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Federal-Mogul (NASDAQ:FDML)

Q4 2012 Earnings Call

February 27, 2013 10:00 am ET

Executives

David Pouliot - Director of Investor Relations

Rainer Jueckstock - Co-Chief Executive Officer and Director

Michael T. Broderick - Co-Chief Executive Officer, Chief Executive Officer of the OE Division and Director

Alan J. Haughie - Chief Financial Officer, Senior Vice President and Member of the Strategy Board

Analysts

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Bret David Jordan - BB&T Capital Markets, Research Division

Fred Taylor

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 Federal-Mogul Corporation Earnings Conference Call. My name is Steve, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to David Pouliot, Director of Investor Relations. Please proceed, sir.

David Pouliot

Thank you, operator, and welcome to Federal-Mogul Corporation's Q4 and Full Year 2012 Earnings Conference Call. Before we begin, please note that the contents of the presentation slides and the comments and discussions provided by the speakers are covered by the provisions of the Safe Harbor statement shown on Page 2.

Please turn to the agenda slide. Our speakers today will provide an update on our fourth quarter and full year 2012 results and recent developments in the company. Rainer Jueckstock will provide a brief total company business description and results overview. And he and Mike Broderick will briefly discuss the markets and current developments relating to their respective business segments, then Alan Haughie will cover additional details of our fourth quarter and full year financial results. After their comments, we will open up the call for your Q&A. Rainer?

Rainer Jueckstock

Thanks, David, and good morning to everybody on the line. Please turn with me to Page 4.

For those members of the audience that might join the first time today, I will start with a very brief Federal-Mogul business description. We serve global original equipment vehicle and equipment manufactures with powertrain, chassis and many other vehicle technologies, as well as providing service and replacement parts into the global aftermarket. For our original equipment and aftermarket business, we serve customers in automotive, commercial, aerospace, marine, rail and off-road, such as the industrial, agriculture and power generation markets.

Federal-Mogul has a strong globally distributed network of manufacturing plants, engineering centers and parts distribution centers to support our very diversified customer and market base. Today, we operate 110 manufacturing sites, 15 distribution centers and 24 technology centers, where we perform research, development and application engineering.

Please turn to Page 5. In Q4 2012, Federal-Mogul had sales of $1.6 billion, 2% lower on a constant dollar basis than Q4 2011. Production of commercial vehicles declined 13% globally during the fourth quarter 2012 versus the same period of 2011, driving Federal-Mogul's sales in commercial and industrial markets down 7% in the fourth quarter.

Sales in commercial and industrial markets represents about 30% of the company's total revenue in quarter 4. And in these segments, we earn normally better margins than we have in the mainstream automotive business. Federal-Mogul sales in Europe were 42% of the total company sales in quarter 4. The company was hard hit by declining vehicle production in Europe, which started in the second half of 2012.

Light and commercial vehicle production in Europe was 14% lower since the same period 1 year ago. The decline was driven by the overall pressure on the European economy and has been well described by almost all of our customers and many of our peers. As a result of 14% lower OE production and the fact that approximately 70% of our European sales are to OE customers, with aftermarket sales nearly flat, the company's quarter 4 2012 sales in Europe were 8% lower on a constant dollar basis.

But equally important to understand is the compounding negative effect of the mix shift from higher-margin diesel engines to lower-margin gasoline engines that also occurred during the same period. Also, the light vehicle market is 50% diesel and 50% gasoline engines in Europe, so a proportion of Federal-Mogul's diesel sales are closer to 60%. And shifts toward gasoline has an over-proportion negative impact on our margins. I will cover more on this in a moment.

On top of these negatives, we had the settlement of onetime commercial and deal agreements in quarter 4. For the quarter, we had to record a net loss of $80 million. Without the onetime items, we would have recorded a net loss of $41 million.

EBITDA is our main measure of operational performance. For the quarter 4 2012, it recorded $65 million, down from $153 million in quarter 4. When adjusting out special items in the quarter, EBITDA was $84 million.

For the full year, we saw similar sales lower due to the European volume and mix impact just described. For the year, we had to report $117 million net loss. Our EBITDA was $483 million as reported and, on an adjusted basis, $508 million. On a percent of sales basis, we lost 2.5 percentage points due to the European and heavy duty volume and mix encountered in 2012.

The lower demand in Europe and in heavy duty on a global basis, as well as our overall competitive situation requires further restructuring activities to shift our footprint further into low-cost countries. We are in a process to prepare and define the projects right now. Execution will take place in 2013 and '14, with significant run rate improvement in 2015 and beyond.

All in all, we believe that we saw in quarter 4 the low end of the economical cycle, especially in Europe. The customers in Europe are reporting higher order inflow for quarter 1, and we expect to participate on this positive trend.

Please turn to Page 6. On December 2012, Federal-Mogul began operating 2 -- operating 2 reporting segments led by our individual segment CEOs and management teams. The Powertrain segment designs, engineers and manufacturer engine components used in several customer segments already discussed. The VCS segment is primarily a global merchandiser and distributor of automotive aftermarket replacement parts on more than 20 leading brands. The segment also benefits from integrated engineering manufacturing of braking chassis, wipers and other components with shorter replacement cycles sold through OE, OES and aftermarket customers. Further, the VCS segment purchase components from Federal-Mogul Powertrain segment for the sale into the automotive aftermarket on a global basis.

On Page 7, a few comments about Powertrain. The Powertrain segment is a part of the business for which I am mainly responsible on a day-to-day basis. Federal-Mogul Powertrain is a leader in precision products designed mainly for engines and other systems in the light vehicle, commercial vehicle and industrial engine product segments.

While we had to report a weak quarter 4, we have quite positive views about our business in the long run. We see solid market growth opportunities in the coming years from 3 main trends: overall market expansion, technology and sophistication and regulatory demands. First, the global automotive market is expanding. In mature and developing markets, we forecast an average of 6% compounded annual growth throughout 2017. Such strong growth in the number of new cars and trucks on the road means more cylinders in the marketplace during this period, in spite of the trend towards engine downsizing.

Downsizing or getting more power out of smaller engines present a second main growth opportunity for Federal-Mogul. In order to get the same or even more power out of smaller engines and engines with less cylinders, the manufacturers are turning to more complex component designs, more specialized materials, more sophisticated coatings and game-changing innovations like our ACIS ignition system that have big value for fuel economy and emission regulations -- reductions. The trend for more sophisticated product means Federal-Mogul can increase feature content as we help our customers to meet performance, environmental and durability requirement. This provides value to Federal-Mogul and will increase barrier to entry for competitors.

Page 8. This chart explain further the detail on overall market expansion. Market growth for new vehicles is forecasted to increase by about 25 million unit, growing to 107 million new cars and trucks sold in 2017. For Federal-Mogul, it is also encouraging that the third main driver of our growth is the high degree of technology and regulatory convergence.

Fuel economy and emission regulations that are causing the development of downsized higher performance engine is a challenge for automakers in all regions. The increasing level of sophistication I talked about on the last slide is an opportunity for Federal-Mogul in mature market and, increasingly, in developing markets as well, where global and local manufacturers are rapidly adopting global emission standards. So higher volumes, more feature content and more technical sophistication for our regulatory compliance will fuel our opportunities to growth -- to grow across the market rates in the future.

Please turn to Page 9. 50% of total Powertrain segment revenue came from European -- from the European market in 2012. We have historically enjoyed a strong market position with the leading automakers in Europe, and this has been the benefit in the past because of the relatively stability in the west and growth in the east.

Unfortunately, the softer economic conditions, unfavorable currency trends and the weaker production rate in light vehicle, commercial vehicle and industrial segments throughout all of Europe have put pressure on our top line and, unfortunately, also on our bottom line in 2012.

While we had growth in line with the market in North America and in BRIC markets, sales were 12% lower in constant dollars in Europe in Q4 2012, when excluding BERU sales. Just as a reminder, we acquired the BERU spark plug business in quarter 3 2012, and this brought around $20 million additional sales into quarter 4 for Powertrain.

This European sales decline for Powertrain was roughly consistent with the market where new vehicle production was down 14% in light vehicle and 12% on a global basis for commercial vehicle during the same period. As previously mentioned, our results were further impacted by the reduction in demand for diesel units and an increase in less feature-rich gasoline technology, especially in Europe.

This product mix shift hurt EBITDA in the quarter and for the full year. We don't expect this to be the normal situation for the long run since we know that diesel powertrains are ultimately more fuel-efficient and are preferred by a large percentage of the European customers. However, the near-term economic impact is driving an unfavorable mix towards cheaper vehicle that could last until the economical situation in Europe strengthens.

As a one-off impact in Q4, we reached a sizable commercial agreement with one of our key customers for a long-standing dispute that also negatively impacted our reported EBITDA for the quarter. But even excluding this $10 million one-off, we have to address the current earning run rate. As a result, we intend to restructure our cost base further by transferring programs and capacity towards -- to lower-cost sites, as already mentioned.

We initiated in the second half of last year and especially in quarter 4 our cost reduction actions throughout the business that will start to show favorable results already in quarter 1 2013.

Overall, a very disappointing quarter for Powertrain. I would have been happy to report after my first 9 months as CEO of the company better results, but the volume decline, especially in diesel and heavy duty, hit us hard, but we have also to conclude that we did not react fast enough to the growing signals in quarter 2 and 3 of last year about the rapid softening in Europe.

But in quarter 4, we accelerated all needed cost-cutting activities, with this the mentioned additional restructuring projects and the expected recovery trends in Europe and in the global heavy duty market beginning in quarter 2 and 3 of 2013, we are well positioned for the future.

Now, I would like to pass to call -- the call to Mike Broderick to talk about the VCS segment results. Mike?

Michael T. Broderick

Thanks, Rainer, and good morning, everyone. On the next page, the VCS team is making positive progress in many areas of the business. We have a great base from which to build with a strong market share position of many of our brands in the large U.S. aftermarket. We also have some equally dominant brands in Europe and are starting to use our reputation from these markets to grow in developing areas of the world.

The key factor for our future growth is linked to the growth Rainer discussed relative to the new vehicles that will be built over the next 5 years. Just as soon as the new vehicles are driven off the dealers' lots, they become a service opportunity for us and for our aftermarket customers.

This new car production growth translates to a vehicle part growth through 2020 in the neighborhood of 10% increase per year. We also have a unique value proposition for our OEM aftermarket customers since within VCS, we have a fully integrated product engineering and manufacturing for brake, chassis, wipers and other products that have planned service intervals within the life cycle of the vehicle.

The knowledge and expertise that we develop working with our OE customers translates to valuable and relevant insight to benefit our aftermarket customers through the brands, products and services and technical resources we offer.

We have several areas of focus in the VCS segment, and our main strategies revolve around 3 primary areas of influence and value for our customers, which you will see on Page 11. First, we are keenly committed to our customers. This means helping them with merchandising and technical support so that they can easily and confidently choose to select our products and brands for their specific needs. In fact, one of the most recent programs that is receiving strong customer interest is our fleet of technical training events with ASE certified technicians that will soon be deployed in major North American markets to increase direct contact with the installer community that selects or recommends our products. We have also redoubled our efforts to ensure that we have inventory and logistics technology to ensure that we deliver with the fill rates demanded by our customers.

Second, we are intent on rebuilding the equity of brands and ensuring that we exert the right level of control over how our brands are presented in the marketplace. We know that part of the appeal of Federal-Mogul brands is the promise that the product will fit and last longer -- excuse me, fit right and last longer. And we are ensuring that Filpro, Moog, Wagner and other leading brands get the full support they need to maintain a premium position.

Third, we have a strong internal logistics operation that is contributing to our success by taking out waste and making sure we get our products delivered on time. There are many more elements to our strategies for success, but these are 3 of the most important to highlight.

On the next page, our strategies are continuing to yield positive results overall. For the fourth quarter, our sales were essentially flat on a constant dollar basis when compared to Q4 2011. North America was slightly down as we chose not to renew some business contracts that were not bringing in the right returns and not complementary to our brand reinforcement strategies. Europe, as Rainer noted, is weighed down by economic uncertainty, but we had a solid quarter there in European aftermarket, up 2%. The opportunity in China continues to be great, and our growth there in Q4 was up 12% over Q4 2011.

We are driving hard by investing in our brands, expanding our attack on all aftermarket channels, taking actions to reduce working capital requirements and accelerating our restructuring, all with a focus on the customer and raising profitability. Further, we are taking actions to reduce working capital requirements for our customer accounts receivable. As noted in the press release, we used about $285 million of cash to extend terms as part of the commercial negotiations, and we do not intend to continue to extend payment terms in the future.

Regarding EBITDA, had it not been for a special legal issue that we consider a consequence of an outdated customs law, we would have brought in higher EBITDA on slightly lower sales in Q4. I believe this result is a sign that we are on the right path -- track with our strategies. We have much to do, but we are showing good signs that the structure we have put in place and the initiatives that we are implementing are a great foundation for future improvements.

Now, I'll turn the call over to Alan and rejoin for Q&A in a few moments.

Alan J. Haughie

Thanks, Mike. This morning, I will be discussing Federal-Mogul's fourth quarter and full year 2012 earnings. Now, please turn to Slide 14 for more details of our fourth quarter performance.

Sales fell by $59 million to $1.6 billion. This decrease of $59 million or 4% is split equally between $30 million or 2 points of adverse currency movements and $29 million or 2 points of constant dollar sales decline. The decline in constant dollars includes an increase of $21 million from the BERU acquisition, so the market-related sales decline is about $50 million.

By region, sales were flat in North America, down $58 million in Europe and up slightly, by $8 million, in the rest of the world. And the European decline of $58 million was entirely within Powertrain, representing a 12% decline. This compares to a 14% drop in European light vehicle production and a 12% drop in European commercial vehicle production.

However, within this 14% decline in light vehicle production is a significant shift in mix from light vehicle gasoline to light vehicle diesel. And furthermore, although Powertrain sales in North America increased by 2%, this reflects a 10% increase in light vehicle production offset by an 11% decrease in commercial vehicle production.

As will be explained again later, the commercial vehicle, industrial and diesel products carry a higher margin, due to greater technical complexity, than the light vehicle gasoline products, and this significant shift in mix is one of the principal reasons for the erosion in gross margin compared to 2011. So gross margin decreased by $79 million to $168 million, including unfavorable currency impacts of $10 million and the recognition of the commercial agreement, referred to by Rainer earlier, of $10 million.

Impairment charges in the fourth quarter of 2011 largely relates to goodwill. And in the fourth quarter of this year, the charges of $20 million mainly relate to fixed assets. The change in other income is related to the legal settlement that Mike Broderick mentioned of $9 million recorded in the quarter. Income tax benefit fell by $23 million compared to the fourth quarter of 2011 due to the nonrecurrence of some discrete items from 2011, combined with the relative change in noncash charges between the 2 periods.

As a result, the company recorded a net loss of $80 million. Adjusted net loss was 48 -- sorry, $41 million for the quarter, which is simply U.S. GAAP net income before the impairment charges, restriction charges, the legal settlement of $9 million and the commercial settlement of $10 million, and these specific items will be discussed again in a moment.

On Slide 15, we have a reconciliation of our net income for the period to our profit measure, operational EBITDA. We have also included the reconciliation to adjusted net income and adjusted operational EBITDA, which we feel helps us explain our run rate performance. As already discussed, the company had a net loss for the quarter of $80 million versus a $239 million loss in the fourth quarter of 2011. But excluding the noncash impairment charges of $20 million, restriction charges of $6 million and special items of $19 million, which we feel are onetime in nature, the net loss was $41 million, compared to net income of $52 million on the same basis in 2011.

Now the special items include an accrual for a foreign customs dispute of $9 million from the period 2007 to 2011, and we are contesting the claim but believe that we have valid defenses. However, based on currently available data, we believe the settlement is probable.

We also entered into a commercial agreement with an OE customer for $10 million, largely in support of our long-term relationship. The tax impact on the items just described was $6 million for the period, mostly attributable to the fixed asset impairments. The right side of the page includes a reconciliation from net income to operational EBITDA, and the reconciling items are basically as discussed.

Slide 16 shows sales by region, segment and market for the full year. Now, 58% of total company revenue is in the Powertrain segment and 50% of that is generated in Europe. Year-over-year, production volumes of light and commercial vehicles fell by 8% and 5%, respectively. Now, with approximately 55% of Powertrain Europe sales being in the light vehicle market and the remainder being in the commercial vehicle and industrial markets, Powertrain's European sales might have been expected to decline by about 7%. Gross revenue in Powertrain Europe was down 5% indicating that we do at least continue to gain market share.

But this really doesn't tell the whole story. Approximately 60% of Powertrain's European sales are for diesel applications. So in combination, light vehicle diesel, commercial vehicle and industrial sales represent over 70% of Powertrain Europe's revenue. And therefore, the reduction in demand for these high-technology, high value-added components has a disproportionate impact on Powertrain's margin and EBITDA. In much of our discussions, we refer to this as regional and product mix. And conversely, over 60% of VCS' revenue is in the North American aftermarket, where, for the last 2 quarters at least, we have seen the stabilization of sales and margins.

Turning now to Slide 17, which describes the fourth quarter performance of the Powertrain segment. Referring to the waterfall on the bottom right-hand side, I've already explained why regional and product mix causes a high conversion and lost volume. In this case, we lost $31 million of EBITDA on $55 million of revenue decline. However, the uneven nature of demand over the fourth quarter, including the mix shift in the U.S. market, did result in $32 million of operational performance issues, although this does include roughly $12 million of year-over-year labor and benefits inflation.

Incidentally, the currency impact on revenue of about $20 million was offset in the currency and other column on this waterfall by the impact of the BERU acquisition. These factors resulted in a decrease in EBITDA as a percent of sales of 6.5 points after removing special items, as already discussed.

Turning now to Slide 18, which describes the fourth quarter performance of the VCS segment. The most significant impact on year-over-year revenue was, in fact, exchange of $9 million. Other than that, the revenue was relatively stable in VCS's largest markets. More importantly, the underlying product margins are stable and have improved on the fourth quarter of 2011.

On Slide 19, we provide a summary of the fourth quarter consolidated cash flow. Cash from operations in investing activities was an inflow of $18 million, compared to an inflow of $117 million in the prior year. The cash consumed by working capital is about $20 million per quarter for both 2012 and 2011. More significantly, however, the extension of terms to North American aftermarket retail customers has finally leveled off. But in essence, the cash flow for the quarter was lower than last year because of the decline in EBITDA.

Now, please turn to Slide 20 for more details of our full year performance. The year-over-year sales decline of $246 million comprises $288 million of adverse currency movements, partly offset by $42 million or 1% of constant dollar growth. And again, if we exclude the impact of acquisitions of about $28 million, we have $12 million of constant dollar sales increase, so essentially, flat sales. By region, sales increased $80 million in North America, fell by $128 million in Europe and increased by $62 million in the rest of the world.

Again, although the decline in Europe is largely offset by increases in North America and rest of the world, the gross margin is adversely impacted by the regional and product mix described earlier. Furthermore, the gross margin decline of $177 million also includes $52 million of negative exchange impact and the $10 million commercial agreement.

SG&A increased by $23 million, including $8 million of increased U.S. pension expense, $6 million of contractual agreements, a $6 million increase in the U.S. medical costs and about $12 million of labor inflation, all of which was partly offset by favorable exchange.

We recorded an OPEB curtailment gain of $51 million relating to the elimination of [indiscernible] health care for non-unit [ph] salary U.S. workforce, which took place in 2010. The increase in restructuring reflects $11 million of charges taken related to the recently announced programs in the friction of wiper business, with the remainder split equally between the aftermarket and other corporate actions taken during the year.

The impairment charges reflect the charge taken in the second quarter of approximately $120 million, mainly related to the impairment of our friction product line intangible assets, the third quarter charge of approximately $50 million related to the reallocation and, therefore, remeasurement of goodwill due to the realignment of our business segments and the remainder occurred in the fourth quarter, as already discussed.

So this results in a net loss for the year of $117 million. Excluding the impairment charges, restructuring charges, the OPEB curtailment gain, as well as the special items related to contractual and legal settlements, adjusted net income was actually $51 million positive for the year. EBITDA declined by $200 million to $483 million, $53 million of which relates to unfavorable exchange. And adjusted EBITDA was $508 million for the year, $175 million lower than 2011.

On Slide 21, we have a reconciliation of our net income for the period to our profit measure, operational EBITDA. We have also included the reconciliation to adjusted net income and adjusted operational EBITDA for the full year. The structure of these reconciliations is identical to that just described for the fourth quarter. In operational EBITDA, in addition to the legal and contractual settlements, we've also added back an executive separation payment made in the first quarter. So adjusted EBITDA was $508 million for the year, as already mentioned.

Turning now to Slide 22, which describes the full year performance of the Powertrain segment, with segment revenue of $4.1 billion and EBITDA of $283 million. Referring to the waterfall on the bottom right-hand side, again regional and product mix caused us to lose $56 million in EBITDA on a $23 million decline in revenue, and the negative $38 million of operational performance does include roughly $12 million of improved productivity more than offset by about $50 million in year-over-year labor and benefits translation. And the $51 million in exchange and other includes $37 million of adverse exchange on $191 million of revenue impact, and this results in a decrease in EBITDA as a percent of sales of 2.7 points after removing the special items, as already discussed.

Turning now to Slide 23, which describes the year-to-date performance of the VCS segment, with segment revenue of $2.9 billion and EBITDA of $200 million. Although margins largely stabilized in the second half of the year, the full year performance compared to 2011 does reflect weaker mixture on the first half of 2012 compared to last year. However, significant performance offsets to the adverse mix include savings on purchased parts. And these factors result in a decrease in EBITDA as a percentage of sales of 1.2 points after removing the special items, as already discussed.

And finally, on Slide 24, we provide a summary of the full year consolidated cash flow. In essence, EBITDA of $483 million was offset by capital expenditures of $387 million and interest payments of $106 million. In addition, the terms extensions with certain U.S. aftermarket retail customers caused an outflow of $285 million of accounts receivable. This is embedded within the $197 million outflow shown on the slide. And as Mike Broderick mentioned, we do not intend to continue to extend payment terms in the future.

We also made a $90 million contribution to the U.S. funded pension plan and paid $52 million for the BERU spark plug business. So this leaves us with liquidity of about $467 million of cash and $450 million in undrawn revolver.

That concludes our presentation. Now, operator, I believe we are ready to open the line for Q&A. Could you please give the instructions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Patrick Archambault.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Yes, just 2 questions. First, on the engine division. I think you -- just to provide context, it sounds like you feel that in aftermarket, things have stabilized, but kind of curious about how you see the trajectory playing out for the engine division? I mean, you have outlined kind of a longer-term recovery, which is based on, I think, a number of factors that are intuitive, but how do we think about, sequentially, how things are progressing? I guess you said a couple of comments, number one is the order books seem to be a little bit better in Q1, I think you said. And then number two, I suppose there are some elements of the restructuring that you've implemented that may be carried forward. So can Q4 be considered the trough or is that still a quarter or 2 away from being at its low point?

Rainer Jueckstock

Yes, Rainer speaking. Thanks for your question. When we look into quarter 4, in the beginning of quarter 4, we had an order book significant higher than what we ended up. So in the quarter, there was further drops in our order book. We lost orders during the quarter, and you have seen especially in Europe and in most of the heavy duty customers that they reduced their forecast and outlook for the quarter during the quarter. And this was also a reason why we haven't been fast enough in adjusting our cost base. When we look into what's happened now in quarter 1, we do see, in our customer base, a stabilization of sales forecast. We do not see that customers are dropping their forecast during the quarter, and so we have currently all reasons to believe that quarter 4 2012 was the low end of the cycle and we expect that the economical recovery in Europe will slowly start by quarter 2 and going forward into quarter 3. On the heavy duty side, the same comments. We see both on truck business but also on industrial applications for mining and power generation and similar application, that the bottom was reached and we expect here to see a positive trend. Federal-Mogul's own activities will benefit in quarter 1 already with cost savings we started in quarter 3. Going forward into quarter 4, we have a flexible business model in Europe, with temporary people and contractors, the same as in the U.S. Here, we adjusted our cost base already significant and further restructurings are -- and going forward, we'll also take structural and cost fixed costs out. So we are looking positive into the next few quarters.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. Very helpful color. One last one if I can get it in. Just on the balance sheet. You mentioned that you launched a transaction last year to extend the maturity runway, but you opted to wait in December. As you think about actions to take in 2013, how are they -- how are these actions being sort of debated in terms of debt runway extensions?

Alan J. Haughie

Well, largely, Pat, we expect the majority of actions taken in '13, in terms of restructuring, to be, let's say, self-funding. That's probably the closest answer I can give to your question.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Sorry, I guess I wasn't unclear. Just in terms of on the balance sheet, in terms of extending the maturities. You made -- there was a deal that you decided to postpone in December. How are you thinking about addressing those maturities for 2012?

Alan J. Haughie

Oh, my apologies. I misunderstood the question. Yes. As you say, in December, we did approach lenders with a proposal to review both the revolving credit facility and partially extend the term debt. Ultimately, my belief, we probably approached the lenders a little too close to the holiday season in fact, which didn't really give everyone enough time to get -- to fully consider the proposal. And we will -- we're still considering options, and we do expect, obviously, to revisit the issue over the next few quarters.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. So no decision as to sort of what actions are going to be taken. But obviously, something -- a number of options being toyed around in the not-too-distant future?

Alan J. Haughie

Correct.

Operator

Your next question comes from the line of Brian Sponheimer.

Brian Sponheimer - Gabelli & Company, Inc.

I want to spend some time talking about cash. What was once a strength is now, potentially -- it certainly is something that should be met with a sense of urgency. As you're looking at this $467 million number and obviously, there are some issues with working capital that have been addressed, can we expect the fourth quarter here is the absolute bottom from a cash burn standpoint? And how should we be thinking about your cash, cash flow going forward?

Alan J. Haughie

Traditionally, the first quarter of a Federal-Mogul year has an outflow just because of the nature of the production cycle and the working capital build for selling seasons and so on. So it's -- I don't, at this point in time, foresee a pattern in -- a pattern by quarter that's different from what I would call the historic pattern, with outflows largely in the first and second quarters, offset by inflows from the third and the fourth. As you know and as you pointed out, the most significant use of cash, out of the norm in 2012, was the extension of aftermarket receivables terms, which, as I've also said, have now plateau-ed.

Brian Sponheimer - Gabelli & Company, Inc.

Right, okay. Well, I guess my -- what's the minimum cash that you need to run the business, because we're starting to get down towards levels that we haven't been in, in a while?

Alan J. Haughie

We estimate that about $300 million is the level of cash that allows us to maintain optimum flexibility to run the business.

Brian Sponheimer - Gabelli & Company, Inc.

If we're thinking about how you plan to use your -- use the cash in 2013, CapEx, was what, $385 million this year? Well, is there an opportunity there to cut CapEx as we're heading throughout the year?

Alan J. Haughie

I wouldn't really -- I don't really want to be drawn on our projections of CapEx spending at this point.

Brian Sponheimer - Gabelli & Company, Inc.

But -- and I guess, what I'm trying to get at is, you have a very ambitious growth attitude on the Powertrain side out to 2017, but there's a confidence issue regarding the ability of the company to generate sufficient cash to get there. As we're heading towards -- through 2013, I guess from what Rainer said, we're looking at potentially a structural profitability in Europe that is lower than what we've seen. What gives you the confidence that we can get through this year?

Alan J. Haughie

Well, the restructuring plans that are going to be put in place will produce, as I mentioned, a good pay back. But I should also stress the point that from a liquidity perspective, we still have 2 major sources of liquidity. One is the $450 million of undrawn revolver. And the second is nonfactored receivables. If you think about the -- we have about $400 million of accounts receivable invested with our U.S. aftermarket customers available for factoring should we need it and an undrawn revolver. Those 2 amounts alone, if I take a pessimistic estimate, would give us $700 million to $800 million of liquidity in addition to the cash balance we currently hold.

Rainer Jueckstock

And Rainer speaking to add on this. I think, Brian, your question is important for us. We do have to focus in 2013 of -- on cash. We know that the cash burn we had in the last several quarters is something which going forward we have to turn around and we will. There are clear plans in place to stay focused on cash and to have a balanced growth in regions and in segments where we have good returns. And we are currently confident that we will go through this period, and we do have ample liquidity to execute the plans, and the focus of the management on cash is given.

Operator

Your next question is from the line of Bret Jordan.

Bret David Jordan - BB&T Capital Markets, Research Division

A couple of quick questions. And one's on North American aftermarket friction. Have you seen any signs of improvement in the brake business?

Michael T. Broderick

The brake business in North America is soft right now in the fourth quarter.

Bret David Jordan - BB&T Capital Markets, Research Division

Signs of improvement since then as we've sort of normalized winter weather or...?

Michael T. Broderick

You're speaking specifically about Q1. I'm optimistic about our brake business for 2013. How that plays out because of weather and whether Q1 is going to be real strong, Q2. But there's a lot of demand out there in the marketplace that's going to happen. Now the more weather -- even the other retailers are talking about it. The more weather, the more winter we talk about, the better that we're going to have for our Q2, Q3 type of event for friction, as well as chassis.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And then a question on the accounts receivable discussion and your intent to not continue to extend terms. Are you trying to hold current accounts receivable flat and not expand, or are you actually going to try to reduce accounts receivable? And I guess to some extent, given the fact that most retailers are intent on expanding their payables, do you think that's going to cost you market share if you're unwilling to play the game?

Michael T. Broderick

That's a great question. I think that it's -- I'd like to talk about the balance. Our products have value in the marketplace, whether it's margin or terms. And I think right now, what I'm trying to demonstrate on this call is the fact that we have in the past given up that balance, and we need to put that back in place. If we need to lose market share because of our terms, I'm willing to concede business if we cannot continue to operate on the margins or the terms that are reasonable for our organization.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And I saw you -- if we look at accounts receivable, are you actually looking to shrink that balance, or are you looking to hold it flat or not going to put incremental cash into working capital?

Michael T. Broderick

We probably -- we do not want to talk about a forecast going forward. So at this point in time, I would probably just leave my comments stand.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And then one last question. I guess you're forecasting a 10% parc growth globally through '20. Do you have a North American parc forecast through '20?

Michael T. Broderick

It's pretty flat. Through '20, it's -- you can talk about low-single digits, 1% to 3%.

Operator

Your next question is from the line of Fred Taylor.

Fred Taylor

I kind of had the same receivables question that several people have had. Can you at least tell us that net working capital will be a provider of cash in 2013, or is likely to be?

Michael T. Broderick

I'm sorry, Fred, I appreciate the question, but I'm not willing to be drawn on a detailed answer that describes our cash flows going forward. I will reiterate that the drain on receivables from the extension of terms has plateau-ed.

Fred Taylor

Okay. And can you go into more detail either at the 2 division level or at the parent level on EBITDA by region, North America, Europe, Rest of the World, for the year? I mean, could we assume EBITDA was either breakeven or negative in Europe and that the U.S. held up?

Rainer Jueckstock

Rainer speaking. We do not give such details, but I can tell you that we didn't have 1 single region with negative EBITDA.

Operator

And your next question is from the line of Betsy Hill [ph].

Unknown Analyst

I have similar concerns with respect to working capital on the potential for it to be a further drain in 2013. But I also wanted to make a comment on earlier commentary on the proposal that was put before the lenders in December. I think that your major lenders had plenty of opportunity to review it. I think the issue was pricing. And I think the issue is the fact that the entire tenure of the BCA was not going to be extended. So we hope that we'll see you again soon, and we hope that we can come to agreement.

Michael T. Broderick

Okay, Betsy [ph]. Well, I appreciate the feedback. Thank you.

Operator

And your next question is from the line of David Melcher [ph].

Unknown Analyst

Just a few things I wanted to chat about. On Slide 17, your walk for EBITDA in the quarter for Powertrain. I wanted to ask you to talk a little bit more about the performance, $32 million decline there. I think you mentioned that $12 million of that number was higher labor and benefit inflation. Is that -- what was that a function of? Was that a function of more people or paying the existing people more money? And if it's the latter, what prompted that? And I also want to know, obviously, about the other $20 million that's not been spoken to.

Rainer Jueckstock

Okay. I'd like to have an answer. We reduced, in Powertrain, in quarter 4 significantly the people employed in our organization, so we rightsized several of our operation, especially in Europe. We didn't hire people in this region, but what we have is, especially in Europe, we have collective bargaining agreements in most of our facilities there on a regional basis. Very often, independent firms, individual company to unions and regional employer associations are agreeing to wage and salary increases. And when Alan talked about this labor inflation, it is mostly coming from this.

Unknown Analyst

But was that a function of an existing contract that had automatic step-ups or did you just rework those contracts during the past year?

Rainer Jueckstock

No. We tried to avoid. Whenever we had as a company's opportunity to do this, we tried to avoid these. But especially in Europe, a large portion of our contracts are not company by company, they're on a regional basis between regional employer associations and regional unions and so we are binded to this.

Unknown Analyst

So they were automatic step-ups in the existing contracts?

Rainer Jueckstock

A certain extent, yes.

Unknown Analyst

Now what about the other $20 million then of the $32 million. What was involved there and increasing costs year-over-year?

Rainer Jueckstock

You have significant amount of new programs coming into our organization. Mainly in high-end fuel-efficient applications, and we had to retool a significant portion of our facilities on the Powertrain side. Here also in the U.S. where we see a significant trend towards downsized engines, the conventional, let's call it, V8 gasoline engine is coming to an end, and we see especially in the U.S. a significant trend towards high-end 6-cylinder and even 4-cylinder engines with very sophisticated components. And the numbers mentioned here are, to a certain extent, the costs to get up and running with this.

Unknown Analyst

And are those costs that we should expect to continue in the future quarters or were those generally onetime tooling costs that lay the foundation for future sales and should not be repeated in the same degree?

Rainer Jueckstock

Especially in the U.S., we see, since middle of last year, maybe going into the beginning of this year, several new engine platforms for all 3 -- Detroit Three players coming into market and we had to spend significant amount of resources in this time frame. I expect that going forward, it will come down.

Unknown Analyst

Okay. I also just wanted to take a moment in the press release and in your prepared remarks, you talk about some additional restructuring programs that you're looking to undertake. You already have the existing program that you've spoken about relative to the VCS business, the aftermarket business. But I'm assuming this new program pertains to the Powertrain and OE. I wanted to confirm that. And also, understand what your expect -- you didn't quantify what you're expecting to save. How -- you said it's going to take 2 years. I'm wondering why 2 years rather than sooner? And then what are the cash costs to make that all happen?

Rainer Jueckstock

Your assumption that this is, to a certain extent, focused on Powertrain is right. We see especially in Europe's need to accelerate the trend towards low-cost countries. And we currently investigate several projects, and we do not make more detailed announcement at this time because you know there are legal processes behind. We have to give the people employed in these facilities time to be consulted, and they have to expect that we follow the legal procedures. We are not -- in most of the cases, we are not in a position currently to make announcements. It's also something we have to deal with our customers to move products around, as on the OE side, a process which takes a longer time than on the aftermarket because we have to get releases. And when we say 2 years, for these months that we wait until 2014, we are in the middle of preparing ourself, but the process on our OE side is more time consuming than on our aftermarket facility.

Unknown Analyst

You've talked in the past about a meaningful portion of your workforce in Europe being temporary, where you obviously would have much more flexibility to do reductions. Have you actioned anything in that regard?

Rainer Jueckstock

Yes, definitely. When we came out of the big recession in 2009 and 2010, we had, in virtually all of our countries in Europe, a clear focus on adjusting the workforce to the higher volumes, mostly, with temporary and contractors. We did this, and we benefit currently in several of our Western European facilities from this flexibility, where we could adjust the workforce without going into cuts of our core employees.

Unknown Analyst

But have you actioned those things and if so where?

Rainer Jueckstock

Yes. As I said, we reduced in quarter 3 and 4 in large scale employment in Western Europe.

Unknown Analyst

So is that when you made kind of a reference to some cost improvements in the first quarter? Is that this year that you're expecting to realize?

Rainer Jueckstock

Yes.

Unknown Analyst

And are you prepared to quantify that?

Rainer Jueckstock

No. We do not give guidance. And so, therefore, I'm stick to this word.

Operator

I would now like to turn the call over to David Pouliot for closing remarks.

David Pouliot

Once again, thank you for joining our Q4 earnings conference call and we look forward to speaking with you in April to cover our Q1 2013 results. Goodbye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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