Federal-Mogul Corporation Q4 2008 Earnings Call Transcript

Federal-Mogul Corporation (NASDAQ:FDML)

Q4 2008 Earnings Call

February 24, 2009 10:00 am ET


David Pouliot – Director, Investor Relations

Jose Maria Alapont – President, Chief Executive Officer

Jeff Kaminski – Executive Vice President, Chief Financial Officer.


Patrick Archambault – Goldman Sachs

[Brian Barnhammer]

Fred Taylor – MJX Asset Management


Welcome to the fourth quarter 2008 Federal-Mogul Corporation's earnings conference call. (Operator Instructions) I would now like to turn the presentation for today's call over to David Pouliot, Director of Investor Relations.

David Pouliot

Good morning. Our speakers for today are Jose 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 and full year results, and after the prepared material, they will be available for questions.

Please turn to the Safe Harbor statement on the following page. I would like to refer you to the company's Safe Harbor statement shown on Page 3 of the presentation and included in the earnings press release filed this morning. Please consider my reference of this statement as contained in these documents of notification of applicability of these Safe Harbor Provisions to today's call and the documents referenced during the call.

Please turn to Slide 4. We will begin with Mr. Alapont providing a brief overview of some key financial operating highlights for the fourth quarter and 2008. He will also address Federal-Mogul's approach to the unprecedented automotive downturn, the company's cost reduction initiatives and long term focus.

Following the overview, Jeff Kaminski will cover the detailed Q4 and full year results. Then we will share our closing remarks and open up the call for Q&A. Please turn to Slide 5.

Jose Maria Alapont

Good morning and thank you for joining the call. Federal-Mogul has a solid performance to report this morning. These results show the benefits of our decisive actions to restructure our cost base combined with the ongoing benefits of our market, customer and product data certification.

We ended the fourth quarter with $1.3 billion in revenue which is 25% less than the same quarter in 2007. This decrease is due to the significant downturn on the global automotive market and our job throughout the last few months has been to flex our capacity to meet customer demands while reducing operating costs to preserve our track record for strong performance.

Gross margin remained solid at $183 million or approximately 14% of sales compared with 2007 of last year. SG&A was reduced by $40 million net of exchange. This demonstrates the results of our ongoing initiatives to drive our waste and reduce company overhead. Operational EBITDA was $140 million or 8.7% of sales which still is a solid performance considering the depth and the speed of the market decline in the fourth quarter.

During the fourth quarter we reported $180 million restructuring charge as part of our global restructuring program announced in the second half of 2008. We have made rapid progress in our restructuring efforts. There were a number of special items related with Chapter 11 2007 and the market decline in 2008 that caused the reported net to be non representative of the fundamental record performance of the company.

When adjusting to the exceptional items just described, we had a net loss of $24 million in the quarter for an adjusted net income of $11 million in the quarter for 2007. Finally, our cash flow remains strong at $180 million during the quarter versus an outflow of $193 million last year.

Moving now to Page 6, and look into the 2008 highlights. For the full year, we realized $6.9 billion of sales in line with 2007 even though the fourth quarter was down about 25% as I've described. Our gross margin was a healthy $1.12 billion or 16.4% of sales. We reduced our total SG&A costs by $72 million before the impact of exchange. This puts the SG&A at 11.3% of sales compared with 12% of sales in 2007.

Operational EBITDA was $754 million versus $763 million in 2007. For both years, we had an operational EBITDA of 11% of sales which means that we did a good job of flexing our cost restructure.

The company recorded a restructuring charge of $132 million for the full year as part of our global restructuring efforts in response to the downturn. This was necessary to rapidly drive our structural costs in order to preserve performance. For 2008, when eliminating the exceptional items, our adjusted net income was $130 million versus $75 million in 2007.

Federal-Mogul was a creator of cash flow in 2008 with a positive cash flow of $321 million as compared with a negative cash flow of $228 million in 2007. That means in a year where most of the industry was burning cash, we generated strong cash.

Let me take you now to Page 7 and talk about driving the future while crossing the desert. We are successfully facing the challenge of crossing the desert of this market downturn with effective action plans, urgency, strength and relentless execution to deliver our commitments. We reported stable sales, solid operating margins and EBITDA plus strong free cash flow in 2008.

As a result of our aggressive actions, we were able to reduce our operating costs by 23% which is in line with the market downturn of the fourth quarter. This restructuring will help us to offset the market downturn and drive for additional sales.

We are implementing a global restructuring and cost reduction plan where our global sites have eliminated shifts, modified shift patterns, establish short work week schedules and reduce head count. We also recently consolidated our five business segments into four, allowing for further operational and support staff to streamline in both.

If you now move to Page 8, and within the driving the future while crossing the desert, let me tell you that we are not only doing corporate actions. We are also working to stabilize and grow our market share presence in the product lines where we compete. This means original equipment, original equipment service market share, expansion and continuing to drive additional share growth and market penetration in the after market.

We will take these steps while continuing to implement a variable cost model that focuses on both additional fixed and variable cost with action so that we can truly flex the manufacturing and support the organization in response to the market demand.

With our strong liquidity we will consider growth through acquisitions and we evaluate every opportunity to ensure a strategic fit and the right financial returns. We believe our business model works and it's appropriate for managing the challenge of this market downturn and to keep generating global profitable growth while crossing the desert.

Let's move now to Page 9. I'd like to share with you here our strong financial performance during the period, 2005, 2006, 2007 and 2008. As you can see, we recorded year over year sales improvements for nine consecutive quarters leading into the fourth quarter of 2008 where there was a downturn, and we finished the year despite that with a stable sales of $6.9 billion.

Regarding EBITDA, we have been improving EBITDA in the last four year and recorded more than $750 million in the last two years, each one of them. We have consistently reduced SG&A both in dollars and in percentage adding $200 million to the bottom line of the last three years.

We continue to improve free cash flow which is one of Federal-Mogul's strengths. In 2008 we realized $383 million which continues our strong improvement and cash generation of about $300 million a year.

Let's move to Page 10 and let me talk about the full year sales by region. The global market is an integral part of our strategy for long term success and profitability. We are diligently working to increase business growth in key areas of the world like China, India, Europe, Russia and South America while strengthening our market leadership in both North American and Europe.

You can see the increase of revenues coming from the markets outside of North America with Europe and the rest of the world represented in 6% of Federal-Mogul sales in 2008.

Page 11 talks about the Federal-Mogul global original equipment and aftermarket advantages. Having a balanced approach to original equipment and aftermarket is the best because we can capitalize on our strength in both segments. With a 60/40 split, we have a robust plan to react to market situations as well as the opportunity to leverage capital and investment and customer strategies.

Federal-Mogul is uniquely able to take advantage of the structural and the market benefits we enjoy by service the OE and the aftermarket in many product segments. Our leading technology and innovation allow us to offer new brands, OE replacement and entry level products for all our global customers.

If you go now to Page 12, we have a look at the vehicle utilization. As you can see in these charts, average vehicle age is increased in the United States and globally, and this trend is expected to continue. Federal-Mogul global aftermarket business positions the company to capitalize on increasing service and maintenance resulting from this trend.

Let's move now to our financing and capital structure on Page 13. Our $3.5 billion long term debt facility offers low interest cost, minimal annual amortization; no financial maintenance covenants and provides Federal-Mogul with the flexibility to deploy capital globally.

We have approximately $1.3 billion of available liquidity. This favorable bank financing and considerable liquidity will enable us to take advantage of future opportunities for organic growth or market consolidation.

We also have about $1.2 billion in interest rate swaps which are with our major relationship banks which reduces our exposure to LIBOR volatility and helps ensure future financial stability.

Now if you move to Page 14, you have a look on our debt maturity profile. You can see that our debt structure was designed to promote long term sustainability and capability to take advantage of growth opportunities. We are required to pay only 1% of our term debt each year till the final maturities in 2014 and 2015.

That means that with 95% of our long term debt facility is several years in the future, we have a unique flexibility to focus our efforts in leveraging our already strong market, customer and products to generate sustainable, profitable growth.

How we look at this strategic acquisition, let's turn to Page 15. With our available liquidity, we are actively evaluating industry consolidation and acquisition, but the transaction must strengthen our leading technology portfolio, offer strategic value for market share consolidation, diversify our revenue base and meet naturally, our financial hurdles.

We have been very active in increasing our ownership positions as noted on the chart in the growing markets including China, India and Russia.

Let's talk about global cost reduction and restructuring on Page 16. Federal-Mogul responded decisively to the market downturn by implementing our restructuring plan to reduce excess capacity and eliminate structural costs.

Our restructuring program is focused on streamlining management layers, reducing the administrative structure, consolidating or closing locations and implementing other improvements. We have announced or already implemented plans to reduce our work force by 26% as compared to July 2008. Our total employment as of December 2008 was 43,000 employees compared with the 50,000 at the beginning of the year.

Additionally, we have implemented a variable cost company strategy eliminating premium shifts, modifying shift patterns and establishing short work week schedules that reflects our capacity in cost base. On a constant dollar basis, our SG&A expenses were reduced by $72 million in 2008 and is part of the total cost reduction efforts.

At the same time, we have implemented programs to reduce material costs, professional services and other expense categories to reduce our spending in line with our view of the current market and the tough industry challenges that we have on the horizon.

If we move to Page 17, and carry on with global cost and action restructuring, let me talk about the fact that we are in the process to consolidate our five business segments into four to enable further operational and support staff productivity. This move also will better align our company with our customers and markets and will allow us to reduce overhead and balance our support staff to meet current expectations.

Our proactive restructuring and aggressive implementation of our plans will prepare our company for growth as consumer confidence and demand returns.

Let me now briefly describe for our portfolio and reporting segments. Highlighted in green on Page 18, you have the product groups that are being realigned. For 2009 we will report the four business segments at the beginning in the quarter first.

As you can see, the combustion chamber technologies are now all in the power train energy segment. We also have placed transmission components together with our sealing and bearing products in the power train sealing and bearing segment. The vehicle safety and protection segment now has all the brake activities together with chassis products, wipers and system protection technologies. Global aftermarket will continue to distribute our world wide product technologies and services through our global leading brands.

If we move to Page 19, I'd like to share with you our robust safety and quality excellence performance. I want also to mention that considering the challenges of flexing our manufacturing capacity to market demand, these two areas; safety and quality must be managed carefully to eliminate risk to employees and to customers. We are proud of the company's ability to take major change and maintain a world class track record for safety and quality performance.

We have achieved a world class incident rate of 1 recordable accident for every 200,000 hours work and we remain committed to zero incidents. Our quality performance is also world class. We achieved nine PPM during 2008 for all our global customers. At Federal-Mogul we treat safety, quality and customer satisfaction as a top priority. We are committed to improve this world class performance year after year.

Let's move now to Page 20 and talk about global manufacturing capacity by region. Federal-Mogul manufacturing footprint from 2003 to 2008 has continued to progress and reflects our drive towards achieving best global costs where as you can see we have now about 25% of our manufacturing capacity.

Key drivers to obtain this global cost as well as customer and shareholders value include having world class manufacturing, sourcing and engineering capabilities, never ending supply chain and efficiency and a strong local supply base in the best cost context.

In that respect, let's go to Page 21. You can see our global supply base optimization. This graph shows our development of best cost country sourcing. You can see how we have increased our direct material versus the last four years in this cost locations. It is not enough to manufacture an engine before in the best location, you must also be able to localize sourcing and distribute materials and products globally through a world class, highly efficient supply chain management.

Let's move to Page 22 and let me recap our 2008 accomplishments. We reported solid sales performance despite the unexpected downturn of the market, especially in the fourth quarter with $6.9 billion in line with 2007.

We continued to proactively implement our restructuring efforts and cost reduction initiatives with 23% reduction in the fourth quarter. We reduced our SG&A expenses by $72 million in constant dollar terms and our continued effort to reorganize the company will achieve further savings.

We realized solid operational performance with $1.1 billion gross margin and EBITDA of 11% of sales or $754 million. We have adjusted net income of $130 million in 2008. That compares with a $75 million in 2008. And finally, we achieved $321 million of cash flow which is one of the strengths of the Federal-Mogul team.

Now I would like to turn the call over to Jeff Kaminski, Senior Vice President and CFO.

Jeff Kaminski

This morning I will cover Federal-Mogul's fourth quarter and full year financial highlights including our usual overview of the sales and gross margin performance of our five business units. The full details of our 2008 financial results are included in our Form 10-K which will be filed with the SEC later today.

Now please turn to Slide 24 for more details on our fourth quarter earnings performance, including a reconciliation of the company's as reported and adjusted results. Starting with revenue, we had sales of $1.3 billion in the fourth quarter of 2008. The decrease in sales of $430 million compared to the prior year is due to the unprecedented downturn in the automotive market which reduced sales volumes by $310 million at constant dollars.

This was combined with unfavorable exchange rate movements of $120 million primarily on our sizeable European business. To understand this change in gross margin year over year, it is important to understand that our overall variable margin is normally around 35%.

In the absence of the significant cost actions in the fourth quarter, this drop in sales would have cost the company upwards of $150 million and result in a gross margin of less than 10% even if direct labor was reduced in line with volume.

Therefore, we believe that our cost cutting actions in the fourth quarter saved approximately $60 million of costs or 4.5% points of margin.

As well as attacking manufacturing costs in the fourth quarter, we reduced SG&A expenses by $40 million representing a constant dollar reduction of $31 million plus favorable exchange impacts of $9 million. Our recently announced restructuring programs required us to book charges of $118 million in the quarter relating to global work force reductions in response to the economic environment as well as the planned closure of several FM facilities.

We recorded $451 million of non cash impairment charges in the quarter due to the economic downturn on the intangible assets that were established as part of fresh start reporting. Other income increased by $12 million primarily due to gains from an insurance settlement relating to a fire in a bearings facility in Poland. The result is a reported net loss of $530 million.

General items are included in the adjustments column including the restructuring and impairment charges for both years and a $1.7 billion gain in emergence from Chapter 11 in 2007. After eliminating the impact from these items, we have an adjusted net loss of $24 million in the fourth quarter 2008 compared to an adjusted net income of $11 million in 2007.

On Slide 25, we have a reconciliation of net income as reported to our operational profit measure. Federal-Mogul management believes that operational EBITDA most closely approximates the cash flow and operating earnings of the company, and we use the operational EBITDA to measure the performance of our business segments.

This chart walks through our definition and reconciliation of operational EBITDA and begins with a simpler view of the reconciliation reported to the adjusted net result for both years.

In summary, for the fourth quarter, we have add backs of restructuring and impairment charges of a combined $569 million and then the reversal of the income tax benefit. In 2007 we deducted the Chapter 11 emergence gains of $1.7 billion and add back restructuring and impairment charges for consistency with 2008.

Following adjusted net income we have add backs for Chapter 11 expenses representing current quarter emergence related items including legal and administrative fees for creditor distribution and professional fees relating to fresh start reporting and the more obvious interest, taxes, depreciation, amortization and add backs.

At the bottom line, we realize operational EBITDA of $114 million for the quarter which was $72 million lower than the same period in the prior year, but represents only 17% of the $430 million reduction in Q4 sales.

Slide 26 represents a roll forward of our EBITDA from fourth quarter 2007 to the fourth quarter of 2008. Starting with the volume and mix bar, and with reference to sales, there was obviously a major impact due to the drop in the market volumes with the company experiencing reduced OE volumes of $300 million and reduced aftermarket volumes of $129 million.

Of the OE volume drop, $90 million was in North America, $190 million in Europe and the remainder in Asia, each region suffering a decline in a range of 25% to 30% reflective of the global nature of the automotive downturn.

Despite the downturn, we still had market share gains of $69 million across all regions in both OE and aftermarket segments which together contributed $18 million of EBITDA. Combining volume, mix and market share gains, sales fell by $360 million with a loss of $154 million of EIBTDA.

Company specific actions were instrumental in recovering much of this loss to EBITDA primarily pricing activity which contributed $35 million and as discussed earlier, the company implemented an aggressive cost reduction program resulting in productivity improvements and labor cost reductions of $69 million as compared to the same period of last year. This improvement was net of underlying labor and benefits inflation of approximately $20 million in the quarter. Other EBITDA drivers remain roughly the same as compared to Q4 2007.

Let's now turn to an analysis of our business unit performance starting on Slide 27 with Powertrain Energy. This is our largest business unit, servicing the OE market and represents about 50% of our OE sales. Highlights of the sales performance include increased full year sales despite a 34% drop in the fourth quarter and market share gains throughout the year.

Highlights of the gross margin performance include an increased gross margin percentage of .8 points of sales for the year due mainly to higher productivity and lower depreciation and a respectable 21% conversion on the fourth quarter decline as a result of effective cost management.

The next slide provides an overview of the full year and Q4 performance of our Powertrain Sealing and Bearings business. Highlights include almost flat sales for the year despite disruptions from a fire at a major bearings plant in Poland, full year gross margin that reflects a 1.6% point improvement on flat sales, again despite disruptions from the fire, and margin contributions from customer pricing actions which contributed $27 million and $16 million to the margin for the full year and the quarter respectively.

Slide 29 provides an overview of the annual and Q4 performance of our Vehicle Safety and Protection business. Significant items of note include the full year sales decline of 10% versus prior year which is almost entirely due to the fourth quarter automotive downturn. Effective cost management that enabled gross margins to remain high even increasing by .3% points despite the full year sales decline, an impressive productivity improvements both for the quarter and the full year, partially offsetting material price inflation and negative volume mix impacts.

Moving to Slide 30, we have a summary of the results of the Automotive Products business unit. Highlights of the sales performance include increased full year sales by 13% despite a 14% drop in the fourth quarter and market share gains throughout the year including the fourth quarter. Highlights of the gross margin performance include an increased gross margin to 21.8% for the full year, an improved fourth quarter gross margin percentage versus the prior year despite the sales decline.

To wrap up the business segment performance summary, we will now move out of the OE focus segments and cover Slide 31 summarizing the Global Aftermarket business. Commenting on the sales performance, this business segment experienced a decline of full year sales of only 2%. In fact sales were ahead of last year until the fourth quarter impact of the general economic downturn which was about half that experienced by our overall OE business.

Despite the downturn, the positive impact on sales from market share gain did continue during the fourth quarter. Highlights of the gross margin performance included the fact that the gross margin remains healthy, and despite the drop in volume in the fourth quarter, the gross margin percentage remained almost flat due to pricing actions and cost cutting measures.

That completes the review of our full year and Q4 business segment performance. We will now move to a few slides covering the full year consolidated results, starting with Slide 32 where we summarize our full year earnings performance.

On this slide you can see that 2008 net sales is $6.9 billion decreased by $48 million or less than 1% as compared to the prior year. For comparative purposed, we have adjusted out the fresh start non cash inventory valuation adjustment of $68 million in gross margin and on this basis, the company achieved an adjusted gross margin of $1.2 billion or 17.4% of sales, an improvement of .2% of sales versus the prior year.

Therefore, in spite of the economic environment in Q4, the company still achieved an improvement in gross margin by offsetting the impact of falling volumes in the fourth quarter with effective and timely cost management actions. In addition, during the first nine months of the year, the company translated the higher volumes into increased gross margin.

SG&A expenses fell by $54 million for the year which was actually a reduction of $72 million in constant dollar terms, an improvement of almost 1% of sales. However, despite the favorable operating performance, we reported a net loss of $468 million due to the fresh start adjustment and the restructuring and impairment charges discussed earlier.

Using the same methodology as described for the quarter on Slide 24, the company earned adjusted net income of $113 million compared to an adjusted net income of $75 million in the prior year for an improvement of $38 million.

On Slide 33, we have a reconciliation of our reported full year net results to operational EBITDA. I talked about our operational EBITDA measurement on Slide 25, so I will not repeat our rational for using this metric. This schedule begins with a simpler view of the reconciliation of the reported full year net result to adjusted net income similar to the slide for the quarter.

In summary, for 2008 we have add backs to the one time non cash fresh start reporting adjustment of $68 million, the add back of restructuring and impairment charges of a combined $583 million and then the reverse of the income tax benefit associated with both these charges.

In 2007 we also add back restructuring and impairment charges for consistency with 2008 and deducted Chapter 11 emergence gains of $1.7 billion.

The rest of the line items are of the same nature as explained earlier, arriving at operational EBITDA of $754 million for 2008. This represents an EBITDA performance that is basically in line with the prior year.

Slide 34 represents a roll forward of our full year EBITDA from 2007 to 2008 starting with the focus on sales volume. The favorable impacts experienced in the first three quarters of the year were offset by the dramatic downturn in the fourth quarter.

In summary, OE volumes declined by $324 million with all but $24 million of this occurring in the fourth quarter and aftermarket volumes fell by $280 million, about two-thirds of which occurred in the fourth quarter.

Regardless of the significant market declines, the company experienced sizable share gains of $285 million for the year, of which 30% came from Europe, 60% came from the Americas and 10% from Asia, In fact, for the full year, FM grew sales in Asia through a combination of acquisitions and organic growth with share gains outstripping the market volume decline.

The company was successful in offsetting material cost increases with customer pricing actions contributing $43 million for the year over year performance. However, the major company initiative to offset the market volume declines was the aggressive cost reduction efforts discussed previously.

These significant productivity improvements contributed $134 million in EBITDA and this was net of an estimated $75 million in labor and benefit inflation. Other EBITDA items include insurance settlements and involuntary conversion gains of around $27 million.

Now turning to Slide 35, we provide a summary of the 2008 consolidated cash flow. In the top section, we adjust for two non cash items previously discussed in the reconciliation to adjusted net income; namely the bankruptcy emergence gains in 2007 and the non cash impairment charges for both years.

After recognizing the Chapter 11 related flows in both years, we add back non cash depreciation and amortization.

The net impact from working capital in 2008 was an inflow of $151 million compared with an inflow of $92 million in 2007 with the difference being largely due to the impact of sales volume changes in the fourth quarter.

During the later part of 2008 the decrease in volumes resulted in a reduction of volumes of amounts due to customers as well as amounts due to suppliers, a reversal of the trend experienced in the later part of 2007. This produced a cash inflow from accounts receivable and a cash outflow in accounts payable.

Inventory was reduced over the course of the year with the major reduction occurring in the fourth quarter.

Overall, these movements combined with investing activities culminated in a solid year performance with $321 million of positive net cash flow comparing favorably to the $228 million outflow for 2007. Furthermore, even excluding the favorable impact of Chapter 11 related inflows from 2008 and excluding the negative impact from 2007, the company had cash inflow of $119 million in 2008 compared to $88 million in 2007, again a solid improvement.

In total, cash balances increased by $462 million in 2008, ending the year with $888 million in cash and when combined with our revolving credit line, providing the company with over $1.3 billion of liquidity.

Moving to Slide 36 for the financial summary, for the full year we realized $6.9 billion of sales in line with 2007, even though the fourth quarter was down about 25%. Our gross margin was a healthy $1.1 billion or 16.4% of sales. We reduced our total SG&A costs by $72 million before the impact of exchange. This puts SG&A at 11.3% of sales compared to 12% in 2007.

Operational EBITDA was $754 million in 2007 and 2008. Our operational EBITDA was 11% of sales which means that we did a good job of flexing our cost structure and implementing other actions to offset the impact from the rapid revenue decline in the fourth quarter. For 2008, after eliminating the exceptional items, our adjusted net income was $113 million versus $75 million in 2007.

Finally, Federal-Mogul was a generator of cash in 2008 with a positive cash flow of $321 million as compared to a negative cash flow of $228 million in the prior year.

Now I'd like to turn the call back to Jose Maria for closing comments.

Jose Maria Alapont

In closing, let me leave you with these thoughts on our performance in 2008 and beyond. Federal-Mogul was strong enough to adapt and compete during a difficult market downturn. Through our restructuring and consolidation of business segments we are now well positioned to support our global original equipment and aftermarket customers and the market.

We have robust strategies in place to make great cost cuts effectively to align our manufacturing footprint with our customers. We have demonstrated world class performance in safety and quality, market, customer and product specification is our strength. No one customer represents more than 6% of our sales and we continue to develop our product with leading technology and innovation to improve fuel economy, reduce emissions, enable alternative energies and improve vehicle safety.

We are committed and confident that with our strategy together with all the actions we have described and with our strong capital structure and liquidity base, we are well positioned to achieve sustainable global profitable growth while we are crossing the desert in 2009 and beyond.

I would like now to open the call to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Patrick Archambault – Goldman Sachs.

Patrick Archambault – Goldman Sachs

Just wanted to get a little bit of a sense, can you kind of spell out what the cadence of the benefits related to the $160 million in restructuring actions that are part of the program, and how you expect those to sort of play out over the coming quarters.

Jose Maria Alapont

As you know, we were on the third quarter reporting record sales, but at the same time in September, we put in place a restructuring plan and then we developed in the fourth quarter that will take us to invest $160 million out of which we have booked $118 million for the fourth quarter, $132 million in total for the year and in our strategy we are going to restructure the company and we have done already an important part of it.

We're estimating that in this plan that we call variable cost company, we will be capable to adjust the cost to the new market situation and from July 1, 2008 to the end of 2009 this year, we estimate a total reduction of 26%.

Together with the head count, we are taking other fundamental actions that we see that coming from the strength of the performance on the quarter and the year, that is the fact that we are merging five business units into four, and as well, that we are on applying strategy for flexing all our manufacturing capacity across with flexible working days during the week, also, by eliminating the premium shifts and as well restructuring the shift pattern.

All this is a package, and as I said, in the fourth quarter we managed to reduce the operating cost by 23% and in terms of the reduction, you saw that first of January 2008, we had 50,000 employees, we ended the year with 43,000.

Patrick Archambault – Goldman Sachs

So it's basically extending forward that 23% cost reduction into subsequent quarters and by the time you get to the fourth, obviously it's going to be a little bit less because you've taken a good part.

One quick housekeeping one, you saw your cash increase by about $100 million over the previous quarter, but I noticed your available liquidity number, you still put it at $1.3 million. Are there any letters of credit or anything like that that made you not increase the liquidity?

Jose Maria Alapont

You're absolutely right. Let me highlight in terms of cash, the fundamental elements here. The first one is you could see that we had $880 million in cash. We have not still drawn anything from the revolver which is around $500 million because the adjustments for the revenue, a little lower. That is what we kept saying. We are about $1.3 billion.

That is to confirm your number. But at the same time, I think it's important to h highlight is, we are a company that for four consecutive years is generating more than $300 million in cash. We're a company that has reported not only $321 million in the year, but in a fourth quarter that we all know how tough has been for this unprecedented market downturn, we have reported a $180 million positive cash, where and when most of the industry has been burning cash. I think it's important to put that into context.

Patrick Archambault – Goldman Sachs

On that topic, maybe working capital is someplace to spend a little time. You have done obviously a great job of that in the fourth quarter, I think it was like positive $180 million, and just how are you thinking about that opportunity as a source of cash as we go into 2009?

Jose Maria Alapont

You've followed us. You know that we took initiative from the very beginning when we came back to the market not to give guidance and we're still there. Then we are not going to give guidance.

I think what you have observed in the fourth quarter is that our operating performance has been very solid at the top, but then our mechanism of managing the generation of working capitals, receivables, payables and the deployment of our strategy has been solid and is the result of all that to give you a company generating consistently quarter after quarter, year after year cash.

Regarding 2009, we are not going to comment, but I think you can look at what has been up to now our performance.

Patrick Archambault – Goldman Sachs

Could I at least push my luck and ask you do you see opportunities in things like inventories and accounts receivable, that sort of stuff?

Jose Maria Alapont

Let me tell you because you're question is a key question on how we see going from here. First of all, you saw me highlight that not only we have put in place this variable cost strategy that tackles all the costs and expenditures and reduce and minimize and adjust it.

But on the other hand we have gone in a strong way as well to look for top line, for revenue, for sales on the OE side by taking market shares wherever possible, although we are as you know have a power place in the market; second, by going OES, and third, globally being even stronger and we are already one of the leaders in aftermarket.

If you combine these two things together and the drive that we are doing to reduce inventories, you have three elements that give you strength and consistency in the way to generate cash.


Your next question comes from [Brian Barnhammer.]

[Brian Barnhammer]

I'm curious without getting too specific, as you look into 2009, you've done a nice job of keeping CapEx pretty steady for the last two years, is this something where given the current environment, you're going to be forced to hold on to some programs that you may have thought about initiating over the course of the next year to keep liquidity at the forefront or considering your fairly strong liquidity position...

Jose Maria Alapont

I just said, if that's okay with you I'm going to take where we left it with Patrick because your question complements Patrick's question. You heard me say about the mechanisms, strong mechanisms to combine financial performance with cash generation. One of the elements naturally for generating cash is how you combine the financial performance with the working capitals, receivables, payables, and then what is going to be your investment in CapEx.

As part of our non guidance, we are not going to give a number but it's clear, it's evident that the same that we have been adjusting and flexing all our capacity in line with the market requirements, we have taken the same steps with the CapEx and it will be done, it has been done.

But we are doing it in such a way that we keep developing and supporting the opportunities that we have in the market and that also you will see. The CapEx will be in line with the current market activity and at the same time we'll keep developing growth and future opportunities.

What also is very important is, the model we have put in place in the company combining this drive for growth with the crossing of the dessert within the challenge of the downturn of the market which is possible, and we proved because we have come down with a final result in 2008, $6.9 billion which is in line with 2007 and we are planning to stay strong on the sales side and at the same time obviously we would like to make sure that whenever the markets pick up, whenever the customers recover we will not only cross the desert successfully, but we will be there to accelerate and grow with the market and our customers.

[Brian Barnhammer]

On the aftermarket business, can you talk perhaps about the orders in the fourth quarter as some of the distributors started to sell down their inventory and picking back up orders from vendors. Any increase in cadence in orders?

Jose Maria Alapont

You obviously had a bounce on the aftermarket on the fourth quarter. Obviously, with such a tough financial market environment on the credit side etc., you could expect that the customers, distribution chains, warehousing, they're going to streamline their inventories. That was no surprise.

Despite that, it was still solid, the quarter, and I think that you can see that the retention utilization and life of the vehicles keep increasing, the maintenance is necessary and basically most of our products are products that are needed for the good maintenance of the vehicle, then we know that the aftermarket has opportunity to remain solid.

But you're certainly right on the fourth quarter. It was an activity of streamlining inventories in the industry.


Your next question comes from Fred Taylor – MJX Asset Management.

Fred Taylor – MJX Asset Management

Could you give me at least what you're hearing in terms of releases what North American light vehicle production is likely to be in the first and second quarter?

Jose Maria Alapont

You make it easy for me. You make it easy because we don't give guidance.

Fred Taylor – MJX Asset Management

Not so much guidance from you, but just in the industry macros.

Jose Maria Alapont

On the industry macros, we are seeing is that still the first quarter remains very tough and there's no doubt whatsoever that the tough market is not only the result of one single country. We see that in North America. We see it across Europe, and in a certain way, there's clear softness as well in Asia Pacific.

The first quarter is not showing any new trends that we even saw in the fourth quarter. It's extremely tough and that's where we are now.

Fred Taylor – MJX Asset Management

When do they sort of announce releases for the second quarter? Is the second quarter likely to be a little better than the first? I'm talking macro production.

Jose Maria Alapont

So far we've probably read it in the papers, on the news yesterday and today, there is here and there a particular brand, a particular manufacturer that seems to have had something good going on. Overall, the industry is still very much under the market downturn and there is no indications of any different trends that we foresee.

Fred Taylor – MJX Asset Management

On some of your restructuring charges, I think it's $118 million, is that likely to be cash charges in the first quarter or did the cash go out in the fourth quarter?

Jose Maria Alapont

Let me rephrase what we said before. The program $160 million announced on the second half of the year. Out of that $118 million on the fourth quarter for a total for the year of $132 million.

Out of that, we have already done a lot of progress since July of last year until the end of the year. You saw that we started the year with 50,000 people and ended with 43,000. We have already started implementing actions and therefore spending some of the cash and the majority of it will keep flowing through the first quarter towards the end of the year with more going on in the first initial actions as you could expect. But that is the flow that we expect.


There are no further questions at this time. I would like to turn the call back to David Pouliot for closing remarks.

David Pouliot

We thank you for your participation on our Q4 earnings call and we look forward to having you back for our Q1 earnings call. Thank you.

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