Federal-Mogul's Management Discusses Q1 2014 Results - Earnings Call Transcript

Federal-Mogul (NASDAQ:FDML)

Q1 2014 Earnings Conference Call

April 23, 2014 10:00 a.m. ET

Executives

Paula Silver – Vice President Investor Relations and Powertrain Communications

Rainer Jueckstock – Co-Chief Executive Officer, Chief Executive Officer of Powertrain Division and Director

Daniel A. Ninivaggi – Co-Chief Executive Officer, Non-Independent Director. Member of Compensation Committee and Chief Executive Officer of Vehicle Component Solutions (VCS) Group

Rajesh K. Shah – Chief Financial Officer and Senior Vice President

Analysts

Patrick Archambault – Goldman Sachs

Brian Sponheimer – G. Research, Inc.

Tom Shandell – Goldentree

Operator

Very good morning ladies and gentlemen, thank you all for joining and welcome to the First Quarter 2014 Federal-Mogul Corporation Earnings Conference Call. My name is Lisa and I'll be your coordinator for today. [Operator Instructions]. I’d now like to turn the conference over to Ms. Paula Silver, Vice President Investor Relations and Powertrain Communications. Please proceed. Thank you.

Paula Silver

Thank you, Lisa and good morning and welcome to the Q1 2014 Federal-Mogul earnings call.

On Slide 2, you'll find the company's Safe Harbor statement. Please note that the contents of this presentation's slides and the comments and discussion provided by the speakers are covered by the provisions of this statement.

Our speakers today will provide an update on our first quarter 2014 results. They will also cover important recent developments in the company. Rainer Jueckstock will provide a brief total company results overview. Then, he and Dan Ninivaggi will discuss the markets and current developments relating to their respective business segments. Their comments will be followed by those of our CFO, Raj Shah, who will provide further details of our first quarter financial results. Finally, we will take questions.

At this time, I will hand over the call over to Rainer Jueckstock.

Rainer Jueckstock

Thanks, Paula, and good morning, everyone on to phone. Please turn to Slide 4. I would like to open this morning’s presentation as a brief visual reminder of Federal-Mogul's business model and how we operate very efficiently to serve two very distinct customer markets. After operating fixed rate for nearly two years, we are seeing significant benefits from this organizational model and recognized the two divisions such as a most appropriate and efficient way to run Federal-Mogul's operation. Dan, Rajesh and I are here to talk about the financial performance of first Powertrain and vehicle component divisions.

Please turn to slide 5. As many of you are aware, Federal-Mogul's last week implemented a holding company structure in which Federal-Mogul Corporation became a wholly owned subsidiary of Federal-Mogul Holdings Corporation. Federal-Mogul Corporation continues as operating units that remains unchanged. There are no changes to customers or supplier contracts, nor will employees be affected by business structure. This new structure creates greater flexibility for us as a company and will have to force or facilitate the company’s previously announced segmentation into two distinct divisions.

Please turn to slide 6. Rajesh will elaborate on the specifics later on the call. However, I would like to share in brief the announcements we've made last week reporting that we successfully secured $2.6 billion to refinance our existing debt. The refinance of some term loans have favorable maturity dates at competitive rates. These are covenant life-term loans with attractive rate terms and conditions to preserve our operational and strategic flexibility. The refinancing transactions strengthens our company’s liquidity and financial profile and positions us favorable for the future.

Please turn to slide 7. I will provide a brief snapshot about [quarter for the] company. I would like to start by saying that the company is running in a much better performance level compared to its first quarter of 2013 driven by improved results for the Powertrain division were results was the weaker component division they are relatively flat.

During quarter one 2013, we are feeling the lasting effects of European market downturn of 2012 and in the first quarter of 2014, we saw continued positive impact from the intensive restructuring and cost reduction actions initiated and executed in 2012 and 2013.

In quarter one 2014, we record sales of $1.8 billion, 7% higher than Q1 2013. The company showed significant improvements in EBITDA as well, $166 million or 9.4% of sales versus $138 million or 8.3% of sales in Q1 2013.

We had a very strong quarter due to increased vehicle production volumes, increased productivity and significant in customer contracts in the Powertrain division which I will talk more later.

Our net income for continued operations was $41 million for the quarter, up $22 million from Q1 2013. Our cash usage for the quarter was $79 million which reflects normal working capital requirements that are needed during the first quarter. We continue to make good progress in our operational improvement as well as our continued restructuring efforts and also strategic cost reduction initiatives.

Page 8, I briefly touch on to Powertrain results. Powertrain had a revenue of more than $1 billion in quarter one up 11% from quarter one 2013. During the quarter, we saw significant growth for Powertrain. We performed above the market growth in all regions into Europe compared to U.S. quarter one 2013. We can attribute this growth to increase in vehicle production volumes but also to new customer contracts for our technologies and product and our related investments in two additional capacity and new product features.

For North America, Powertrain revenue was up 12% while Europe revenue was 10% higher than quarter one 2013. In the rest of the world, Powertrain revenue was up 16% from quarter one 2013 with China continuing to drive much of our growth in earnings in this region.

Powertrain recorded operational EBITDA of $160 million in Q1 2014, up $29 million from Q1 2013. Our quarter one results overall are due to increased volume as well improved operational efficiencies and cost reduction activities.

Please turn to page 9. The brief overview of some of the dynamics that are driving market growth. We talked about Powertrain success being significantly driven by increased production volumes and new customer contracts. During first quarter of 2014, we recorded the long-term contract for the key engine components with the major global producer of heavy duty trucks and engines. It's clear that our customer’s engine strategies are thriving need for our technologies.

For examples, the company's expansion, the company's expansion, the company’s [Qingdao] piston facility expansion demonstrated the need in China for advanced aluminum piston technologies that reduce emission and enable fuel economy, key requirements for such regions. At the same time, we have several new manufacturing facilities on the construction and planning. For piston rings in Mexico, for (inaudible) in China and for system perfection in China, Russia and Morocco and other places, close to some product groups of power customers.

Finally, our leading lead-free bearing technology was recently recognized as an automotive news space award, which rewards automotive suppliers for superior innovation technological advancement and business performance. Federal-Mogul has been and continues to be one of the most awarded supplier, we have won 13 PACE award since the competition started in 2013.

We continue to focus on having a tough market presence in each of our core products, holding the number one or number two positions being cost competitive and developing technologies at the low to gain market share by supporting our customers try to low on CO2 emissions.

Overall, Powertrain had a solid quarter was more than 10% EBITDA that have had positive market environment but even more due to our successful hard work by the entire team within Federal-Mogul Powertrain. With this, I will turn the call over to Dan.

Daniel Ninivaggi

Thanks, Rainer. Turning to slide 10. The Vehicle Components Division first quarter revenue was $720 million, up $6 million from the first quarter of 2013. The North America aftermarket sales were up 4% and were partially offset by lower North American OE sales which declined in part due to planned exit of an unprofitable customer supply contract.

In Europe, aftermarket sales declined by 3% and were offset by stronger European OE sales which were up 4% compared to the first quarter of 2013. In rest of the world VCS sales were overall flat.

Operational EBITDA for the quarter was $50 million or 7% of sales, which reflected decrease of $1 million compared to the first quarter last year. North American aftermarket benefited from strong demand in the lateral half of the quarter driven by adverse winter weather after a very slow start for the quarter. Europe aftermarket was negatively affected by mild winter in that region.

During the first quarter, we saw in purchase agreements to require Honeywell’s friction business and Affinia’s chassis business which will enable us to better serve customers with a deeper product line in each category while achieving significant synergies with the combined businesses.

On slide 11, you'll see the key initiatives for long-term growth in VCS, I'll provide an update from where we were couple of months ago. First, it's critical that we have the right delivery network in place. We need to ensure that our complete product line is readily available for deliver high fill rates to customers with shorter lead times.

As I mentioned on our call in February, our U.S. distribution network is largely based in the Mid-West with some locations carrying limited product lines. No product line is shipped out of more than one DC. We're working to establish new multi-product line distribution centers on the East and West Coast of United States with improved inventory and order management systems to better serve the customers throughout the U.S. with faster delivery times and a broader product range.

We also need to build out and optimize our distribution capabilities in other parts of the world. For example, we believe there are opportunities to improve our distribution system in Europe as our business grows in that region. Second, we will continue to improve our cost structure by improving our manufacturing footprint strategically using low cost sourcing and improving our operational performance. An example of this is we previously announced closure of our breaking plan in Heinsberg Germany where production has been moved to a low cost facility. We're also transitioning North American breaking production to a lower cost operation in Juarez Mexico.

Third, we have strong brands and solid market share in each of our core product categories. But we need to ensure that our brands remain differentiated from private label and lower tier competition. We are investing aggressively in our product portfolio so that is deeper and wider. The pending acquisitions of the Honeywell friction business and Affinia chassis for example of this commitment.

Our objective is to be a category leader in each of our core product lines in terms of quality innovation coverage and value. A broader product level also allows us to leverage our assets and capabilities to better serve our customers.

Finally, as I mentioned in February, we're very focused on globalizing the business. In addition to ensuring that we have the right infrastructure to meet customer delivery needs, we see tremendous opportunity to expand regional success with other regions not only in developing markets like China and other Asian countries where our presence is relatively small but in other regions as well.

We're pursuing growth in Asia both with joint venture with established partners as well as organically and we are presently evaluating the opportunities to serve new customers in North America with successful European brands. For example we are preparing to introduce our primary European great brand Ferodo, which has significant share in Europe, into North America to serve the growing luxury car segment.

In short, the VCS team is working diligently to address both the challenges and opportunities ahead of us and trust me there is plenty of power. Our strategy will require investment and a long-term perspective. In the meantime, our financial performance have stabilized and we're ready beginning to see signs of progress in our core operational performance.

With that, I'll the turn the presentation over to Raj for a detailed financial review.

Rajesh K. Shah

Thank you, Dan. Good morning again everyone. I'm pleased to report and provide the details of another quarter of improved sales and operating results. We will successful in reporting improved financial performance and virtually all metrics in this quarter. While also at the same time continuing to invest in strategic initiatives in both our PT and VCS divisions as outlined by Rainer and Dan.

Our objective is to continue to maintain this balance between improved current performance while also investing to secure the longer term stakeholder value creation objectives through the market share growth, product expansion and structural cost reduction initiatives outlined earlier. In this regard, the completion of the refinancing that we announced on April 15th subsequent to the quarter helps us pursue this objective confidently and it extends our debt maturities for several years while preserving our operational and strategic flexibility.

With this summary, let me provide more details of some specific line items in our financial statement, please turn to slide 13. The company reported sales of 1.8 billion and EBITDA of $166 million which is a 23% conversion on the increased sales in the period. Sales increased by $120 million including [$1.06] million of positive currency impact. So the constant dollar sales increase is a $114 million. PT division’s third-party sales accounted for a 1$10 million of this growth which represented a solid 11% growth rate. VCS accounted for $4 million of this growth or 1% higher compared to the prior year.

On the regional basis, after adjusting for exchange, North American sales increased by 6% or $42 million, sales in Europe were up 6% or $47 million and rest of the world sales increased by 13% or $25 million. This was driven by increases in the PT division, the volume increased in all regions both from the improvements in market production rates as well as market share gains across all regions. Sales in the VCS division included net increases in North America with Europe and the rest of the world being virtually unchanged compared to the prior year quarter.

Gross margin for the company was $273 million in Q1 2014 or 15.3% of sales compared to $249 million or 15% of sales in the prior year, an increase of $24 million or 30 basis points. This represents the conversion of 20% on the incremental sales of a $120 million. This 30 basis points improvement in gross margin is attributable to our PT division with gross margin up $148 million or 13% of sales as we continue to benefit from the strong conversion on incremental volume. This is compared to PT gross margin of $125 million or 12.1% of sales in the comparative prior year period. Gross margin in our VCS division remain relatively flat at $125 million in Q1 2014 or 17.4% of sales.

SG&A decreased to $181 million or 10.2% of sales from a $184 million or 11.1% of sales in the prior year. The favorable run rate impact of lower personnel cost and spend due to restructuring action was partly offset by project expenses on our strategic initiatives.

Operating income, which is the time that income before interest income taxes restructuring and impairment charges increased to $88 million in Q1 2014 from $67 million in Q1 2013 an increase of $21 million or 31%. This is mainly related to the improvement from higher sales and a slight reduction in SG&A expenses as we just discussed.

The improvement in operating income of $21 million translated to a similar increase in net income from continuing operation, which improved to $41 million in the quarter versus $19 million in the prior year quarter. In the prior year quarter, the company had reported a net loss from discontinued operations of $51 million mainly related to the loss from divesture of our Syntertech component business in France, this was completed in Q1 2013 because of this loss from discontinued operations in 2013, the net income attributable to Federal-Mogul for Q1 2014 at $40 million or $74 million better than the prior year quarter.

Operational EBITDA of $166 million in Q1 2014 improved by $28 million versus operational EBITDA of $138 million in Q1 2013. As a percentage of sales operational EBITDA of 9.4% in Q1 2014 with substantial improved from 8.3% of sales in the comparative year period.

And finally, free cash flow defined that cash from operating activity less capital expenditures with the cash outflow of $79 million which reflects our normal Q1 working capital requirements but there is a solid improvement from the cash flow of $143 million negative in the comparative prior year period.

Now please turn to slide 14. On this slide, we have reconciliation for the period of our Q1 EBITDA of $166 million to a net income from continuing operations of $41 million. The principal reconciling items are depreciation and amortization, restructuring charges and interest and taxes, a brief comment on each of these.

Firstly the lower interest expense this year reflects the exit from the cost of the unfavorable interest rate swaps which impacted the first quarter of 2013. The swaps began to expire during the first quarter last year and were completely exited in Q4 2013.Higher income tax expense in Q1 2014 compared to the prior year reflect the increased in pretax income. The effective tax rate in Q1 2014 is slightly lower than the comparative prior year quarter. Restructuring charges of [$1.08] million in each of the comparative quarters pertain to provisions reported in the announced restructuring program.

As indicated, Q1 EBITDA of $166 million was $28 million or 20% higher than the prior year quarter EBITDA of $138 million. Q1 2014 EBITDA at 9.4% of sales was 110 basis points higher than Q1 2013 EBITDA which was at 8.3% of sales reflecting improved profitability due to favorable volume impact and cost reductions achieved.

Please turn to slide 15 to review the Q1 performance of the PT division. Revenues including intersegment sales for the PT division increased a $109 million or 11%. On a constant dollar basis, revenue increased by 10% or $104 million. As Rainer already discussed this growth has been in all regions and is driven by improvements in vehicle production as well as market share gains in all regions.

Powertrain EBITDA increased by $29 million to $116 million or 10.2% of revenue. As shown on the bottom left of the page the trends in Q1 last year is very positive with a slide expected this in the third and fourth quarter due to the normal holiday shutdown schedule.

Breaking down the EBITDA performance as shown on the waterfall in the bottom right of the page, the primary factor driving the growth in EBITDA and improved profitability with some positive mix and solid conversion on incremental volume. The conversion was about 35% or $38 million. This is mainly due to the recovery of vehicle production volume last year especially in Europe 50% of PT sales are generated. A further $5 million of EBITDA was generated due to operational and overhead cost control actions as well as material and source of saving.

The impact of customer price decreases reduced the EBITDA by $8 million or just in the 1% of revenue for the period. The negative $6 million in currency and other primarily reflects the negative impact with currency movement.

Please turn to slide 16, which describes the Q1 performance of the VCS division. As Dan already discussed, revenue increased by $6 million or 1% year-over-year with minimum currency moment. This was primarily due to an increase in North American aftermarket sales partly offset by decrease in North America OE sales as a result of the planned exit of the customer supply contract.

Sales in both Europe and rest of the world remain relatively flat. EBITDA decreased slightly from $51 million in Q1 2013 or 7.1% of sales to $50 million in Q1 2014 or 7% of sales. As shown on the bottom left of the page, sales and EBITDA have remained relatively constant with slight inflection due to normal seasonality of the business. On the bottom right of the page, we have a further breakdown of the movement of sales and EBITDA versus the same period in 2013. Focusing on the volume and mix column EBITDA increased by 5 million on a volume increase of 10 million.

The main driver of this improvement is coming from the aftermarket market business due to new business wins as well as a better mix partly due to the planned exit from some low margin sales. Customer price reduction and incentives represented a decrease of $5 million this quarter. Net performance was flat year-over-year which reflects productivity improvement in material cost savings offset by inflation and project costs.

Now please turn to slide 17. As Rainer already mentioned, the company successfully completed the refinancing of term debt on April 15th. This slide shows the pictorial of the new maturities of our term loan. As you can see the term loans come in due at the end of 2014 and 2015 we will refinance and extend the maturities to 2018 or 700 million and 2021 for 1.9 billion.

As a reminder, the ABL was refinanced at the end of last year and matures in 2018. On most tranches we were able to loss into very competitive interest rates. The first term loan facility of $700 million bears interest at LIBOR plus 3%, the second term loan facility bears interest at LIBOR plus 2.75% and both include a LIBOR floor of 1%.

As I said earlier, with the completion of the refinancing and the extension of the debt maturities, we can confidently pursue our strategic objectives. I should mention that our liquidity remains strong as we continue to have the benefit of the undrawn ABL facility plus $652 million of cash on the balance sheet at March 31, 2014. To remind you, we have announced two acquisitions for about $300 million which we expect to close through the balance of this year.

And please turn to slide 18. Where we represent our cash flow details for the quarter. We generated $70 million of cash from operating activities compared to an outflow of $50 million last year. This was mainly due to more stable working capital with a substantially reduced outflow of $50 million this year compared to an outflow of $106 million last year.

The reduced working capital outflow is primarily in VCS due to lower inventory bills and lower receivables in the discontinued some fuel business. That being said, net working capital efficiently measured as base sales of receivables, inventory turns and base payable is outstanding improved slightly for the company and for each of the divisions.

Improved EBITDA, lower interest payments and lower U.S. pension and OPEB payment all contributed to the cash flow generation this quarter at the operating level. The increased cash flow for other assets and liabilities in 2014 compared to the prior year quarter was due to payouts for incentive compensation and re-bid allowances.

Cash used by investing activity was an outflow of [$170] million which is an outflow of $136 million. With CapEx remaining relatively flat at about $90 million. The main driver of the difference is the net payment in Q1 2013 related to business dispositions of $40 million versus payments made to acquire business in Q1 2014, mainly related to the closure of the previously announced acquisition of the bearings company in Russia.

The net results from operating and investing activity with the cash outflow of $100 million in 2014 and this cash outflow of $186 million in 2013. As I said earlier, at the end of the quarter, the company reported a cash balance of $652 million in addition to the undrawn credit facility of $550 million.

And now I will ask the operator to open the call for questions and answers.

Question-and-Answer Session

Operator

Certainly, thank you Mr. Shah. So, ladies and gentlemen, we'll now conduct the question-and-answer session. (Operator Instructions) Okay. Your first question is from the line of Patrick Archambault of Goldman Sachs. Please go ahead.

Patrick Archambault – Goldman Sachs

Hi. Thank you very much and good morning.

Unidentified Company Representative

Good morning.

Patrick Archambault – Goldman Sachs

I just have a couple, I guess on the, starting out on page 16, with the VCS, I guess one of the things that might have surprised us a little bit there was that, I get the end market kind of with the offset in Europe growing slowly but I thought you had already done a descent amount of foot-printing where there might have been some tailwinds on the cost side, can you edge as may be kind of go through sort of where you are on some of those action in terms of transitioning your manufacturing footprint over and then it sounds like potentially there are some offsets from new investments you are making and sort of not only have that sort of became the wash this quarter but how we should think about it in the subsequent quarters.

Daniel Ninivaggi

Hey Patrick, it’s Dan. So I would say the overall restructuring what we have announced, we are not even halfway through. So over the last several months we moved chassis business from Chicago and just recently completed wiper business to Mexico, that transition was a bit lucky while we were experiencing unprecedented demand in the wiper business in North America. The break business we took here to Winchester last year, we are still transitioning Orangeburg, most of that aftermath business is going to Mexico, some of that has been go Smithville and then there will be another step where some of the business from Smithville will go to Mexico. So we are still, I would say in the relevantly early stages and not seeing the tailwind yet. I think you will start to see the benefit in the latter half of this year and stronger into 2015.

Patrick Archambault – Goldman Sachs

Okay, helpful and then just kind of a general question may be this was one more for Raj or Rainer but in terms of the acquisitions you have made, I know they are closing in the quarters ahead but how do you kind of think about the integration costs on a go-forward basis and how long -- may be any kind of color on accretion or sort of as we think about doing the walk, how those integration costs are likely to impact the conversion of revenue on a go-forward basis would be helpful.

Rainer Jueckstock

So I hesitate to give -- we're not going to give guidance on the integration or the financial impact of the integration. I would say as a general matter, the Affinia integration, we expect to close Affinia relatively soon. The integration is relatively simple. They're two very similar businesses. Combining product lines and plant capacity and management teams is already at work, and preparation is already taking place. And that integration will be relatively straightforward Honeywell, as you know gives us a low cost manufacturing footprint Romania, China. It will impact other facilities in Europe and may be more complicated way. I mean it will take a little bit longer to realize those synergies but we expect to start seen the benefit of it next year and the synergies overtime would be very significant.

Patrick Archambault – Goldman Sachs

And I’ll push my luck here when you say, sort of the benefit sometime next years, could we interpret that as accretion?

Rainer Jueckstock

Well, we don’t even know when we are closing yet. So it will depend to some extent on that. I will comment on the financial impact. We are really more focused on the operational integration and the abilities Honeywell to accelerate or restructuring actions in Europe rather than what quarter there would be financial impacts going to show up. So I really wouldn’t comment on that.

Patrick Archambault – Goldman Sachs

Okay, that’s helpful color and in fact.

Rainer Jueckstock

You were pushing your luck. That’s clear.

Patrick Archambault – Goldman Sachs

I will try and get what I can. But I understand that the timeframe is very much still TBD. The last question from me is, just even we can do the math but can you give us a sense of like the quarterly run rate of interest expense that you guys estimate with the swap now obviously fully and (inaudible) that you have just done.

Rajesh Shah

Yes, on the cash interest basis, just for the term loans, we expect interest cost to go up roughly about $12 million to $15 million for quarter, just on the term loans. Obviously some of the part of that was offset by the swaps in early year so we would say that on the term loans interest costs are based on present LIBOR is about $115 million to $118 million, cash interest cost.

Patrick Archambault – Goldman Sachs

Cash interest, okay all right.

Rajesh Shah

This is on the term loan. In fact this is on the term loan. We have some minor amounts of debt in foreign country.

Patrick Archambault – Goldman Sachs

Okay, okay. That's helpful. So okay the 115 is the run rate just based on the financing extra swaps that you've done okay. Great, thanks a lot guys. Those were my questions.

Rajesh Shah

Thank you.

Operator

Thank you for your questions. (Operator Instructions). And our next question is from the line of Brian Sponheimer of Gabelli & Company. Please go ahead. Thank you.

Brian Sponheimer – G. Research, Inc.

Hi, good morning everyone, thanks for having me. If you guys can talk at a high level, some of the benefits from an operating perspective as you go to this whole co-structure and why it was done now?

Daniel Ninivaggi

From an operating standpoint, I don't think it does very much. We're going to run the business the way we're currently running it. I would say just a further step in the overall segmentation of the business, we have well over 100 subsidiaries, our organizational structure is very complex so we have operationally separated the business, operationally separated it almost two years ago but from a legal structure standpoint, it just takes time and I would say the whole new company is just the next step in that process.

Brian Sponheimer – G. Research, Inc.

Okay, alright. That makes sense. And Dan within the aftermarket business, just give an update pricing with negative 5 million bucks in the quarter you've got two major customers and one major customer becoming integrated over the course for the year. Any update on pricing returns that are getting more difficult for you?

Daniel Ninivaggi

Well, pricing is driven by a couple of things, there is mix shift. And so in some of the product lines we're seeing continuing shift to mid grade from premium. But overall I would say it's not a big impact and in fact is probably firmed up somewhat. I would say the -- I mean the acquisition you are referring to I guess it's advanced (inaudible) that's a positive for us. We are obviously a large supplier to advance, have a great relationship and is an opportunity to expand our business, particularly with the Affinia transactions which bring to us some carquest business. (inaudible) I was there in the last week, our relationship with Napa probably has never been better. We've received the service award and we see opportunities to grow our business with Nap as well including through the Affinia acquisition. The other large customer relationships are good and I think there is a realistic discussion going on on pricing in terms and that sort of thing. We know we need to be competitive at every tier and every product line we're going to compete for every product in our core product categories and we doing things to remain competitive both from the manufacturing and sourcing standpoint. So yes it's a competitive industry. Our objective is to be the strongest competitor in the industry in our core product lines and that's what we're focused on. As long as we do that I think our customers will be fine and our profitability would be fine.

Brian Sponheimer – G. Research, Inc.

That's helpful. How much in your discussions with some of your own suppliers and your customers, does the turmoil at Federal-Mogul or at least from your seats perspective matter having three or four different people running the aftermarket business over the course of the last four years and not really having the identity that you’ve always looked to establish.

Daniel Ninivaggi

Well, I mean it's a little bit early in the process, but I would say from at least the initial customer meetings, it’s safe to say that I think they love me, I think it's a breath of fresh air. Listen, I wouldn't say there is turmoil, all that the customer want to understand what's going on here and so we get that question all the time. And I think we have a reasonable explanation for that and we can demonstrate that there is stability, the average tenure of employees in the VCS group is many, many years. So we have a lot of continuity and lot of stability in the ranks even though we have a little bit of change at the top. What they really want to know is what's our vision for the company, how does that align with their strategy. They are curious about our investment plan. They want us to invest with them, they globally, domestically wherever. They want us to be competitive in every product category. They're actually, I think, very positive about the direction we are going and they understand that for them to be successful they need to have a strong suppliers in all the core product categories and I have been very honest with them, very candid that—we have to be as competitive as we can be to make ourselves and them successful that's what we're doing. And it looks as long as we follow through, I think those relationships will be good and I think the initial feedback has been pretty favorable.

Brian Sponheimer – G. Research, Inc.

All right, tremendous. Rainer, if I can just sneak one with you?

Rainer Jueckstock

Thank you very much. Thank you very much. Go ahead.

Brian Sponheimer – G. Research, Inc.

Any benefit thus far, that's really material for North American commercial truck?

Rainer Jueckstock

Number one thanks for asking the questions. Business is in a reasonably good shape and so it's a good to be here after (inaudible) and we had about poor 2012 and 2013 and I think we are on the good run this Powertrain. Heavy-duty in North America, is flat, not only an interesting business where we have significant exposure, it’s also an indicating needle for us how is the economy into the U.S. overall is going and you saw mid last year a lot of positive movements on passenger car, but we didn’t saw it on the truck side and we at this time saw some business, the economy development is still somewhat fragile. Quarter four, you saw solid improvement in heavy duty truck in North America, a lot of (inaudible) and at this time we saw that's mainly a pre-buy because the emission regulations are kicking in.

Now in quarter one, we still have the significant order book even better than what we had in quarter four last year. So I am very optimistic that this is a signal that overall economy in North America is picking up. The heavy duty is in a good shape outside of a pre-buy period that's a good sign. We still have weak spots we note that mining is not in a good shape and we also see some of our industrial applications and customers on a relatively low level but heavy duty truck which is basic for the industry overall is in reasonably good shape and we are well positioned with our product now.

Brian Sponheimer – G. Research, Inc.

Thank you very much. And as you said it was a nice quarter certainly in the Powertrain division.

Rainer Jueckstock

Thank you.

Daniel A. Ninivaggi

Thanks, Brain.

Operator

Thank you for your question. Our next question comes from the line of Tom Shandell of Goldentree. Please go ahead.

Tom Shandell – Goldentree

Hi, good morning. Two questions, page 8, I'm just trying to reconcile two different comments. The comment was made that rest of world revenue was up 16% driven by China where sales were increased by 29% and the next bullet says PT revenue growth in all regions increases at a rate higher than market production rate. Is that imply that in China sales were greater than production?

Rainer Jueckstock

Yes, Rainer speaking. I can confirm Powertrain in China, grew sales-wise faster than to underlying market. But in order to put in the fair perspective, it sometimes hard for us to really determine what is market share growth and what is not because our product we are producing in this quarter going into car which is sold to a find the customer in three months or in four months. So some of what we see is timing, while we anticipate with our higher order book and solid sales of our final customers in a few months. And secondly what is also clear and it is valid for all regions not just for China in time there is overall market is growing our pipelines are filled with inventory. We produce parts, selling to the engine makers. They fill their pipeline towards the car maker’s engine and also that car makers are filling the pipeline at the dealership. And so some of the growth we saw in quarter one beyond and above the output of OEM customers might be related to these two impacts of timing and inventory build.

But I have also to say the outlook for our quarter two is positive. We do not see a significant change into order book, so I think the inventory impact will have, the timing impact will have relatively minor, -- is a minor element that is somewhat positive for quarter two result.

Tom Shandell – Goldentree

Okay, great. And then the other question I have is on side 16. I just hoping that you could elaborate more on the $5 million negative variance to EBITDA from pricing. What was driving that I didn't quite understand the explanation I'm sorry.

Daniel A. Ninivaggi

So pricing is fluid and the timing of that can be somewhat unusual. So what I said earlier is pricing in my mind has firmed up. The impact here probably is more a function of timing than anything else. So I wouldn't be too much into it.

Tom Shandell – Goldentree

Okay.

Daniel A. Ninivaggi

And sorry about this, by the way it’s roughly split and half between OE and aftermarket. So there is a little bit of noise in there.

Tom Shandell – Goldentree

Okay. Thanks.

Daniel A. Ninivaggi

Thanks, Tom.

Operator

Thank you for your questions. As there are no further questions, I'd now like to turn back to Ms. Paula Silver for closing remarks. Thank you.

Paula Silver

Thank you, Lisa. Thank you for dialing in today's call. We look forward to speaking with you again in July when we announce our second quarter results. And you may now disconnect.

Daniel A. Ninivaggi

Thank you.

Rainer Jueckstock

Thank you.

Rajesh Shah

Thank you.

Operator

Thank you, ladies and gentlemen. That concludes today conference. You may now disconnect your lines. Have a good day.

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