tax rate for 2018 and 2019 as well as our views on the mid and long-term. Starting with 2018, WABCO's reported tax rate was 10.6%. You will recall that in 2016, we booked the material tax reserves following the European Commission decision that Belgium's excess profits ruling program, the EPR was to be considered illegal state aid. We have been working on mitigating the tax impact of that decision and in Q4 2018, we received confirmation from Belgium allowing our Patent Income Deduction claim and reducing the EPR tax clawback by $33 million. In addition, yesterday, the General Court of the EU issued a judgment annulling the original European Commission's decision. We are currently reviewing this EPR judgment to determine whether it will allow us to reinstate approximately $100 million of tax losses, which are currently worth $30 million -- approximately $30 million of net income. Furthermore, in Q4, the reported tax number was reduced by approximately $11 million related to the transfer pricing arbitration settlement that we announced and included in our Q3 performance tax rate.

Moving to 2019, we foresee a performance tax rate of 18%. There are two elements that contribute to us maintaining our forecasted tax rate at this level. First, we are seeing the initial impact of site benefits, resulting from the reorganization of our treasury function, which is relocating to a new corporate headquarters. The second element is driven by a project to optimize the management of our pension liabilities and for which we expect to achieve a one-off benefit by mid-year 2019. As we think about the mid and long-term, we have a line of sight for performance tax rate of approximately 20%. This confirms the view that we shared with you during 2018 Q3 earnings call.

Now I would like to turn it back over to Jack, who will provide an update on our view of the market. Jack?

Jacques Esculier -- Chairman and Chief Executive Officer

Thanks Roberto and moving to slide 10, looking as we do in the key announcement that we made across the quarters related to our three-pillar strategy, starting with new technologies and products. We have been contracted by Daimler to develop and provide them the next generation of AMT products. We have received a contract from one of the leading car manufacturers in Europe for air suspensions and that represents a 10-year business for $230 million and we have been also signing a contract with Hyundai to provide them with a range of new technologies for the medium-duty trucks including electronic stability control, braking, air suspension and so on.

In globalization, we have signed the extension and expansion of a long-term agreement with one of our key OEM customer, totaling $950 million and that covers braking, advanced driver assistance and efficiency technologies. We also (inaudible) are moving our headquarters to Bern and then finally we together with the Board of Director, actually in the later part of the year we integrated new headquarters covering the Americas region in Michigan, and that's the important milestone as we kind of consolidate all the different activities of WABCO in this important part of the world under one roof and one team. Execution as we do every year, we continue to receive a very healthy flow of rewards and recognition by customers for exceptional level of service levels in this part of the world and then still a healthy flow of productivity.

Moving to page 11 and then looking at how we kind of we view 2018 and anticipate '19 for the market for all our key regions starting with Europe. New registration in Europe for the quarter was down 1% and up 3% for the full year '18 versus '17. When we look at production, Q4 levels was down 4% year-over-year and up 2% full year. At this level, we are still 12% short of the peak that Western Europe production has reached in 2008 and 52% short of the peak that we have seen in Russia back in 2007, so still some nice room to further improve. Now in '19, in a environment where GDP is slightly eroding down from 1.8% in '18 forecasted at 1.6% in '19, we see new registration being flattish and production level flattish as well in that minus 2% to plus 3% range. Moving to the US, production was up a healthy 20% year-over-year for the fourth quarter. For the total year, it was up a healthy 18% and we actually closed the year with a record level of orders that have filled up a pretty strong backlog that should cover most of the production of 2019, but the production level being at what is probably close to full capacity, we believe at this time that it is reasonable to anticipate a production flat to slightly eroding minus 5% to zero in a GDP environment that stays very healthy, slightly forecasted to be slightly lower than '18 but still at a very strong 2.5% level.

Moving to China, production was down 19% in the fourth quarter year-over-year, full year was down 8% versus 17%. But as we have kind of reported all year long, the level of tractors that was kind of artificially inflating in 2017 has been brought down back to a reasonable level, but at the same time we saw a surge in construction equipment, so the mix has been significantly unfavorable for us as well as a much lower level of production of electrical buses that carry a very high level of content per vehicle for our technology and that also impacted our performance. Looking at 2019, unfortunately again at this point of time that we have one year to see change, but this point of time, we see the ratio of tractors versus construction, construction equipment will be still unfavorable to us. We expect though to reconnect with a full-year double-digit outperformance level, however it's going to be more, it's going to be stronger in the second half than the first half as we see some pretty interesting events on the horizon one being introduction of the mandate for ABS on certain buses in the second quarter as well as obviously the start of production of air disc brakes for FAW that should be triggered in July. And the production is anticipated to further erode in that minus 15% to minus 10% range.

Moving to India, again disappointing and surprising level of production in Q4. Again, not in line, disrupting the logic of very strong economical growth. '18 finishes at plus 7.3% GDP growth and '19 is planned at 7.5%, so kind of we keep increasing the industrial -- the economical activity. Production for the total year was still a very strong 23%, up versus what it was in '17. Now again, the first half will be probably impacted by what happened in the last quarter. We ended up -- actually we just learned already a few days ago, we end up with some inventory of heavy-duty trucks at OEMs, which will have to be absorbed and which will affect Q1 more than the rest, but this will be more than offset actually by a pre-buy event that will start in Q3 ahead of the introduction of a new wave of regulations relating to emission controls. So we think the market should net-net end up in the zero to plus 10% range.

Moving to page 12, Japan-Korea was up 7%, full year down 4%. It was a significant slowdown in Korea this year and for next year we (inaudible) this market to see basically flattish in that minus 3% to plus 2%. Now going to Brazil, Q4 was up a solid 14% year-over-year. Production for 2018 increased by 27% versus 2017 and we kind of anticipate a continuous recovery. We are still more than 40% down versus the peak that this region reached in 2011. GDP for '19 is forecasted at 2.5% versus 1.3% in '18. So everything points toward a much higher level of production in '19. However, one of the key OEMs has basically shutdown production in January to update their line to the next -- to the new generation of trucks and that created gap of 6,000 trucks for the first quarter, which represents about 20% of a quarter production in Brazil and that will impact unfortunately the overall forecast for the full year. So we see it for the moment ending up flat to plus 10%. I would not be surprised if we end up actually nicely above that.

Aftermarket Q4 ended up at 7% growth year-over-year. Full year, we had a 6% organic growth. We have started the year actually across the first three quarters having significant headwind coming from supply chain and as you know we favored OEMs to aftermarket to avoid any stoppage of production line at our key customers and that impacted our ability to grow. Now we are back to normal growth, however we still suffer and we probably continue to suffer from this situation in some important areas of the world. So overall, the initial outlook for this market is up 6% year-over-year. And finally the trailer market production was down 8%, driven by a severe drop in China which was partially offset by continued growth in Americas and Europe. So for the total year of 2018, the production was flat and then for '19 in line with our prediction for the total truck and bus market, we see trailers being flattish to minus 5%.

Turning to page 13 and then kind of sharing our guidance for 2019. First from the topline standpoint, we see a growth in that 1.5% to 6.5% range again to put that in perspective of a market that should erode more than 5%, leading to sales of $3.8 billion to $4 billion, performance operating margin in the 13.4% to 13.8%, leading to performance EPS of $7.6 to $8.10 per share with a continuous strong conversion rate between 80% to 90% of our net income into cash. On the right side, you see a very kind of simple bridge of what is core driven by our operational activity, a little tailwind from FX and then we have the $0.39 of onetime risk in our tax programs described by Roberto a little bit earlier, so that's $0.39 per share. That leaves us to the range that I just shared with you. Now It's important that we spend some time on the bucks below to kind of share with you the assumptions behind this guidance. First, as I said, we are back the operational part of our company will be back to the incremental margin framework. However, we are recognizing that we have to stretch our investment in engineering by $40 million beyond what we should normally be able to afford in a environment with about 4% of topline growth. And that is not covered by incremental margin because its stretch is exceptional.

We also have price erosion plan in line with 2018, slightly above 1%. We are planning to have a flow of net productivity back to normal and the $20 million of one-timer-ish that we had to generate in '18 to compensate for the shortage of activities in the normal pipeline of productivity actions, that $20 million will be compensate for by actually keeping the known Product Engineering OpEx level flat year-over-year, meaning that we do compensate about $10 million of inflation and we do offset all the carry-overs in the area of the business, that would trigger the necessity to have some restructuring program and that's why you see because we started the program in Q4. There are several activities that we have triggered from Q4 and we continue in this year, all these activities justify raising of the level of restructuring of the expenses in restructuring. I think in transactional FX is providing some tailwind of $40 million and the tax rate is estimated to be at 18% however, this 18% which is created by those actions that Roberto referred to is asking for a $5 million of performance investment in OpEx that is really attached to our ability to reach that 18% level.

Turning to the concluding page, so we can describe 2018 as a complex, but important year for WABCO, because again it was a year of very strong activities related to the next wave of technology and how we position our company at the leading-edge of the movement toward those technologies and having to face the challenges and headwinds that we have mentioned all along, I think it's very impressive that improving our resilience that we end-up with a very healthy top line growth and also a strong return to our shareholders. In 2019, we again continue to certainly outperform the commercial vehicle market, we are back to our delivery of strong productivity gains across the supply chain material and in our factories. We have this stretch of $40 million unfortunately that is hard to avoid but, together we want to crank-up our return to shareholders from $300 million to $400 million that will be our aim for our share buyback program this year.

So this closes our presentation and like to open the session for questions. Thank you.

Questions and Answers:

Operator

Thank you. In the interest of time, please limit yourself to one question and if need be a short follow-up question so that more participants get a chance to engage with management. (Operator Instructions) Our first question is from Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Jacques Esculier -- Chairman and Chief Executive Officer

Good morning, Jeff.

Jeffrey Hammond -- KeyBanc Capital Markets Inc. -- Analyst

Good morning, Jack. Just a couple of market questions. I think you guys took North America down, it seems like most of your peers are kind of holding that, so just maybe speak to that change and then India it seems like your peers are kind of lowering that much more. I don't know if they see that impact from the financial institution lasting longer, but just wanted to understand your optimism there.

Jacques Esculier -- Chairman and Chief Executive Officer

Yeah, Jeff. Thank you for the question. While US market there are, I mean, again, there are all kinds of obviously sources of forecast and as we all know this is a pretty complex time to focus markets that little bit capricious at this moment. I hope that the market will be able to go up again. In my own view from what I understand from our customers, it's going to be harder to stretch their capacity beyond what we have been able to produce in '18, but I would be more than happy to welcome an additional growth there. At this point again, it's all the different kind of inputs we gathered ourselves, we kind of think that flattish to slight erosion is the best forecast.

India, I would say, same thing. At this point, very complicated to anticipate two things. One is the carryover of that impact of what happened in Q4 and two is the extent of the pre-buy that will be triggered in the second half of the year and the normal kind of flow of need for new trucks in a market like India that is really driving enormous amount of economic growth should point finger to a very strong growth in production like we have seen in the past years. We kind of limited it, because of again what we anticipate to be a carryover of the programs generated last year, but we don't want to be excessive in anticipating it, it kind of drop in production, because of this pre-buy that we anticipate to be pretty strong in the second half, but again, Jeff, this is the best guess and I would anticipate that we can probably debate long hours around whether it should be slightly negative, all in the single-digit like we are planning right now.

Jeffrey Hammond -- KeyBanc Capital Markets Inc. -- Analyst

Okay. And then just back on the cost side. I guess it sounds like couple of moving pieces there, it seems like you're really feeling a lot better about productivity, rebuilding and getting back to normal, but just on this $40 million, is that all incremental spend and then if -- I don't know if I misheard you, there's a lot of that not come through the product engineering line?

Jacques Esculier -- Chairman and Chief Executive Officer

No, this will be -- when we look at it, we look at incremental margin as part of a model that can serve a certain percentage of OpEx versus the revenues, non-product engineering and product engineering OpEx, so in a environment where you grow 4% you can't afford normally $6 million, $7 million of additional investment in engineering and what we are saying is beyond that framework that covers a $5 million, $6 million, $7 million of normal increase in engineering spending, we next year have to invest another $40 million in engineering. Now, again I kind of gave you the rationale what's behind it. I also have to recognize that unfortunately as I mentioned to you in during our Q3 call, the cost of those additional hours is significantly higher as compared to the average cost of our engineering labor because we have to rely a lot and even more on outside services, because we just can't find in such a rapid time, we can't find the resources to hire, so we have to rely on service companies, outside services company and basically it doubles the cost of the engineering hours. So when you look ahead, in my opinion, two things should kind of prevent these further inflation of the need for engineering hours. Number one, we are going to end up having kind of absorb these funds, you know level of activities that we're driving (inaudible) I mentioned AMT, braking, there are some other products where there is enormous amount of contracts that we want that need to be addressed. And the second thing is, fortunately, we'll be able to end up hiring a good part of those engineers that we would like to have on board, but unfortunately can't at this point and that should by itself lower the expense at the same level of ours. So that's why I'm saying this is a step that we have to take that we cannot avoid without obviously penalizing our customers and penalizing our reputation in the eyes of our customers, but also without kind of risking our ability to really position ourselves properly on that movement toward these new technologies and that's the $20 million I talked to you about.

Jeffrey Hammond -- KeyBanc Capital Markets Inc. -- Analyst

Okay, thanks.

Jacques Esculier -- Chairman and Chief Executive Officer

Thanks Jeff.

Operator

Thank you. Our following question comes from Justin Long with Stephens. Your line is now open.

Jacques Esculier -- Chairman and Chief Executive Officer

Good morning, Justin.

Justin Long -- Stephens Inc. -- Analyst

Thanks and good morning. So maybe to start by building on that last question and $40 million of excess engineering investment this year. Can you help give us a sense for the quarterly cadence of that number as we update our models and then also, Jack you walk through the dynamic with hiring and I understand that but given the elevated expense on this line item this year and maybe next year too, what's your confidence that you can still deliver on the incremental margin framework you've historically provided or is that a framework, we need to rethink?

Jacques Esculier -- Chairman and Chief Executive Officer

Well, Justin again, two important questions. The first one is, it's kind of fairly evenly spread across the quarters, because we have to do it progressively, so you can count on $10 million a quarter kind of increase year-over-year. Now on the second one, we -- listen, this is what -- this is the identity of who we are as leaders and the Company we want to keep driving in the future essentially in the eyes of investors, departing away from our performance, really strong focus on our performance and incremental margin would significantly challenge our conviction. What we are here for, what is the way we have been driving this Company kind of very consistently in the last 11 years. So I can tell you that you don't know what's going to happen in the future because there are many things that could disturb our commitment and some of them have been disturbing it lately, but what I'm telling you is we are aiming at not only rebuilding this kind of connection to this to the incremental margin model this year, but to maintain it as much as we have in the past -- in the future years. That's -- I can tell you, out of question for us now to kind of think that we will in for -- actually that we will abandon this focus for the leadership team.

Justin Long -- Stephens Inc. -- Analyst

Okay. And maybe secondly to talk about Europe. You mentioned a slowdown that you saw in the fourth quarter, some of the macro headlines have been more uncertain as well. Can you just provide an update on how you're thinking about the European truck cycle over the next couple of years and if we do see a moderation in that cycle, can you talk about the ways that you can outperform and flex the cost structure in that type of environment?

Jacques Esculier -- Chairman and Chief Executive Officer

Well, as you know the cyclicality of Europe historically except for 2009, but historically has always been fairly limited in (inaudible). At this point we see certainly some challenges on the horizon. There is this Brexit situation that doesn't seem to be incredibly simple to say the least. There is this potential kind of macroeconomic situation vis-a-vis potential tariffs types that would be raised between the US and Europe. There are all kinds of stats on the horizon that could disturb what in my opinion should be still a pretty meager, but continuous kind of need for additional trucks and buses in Europe given the fact that at the end of the day, the average age of the fleet is still at the highest level ever has not really improved as it did during the cycle in the US. We are still at 7.7 years. So it's not and we are not by the way at the peak of the historical peak we had reached in 2008, which was not an inflated peak like it was in 2006 for the US.

So I'm not expecting at this point any drastic dramatic kind of decrease in this market. I would say, flat, I would not be surprised if we have a little bit more kind of growth. I would not be surprised either if we would start to see some erosion. That's why we kind of put that thing in that close to zero range. However, yes, there are some factors that could disturb not only Europe, actually, but many other regions of the world. I'm telling you China could be significantly disturbed if we don't rapidly find a way to close this discussion between those two superpowers on how they're going to kind of work together and have kind of a reasonable tariffs established. Right now I'm telling it's disturbing China, I think it could disturb many other regions in the world, but all these being pushed and obviously kind of trusting that people with a reasonable and actually will end up resolving those problems in a very favorable manner for the overall global economy. I think this is the best guess to have at this point.

Justin Long -- Stephens Inc. -- Analyst

Okay, that's helpful. I appreciate the time.

Jacques Esculier -- Chairman and Chief Executive Officer

Thank you, Justin.

Operator

Thank you. And our following question comes from Ann Duignan from JPMorgan. Your line is now open.

Jacques Esculier -- Chairman and Chief Executive Officer

Good morning Ann.

Ann Duignan -- JPMorgan & Co. -- Analyst

Hi, good morning everyone. It's Ann Duignan. Perhaps you could give us little bit more color you mentioned a lot of headwinds going into Q1. If you could give us any kind of modeling systems and terms of what you would anticipate revenues sequentially or year-over-year to be and then maybe margins or earnings. Just some directional updates would be great for the model.

Jacques Esculier -- Chairman and Chief Executive Officer

Yeah. Ann, unfortunately we don't guide by quarter and however along the presentation we gave I'm sure you have captured the fact that we see some headwinds converging toward Q1 even though the full-year should end up actually very nicely for us and for the market. We end up having 20% decrease of production in Brazil because of this OEMs stopping production. We have a significant headwinds in India and the market in China is not happening either in the real kind of meet around our performance in this year is going to happen after Q2. So it means that we unfortunately are not expecting a margin in Q1 and a top line growth in Q1 that would be aligned with what we see as an average across the year. I think that's at this stage of our quarter (ph) I would share with you.

Ann Duignan -- JPMorgan & Co. -- Analyst

Okay, I appreciate that. It was worth a try. And then could you just explain a little bit more the rationale behind moving your headquarters to Switzerland as a part of a broader succession plan or how should we think about succession planning going forward?

Jacques Esculier -- Chairman and Chief Executive Officer

Well that's an interesting question. I would say even though we have quite a bit of challenges ahead, I'm not sure, we are looking for mountain guide to replace me (ph) and moving to Switzerland as part of the succession plan, maybe a little bit of a radical way of doing this. First of all, we do work hard on a succession plan but there is no announcement that I am leaving at this point. Second, again, I'm sorry for kind of what we're supposed to be a little bit of a friendly tone my answer, but I would say, Switzerland is actually attractive. First of all, we wanted to separate corporate headquarters from this newly formed European team and I'm going to tell you the profound reason for that is that this new wave of technologies that are absolutely fundamental for industry and obviously for WABCO needs to be neutral and it's kind of management globally. Historically, WABCO has rooted all it's key technology development in Europe, connected to European OEs. However, this next wave is not going to be totally or primarily developed in Europe. It will be developed across the world in different regions, particularly actually in China.

You look at China, they are already ahead in electrification in our industry and they are actively working toward this movement, toward autonomous driving that's why by the way, we established grounds at building of collaboration with Baidu. But you can't have the headquarters together with the European team and essentially more managing the European relationship, you need more neutrality of headquarters, those who make decisions on investments and strategic directions for this technology. That's why we leave the European team, managing the European, Middle East and Africa business in Brussels, but we move-out. Now moving out to where, we kind of glance through all the different opportunities we have. It happens that actually Switzerland is a very attractive place to establish grounds, because they are very keen to see companies like us moving in new technological spaces particularly around autonomous driving electrification and they have very strong kind of programs in the universities to build capabilities and tenants that we would have access to. They also are financially supportive of companies like ours investing in those capabilities over there and then I would say, finally, but not bad to add our Switzerland offers a tax environment that is attractive to corporations as well. So I would say, this is, how I would describe the rational that has led us toward establishing and selecting as a new location for headquarters.

Ann Duignan -- JPMorgan & Co. -- Analyst

Okay. I really appreciate the color on that. I think investors will be delighted to hear you, not going anywhere. So I leave it there. Thank you.

Jacques Esculier -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And our following question comes from Jerry Revich with Goldman Sachs. Your line is now open.

Jacques Esculier -- Chairman and Chief Executive Officer

Good morning, Jerry.

Louis Bamberger -- Goldman Sachs Group Inc. -- Analyst

Hey, good morning everyone. This is actually Bamberger on for Jerry. Just wanted to start with your production, which declined in 4Q, however, Daimler, Volvo and others so that build rates increased in the quarter. Can you actually give us an idea of what's contributing to that disconnect?

Jacques Esculier -- Chairman and Chief Executive Officer

Well, that's an interesting question. There maybe others than Daimler and Volvo decreased, I don't know, but this is the numbers that we obviously gather from the industry and there's not much I can comment very promptly beyond that. Now what is important is, again, it depends what we're talking about here in numbers. We talk about Europe -- European numbers and it covers production, not registrations, because sometimes our customers talk about they're not -- the position of the production, but the position of the registrations. So indeed, as I said, registration was more or less flattish, but production was down and production covers Europe, but covers also Russia, there is a non-negligible number of trucks actually that are exporting. When you look at it for the full year exports of trucks, built in trucks built in Europe represent about 140 plus 1000 trucks, right. So, it may vary in exports, and whatever so again they may talk specifically about trucks to produce for the European region. We talk about production of trucks in Europe.

Louis Bamberger -- Goldman Sachs Group Inc. -- Analyst

Understood. And then outgrowth last year in 2018 was really driven by share gains in South America and India. Going forward, which region and products do you expect will drive our growth in 2019?

Jacques Esculier -- Chairman and Chief Executive Officer

What is interesting is, I would say we are right now in a little bit of a valley of outperformance and let me explain what I mean. We have completed a couple of years ago this kind of major wave of mandates around ABS stability control. Stability control still have some nice opportunities in India and it will come, but what is important is the next wave of growth is in my opinion starting in '19 and will start kind of taking more and more amplitude and that's everything related to mandate of more complex systems like ABS. You look at China, there is a first mandate of ABS in China for all long haul coaches that starts in Q2 of this year, but we know that we have a line of sight already on the next waves of ABS mandates that would cover large trucks and that would also actually potentially toward 2021 demand that this ABS can react on pedestrians which is even beyond the European mandate at this stage. Now, we know that Europe with also mandate probably in '21- '22, the site detection in urban areas and we are working that we have an agreement with Valeo on this. So at the end of the day, there is a new wave of mandates that will kind of pave the path toward establishing ABS as a standard, at least in the western world, the US would probably at one point make it a mandate even though right now it's growing in penetration, short of the mandate, but it's going to affect is going to be invading the space in China progressively and India is starting to think about it, 2021, 2022 seems to be a milestone that they are kind of at this point, reflecting on.

The other thing is air disc brakes, I mean air disc brakes is very, progressively invading the space in the US, but we are today at about 30% plus penetration there is still much room and then obviously aligned with this announcement of our joint venture with FAW there seems to be some momentum that is kind of growing in China and then obviously I'm not even talking about AMT that still has to invade the space of China and India and we see some promising movements and dynamics being created, particularly at this stage in India, but everybody believes that China will join forces in the coming months or very next years.

So again, in my opinion, ahead there is still a very rich pipeline of technologies and capabilities that will really continue to feed and support this reservoir for growth that obviously feeds our ability to outperform markets. It's a long story, but it's a long answer in '19 by the way, again in China, I mentioned, ABS in April we have air disc brakes, those are pillars that should propel the outperformance at double-digit level. In India, we see very funky (ph) right now a more than 15% outperformance for the full year even though our performance at the very beginning of the year will be still meager because of this mix problem, but our team over there is still having a good line of sight on additional technologies.

US, we still have to compete AMT, still a big question mark around medium size trucks, air disc brakes will provide, again a very nice momentum. In Europe, you're going to have as usual smaller in amplitude, but we still have lane keeping, we still have the site radars. It will not be 2019, by probably 2021, 2022, but there is really ahead of us quite a bit of activities that we believe will again kind of support our performance commitment.

Louis Bamberger -- Goldman Sachs Group Inc. -- Analyst

Got it. Thank you.

Jacques Esculier -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our following question comes from David Leiker with Baird. Your line is now open.

Joseph Vruwink -- Robert W. Baird & Co. Incorporated -- Analyst

Good morning. This is Joe Vruwink for David.

Jacques Esculier -- Chairman and Chief Executive Officer

How are you, Joe?

Joseph Vruwink -- Robert W. Baird & Co. Incorporated -- Analyst

Doing well. Thanks. I wanted to go back to engineering and specifically on the $20 million piece of R&D supporting. I think you said AMT and braking systems. What is the revenue, this investment is going to be leveraged against and I asked because if it's a normal 5% of sales, that's $400 million in incremental revenue, sounds like there is some outsourced engineering. I understand that's more expensive. So, maybe it's a smaller revenue value, but either way, it seems like a big piece of incremental revenue that's set to be launched, and I'm just hoping to quantify it.

Jacques Esculier -- Chairman and Chief Executive Officer

Yeah. Joe, whether it's going to be hard to do it for you, because actually, it's a complex question, It's a very -- obviously very important question, but it's complex because number one, it's not only as I said AMT and braking system covers some more ground, but I don't want to give you the full list of name, it's fairly exhaustive, but actually it does however encourage sales into the significantly higher level of contract wins that we have publicize in the last year. Remember, we have had what, three, four years above billion dollars of wins and these kind of obviously lead to the necessity to increase resources as we speak. The other aspect of the complexity is some of those contracts will start earlier than others that the development of the braking system is of extreme complexity and there are some braking -- there is one actually we are developing today will not be in production before 2023, but some others like AMTs have shorter cycle and some of those AMTs we have started already a couple of years ago. So we are not far from starting to generate revenues from it. So that's why unfortunately, I cannot give you one number. What I can tell you is obviously all those contracts are leading to profitable growth in the future.

Joseph Vruwink -- Robert W. Baird & Co. Incorporated -- Analyst

Do you think you have line of sight to get back within the highest range of the 6% to 10% of growth target, it doesn't seem like it's a 2019 event. But as you look into 2020, do you think that's achievable?

Jacques Esculier -- Chairman and Chief Executive Officer

Joe again, we are indeed for the moment at the low end of the range and we actually extended the range down to 6% because we saw that value we kind of anticipated that it would be probably a little bit of shortage of support in these activities, markets being not yet mature as we had anticipated to absorb AMT in China, India and all that. So it's very hard. When you look at our strategic planning, yes, it goes, when you look at future years in the next five years there will be years with nicely higher our performance level above 6%. I just told you that in our opinion we see kind of a new wave of mandates that should support this in addition to again technologies that will not be covered by mandates like AMT or air disc brakes in certain region of the world that also should finally kind of start gaining momentum, it's very hard to kind of give you numbers and kind of in the next years of how much it's going to be above 6%.

Joseph Vruwink -- Robert W. Baird & Co. Incorporated -- Analyst

Okay, great. Thank you.

Jacques Esculier -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. And our last question comes from Larry De Maria with William Blair. Your line is now open.

Jacques Esculier -- Chairman and Chief Executive Officer

Good morning, Larry.

Lawrence De Maria -- William Blair & Company -- Analyst

Good morning, everybody. Just first clarification and then a question. The $40 million incremental engineering expense, I'm sorry if you said this already, but what part of that or all of it should kind of reverse to go away in 2020. And secondly, Jack you missed some acquisitions over the past few years. Now, you're upping internal investment and buyback, does that imply that you think the portfolio is where you want it to be or there is still some pieces, you think that you need to round out? Thank you.

Jacques Esculier -- Chairman and Chief Executive Officer

We are still glancing through all opportunities to enrich our portfolio and believe me, we have not (inaudible) [1:13:31] to kind of look at possibilities to acquire valuable business that continue to strengthen the franchise. We are today where we were before. We have obviously made important steps in '17, but if we can capture companies that would help us in the key strategic directions that we are pursuing, we certainly will not hesitate and the good thing is we have a pristine balance sheet that will enable to do it easily.

The second question was?

Lawrence De Maria -- William Blair & Company -- Analyst

The $40 million I'm just --

Jacques Esculier -- Chairman and Chief Executive Officer

All right, $40 million. At this point Larry, I can't tell you, because it's again there are different moving pieces. One of them is we over spend because we have to hire outside services. So as we bring resources on board, we should see certain lowering of the expense. We will at one point have gone over there hump of this kind of parallel developments and we could probably anticipate at one point to come down. What I would say is, at this point conservatively I would -- I'm just not planning to recover and bring that down back to where it was in '18 and eliminate that fully. So I would say moving forward for the moment I leave myself with the flexibility to maintain that $40 million in the foreseeable future. Now, if we can actually again benefit from one of those two things that is not actually kind of utilized for other purposes, then we will decrease the investments, believe me, we are not really looking forward to growing investments, we're looking forward to optimize the level of OpEx. We are going to end up '19 at about 5.7% which is historically high compared to what we have seen in the past. For the moment I would say we are anticipating to keep it and if we can obviously bring it down we definitely will.

Lawrence De Maria -- William Blair & Company -- Analyst

Okay. So to be clear, the $40 million we should think of as a run rate for now but we're also excluding it from your incremental margin framework.

Jacques Esculier -- Chairman and Chief Executive Officer

You should exclude it from the margin framework this year, but next year, obviously we will kind of operate within the normal incremental framework, which means that the $40 million have been put in and will stay in.

Lawrence De Maria -- William Blair & Company -- Analyst

Okay, understood. All right, thank you and good luck.

Jacques Esculier -- Chairman and Chief Executive Officer

Okay. Thanks, Larry.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to your speakers for closing remarks.

Jacques Esculier -- Chairman and Chief Executive Officer

Well, thank you for your participation and attention and looking forward to great quarters for all of you. Thank you. Bye-bye.

Duration: 77 minutes

Call participants:

Sean Deason -- Vice President, Investor Relations and Controller

Jacques Esculier -- Chairman and Chief Executive Officer

Roberto Fioroni -- Chief Financial Officer

Jeffrey Hammond -- KeyBanc Capital Markets Inc. -- Analyst

Justin Long -- Stephens Inc. -- Analyst

Ann Duignan -- JPMorgan & Co. -- Analyst

Louis Bamberger -- Goldman Sachs Group Inc. -- Analyst

Joseph Vruwink -- Robert W. Baird & Co. Incorporated -- Analyst

Lawrence De Maria -- William Blair & Company -- Analyst

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