Federal-Mogul Corporation, Q2 2008 Earnings Call Transcript

Federal-Mogul Corporation (NASDAQ:FDML)

Q2 2008 Earnings Call

October 22, 2008 9:00 am ET


David Pouliot - Director of Investor Relations

José Maria Alapont - President and Chief Executive Officer

Jeff Kaminski - Senior Vice President and Chief Financial Officer


Patrick Archambault - Goldman Sachs

John Sykes - Nomura

Nicole Torraco - Babson Capital


Great day, ladies and gentleman, and welcome to the third quarter 2008 Federal-Mogul Corporation earnings conference call. My name is Katina and I’ll be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to our host for today’s call, Mr. David Pouliot, Director of Investor Relations. Please proceed.

David Pouliot

Good morning and thank you Katina. Thank you for joining the Federal-Mogul Q3 2008 earnings call. Before we begin, I would like to refer you to the company’s Safe Harbor statement shown on page 2 of the presentation and included on the earnings press release filed this morning.

Please consider my reference to this statement, as contained in these documents, as notification of the applicability of these safe harbor provisions to today’s call and the documents referenced during the call. Please turn to slide three.

Our speakers for today are José Maria Alapont, President and Chief Executive Officer; and Jeff Kaminski, Senior Vice President and Chief Financial Officer. Both gentlemen have some materials to share concerning our company’s strategy and our quarterly results. And after their prepared material, they will be available for questions. Please turn to the agenda slide.

We will begin with Mr. Alapont providing a brief overview of the company and presenting some key financial and operating highlights for the third quarter. He will also address Federal Moguls approach to the automotive downturn, the company’s cost-reduction initiative, and focus on our fundamentals. Following the overview, Jeff Kaminski will cover the Q3 results. Then we will share our closing remarks and open up the call for Q&A. Please turn to slide five. Mr. Alapont?

José Maria Alapont

Thank you, David. Good morning and thanks for you to join in our call. We have some performance to report this morning despite the unprecedented downturn of the markets. These results show the benefits of our decisive actions to restructure our cost base combined with the on-going benefits of our market, customer, and product diversification.

Federal Mogul ended the quarter with $1.7 billion in revenue which is about the same level in third quarter last year. This is our ninth consecutive quarter of year-over-year sales increase. We believe that it is important to highlight that these results were achieved during a significant downturn on the global automotive market.

The gross margin remained solid at $279 million or 16.5% of sales, which is also about the same margins that the last year. SG&A was reduced by $22 million before exchange to 11.3% of sales compared with the 12.3% on the third quarter 2007. This demonstrates the results of ongoing initiatives to drive our waste and reduce company overhead. Operational EBITDA increased 7% up $12 million to 178 million, which is up from the 166 last year.

During the quarter, we recorded an 11 million restructuring charge as part of our global restructuring program that was announced on September 17. We have made progress in our streamlining efforts already.

Pre-tax income was 22 million in the quarter, reflecting improved earnings performance over the prior period when Federal Mogul recorded a pre-tax income of $7 million. Net income was 4 million, or $0.04 per share, compared with 40 million last year, third quarter. This higher net income on last year third quarter was primarily due to a onetime tax benefit of 24 million.

Finally, our cash flow remains strong at 25 million during the quarter. This was an outflow of 140 million last year. Our positive cash flow added to our overall strong balance sheet and available liquidity of about $1.3 billion.

If we move to page six, the charts are showing that we continue to increase our geographic diversification with markets other than U.S. and Canada representing 62% of our total revenue. Developing and strengthening market diversification is a key objective in our strategy for sustainable global profitable growth.

We keep working diligently to increase growth in China, India, Europe, Russia, and South America while at the same time strengthening our market leadership in mature markets like North America and Europe.

The decline in global industries sells primarily impacted our U.S. and Canadian operation while Europe and the rest of the world we continue to perform. In fact, our revenue in U.S. and Canada declined about 66 million, which was offset by the increased revenue in Europe and the other international markets.

If we now move to page seven, we’d like to talk about the unprecedented market downturn. This year, as you know, the third quarter was a very different market environment than the one we had last year. We have experienced several macroeconomic factors such as turmoil in the credit markets, higher energy prices, and still spending high commodity material prices, which negatively impacted the consumer confidence.

This factor’s set to reduce new car purchases and simultaneously reduce vehicle miles driven in the major global markets. As a result, we observed double digit reduction in our automotive industry sales volumes, which started first in U.S. but then followed by Europe and even now growth markets like China, India and Russia are also experiencing a very rapid cooling during the third quarter.

While several vehicle makers experienced year-over-year sales decline during the quarter, we at Federal-Mogul due to our market customer and product diversification disenabled the company to report on the slight sales increase.

Let’s move now to page eight and if you are asking yourselves what is Federal-Mogul doing to offset today’s difficult auto market industry environment, well to begin with we are focusing in our fundamentals.

We have put in place several actions designed to support our top and bottom lines in a declining industry environment. We are competing aggressively to increase our volume with customers, especially where we are outsourced with our competitors. We have also been proactively working to offset the impact of the high cost materials through price recovery together with developmental alternative materials and improved designs.

We are leveraging the strong diversification we enjoy with markets, customers and products. This diversification not only provides an extensive global presence, but also helps to mitigate industry and regional downturns such as we are seeing today. And, as always, we maintain our commitment to research and development of leading technology and innovation in vehicle and industrial products for fuel economy, alternative energies, environmental and safety systems.

Innovation drive combined with our competitive costs base a manufacturing footprint is worked as asked to successfully compete for future business and continuous growth.

Let’s talk now on page nine about our cost reduction plans. Part of our focus on the fundamentals is both adjusting our infrastructure to current demand while increasing productivity and reducing costs. Federal-Mogul responded decisively to the market downturn and the global industry by implementing our restructure plan to reduce excess capacity and eliminate structural cost.

Our restructure program is focused on the streamlining, management layers, consolidating initiative structure, consolidating or closing locations and implementing other management improvements that will lower operating costs.

We began planning the necessary initiatives early in the quarter and expect to reduce approximately 4,000 positions or 8% of the workforce plus closure of a number of facilities before the end of 2009. During the third quarter 2008 we report already 11 million restructure charge to account for salary and hourly workforce severances as we implemented our streamlining products.

Reducing our SG&A expenses by $22 million is just part of the global cost reduction effort. At the same time we have implemented programs to reduce (inaudible) material costs, professional services and other expense categories to reduce our spending in line with our view of the current market and the tough industrial challenges on the horizon.

We move now to page 10. I would like to share with you how we are developing our revenue. We are committed to simultaneously strengthen existing and new customer relationships while we are expanding our presence in developing markets. Federal-Mogul is implementing several initiatives to develop this revenue base.

First, we are pursuing global development of Federal-Mogul’s market share on existing vehicle platforms and on Powertrain programs to compensate for the reduction in production volumes made by our customers in response to the weaker market environment.

We are restructuring our global operations towards best cost manufacturing in order to optimize our competitive costs to better capture global customers and market opportunities. We are continuing to invest in our future product portfolio while maintaining our focus and commitment to the development of leading technology and innovation for fuel economy, alternative energies, emission technologies and vehicle safety products to support our customers’ immediate and future requirements.

We are also implementing new programs in our global aftermarket organization to boost sales on seasonal replacement parts and other consumable products. Finally, we are looking the strategic opportunities to grow organically or through external organizations in order to strengthen our competitive position.

Let’s go now to page 11 and show you our financing and capital structure. We are really well positioned to manage industry challenges and to continue our leadership in the markets where we compete because we have considerable liquidity for a business of our size.

Our $3.5 million long-term debt facility office, low interest cost with minimal annual amortization, no financial maintenance covenants can provide Federal-Mogul with a flexibility to deploy capital globally. We have about 1.3 billion of available liquidity to maintain our sustainable global profitable growth as strategy.

Out of that, 800 million of this is in cash, and the other 500 is in a revolving credit facility. This favorable bank financing and considerable liquidity will enable us to take advantage of huge opportunities through organic growth for market consolidation.

We also currently have about 1.2 billion in interest rate swaps with our major banks, which reduces our exposure to LIBOR volatility and helps insure future financial stability. Similar to the last two quarters, I would like to share some examples on how our leading technology and innovation support our plans for global growth and how we support our customers.

Federal-Mogul continues to benefit from its leading technology and innovation, by winning major business awards related, as I said before, with fuel efficiency, emission reductions vehicle safety and we do it with the leading automakers.

Our leading technology and innovation is a differentiator between us and our competitors. In the third quarter, we were awarded major business contracts that will help to meet our customer challenges that they have in fuel efficiency and reduced CO2 emissions.

Our award winning Monosteel© piston separates itself. This patented technology features superior strength and performance essential for the next generation of emissions compliance for diesel engines. The design addresses increasing thermal, mechanical and corrosion challenges placed on the heavy duty diesel engine.

Federal-Mogul has also designed an innovative aluminum piston with a new proprietary re-melting process that improved durability by increasing hardness in key areas around the piston ring.

This process is essential and is applicable for high-charged engines where downsizing, as you know, that is a major trend in industry, has been employed to improve furl economy and reduce CO2 emissions.

In page 13 I’d like to do the third quarter highlight summary for you, and as I mentioned at the beginning of the call, we finished the quarter with solid sales and earnings as a result of our focusing on the fundamentals of our business.

Leveraging our global diversification and energizing our restructuring initiatives to respond to the decline in the automotive markets, we recorded $1.7 billion in sales, 6 million better than previous year, despite this strong downturn in the market that we mentioned. We finished the quarter with a strong operating performance, increasing EBITDA by 7 % to 117 million and positive net income of 4 million.

Cash flow remains strong during the quarter at 25 million, which is favorable versus the previous year third quarter, where Federal-Mogul had a cash outflow of 140 million. We enter the fourth quarter with approximately 1.3 billion in available liquidity and a strong financing position, which allows Federal-Mogul unique flexibility.

Finally, I want to stress that we are committed to keeping our pipeline of leading technology and innovation while restructuring our operating capacity towards best cost manufacturing. We believe that this is a key and (inaudible) to compete efficiently and effectively for future business as we respond to market trends and increasingly strengthen requirements.

Thank you. And now Jeff Kaminsky, our CFO, will provide more details about the third quarter financial performance.

Jeff Kaminsky

Thank you José Maria. This morning I will be covering Federal-Mogul’s third quarter financial highlights, including a review of the sales and gross margin performance of our five business units.

I will also include brief comments on the company’s year to date performance. In addition, and as a point of information, later today we will file our form 10-Q with the SEC containing the full details of our third quarter and year to date results.

Now please turn to slide 15 for more details of our third quarter earnings performance. Starting with revenue, as mentioned by José Maria, we had sales of $1.7 billion representing a third quarter record.

The small improvement versus prior year will be explained in more detail later in the presentation, but it was primarily due to favorable exchange rate movements on our sizeable European business, offsetting the declines in North American volumes.

We managed to maintain a healthy gross margin of $279 million, or 16.5 percent of sales, the same as last year. We realized a $22 million reduction in SG&A expense, in constant dollar terms versus the prior year, including $8 million of reduced pension expense. This decrease is partially offset by exchange impacts of 6 million for a net improvement of one point in percent of sales terms.

Interest expense improved by $3 million resulting, from the new 2008 capital structure consisting of $3 billion of term loans at very favorable terms and rates. This improvement was net of $5.5 million of non-cash amortization relating to the debt discount adjustment.

The increase in amortization expense, as called out on the schedule, is associated with higher intangible asset balances established as part of the fresh start reporting. Chapter 11 costs were down to $2 million in the quarter, a $13 million reduction. Joint venture earnings fell by $6 million, primarily due to increased amortization as a result of fresh start.

The first wave of our recently announced restructuring program required us to book charges of $10 million in the quarter relating to severance of mainly white collar staff. This charge will have a payback of less than one year.

Combined with $1 billion of restructuring relating to the previously announced plans, the total charge for the quarter was 11 million. This amount is comparable to the prior year, although the 2007 activity was mainly related to closures.

Other income net includes a number of miscellaneous income and expense items, with a net improvement of 6 million versus the prior year. Our pretax income was up 15 million, basically as the result of gross margins that were maintained at the prior year level, improved SG&A expenses and remaining line items which basically netted to zero.

2008 booked tax expense did not directly comparable to the prior year due to $24 million of one-off credits achieved in 2007. Finally, at the bottom line, we generated net income of $4 million, which is unfavorable to the prior year due to Q3 2007 one-time tax credits and includes $13 million of negative impacts due to translation and transaction exchange compared to the prior year.

On slide 16, we have a reconciliation of net income as reported through our operational profit measure. Federal-Mogul management believes that operational EBITDA most closely approximates the cash flow associated with operating earnings of the company, and we used operational EBITDA to measure the performance of our business segments.

This chart walks through our definition and reconciliation of operational EBITDA, and I will make a few comments on the individual items that are added back to that income, starting with Chapter 11 costs.

This item represents current quarter emergence related expenses including legal and administrative fees for creditor distributions, and professional fees relating to fresh start reporting. Restructuring charges are also excluded as we treat them as investments back into the operations supporting improvements in future earnings. These charges are evaluated on the same basis as capital spending and acquisitions, with the same required payback and return HRDA rates.

Interest expense and taxes are obviously excluded from EBITDA, along with depreciation, amortization, and other non-cash charges to earnings. At the bottom line, we realized a 7 % increase in operational EBITDA, reaching $178 million for the quarter, which was $12 million higher than the same period prior year.

Slide 17 represents a roll-forward of our EBITDA from the third quarter of 2007 to the third quarter of 2008. At a high level, the company performed favorably in a number of areas in order to offset the impact of market volume declines and mix during the current year. As you can see on the chart, we experienced a $60 million negative impact in EBITDA from the 140 million decline in volume, along with the effective negative mix.

We had reduced market volumes of 63 million from the OE business and 77 million from the aftermarket. Of the OE volume decline, $51 million was in North America, and 11 million in Europe. Of the aftermarket volume decline, 63 million was in North America.

The buying declines were partly offset by market share gains in all regions. We achieved a solid conversion on the $51 million of gains and an average EBITDA margin of 25 %. This positively contributed 13 million to the quarter over quarter variance.

The $24 million pricing impact was due to aftermarket price increases of 15 million and OE increases of 9 million, the latter primarily due to material recoveries and escalators. We had strong improvement in productivity during the quarter, especially considering that this number is net of labor and commodity inflation of an estimated 28 million negative. Therefore gross productivity in reductions in materials and services contributed about 42 million incremental to the bottom line versus Q3 ’07.

The positive 21 million EBITDA contribution from exchange and other was primarily due to reduced pension expense of 8 million and 16 million of one-off settlements, partially offset by exchange of 6 million.

Next, reviewing the same slide that José Maria discussed earlier, I will provide a few more details of our sales by region. Overall sales are relatively flat versus the same period in 2007; with volume declines more than offset by exchange, market share growth and pricing. You can see the trend of increased revenues coming from outside of the U.S. and Canada with Europe and the rest of the world now representing 62 % of the company’s total sales versus 57 % in Q3 2007.

European sales rose 43 million for the quarter, representing an increase of 6 % versus the prior year. Our rest of world sales had growth of $29 million or 13 %, with all of the increase coming from Brazil, Russia India and China, known as the BRIC countries, which increased by 42 %. U.S. and Canadian sales declined $66 million due mainly to the market downturn, with an OE net sales decline of 41 million and an aftermarket decline of 25 million.

Moving to slide 19, this is a view of our sales by market detailing our global OE and aftermarket revenues. With almost flat overall sales, there was a continued mixed shift towards OE, which increased by 3 % or $26 million versus Q3 ’07, while the aftermarket sales fell by 3 % or 20 million.

As can be seen on the chart, a number of factors impacted our third quarter revenue, with various positive and negative effects, again emphasizing the advantage of our market customer and product diversity. The individual impacts will be covered in more details when we review the results of the business units later during this presentation.

In slide 20, we have a high level summary of our reporting segments. Federal-Mogul is organized into five business units: Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products and Global Aftermarket. As you can see the segments represent a broad range of products serving OE, service and replacement parts customers in automotive, off-highway in commercial and industrial markets.

On the next slide we have summarized the sales by business segment and you could see that three of the five operations realized increased quarterly sales versus 2007. The detail drivers and specific factors relating to the change in each will be covered in the following segment details slide starting with the Powertrain Energy business unit on slide 22.

Powertrain Energy is our largest business unit serving the OE market and represents about 50% of our OE sales. Highlights of the $25 million or 5% sales improvement versus prior year include growth in Europe and the rest of the world, market share gains in all regions, but concentrated in Europe and a large favorable exchange impact due to the significant component of European sales for this business segment as can be seen on the pie chart.

The primary drivers behind the 26% improvement in margin dollars include $16 million of productivity improvements and reduced depreciation, favorable product mix, relatively low price downs of just $1 million due to contractually committed OE customer price reductions that were nearly offset by material price recoveries and finally, the macroeconomic factors of raw materials price increases and unfavorable transaction exchange versus Q3 2007 that reduced margin by combined $4 million.

The next slide provides an overview of the Q3 performance of our Powertrain Sealing and Bearings business. Overall, we experienced a $14 million increase in quarterly sales reaching $266 million. In this segment we had strong sales growth in Europe and the rest of the world. Offset by the declining light vehicle volumes in the U.S. market.

Our global volumes fell by $11 million, but the sales dollars actually increased due to customer to price improvements of 9 million, favorable exchange of 12 million and a first quarter 2008 acquisition in India.

Gross margin excluding a $3 million impact from acquire at our Gdańsk, Poland facility was basically held flat with last year. Essentially favorable pricing of 9 million offset an unfavorable volume in mix impact of 9 million, improved productivity and reduced depreciation offset material price increases.

Moving now to slide 24, which summarizes the third quarter performance of our Vehicle Safety and Protection business unit; quarterly sales fell to $173 million versus 196 million for the same period of the prior year, primarily due to reductions in U.S. and Canada. Sales were favorably impacted by 10 million of exchange during the quarter with almost 70% of segment OE revenues now coming from Europe.

Vehicle Safety and Protection incurred a $9 million or 20% reduction in gross margin for the quarter. The strong timely implementation of productivity projects, net of inflation, continue from prior quarters and was sufficient to offset buying declines. However, the macroeconomic factors and material prices and transaction exchange combined to reduce gross margin by 9 million.

On slide 25, we have a summary of the results of the Automotive Product business unit. This segment has a diversified product offering that internally transfers the majority of its manufacturing output to our global aftermarket business. The sales performance for this slide represents the direct OE customer sales of the business unit as was the case for the three segments just discussed.

The 12% positive sales variance is the largest increase in percentage terms of any of the segments. Driving this increase was double digit percentage increases of OE sale in Europe and the rest of the world and remarkably a 1% increase in U.S. and Canada.

Gross margin was up $7 million or 53% versus the prior year with the 5 point increase in margin as percent of sales. The improvement was driven by favorable productivity and lower depreciation, partly offset by increased raw materials prices.

To wrap up the business segment performance summaries, I will now move out of the OE focus segments and cover slide 26, summarizing the Global Aftermarket.

This segment reported $645 million of quarterly revenue down $20 million or 3% versus the prior year. Sales were down in the U.S. although share gains partly offset the overall market decline. The U.S. market share increase was driven by significant business gains of premium branded products in the major domestic customers.

In Europe, the favorable exchange impact from translation offset the market declines. Margin dollars decreased 8% or 13 million to $140 million due mainly to loss contribution from buying declines net of market share gains. Favorable customer pricing of 16 million partially offset negative impacts relating to product mix. The results of favorable exchange impact in the quarter in proportion to sales at approximately the average historical margin.

That wraps us the review of our Q3 business segment performance. We will now move to a few slides covering the first nine month’s results. Starting with slide 27, where we summarize our earnings performance.

The first column of this slide represents the GAAP-based consolidated P&L for the nine months ended September 30, 2008. The second column reflects one of the fresh start accounting adjustments. Management believes that excluding the first quarter 2008 one time non-cash impact of this valuation of inventory from both gross margin and net income provides information most comparable to the prior year.

Other adjustments to earnings as a result of fresh start accounting are repeating and somewhat permanent and as such have not been adjusted out. In addition, the other adjustments are not material on a net basis.

Moving to the net sales line, revenues increased to $5.5 billion representing a first nine months' record performance for the company. The $381 million increase is primarily due to European OE sales growth and exchange. The adjusted gross margin percentage increased by almost six-tenths of a point mainly driven by productivity improvements and lower depreciation. This resulted in a $99 million increase in gross margin dollars versus the same period in 2007.

The SG&A reductions in the third quarter combined with those in the first half produced a constant dollar SG&A reduction of 41 million partly offset by $27 million of unfavorable exchange movements. The various other line items add an additional 21 million of positive impact to pre-tax income versus the first nine months of 2007.

And finally at the bottom line we reported a solid increase of $103 million in adjusted net income resulting from the after-tax impact for the above factors as well as a significant improvement in the year-to-date effective tax rate.

On slide 28, we have a reconciliation of net income as reported to our operational EDITDA. I talked about our operational EDITDA measurement on slide 16 so I will not repeat our rationale for using this metric.

In the top section we have the one-time non-cash fresh start reporting adjustment that is added back net of tax to arrive at adjusted net income of $125 million. The rest of the line items are of the same nature as explained earlier relating to the third quarter arriving at an operational EDITDA of $640 million for the first nine months of 2008. This represents an improvement of 11% and an increase of $63 million versus the same period of 2007.

On the next slide you can see a roll forward of our first nine months 2007 EDITDA in sales to 2008. This shows a very similar trend as our Q3 roll forward with a large negative impact from volume and mix more than offset by proactive initiatives in several categories including market share gains and productivity.

Now turning to slide 30, we provide a summary of the first nine months consolidated cash flow starting with net income and adding back depreciation and amortization of non-cash items at approximately the same amount for both periods. The next $225 million line item relates to Q1 2008 receipts from the 524(g) Trust.

Regarding working capital, significant progress was made through the first nine months of 2007 to increase the prior payment terms. These improvements remain but the one-time cash benefit of that improvement in 2007 was not repeated this year.

Net working capital movements, therefore, created a larger outflow in the first nine months of 2008 compared to 2007. Also, capital spending increased slightly versus the same period of the prior year supporting our continued globalization.

Overall, a solid nine months of performance with $141 million of positive net cash flow from operations net of investing activities comparing favorably to the 35 million outflow for the first nine months of 2007.

In the financing activities section and as discussed earlier, the company set up our post-emergence capital structure during the first quarter resulting in a net $227 million of positive cash flow after a 17 million outflow from a block purchase of company shares and term loan payments of 22 million.

In total, cash balance has increased by $356 million during the first nine months of 2008 ending the period with $782 million in cash and when combined with our revolving credit line providing the company with approximately $1.3 billion of liquidity.

With that, I will turn the presentation back over to José Maria for closing comments.

José Maria Alapont

Thanks, Jeff, and if you come to us (inaudible), before we'll begin with the questions and answers, I want to emphasize for you some key points.

We reported solid performance in sales, gross margin, EBITDA, income, and cash flow. We strongly believe that nine consecutive quarters of year-over-year shows improvement demonstrates that our (inaudible) must recognize Federal-Mogul for its leading technology and innovation at competitive costs. Our global engineering and manufacturing footprint supports our customers to meet increasingly difficult challenges and fuel economy emissions, vehicle safety and performance.

We continued to streamline our cost base by the structure and our global manufacturing operations and reducing our SG&A. As a result, our operational EBITDA increased in the third quarter to $178 million and to 640 million year-to-date and the adjust net income is $125 million year-to-date.

We remain committed and focused on restructuring our global operations while enhancing our already strong market, customer, and product diversification to generate sustainable global profitable growth. Thank you for your attention. Now, we will open the call for questions. Operator, will you please provide instructions?

Question-and-Answer Session


Thank you. (Operator instructions). Your first question comes from the line of Patrick Archambault representing Goldman Sachs. Please proceed.

Patrick Archambault - Goldman Sachs

Hi, good morning.

Jeff Kaminski

Good morning.

José Maria Alapont

Good morning, Patrick.

Patrick Archambault - Goldman Sachs

Yes, just wanted to -- a couple of questions here. Just first on the restructuring. Can you give us a sense of the cash proportion of that 60 to 80 and what the expected payback on that might be?

José Maria Alapont

Well, first of all, Patrick, the cash that we have announced is in line with the restructuration you can expect 60 to 80 million and the return on the investment will be within 12 months. That’s the expectation. That is the way we operate of the restructure in investments and that is what you could expect on this one.

Patrick Archambault - Goldman Sachs

Oh, okay. So I take it it’s mostly personnel, not that much in terms of write-downs in that charge then?

José Maria Alapont

Absolutely, absolutely.

Patrick Archambault - Goldman Sachs

Okay. In terms of -- wanted to -- actually, a couple of questions on Slide 13, or excuse me the EBITDA walk for the third quarter, which I thought was Slide 13, but --

José Maria Alapont

Slide 17.

Patrick Archambault - Goldman Sachs

Slide 17, there we go. Okay. On the market share gains of 13 million clearly this is sort of one of the aspects that can help mitigate some of the volume impacts we continue to expect in subsequent quarters. That’s obviously down from I think your first half run rate of about 25 million in terms of incremental EBIT from business wins?

José Maria Alapont

Yes. You’re correct.

Patrick Archambault - Goldman Sachs

And just wanted to get a feel from you where you think that could be heading just based on your backlog and sort of how much impact there might be from FX or volume on that?

José Maria Alapont

Well, Patrick, you have definitely seen the major driver of why we have this nine consecutive year-over-year quarters of growth. Year-to-date, we are above $50 million of new net business and that is due to two main fundamental factors, one is our diversification on market, customer, and product portfolio and as you know, our dependence of any given customer is not more than 6%.

Now, if you couple that with our growth in market shares globally, that mix, that despite the downturn of the markets, will remain with a solid revenue. And obviously that is, as we have highlighted through the presentation, either Jeff or myself, that is one of the strength of our strategy.

Patrick Archambault - Goldman Sachs

And I guess I mean, asking it sort of another way is there expectations? I mean, obviously you guys have -- you guys have had a lot of CapEx to support pretty strong backlog of new business that we know is kind of ramping up in 2009. You’ve previously thrown up that backlog slide in past presentations.

I guess I’m trying to think is would it be reasonable to expect continued tailwinds in this kind of order of magnitude that we’ve seen for this quarter and subsequent quarters helping to obviously offset some of the pressures from volume I guess is the other way I’d sort of frame the second part of my question.

José Maria Alapont

Regarding backlogs, we report it once per year because we think that is the right way to do it. During the last three years, we have booked more than $15 billion in new business. That compared with our OE portfolio shows a clear trend of growth.

Regarding how that applies into the current business, well, again, that translate into CapEx. Out of the CapEx that we are reporting year-to-date, which is around the 220 million, there is a substantial part that is what we call maintenance CapEx, I mean, the CapEx that you need to run the business. And also there is an important part that is the growth investment in CapEx that we do for all these new contracts.

The contracts are signed contracts, are already in the portfolio, but naturally with the market downturn, what we are doing is proactively as we are doing with the restructuration on the operations, we are also reassessing the needs of capacity on a global basis because, as you know, we are very globalized in line with the new volumes that we are forecasting for the industry. Then, very strong backlog on the last three years, in three months we will record the one for 2008 but for the last three years more than 15 billion.

Our CapEx year-to-date, first nine months around 220 split between the maintenance CapEx and growth CapEx and an assessment on the global capacity needs for the new programs in line with the downturn of the market.

Patrick Archibald - Goldman Sachs

Okay thank you. And I guess, just last one, it sounds like from your commentary that you are still interested in pursuing acquisition opportunities despite the market downturn. Can you just give us a little bit of an update as to how that’s going? I would suspect that in this environment clearly potential sellers have to be somewhat realistic about prices so can you just give us an update on that?

José Maria Alapont

Definitely, with us having about $1.3 billion liquidity available for Ada developing internal organic growth through our strategy through sustainable global profitable growth or looking for external opportunities for consolidation. That is quite a unique decision in today’s market.

Also you need to take in consideration that, as you have observed through our third quarter, we keep generating cash. We are not burning any cash, which also is positive with us in a position of strength.

Regarding the opportunities you have described in your question, today, there are plenty of opportunities. The market is very tough and it’s getting tougher; therefore, our interest remains clear and we are continuously evaluating opportunities and obviously we will be pleased to share with you if something materializes.

Patrick Archibald - Goldman Sachs

Okay, thank you. Thank you very much.

José Maria Alapont

Thank you Patrick.


The next question comes from the line of John Sykes representing Nomura. Please proceed.

John Sykes - Nomura

Yes, just a couple of housekeeping questions for you. I’m wondering what was cash interest in the third quarter and what was cash taxes?

Jeff Kaminski

I’m sorry, you’re -- cash taxes, for the nine months year-to-date, we estimating that we’ll pay about 45 million in cash taxes for the nine months. Interest, if you look at the interest for the quarter, interest paid was $42 million in cash.

John Sykes - Nomura

Okay, and I guess one surprise to me was just in the safety segment and how much, I guess, overall that was down in Europe. I mean that’s purely volume-driven I’m assuming, but in terms of penetration, have you been increasing your market share in that segment in Europe?

José Maria Alapont

Well, probably, you’ve got it a little mixed-up. It’s down but it’s not in Europe, it’s in North America. If you look into slide 24 it says U.S./Canada down 35% with Europe is with the market. Europe is 4%. Europe is basically slightly better than the market that is around 5%.

Then in U.S., what happened is that we are the worldwide leader for friction materials for breaking systems and we are very strongly positioned on SUVs in North America for that particular product. For the rest, as I said, we are like 6% maximum for any given account, any given customer.

Then in this particular case, it was in North America, not in Europe and it was due to the fact that as we all know the volumes in light tracks has gone down in a major way. But we are readdressing the situation, we are taking all the necessary actions and overall we remain a worldwide leader in that product or portfolio. Then we are quite reassured that we will be taking the right actions and keep in the long-term the growth.

John Sykes - Nomura

Okay, yes, because I’m just looking at slide 24 and I understand the U.S./Canada, the 35% decline just give what the Big Three are doing, et cetera, et cetera, it was just surprising to see that Europe was down 4% in that segment given that Europe’s about two-thirds of that total segment’s business. And that was kind of the question that I had.

I guess I didn’t expect that that segment would be down at all only because I was assuming penetration would offset volume decline, but I guess obviously the volumes have declined a lot more then the ability to further penetrate each model line.

José Maria Alapont

Your assumption is accurate, it’s just that when you look to Europe and as we say, we are very present in all of Europe, whether it’s Western Europe it’s in Europe or actually when you see all th markets combined end of third quarter, Europe according the market data, is around that number, it’s around 6-% with Western Europe down by 9.6%. What I’m saying is performing at around 4%, all included, we are slightly better then the market. We would like to be even better but that is where we are.

John Sykes - Nomura

Can I end up; I know you can’t give too much forward guidance.

José Maria Alapont

We cannot give guidance at all.

John Sykes - Nomura

Yes. Well, let me ask you this without being specific about the company itself do you, I mean I guess what you’re saying, is ’09 across the board, all over the world in the markets that you compete in, it’s going to be another tough, tough year. That’s basically fair to say, is that what you’re planning on?

José Maria Alapont


John Sykes - Nomura


José Maria Alapont

I would say that today whether you look to J.D. Powers or any other source of data information, there is no doubt that we are facing a very tough fourth quarter and a real tough 2009. That is not Federal-Mogul, that is the macroeconomy and that is the automotive industry.

John Sykes - Nomura

And the cost cutting actions that you’re taking now, you don’t feel like those will put you at a disadvantage when the market improves or let’s just say, if and when the market improved, beyond ’09, right, that these cuts that you’re making now won’t constrain your ability to service your customers if you see an improvement in the market in the future.

José Maria Alapont

Not at all in the sense that as we have reported consistently, we are a very global company and 62% of our revenue comes from out of North America, no customer or account is more than 6% and we are presented with all of product portfolio whether it’s in Asia Pacific or in Eastern Europe and Russia.

Now, what we are doing simultaneously is the restructuring the company to have cost structure that is in line with the market and customer requirements, but at the same time we are globalized in the company towards what we call, Best Cost Manufacturing Locations.

And in that sense if you have been tracking us you will see that back in three or four years ago we were around the 10% in the Best Cost Manufacturing Locations. Last year we’re already reporting 21% and we keep growing and strengthening our Best Cost Manufacturing Locations.

We are in fact, using the down turn of the markets and every situation to strengthen even more our global manufacturing footprint.

John Sykes - Nomura

Okay. Thank you very much.

José Maria Alapont

Thank you.


The next question will come from Nicole Torraco representing Babson Capital. Please proceed.

Nicole Torraco - Babson Capital

Hi, good morning.

José Maria Alapont

Good morning.

Nicole Torraco - Babson Capital

Most of my questions have been addressed. Just one quick housekeeping question. What do you view as your minimum cash balance that you like to keep on balance sheet just to deal with daily working cap, weekly working cap swings, things like that?

Jeff Kaminski

Yes, we look for around 200 million on the balance sheet.

Nicole Torraco - Babson Capital

Okay. And I just want to go back quickly to a question that was asked earlier on market share gains. Can you sort of describe what that mainly was? I mean was that mainly taking market share competitors, was that growth in the brick companies? And can you talk about how you plan to continue making those market share gains.

José Maria Alapont

The market share gains were well spread into the business units, that means it was basically a good balance between original equipment and after market. And in the case of original equipment, it’s basically done through leading technology and innovation. That is one of the strengths of the company and you have seen it and I’m sure you can track it through our information.

The other one is our globalization. Not only we can support the customers with very core important strategy for the automotive industry like fuel economy, alternative energies, environmental, CO2 reductions, safety, performance, but also we can support them globally.

That means we are present in all regions with basically all our products. That is on the side of the vehicle original equipment. Plus, also is very important, our industrial and consumer sector which represent 10% of the company.

On the other side, we are one of the world leaders on global after market, and in that sense we keep developing our customer portfolio getting wider and deeper. That means expanding our customer base globally around the world and at the same time those that we are already present, deeper by getting more product lines, more product portfolios.

That is summarized and if we will take you through the details of that market share growth you will see that it’s very global and it’s very well deployed through all activities.

Nicole Torraco - Babson Capital

Okay, thanks. Well, one last thing, on your revolver you have full access to the 500 million, did Lehman hold any portion of that?

Jeff Kaminski

No, they don’t and in fact, we have a pretty diverse group of institutions involved in it with not one single institution holding more then $75 million.

Nicole Torraco - Babson Capital:

Alright. Thanks.

José Maria Alapont

Thank you.


Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back to Mr. Pouliot for closing remakes

David Pouliot

Thank you very much, Katina. We would like to once again thank you for joining our Q3 call and if there are still any other questions that we were not able to answer please feel free to call me, David Puliot at (248) 354-7967 and we look forward to having you joining us on our fourth quarter and total year end 2008 call. Thank you.


Ladies and gentlemen thank you for your participation in today’s conference. This concludes your presentation, you may now disconnect. Good day.

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