Federal-Mogul Corp Q3 2009 Earnings Call Transcript.

Federal-Mogul Corp. (NASDAQ:FDML)

Q3 2009 Earnings Call

October 29, 2009; 09:00 am ET


Jose Maria Alapont - President & Chief Executive Officer

Jeff Kaminski - Executive Vice President & Chief Financial Officer.

David Pouliot - Director of Investor Relations


Patrick Archambault - Goldman Sachs

Eric Verve - EBS & Associates


Good day ladies and gentlemen, and welcome to the third quarter 2009 Federal-Mogul Corporation’s earnings conference call. My name is Demoulie and I’ll be your operator for today. (Operator Instructions)

I would now like to turn the conference over to your host for today Mr. David Pouliot, Director of Investor Relations. Please proceed.

David Pouliot

Thank you operator. Good morning and welcome to Federal-Mogul’s third quarter 2009 financial results conference call. Our speakers today are Jose Maria Alapont, President and Chief Executive Officer and Jeff Kaminski, Senior Vice President and Chief Financial Officer. Both gentlemen will provide information about our company’s operating strategy and quarterly results. They will be available after the presentation for questions.

Please turn to page three. Before we begin, I would like to refer you to the company’s Safe Harbor statement, shown in this page of the presentation and included in the earnings press release filed this morning. Please consider my reference to this statement as notification of the applicability of these Safe Harbor provisions to today’s call and the documents referenced during the call.

Please turn to the agenda slide. We will begin with Mr. Alapont providing a brief overview of some important financial and operating highlights for the third quarter of 2009. He also will share the results of some key initiatives the company has undertaken in response to the current market environment.

Following this overview, Jeff Kaminski will cover the details of Q3 company and business segment financial results. We will finish with closing remarks and then open up the call for Q&A. Mr. Alapont.

Jose Maria Alapont

Thank you David. We are pleased to present third quarter financial results for Federal-Mogul. Our results demonstrate continuous improvement from the prior quarters of the year. Last quarter, we presented improvements over the first quarter, which we are again using as a basis for comparisons today.

The third quarter raises our performance to even higher levels of sales, gross margin, EBITDA, net income and cash flow. We are reporting improvements over prior periods and we remain convinced that there are additional opportunities. We will continue to take the actions necessary to maintain a strong margin in future quarters.

The profitable third quarter results reported by Federal-Mogul show that we are successfully strengthening our company through a variable cost strategy to operate more efficiently in the current environment and this is preparing us [Audio Break].


Pardon the interruption everybody. Please continue to stand by. Your speaker will join you shortly. Thank you for your patience and please continue to standby.

Jose Maria Alapont

Thank you for being patient. It seems that the Detroit Electricity had a short cap, but we are back, and still our results are strong as we are reporting.

I would like to take it back from page five, and as I said we are pleased to present the third quarter financial results for Federal-Mogul. Our results demonstrate improvement from the first prior quarters.

Last quarter, we presented improvements over the first quarter which we are again using basis comparisons to-date. The third quarter raises are performance to even higher levels of sales. Gross margin, EBITDA, net income and cash flow. We are reporting improvement over prior periods and we remain convinced that there are additional opportunities. We will continue to take the actions necessary to maintain the strong margins in future quarters.

The profitable third quarter results reported by Federal-Mogul show that we are successfully strengthening our company through a variable cost of strategy to operate more efficiently in the current environment and this is preparing us to capitalize on the market rebound. Let’s move now to page six.

Federal-Mogul in the third quarter reported strong profitability with greatly improved cash flow over the first quarter and second of this year. The company in the third quarter reported sales of $1.4 billion, a $142 million increase from the $1.2 billion that we had in the first quarter. This is an encouraging sign of market recovery. Gross margin also improved $54 million to $212 million or 15.4% of the sales in the third quarter.

We reduced our SG&A expense by $11 million to a $173 million in this quarter, that was the first one, our SG&A expense was 12.5% of the sales and that represents an improvement from both the first and the second quarters.

Net income was $10 million in the third quarter an improvement of $111 million versus the first quarter of the year, with EBITDA nearly doubling to a $134 million or almost 10% of the sales. We posted cash flow of a $112 million, a record for any third quarter period in the history of the company and that significant performance improvement of $308 million versus the first quarter of the year.

We continue to have a solid liquidity of $1.3 billion with cash up $800 million and an undrawn revolver of $500 million. These give us the company the flexibility to consider strategic opportunities. Let’s move to page seven. As you can see from the upward sales and evident trend show on these charts we are converting the increases in sales into additional operating performance as a result of our restructuring and extensive cost management problems.

Our SG&A, as a percentage of sales as indicated by the red line shows the progress we have made in this area of our variable cost competent strategy. Finally, we have realized a significant positive moving cash flow as we have implemented measures to improve EBITDA, manage capital spending, reduce inventory and account receivables along with all aspects of our working capital.

Let’s move to page eight. Federal Mogul implemented a variable cost competent strategy and had comprehensive restructuring as soon as we saw the beginning of the market collapse in the mid of 2008. As a result of that program the company has utilized approximately $112 million in cash to fund severances and other payments to align our SG&A structure and our workforce to current market demands and facilitate the variable cost competent strategy.

Over the same period, the company has made ongoing labor cost reductions of $376 million and we will continue to benefit from the labor savings related to our restructuring in the fourth quarter. This reduction represents an estimated annualized labor saving of $460 million.

From the beginning of the third quarter of 2008 until the end of this third quarter, our SG&A structure and our overall work force has been reduced by $11,000 or about 22%. While this has been a difficult process for many parent and former employees it is a necessary component of a broader program of restructuring, design tool maintaining our strong margins and prepare the company for greater future earning potential as markets continue to recover.

Let’s move to page nine. Here we are comparing our third quarter 2009 original sales performance versus the first quarter. We continued during the third quarter to expand our sales in China, India and Brazil along with other emerging markets.

These countries present excellent growth opportunities as their prospect for rapid recovery and continued growth are very strong. We remain committed to grow our business in these developing markets while strengthening our leading position in North American and Europe where we also see signs of market recovery.

Let’s move to page 10. On this page we analyzed the balance between our OE and after market business segments. One of the Federal Mogul’s strength is our market and customer diversity. This independence from any single market or customer is a benefit in times of market decline as well in market recovery has been a key element of our overall success. Our original equipment and after market segments, both increased revenue during the third quarter as with the first quarter with a total increase of a $142 million.

Let’s go to page 11. Federal Mogul has been a market leader for more than 100 years and our success is based on an unwavering commitment to leading technology and innovation. Even during the challenging market conditions over the last few quarters we have continued investing to develop future vehicle and power train technologies.

Our favorable track record is based on several long term value drivers including the ability and the commitment to react quickly to market conditions with our variable cost company strategy. Our global restructuring and cost reduction initiatives have helped us to match enterprise capacity into customer demand while positioning Federal Mogul to capitalize on eventual rebound in production volumes.

We benefit from our unique customer, market and product revenue diversity where no single customer accounts for more than 5% of our worldwide revenue. Federal Mogul products are installed in over 250 current vehicle platforms and more than 700 power trains around the world.

And now, Jeff Kaminski our CFO will provide more details about the year-over-year third quarter financial results.

Jeff Kaminski

Thank you, Jose Maria. This morning I will be covering Federal Mogul’s third quarter and year-to-date financial highlights. I will also note our improvements as compared to the first and second quarters of this year during the review of both the consolidated financials as well as the sales and EBITDA performance of our core business segments. The full details of our third quarter and year-to-date financial results are included in our Form 10Q, which will be filed with the SEC later today.

Now, please turn to slide 13 for more details on our third quarter earnings performance. Starting with the high level comparison of Q3 to the previous quarters of this year, we continued our trend of quarter-over-quarter improvements in all key financial metrics as covered earlier by Jose Maria.

This chart highlights the reported third quarter results and the variances to the prior quarters. We had sales of almost $1.4 billion in the current quarter, which represents increases of $76 million and $142 million compared to Q2 and Q1 respectively. Gross margin increased both in dollar terms and as the percentage of sales.

We continued to reduce SG&A expenses with again improving percentage to sales and reductions of $1 million and $20 million on a constant dollar basis compared to the prior quarters. Net income was $10 million in the quarter with a significant $111 million improvement versus Q1.

EBITDA improved by $5 million and $64 million over Q2 and Q1 respectively, and cash flow increased to $112 million in the quarter representing significant improvements over the $6 million inflow in Q2 and the $196 million outflow in quarter one.

Now shifting the comparison to the third quarter of 2008. Sales this year were lower by $312 million or 18%. In constant dollar term sales decreased by $250 million or 15%. As we will be explaining later the 15% reduction and sales reflects better performance in the markets based on changes in light vehicle and heavy duty OE production in the quarter.

The gross margin decreased to $67 million represent a conversion at 21% on a reduced sales of $312 million, and given that the company’s variable margin is in the region of 35% this excellent conversion reflects the extend to which costs have been removed.

We also achieved a net $19 million reduction in SG&A expenses compared to the same period of 2008 more than offsetting the increased SG&A pension charges of $14 million. Overall, excluding the pension charge the company managed to almost entirely flex SG&A expenses in line with the sales decline.

Net income of $10 million for the period represents a $6 million increase from Q3 2008. EBITDA decreased by $45 million representing a very respectable 14% conversion on the sales decrease, which was a result of the healthy gross margin conversion coupled with the SG&A reductions described above. Finally, cash flow increased by $84 million compared to the prior year period and this will be covered in more detail later in the presentation.

At slide 14 we have a reconciliation of net income to our profit measure. Federal Mogul’s management believes that operational EBITDA was closely approximate to the cash flow associated with operating earnings of the company and we will use operational EBITDA to evaluate the performance of our four business segments.

As already discussed, we realize a net income of $10 million in the third quarter of 2009 compared to a net income of $4 million for the same period in 2008. The obvious expenses including interest expense, income taxes, depreciation and amortization are excluded from EBITDA. We have also added back to non-cash pension expenses a $17 million in 2009 relating to the US funded pension plans.

We realized a positive EBITDA of $134 million for the quarter, which was lower than the same period in the prior year, but as already mentioned, represents a very healthy conversion of 14% on the reduced sales.

Slide 15 represents a roll forward of our sales and EBITDA from the third quarter of 2008 to the third quarter of 2009. This chart demonstrates in simple visual terms how we would minimize the impact of the volume reduction through relentless cost reduction actions.

Starting with sales market volumes declined in the third quarter versus 2008. Almost $200 million of volume reduction was due to lower OE production than last year representing a 20% drop in sales for Federal-Mogul. However, this reflects market share gains in all regions given that the weighted average light vehicle and heavy duty market decline in North America and Europe was about 25% when taking into consideration our relative presence in those markets.

Global after market volumes declined about 6% in dollar terms. As a result of unfavorable movements in product mix in both the OE and global aftermarket, the reduction in sales of $244 million resulted in a $121 million reduction of EBITDA. The company’s continuing restructuring and cost reduction actions resulted in $61 million of gross productivity improvements in Q3 before an estimated $8 million in labor and benefits inflation. On a year-to-date basis, this brings a total net productivity to $142 million.

The productivity gains were generated from many actions including headcount reductions, ship pattern realignments, elimination of over time, reductions in temporary labor, fixed cost reductions and control of all aspects of discretionary spending within the business. When combined with the reductions in material prices and sourcing savings initiatives, which increased EBITDA by $35 million versus the prior year, we have eliminated almost $100 million of cost from the organization in the third quarter alone. Finally, exchange in other items negatively impacted EBITDA by $10 million.

Now, turning to slide 16, we provided summary of the third quarter 2009 consolidated cash flow as well as a reconciliation to cash flow excluding emergence related payments. Starting at the top with net income we add back non-cash depreciation and amortization in both years. We had an outflow of $12 million in accounts receivable compared to $142 million inflow in 2008. The difference between the flows in the two years is a result of the relative volume changes between the second and third quarters of each year.

The third quarter 2008 is a period during which significant market reductions began, and so during this period the company harvested receivables. During 2009, the quarter over quarter sales trend although upward has not been as dramatic thereby creating lower fluctuations in accounts receivable. The same phenomenon applies equally to changes in accounts payable.

We reduced inventory by $48 million compared to an increase of $33 million in the same period of 2008. Including changes in other assets and liabilities, cash flow from operations was an inflow of $145 million in Q3 2009 compared to an inflow $118 million in 2008. Despite the significant decline in sales the company’s ability to manage operating costs and working capital through this challenging time has translated into a healthy generation of cash from operations this quarter.

Capital spending decreased from $92 million in Q3 2008 to $35 million in the current quarter. The company has continued its efficient use of existing operating capacity along for the reduced spending. After netting out cash used by investing and financing activities as well as foreign currency exchange rate fluctuations on cash, the company’s cash balance increased by $97 million to $784 million at September 30, compared to $687 million at the beginning of the quarter.

When combined with the revolving credit line the company continues to sustain its strong liquidity position a $1.3 billion. The cash flow excluding the minor emergence related payments was $112 million in Q3 as compared to $28 million in the same period of last year.

Now turning to page 17 to introduce our review of business segment performance. In prior reviews of the financial results we have discussed the gross margin by segment. For this review we are focusing our discussion on a comparison in trends and EBITDA. We feel that at this stage in the company’s drive for sustainable global profitable growth, this measure best reflects our approach to total cost management, which includes reductions in both cost of goods sold and SG&A expenses. A detailed analysis and discussion of business segment EBITDA will be included in our 10Q for third quarter.

Turning now to slide 18. The format adopted for the business segment discussions will be to cover third quarter of 2009 compared to the same quarter of 2008 as shown on the left side of the page with the right side covering the trend of improvement over the first three quarter of 2009.

Starting with Powertrain Energy, our largest business segment serving the OE market and representing 47% of our OE sales in Q3 2009, the significant items in the year over year comparison include a constant dollar reduction in sales of 25% due mainly to the impact of the automotive downturn on our major markets, partly offset by market share gains in all regions. It also includes an EBITDA reduction of $40 million with productivity improvements helping to offset the impact of the volume decline.

Now, moving to the right side of the chart, quarterly sales continue to grow up by 4% from Q1 to Q2 and by a further 15% from Q2 to Q3. The EBITDA improvements represent a conversion of 22% and the sales increased from the second to the third quarter and 42% on the sales increase from Q1 to Q3. EBITDA is increasing in dollar terms and as a percentage of sales primarily due to tight control, and in certain cases continued reduction of labor and manufacturing cost as sales increase.

The next slide, 19, provides an overview of the third quarter performance of our Powertrain Sealing and Bearings business. First, in reference to the sales and EBITDA performance versus the prior year, the impact of the automotive downturn and total segment sales resulted in a constant dollar decrease at 24% similar to the scale of reduction in the Powertrain Energy segment.

However, EBITDA actually increased as compared to last year, the loss of volume and isolation caused a $30 million drop in EBITDA which is more than offset by favorable material price changes of $8 million, significant productivity improvements of $19 million and positive currency exchange and other expenses of $4 million.

Now, moving to the right side of the chart and comparing the third quarter to the previous two quarters of this year, sales were relatively flat from Q1 to Q2, but increased by 14% or $26 million from Q2 to Q3 as a result of falling volume decreases and market shares gains. EBITDA as a percentage of sales continues to improve quarter over quarter with a significant gain in Q3 versus Q2 of 4.3% points and 6% points compared to the first quarter.

Slide 20 provides an overview of the third quarter performance of our Vehicle safety and protection business segments, with reference to the year over year comparison of sales in EBITDA, the decrease in sales, again a result of market declines with $32 million or 10% in constant dollar terms.

As a result of strong productivity improvement of $9 million, combined with reduced material costs and customer price increases of $10 million, EBITDA remained essentially unchanged from last year at $49 million, thereby reflecting improved profitability of 3% points on sales.

The right side of the chart shows that both sales and EBITDA are improving quarter-over-quarter to this business segment. To wrap up the business segment performance summaries we will now be moving out of the OE focused segments and cover slide 21 summarizing the global after market.

First, in reference to the year over year performance on the left side of the slide, sales build 6% in constant dollar terms. The after market business performed slightly under 2008 levels as a result of macro economic factors driving the labor spending and liquidity constrains in certain key developing markets. EBITDA decreased by just $7 million, and a $52 million sales decline, mainly result of favorable pricing and productivity improvements.

The right side which charts a quarter over quarter performance, reflects a normal seasonal aftermarket sales fluctuations. Furthermore, in comparing the third quarter to the first, we can see that EBITDA improved $10 million and a sales increase of $10 million, again reflecting tight cost control. That completes the review of our Q3 business segment performance.

Now moving to slide 22, for more details on our September year-to-date consolidated earnings. Obviously the most significant impact and the year over year financial results was the effect of the market declines and revenue in 2009. We had sales of $3.9 billion for the nine months ended September 2009 versus $5.5 billion for the same period last year, representing a 29% decline. In constant dollar terms the decrease in sales was $1.2 billion or 24%.

As with the third quarter, this represents the better sales performance, and would be expected based solely on the declines in light and commercial vehicle production, as a result of market share gains. In response to the sales decline, the streamlining of our operations continues to provide significant economic benefit to the company while maintaining the production of high quality products for our customers. This allowed us to maintain a solid gross margin of 14.5% of sales and achieving $86 million reductions in SG&A expenses in 2009.

Combined with reductions and interest in amortization expenses, this resulted in a net loss of $88 million for the nine months ended September 30, 2009, compared to a net income of $62 million for the same period in 2008. Over the same period we generated $333 million of EBITDA representing a conversion of under 20% on the reduced sales and minimized cash outflow to just $78 million about the same as the prior year.

Slide 23 represents a reconciliation from net income to operational EBITDA for the nine months ended 2009 and for the same period in 2008. Basically, the reconciling items are the same nature of results already discussed in relation to the third quarter. Two additional items for the nine month year-to-date period include the add back of the non-cash fresh start inventory adjustment of $68 million in 2008 and the restructuring expense add backs that are detailed on a separate line on the schedule.

Turing to slide 24, we provided summary of the consolidated cash flow for the nine months ended September 2009 as compared to the same prior year period. Starting at the top of the net loss we then have the cash receipt from the 524 G-trust which occurred in Q1 2008. We then add back non-cash depreciation and amortization in both years.

During the first nine months of this year we consumed $148 million of working capital. This is an improvement of about $82 million over the same period last year where before considering the non-cash adjustment of $68 million for fresh start inventory the company consumed $230 million.

Including changes in other assets and liabilities, cash flow from operations was an inflow of $48 million in 2009 compared to an inflow of $375 million in 2008. Year-to-date capital spending declined by about 40% from $240 million in 2008 to $146 million, again as a result of actions taken in the face of the downturn in the markets including the efficient use of existing operating capacity.

After net in cash used by investing and financing activities as well as foreign currency exchange rate fluctuations on cash our ending balance remained strong at $784 million at the end of the third quarter. As shown at the bottom of the slide cash outflow excluding emergence related payments was $78 million during the period in 2009 as compared to $65 million for the same period of 2008.

Now, I will turn the presentation back over to Jose Maria who will make some closing comments before starting the Q&A.

Jose Maria Alapont

Thank you Jeff. In summary, Federal Mogul is successfully implementing its variable cost component strategy to maintain strong margins and progressively improve our operating performance and cash flow during 2009. At the same time we have continued to invest in the long term for our company developing leading technology and innovation to solve customer challenges in both mature and developing markets.

The quarterly numbers speak for themselves and the management team is focused on continuing to build on our improvement trend. This is and will bring for us our multi-year track record for the strong operating results.

We reported a profitable third quarter, which when compared to the first quarter of the year, sales were up $142 million. Gross margin improved by $54 million. EBITDA increased by $64 million. We had a $111 million positive improvement in net income and cash flow was a $112 million, a $308 million performance improvement. As part of our variable cost company strategy since the beginning of the third quarter of last year we have reduced our global headcount by 11,000 employees or more than 22%.

We have $800 million in cash plus $500 million in an undrawn revolver; these provide us with a total liquidity of $1.3 billion offering the company the flexibility to grow organically or through strategic acquisitions.

Federal Mogul’s strong third quarter financial performance is evidence of our benefits of our customer market and product diversity, our leading product portfolio, the power of our brand and the effectiveness of our efforts to not only counter the impact of a global market down term but in addition to capitalize on the market recovery to generate sustainable global profitable growth.

Thank you for your attention and we will now open the call for questions. Operator, will you please give instructions?

Question-and-Answer Session


(Operator Instructions). Your first question comes form Patrick Archambault - Goldman Sachs.

Patrick Archambault - Goldman Sachs

Well congratulations on the good cash flow. I had more of a question just on sequential EBITDA. I just on slide 13, you show a sequential improvement of $5 million versus Q2 and I was wondering, it seems like if you would just took back the revenue improvement and sort of apply that thirty-ish incremental margin that you kind of mentioned and then looked at some of the incremental cost savings that you showed in that chart on slide 8, that it would imply probably maybe more EBITDA sequential improvement than 5.

I think just from the incremental piece you would probably have like 24 and then I guess it’s hard to see what it says exactly on the other slide, because we don’t have the number for the Q2 piece, but it looks like it could be 10 or something like that.

So, just wanted to see what kind of puts and takes went in there if you could walk us through that that would be helpful.

Jose Maria Alapont

Thanks Patrick for the question. 2009 was quite a perfect challenging year to asses, but one thing that is clear is that we are showing a very strong progress quarter over quarter. Now, when you compare second and third quarter, probably it’s one of the first times that you are going to see in the industry, a company like Federal-Mogul performing better on the third quarter than the second. Second quarter is a full quarter, three months of continuous operations.

Third quarter is a quarter where you have two months, July and August that you have occasional shutdowns globally all over the place. Theoretically you should expect lower financial performance because as I said, you are doing all the labor and corporate expenses without having the full three months operating. That is one of the elements, and the fact that despite the shutdowns of the July-August in the industry on the third quarter, we have a stronger performance done on the second quarter. It is very positive.

The other one is on the third quarter is basically the numbers you are saying is very straight performance, you see on the marching and then on the EBITDA and then on the net, in the second quarter if you check back on your notes there were a couple of ones that happened in the company in any given quarter.

What I think that you are seeing in these numbers is a very strong performance at the spin off, the restructuring efforts that we’ve done in one side, but as well as the strength, our technological drive that makes us to gain market shares. Then I think we are very well positioned to keep performing strong on the coming quarters.

Patrick Archambault - Goldman Sachs

So there were a couple of non-recurring sort of items that sort of helped Q2 a little bit. Can we dimension those a little bit or have you guys, you’re right you probably did mention them before, but I can’t remember sort of how big they were.

Jose Maria Alapont

Yes as you know, it was around the $30 million. It was again on debt and insurance gain of an incident that’s happening in one of our plant in Europe. The first item was around the $8 million and the second item was around $5 million, in total $13 million plus four that we have improved between the third and second quarter.

Then in reality you are talking of an improvement of pro forma apples-to-apples of $70 million which is very much in line, it’s not even better than what you were estimating at the beginning of your question.

Patrick Archambault - Goldman Sachs

That’s helpful. I guess, one more general just on slide 21. The sequential comparison presentation is very helpful, you have sales in the after market going up in Q2 and then back down in Q3. I thought I heard that, you said it was seasonality, but I guess I would have thought that Q3 was a seasonally strong quarter for the aftermarket just given the driving season and all that.

Am I sort of wrong in that, is seasonality actually kind of responsible for the down tick or are there a couple of other factors maybe sequentially at play, and then just as a follow on to that, I would love to just get your thoughts on sort of how you see the aftermarket going forward.

I mean, I understand that a lot of it is kind of macro at this point, but we are seeing some positive signs out of miles driven and you have some dealerships closing. So at the same time there do seem to be some pretty good opportunities there.

Jose Maria Alapont

The aftermarket as you know is one of our leading areas of strength. Let’s start with your question, first part of the question and then we go through the second part.

Second and third is basically two things. Seasonality and still, a lot of pressure on both WDs and retailers reducing inventories and trying always to make all of us together more efficient supply chain. The seasonality definitely in the second quarter is stronger than the third because you have, at the beginning all of the after spring or after winter and then you have also preparation for vacation, and bliss in our portfolio of aftermarket products, globally in the second quarter is stronger than third quarter.

The difference you have seen if you again check your second quarter notes, you will see that we are closing the gap on the revenue versus previous year, then that’s the news. I think adjustments on inventories and so on are going through, but they are good signs you indicated for the first time August, still we don’t have data on September was the first time that the mileage driven was flat previous year, with July being close at the previous year, but August was flat hopefully September will go in that direction.

Then there are market recovery signs both in OE and aftermarket and since we are leading with our brand portfolio whether it’s premium or entry or original replacement, then we are confident that we will pick and also what is important as you could see that we have very well maintained our margins and our profitability.

Patrick Archambault - Goldman Sachs

Just as a follow on I think there is something like 3000 dealers going out of the system, right just between GM and Chrysler. Can you talk a little bit about that, how much is that an opportunity for you guys? I know you sell much more to the warehouse distributor and retail channels than you do the OES channels. So, maybe you guys could highlight a little bit about that?

Jose Maria Alapont

Well as you know, because we have had these conversation in prior occasions, the global after market is evolving also very much like in the OE market, and in this case what is happening is that restructuring of the OE on the dealerships is going to have a positive impact on the aftermarket, because obviously the maintenance of the vehicles that needs to be done and fortunately for industry and for the business we are seeing that customers are coming back to the normal standard.

That should benefit the independent aftermarket where the data, the WDs or retailers for to resolve will pick up that business going from the dealership that will we restructured in the incremental factors towards the aftermarket. That is not going to be something that will happen overnight because maybe the restructuring happening overnight, but when all these processes conclude definitely that should be an incremental plus.

Simultaneously there are other things that could affect in another direction, of course the levels of maintenance, the max driven, the performance and quality of the products and always evolving between branding, original equipment and entry products.

The advantage and the positive thing of a company like Federal-Mogul is because we are leaders in any of this segments, these transitions are positive for us, because we can capture that advantage whether it’s being won or in the other segment, whether it’s in WDs or in the retailer event if it stays partially in OE. Then it will take some time, this is not something that you are going to see from one month to another.


Your final question comes from [Eric Verve - EBS and associates].

Eric Verve - EBS & Associates

Patrick, really kind of nailed the questions that I was going to have, but I just sort of wanted to go back to that contribution margin question that he asked and that the sales increased and yet the EBITDA increase didn’t kind of coincide with 30% margin you guys have talked about.

If we strip out those one time gains that you said you had in the second quarter, and also the seasonality effect that you spoke of, would you expect that the appropriate contribution margins to use in this business as sales start to come back in the next year or is it still that 30%? Is it sort of the rule of thumb or do you think, as you guys see production schedules come back and demand for your products come back you will have to add fixed cost. That’s first my question.

Jose Maria Alapont

Eric, thanks for the question and you already mentioned it, I’m not going to repeat everything I said to Patrick, but I would like this to be very clear. When you do these two adjustments that we said of the first quarter the gain on the debt and insurance which were around the $30 million, the second quarter was a $116. Now we are reporting a $134, okay.

The other important thing is that as you could see in our P&L it’s very solid. I mean the gross margin which is really [industrial] margin has been going up consistently. Now we are 15.4% and the challenge that we will have in the industry is, this industry has gone really low. Are we capable to recover the profitability? And Federal Mogul is showing, very pleased that we are very capable.

Despite how [Inaudible] we cannot forget that, we are within one point, last year 16.5, now 15.4, last year 10.6 EBITDA now 9.7. I mean we are very close in the neighborhood, and that is even despite more than $300 million of difference in revenue.

I think we have proven that our global and in depth restructuring of the company has paid good dividends, $367 million already by the end of the third quarter on labor cost reductions with a restructuring with an annualized value for 160. Then the margins are there and the gap that was fairly large in the first quarter to previous year is closing within a point. I think that proves that the performance is strong and consistent, and of course you need to go through the Q2 and Q3 if you want to be more precise with the differences.

Together with these two elements that we refer to Patrick and to you, we are very global company, 60% globally come from outside of the states and you need to do always the right adjustments on this change and a company of our size, and with around 60% coming from outside of States, the exchange also play an important role quarter to quarter that you need to take into consideration, but the consistency and the strength of the financial performance from the revenue I think is evident.

Eric Verve - EBS & Associates

All right that’s helpful, the other question I had is you mentioned you guys are seeing strength in China and India and I assume Brazil as well. I was hoping maybe you could just sort of tell us if that’s just on the aftermarket side or that an OEM as well, and what you guys expect kind of going forward is this just overall market strength or are you gaining market share in those areas?

Jose Maria Alapont

First of all we are gaining market share. Second we have seen signs of market recovery, but you need to be cautious because we are coming from so low in North America and Western Europe. Regarding China, India and Brazil the growth is evident, China is basically having record amounts in the last couple of months and they forecast, we don’t give guidance, they forecast to cross 12 million vehicle for this year and for the first time they will be the largest single counted market in the world above the State and that speaks by themselves.

That is where we see signs of recovery, but we need to still differentiate. The North American and the Western European and the Eastern European market having pulled very, very low and now we started recovering, that is one reason and China, India remaining strong overall and in case of China taking the lead on a single account.

That is for both our OE and aftermarket. Because again we are very global, but we are very global and leading in our markets and be number one between both in OE and in aftermarket and our split are similar to the one between North America and the rest of the world, we have 60% or around 60% of original equipment and around 40% of aftermarket. Thank you Eric.


There is no further question. I would like to turn the call back over to David Pouliot for closing remarks. You may proceed.

David Pouliot

Thank you operator. This concludes our third quarter earnings conference call. As I mentioned earlier our Form 10Q will be filed later today, should you have any questions please feel free to contact me and we look forward to having you join us once again for our fourth quarter earnings conference call. Again, we apologize for the electricity interruption earlier in the call. We appreciate your patience there. Thank you.


Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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