Federal-Mogul's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Federal-Mogul (NASDAQ:FDML)

Q3 2011 Earnings Call

October 27, 2011 9:00 am ET


José Maria Alapont - Chief Executive Officer, President and Director

David Pouliot - Director of Investor Relations

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


Brian Sponheimer - Gabelli & Company, Inc.

Anthony F. Cristello - BB&T Capital Markets, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division


Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Federal-Mogul Corporation Earnings Conference Call. My name is a Chantalier and I will be your facilitator for today's call. [Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. David Pouliot, Director of Investor Relations. Please proceed, sir.

David Pouliot

Thank you, operator, and good morning, and thank you for joining Federal-Mogul's Third Quarter 2011 Earnings Conference Call. Before I begin I would like to refer you to the company's Safe Harbor statement shown on 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.

Mr. Alapont will begin this morning's call by providing a brief overview of some important financial and operating results for the third quarter of 2011. Following this overview, Alan Haughie will cover the detailed quarterly company and business segment financial results. We will finish with closing remarks and then open up the call for your Q&A.

Mr. Alapont?

José Maria Alapont

Thank you, David, and good morning, everybody. Federal-Mogul has record third quarter sales at over $1.7 billion which is $188 million or 12% more than the same quarter last year. This is our 10th consecutive quarter of sustainable global profitable growth.

We improved gross margin by 11% versus the same period last year to $263 million or 15.2% of sales, a $25 million increase. The company continues to operate efficiently at higher global utilization rates by delivering on a strong sales demand on our regional equipment markets. We also continued to gain revenue for additional technology content and have implemented actions to offset the challenge of higher raw material costs in several areas.

Federal-Mogul SG&A costs were $172 million, or 9.9%, an improvement from the 10.6% of sales in the same period last year. We continue to emphasize SG&A efficiency in order to place maximum resources on developing our advanced technology portfolio as well as expanding in fast growing markets. We have, since 2005, improved SG&A spend by more than 5 percentage points. The company had net income of $34 million which compares favorably to an adjusted net income of $29 million when excluding the $24 million on non-cash income from OPEB curtailment gains in the last year reporting.

Our operational EBITDA was $166 million in the third quarter, or 9.6% of sales, another strong performance. This operating result demonstrates the success of the company investing in developing new technology for fuel economy, emission reduction and vehicle safety to drive growth faster than the markets. We supported several new original equipment global program launches and higher customer demand as well as continue to expand our new mid-grade and private label product lines for the aftermarket.

These investments plus $105 million in capital expenditure for additional capacity and new program launches in the quarter resulted in a cash outflow of $71 million, still Federal-Mogul maintained it's $1.5 billion in liquidity including $1 billion in cash and $0.5 billion undrawn revolver at the end of the quarter.

If we move to Page 5 and as I mentioned it, Federal-Mogul had a record third quarter sales up 12% versus a global market up 3%. This was due to strong demand in the light and commercial vehicle markets as well as higher demand for our leading technology and innovation. We have consistently outperformed the original equipment and vehicle markets, and we have also grown in the energy industrial transfer markets where, since 2009, our sales have increased by 14%.

Company sales to global original equipment vehicle makers increased by 19% with sales up in U.S. by 10%, Europe 20%. BRIC and rest of the world were up 27%, with a specially strong increase in China, 29% and in India 35%. The global aftermarket business segment reported 1% higher sales as the decline in the U.S. has narrowed to 5%. This offsets by increases of 7% in Europe, while the BRIC and the rest of the world markets were 21% led by China, 14% and India 18%.

We are beginning to see the results of our aftermarket business model strategy which includes a strong support for our premium brands while simultaneously making investments to develop leadership in new mid-grade and private label product lines. We have secured in the last 12 months more than $120 million in new contracts in mid-grade and private label categories with leading aftermarket distributors.

Moving to Page 6. This quarter's performance strengthens our trend of consistently winning global market share and growing faster than the underlying market rate. Federal-Mogul original equipment sales increased 17% during the last 12 months and have exceeded the global vehicle sales growth rate of 6% during the same period. This strong performance has occurred across all markets. The company's original equipment business segments have driven strong sales growth of 16% in the U.S. versus the market 11%, Europe up 15% versus the market of 1% and the Federal-Mogul sales in the BRIC and the rest of the world were up 22% in comparison with the market up 12%. With our growth in China up 23%, we're -- while the Chinese market went up only 9%. Sales in India have increased 31% and far exceeded the market growth of 13%.

This growth is driven by our portfolio of leading technology and innovation, fuel economy emission and vehicle safety which has been and continues to be in high demand. Our strong growth also reinforces Federal-Mogul's market diversification, a key component of our sustainable global profitable growth strategy.

Now to conclude this part, let's move to Page 7. Federal-Mogul has a unique competitive position with excellent business segment, geographic and market diversification where no customer accounts for more than 5% of sales. Federal-Mogul products are present in more than 300 vehicle platforms and in more than 700 powertrains. We are one of the few suppliers to serve both the OE and the aftermarket across the automotive energy, industrial and transport markets. We provide our customers with leading technology, global engineering and a manufacturing footprint with world-class services.

Federal-Mogul original equipment business represents about 66% of the total sales while the Global Aftermarket represents 34%.

And turning to regional revenue sources: 38% come from the U.S. and Canada, 43% from the Europe and the BRIC and the rest of the world countries represent 19% of sales in the period. Federal-Mogul's original equipment BRIC sales have grown a 35% CAGR versus the BRIC markets growing 19% since 2005. Our leading technology, global engineering and manufacturing footprint and diverse global customer relationship will help us continue to drive this strong growth.

Regarding the market diversification, about 70% of our business is in light vehicles and 80% is in commercial vehicles. Our business in the energy, industrial, transport markets, which also grow significantly, represent about 10% of total sales and serves customers in aerospace, commercial power generation, shipping, railways and other industries.

Now let's move to Page 8. And I would like to share with you our drive for sustainable global profitable growth and the market opportunities that reinforce our strong potential for continuing to grow at rates greater than the markets. First, we are driving profitable original equipment growth from the recovery of the mature markets, coupled with the substantial growth on the BRIC and the rest of the world. The global market is forecasted to increase to more than 104 million units by 2015, a CAGR of 7%. We also are developing and delivering leading technologies that directly address the tougher government regulations on fuel economy emissions and vehicle safety. This more stringent regulations provide significant price and opportunities as we add design complexity and system content to enable our customers to meet their objectives. There are winning market share with this highly engineered products, and this is a key ingredient to our above market growth.

Second, we are positioned for profitable growth in aftermarket industry from the growth in the global car park, the diverse mix of vehicle in operation and because, as well, the average age of the vehicle part is increasing. In addition, China and the U.S. and Europe have consolidated, while the BRIC countries distribution channels are starting to form rapidly, creating more opportunities for Federal-Mogul premium mid-grade and private label offerings.

Finally, Federal-Mogul's leading technology and innovation, global footprint, operating efficiency and ability to grow faster than the markets together with our aftermarket strategy for premium brand mid-grade and private label products is driving our sustainable for global profitable growth.

Now I will turn the call over to Alan, Federal-Mogul's CFO for a detailed review of our financial performance. Alan?

Alan J. Haughie

Thank you, José Maria. This morning I will cover Federal-Mogul's third quarter financial highlights including a review of the sales and EBITDA performance of our 4 business segments. The full details of our financial results for the third quarter are included in our Form 10-Q, which will filed with the SEC later today.

Now please turn to Slide 10 for more details of our third quarter earnings performance. Sales rose to $1.7 billion, representing an increase of $188 million or 12%. In fact, this sales figure is a record third quarter for Federal-Mogul, which is testament of continuing ability to leverage our OE technology to capture market share and attain growth in both mature and developing markets, more than offsetting the current challenges of the U.S. aftermarket.

In constant dollar terms, sales increased by $118 million or 7% with OE sales, which represent about 65% of the company's sales, growing by 13% compared to low single-digit growth in the vehicle markets and the Global Aftermarket sales falling by 2%. Gross margin increased by $25 million to $263 million an increase of 11%. As a percentage of sales, gross margin fell by 0.2 point reflecting product mix shifts, the continuing cost of globally expanding the business in all regions partly offset by depreciation charges.

As with the second quarter, the company was able to more than recover underlying material cost increases through price escalators, supply and negotiations and customer price recoveries.

But although it is neutral in terms of gross margin dollars, this recovery of material costs, in pricing, has the impact of the depressing the margin percentage by 0.1 point.

SG&A increased by $8 million versus last year including $6 million due to currency movements. Therefore, in constant dollar terms, SG&A expense increased by just $2 million on a real sales increase of $118 million. So as a percentage of sales, SG&A improved to 9.9%, 0.7 point better than last year.

Our operating margin being the difference between the gross margin and SG&A improved by 23% or $17 million to $91 million reaching 5.3% of sales compared to 4.8% last year.

In 2010, the company eliminated retiree healthcare benefits for certain U.S. employees resulting in a non-cash curtailment gain of $24 million in the quarter, largely as a result of this non-recurring item, pretax income in 2011 of $45 million is $15 million lower than last year but $9 million higher when excluding the impact of the curtailment gain. Adjusting net income, which is simply GAAP net income without the 2010 curtailment gain, on which there was no tax impact, increased by $5 million to $34 million.

EBITDA was $166 million for the quarter, a $2 million improvement over last year.

On Slide 11, we have a reconciliation of our profit measure, operational EBITDA to our net income for the period. We have also presented the reconciliation to adjusted net income at the foot of the page. As just mentioned, we realized EBITDA of $166 million in the third quarter compared to the $164 million last year.

Depreciation charges decreased this quarter versus last year. And as a reminder, when the company emerged from bankruptcy at the end of 2007, as part of the mandatory fresh start reporting, many assets were assigned increased values and useful lives of 3 years. These assets therefore became fully depreciated at the end of 2010. And given it's non-cash nature, we excluded that the $24 million OPEB curtailment gain from EBITDA in 2010. The other components of the EBITDA to net income reconciliation remain largely unchanged from last year.

Slide 12 represents the year-over-year growth of our third quarter sales and EBITDA. If you move along the foot of the page, work sales from last year to this year, and the waterfall above it represents the associated EBITDA impacts. This chart also illustrates how we separate the impacts of volume, pricing, exchange and so forth.

Now with regard to sales. We attribute $105 million of sales growth to market factors and new business wins. Of this amount, $65 million is due to increased demand before market share gains that is for the company's products in the automotive light, medium and heavy duty commercial vehicle markets as a result of regional increases in vehicle production. This represents a year-over-year growth of about 6% on the 2010 OE sales base.

On top of this 6% growth, market share gains represent sales growth of a further 5 percentage points, or $50 million. In fact, our OE sales both from volume increases and market share gains in every major region of the world exceeded the growth attributable to increased vehicle production alone in those regions, most notably in Asia where total vehicle production remained flat year-over-year but the company's OE sales grew by 27%.

However, aftermarket volumes fell year-over-year by about 5% or $13 million, the majority of which occurred in the U.S. where economic and affordability issues continue. This market decline was partly offset by new business wins representing an increase of 3% or $20 million. Again, primarily in the U.S, reflecting the successful launch of the mid-grade and private label product lines discussed in the prior quarters. This $20 million is the impact in the third quarter of the $120 million of new grade -- new mid-grade, sorry, and private label contracts referred to by José Maria earlier.

Year-over-year pricing including the impact to material costs escalators was favorable by $13 million. The remainder of the sales movement is exchange rate impacts of $70 million.

Turning now to EBITDA. The net impact of the volume and market share increases was minimal due to the significant mix shift occurring in the aftermarket. The increase in raw material cost was more than offset by pricing increases and customer price escalators with a net increase to EBITDA of $4 million.

We did improve productivity by $15 million year-over-year but this was offset by labor and benefits cost inflation of $18 million as well as global development cost increases of $5 million as we continue to invest and support new project launches, equipment transfers, production and inventory moves as well as increased R&D spending.

But furthermore, the rapid rate of our OE growth requires non-structural operating cost increases to ensure the highest standards of quality and delivery performance, including developing and sustaining our expansion in BRIC and the rest of the world. As a result of these items, EBITDA increased slightly to $166 million versus $164 million a year ago.

On Slide 13, we provide a summary of the third quarter consolidated cash flow. This quarter we consumed $93 million of working capital versus an inflow of $5 million in 2010, and this is largely due to the investment required to support record Q3 sales. Cash inflow from other assets and liabilities of $18 million compared favorably to an outflow of $63 million last year, essentially due the timing of certain receipts and payments compared to last year including VAT collections, pension payments, dividends from joint ventures and cash taxes.

The deduction of the non-cash curtailment gain of $24 million is reflected in this line in 2010. As a result, cash provided from operating activities decreased from $78 million in 2010 to $34 million in 2011. The company also increased capital spending by $37 million over last year, a significant portion of which to support current and future global sales growth including the commencement of a number of greenfield projects and program launches in Asia.

The cash outflow for this quarter of $71 million compares to a $10 million inflow last year and as stated reflects our commitment to investing in long-term growth.

Page 14 introduces our review of business segment performance for the third quarter, which focuses on the comparison in trends and sales on operational EBITDA.

Turning now to Slide 15. The format adopted for the business segment discussions will be to cover the third quarter sales performance compared to 2010 on the left side of the page with the right side to the page covering the third quarter EBITDA results compared to 2010. And in order to highlight the evolution of our segment performance, we've also included a chart comparing the third quarter of 2011 to the third quarter performance of the previous 2 years.

Starting with Powertrain Energy, our largest business segment serving the OE market and representing 50% of our OE sales. The significant items in the third quarter comparison include a 17% constant dollar sales increase, including volume and market share gains in all regions with sales in BRIC countries up by 32%. In fact, with reference to the pie chart, sales in the rest of the world are now equal to those in the U.S. and Canada for this segment, both representing 22% of the total.

EBITDA increased by $15 million, of which, $19 million is due to volume and market share gains. Labor inflation and our continued investment in R&D and new product launches decreased EBITDA by net $7 million of productivity. Material cost increases were completely offset by customer price escalators. As mentioned earlier, the impact to material cost escalators in pricing lowers the EBITDA margin, in this case by 0.2 point. Therefore, in the absence of the escalators, the EBITDA margin for this segment would have been 0.1 point higher than last year. As shown on the chart, sales and EBITDA continue to grow from 2009 levels.

The next Slide 16 provides an overview of our Powertrain Sealing and Bearings segment. Sales highlights include a 10% constant dollar increase due to volume and market share gains in all regions, with sales in BRIC countries up by 8%. EBITDA increased by $10 million to 10.9% of sales compared to 8.9% last year.

This segment was able to increase EBITDA through net productivity improvements in excess of inflation and global development as well as offset material cost through customer price increases and material price escalators. The EBITDA margin percentage for this segment was also impacted slightly by the material escalators in pricing. And as shown on the chart below, this segment continues to grow sales and EBITDA in absolute dollar terms and EBITDA as a percentage of sales from 2009 levels.

The next Slide 17, provides an overview of our vehicle safety and protection segment. Highlights include a 6% constant dollar sales increase, mainly due to global market share increases with sales in the rest of the world including BRIC countries, up by 16%. EBITDA decreased by $8 million primarily due to material cost increases. This is due to increases in steel and many other diverse materials specific to the products within the segment including molybdenum and zirconium. However, productivity improvements were sufficient to offset labor inflation and global development costs including the operational transformation required for the introduction of the mid-grade and private label product lines manufactured for the aftermarket.

And finally, the Global Aftermarket on Page 18. Firstly, in reference to the sales performance on the left-hand side, sales increased by 1% including favorable currency movements, but they decreased by 2% in constant dollar terms, mainly as a result of a 5% decrease in the U.S. driven largely by a change in product mix. However, this doesn't narrow the gap from the second quarter where U.S. sales were 12% below the prior year. The company continues to transition its business model to drive profitable growth to a premium, mid-grade and private label offerings. Furthermore, the aftermarket continues to grow in all of the global markets. For example, sales in the rest of the world increased by 21% or 16% in constant dollars with the largest increases seen in China, 14%, or 8% in constant dollar terms and in India, which increased by 18%.

EBITDA decreased by $7 million, again due to the decrease in volumes in the U.S. combined with unfavorable product mix. Now, although the impact of volume and mix was a negative $16 million impact on EBITDA, significant year-over-year progress has been made in resourcing parts and production resulting in $7 million improvement in material costs.

And as shown on the chart, the aftermarket sales on a global basis is stable. The sales declines experienced in the U.S. as a result of economic issues and current consumer spending habits are being offset by increased market share in all of the regions. The change in EBITDA dollars does reflect the transition in product mix offering introduced in order to capture the growing mid-grade and private label market. And the company and will continue to invest in BRIC and emerging markets, but the vehicle part is expected to grow to 450 million vehicles by 2015, a compound annual growth rate of 7%.

Now please turn to Slide 19 for more details of our year-to-date earnings performance, which demonstrates continuous improvement on the first half results. Sales reached nearly $5.3 billion, an increase of $625 million or 13%. In constant dollar terms, this represents an increase of 9%. OE sales grew by 16% and Global Aftermarket sales fell by 2%.

The gross margin improvement of $75 million represents a 12% conversion on the incremental sales. And as previously mentioned during the third quarter discussion, material price escalated to press the gross margin slightly by 0.1 point and this is true in the year-to-date performance also.

SG&A expenses increased by $6 million in the prior year, but this includes $15 million from negative currency movements. Therefore, in real dollar terms, we actually reduced SG&A by $9 million while increasing sales by $450 million. This is evidence that the company continues to control general administration costs in support of increased spending on R&D and global market expansion. As a percentage of sales, SG&A improved by 1.2 points to 9.9% of sales. Our operating margin for the 9 months ended September improved by 28% or $17 million to $319 million compared to $250 million last year.

Operating margin as a percentage of sales has increased to 6.1% from 5.4% a year ago.

As already described, in 2010 the company recognized non-cash curtailment gains from the elimination of certain retiree healthcare benefits of $28 million for the first 9 months of 2010. Income taxes are significantly higher in 2011 than 2010 due to the higher operating profit in 2011 combined with the non-recurrence of certain valuation allowance releases in 2010.

Net income attributable to Federal-Mogul of $150 million for the period represents a $34 million or 29% from increase in the net income in 2010. However, after adjusting for the curtailment gain, net income improved by $62 million or 70%, a very healthy conversion to net income of 10% on the incremental sales. EBITDA improved to $544 million from $501 million in the same period last year.

On Slide 20, we have a reconciliation of our profit measure, operational EBITDA to net income for first 9 months. We realized EBITDA of $544 million compared to $501 million last year. And in terms of reconciling from EBITDA to net income the items are exactly the same as discussed in the third quarter. And again, at the foot of the page, we've shown a reconciliation to adjusted net income which is merely GAAP net income before the OPEB curtailment gain on which there's no tax effect.

Finally, Slide 21, we have a summary of our year-to-date consolidated cash flow. cash flow from operations and investing activities was a net outflow of $158 million compared to a net inflow of $52 million in the prior year. And this essentially reflects the company's investment in current and future growth. We have consumed $106 million more of working capital, and invested $116 million more in capital projects, necessary to support both current and future sales. We continue to support increasing demand with the highest quality and delivery performance for our portfolio of leading technology products. And this leads us with strong liquidity of $1.5 billion comprising $1 billion of cash and $0.5 billion in undrawn revolver.

And now I will turn the call back over to José Maria for final comments before the Q&A.

José Maria Alapont

Thank you, Alan. If we turn to Page 22, Federal-Mogul is delivering sustainable global profitable growth and our performance in the third quarter of this year further demonstrates the company capability to drive additional sales growth to deliver solid profitability.

Sales were a third quarter record and stronger in all OE business segments, again outperforming the underlying market. Federal-Mogul sales in U.S. were up 10%, Europe 20%, sales in the BRIC were up 27%, with China up 29% and India 35%. And our aftermarket sales increased 1% on a global basis with a strong growth on the BRIC and rest of the world 21% up, China 14% and India 18%. The company has continued to implement process improvements that drive efficient operating performance as demonstrated by our SG&A at 9.9% of sales.

Our effective actions to offset the challenges of higher raw material costs in several areas has delivered cost reduction from suppliers, improved manufacturing efficiency and price recovery.

Gross margin and EBITDA were very solid in the quarter and were up versus the third quarter of last year and adjusted net income compares favorably to the prior year. We continue to bring new products to market that are driving growth and capturing market share, especially in the areas of fuel economy, emissions and vehicle safety.

Let's move to Page 23. In closing, Federal-Mogul continues to perform well, with a strongly increasing customer demand for our leading technology and innovation in all vehicle market segments. Several trends are driving this growth and favorably positioning Federal-Mogul for the future. The mature markets of the U.S. and Europe are forecasted to grow at 7% CAGR to 2015. The fast growing BRIC markets continue to experience substantial growth with an 11% CAGR, the global vehicle car park is also expanding, especially in developing markets and is suspected to grow to more than 1.2 billion vehicles by 2015.

Governments around the world in both mature and developing markets are mandating more stringent regulations, demanding higher fuel efficiency, reduced emissions, improved vehicle safety and enhanced technology and innovation is required for market differentiation, which we are able to provide to our customers. Furthermore, we are operating with world class manufacturing, quality, delivery and supply chains management with strong financial performance. These factors together create opportunities to capitalize on the strong demand for Federal-Mogul innovative and market-leading technologies, driving our third quarter record sales growth above the global markets.

And now, operator, please open the call for question-and-answers.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Patrick Archambault of Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

There's no doubt that from a sales perspective, even despite the headwinds in the aftermarket, you have had a lot of success in growing your business. My question is really just about the incremental margins. I think potentially where we are now versus where would've thought we would've been either kind of standing maybe 3 quarters, there's probably been more investment that's been required to grow that business both in terms of things that hit the P&L directly as well as CapEx. When do we see that investment transition starting to lighten up a bit? Where you can really start to see the dividends, both in terms of incremental margins and in terms of cash flow generation because clearly it does seem from the top line point of view, aftermarket notwithstanding, you have very good traction.

José Maria Alapont

Thank you, Pat. Question shows a really good understanding of the company. First of all, we started the journey in 2005 to move the company to generate sustainable global profitable growth. And to make it sustainable, you need to lead in technology and innovation. That is what is going to give you the pricing edge. And that is what is going to generate sales to over-pace the market, when you achieve that, naturally, you need to then make it profitable. I think our path is very much in the right direction. When you look into the last couple of quarters, we have been facing the tough challenges of the material cost and we have managed to turn it around with overall positive pricing, $30 million versus $9 million. We have moved substantially towards the fast growing markets, that means new investments. We have launched a very, very large number of new programs, new powertrains, new platforms. That is an investment and obviously that has a ramp up cost. And we see it in some business unit already very strongly paying, as the cases of the powertrains. On the VSP, it's taking a little longer because they are affected by the aftermarket. And overall, even in the aftermarket, we're seeing better returns and narrowing the GAAP in the only market where we were shrinking, now we are in that comparison moving positive, although still under as you saw. Therefore, we have a conviction that the leading technology and innovation that have put in such a strategical areas like fuel economy, emission reduction and vehicle safety sustained very well first to get the right market shares, the leading market shares, at the right price. And second, the investment that we have been doing in new capacities, launch new lines, new technologies are also working well although that obviously, takes time and we need to go through that transition. But we are confident that the profitability of these very strong over-pace in growth to the market on OE is solid. It's real. It's there. And the recovery business plan that we put in place in North America, but across the world as well but affecting mainly North America for mid-grade and private label is working as well on the positive path, then you know we don't give guidance, but we are very convinced of the performance of the company.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

So it sounds like there's -- because I think if I do the math quickly, you were at about 7% incremental EBITDA margins for the first 9 months. You were clearly sort of low singles in this quarter. It sounds like then, you're pretty well-positioned for reacceleration of that.

José Maria Alapont

That is absolutely correct. We have managed to keep it all on the positive range. And as I said, the challenges were fairly considerable. And also what is important is that as you saw in Page 6, when you have been outpacing the faster growing markets in the world by mostly 3x, when you have been growing in China, 23% versus 9%, in India 31% versus 13%, all that is a very strongly good, positive trend for the future because you are developing a capacity, profitable margins and developing the countries where we have put in the latest technologies, the latest manufacturing processes. And to do the and still maintain bold and single digits as you remarket our progress, that is where we see the positive clear trend and path. And we have done it. In a relatively short period, we have increased our capacity and our market shares in a very substantial way without leaving profit behind.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay, and I'm going to push my luck here and just ask you is this potentially the bottom quarter in terms of incrementals with them starting to re-expand or is there a little bit more of an investment period before we turn the corner?

José Maria Alapont

Dave is here. He's real tall guy and he doesn't look good to me to give an answer, then we are going to give no guidance. But what we feel is very positive into one aspect that is important to highlight here, despite all the challenges of the global economy, Europe, the change of the currency, the banking systems, deficits in the States, and slowing [ph] path in other regions in the world. We keep having very strong programs. We keep outpacing the markets. And that, together with our manufacturing world class efficiency is the best recipe for performance, then we still see a strong performance going on and that is as much as we can comment for now.


Your next question comes from the line of Tony Cristello of BB&T Capital Markets.

Anthony F. Cristello - BB&T Capital Markets, Research Division

First question on the aftermarket side of the business. I just want to kind of get your take on where you think you stand now with the initiatives? Are you sort of in place just to again start to really be more competitive on the sort of entry point or second-tier product? And are you seeing the ability to capture or win share as you've become more aggressive in those categories?

José Maria Alapont

We have decided this quarter, anticipating questions like yours, to comment specifically on that. And as you saw on Page 5, I did comment on that and also later on, I will. We have been getting new mid-grade and private label contracts for about $120 million, as you could imagine. We said we cannot disclose the customers, but we'd say with the major distributors and, obviously, the bulk of that is not close to the majorities in the States. That shows that the business model is working. And we have seen it consistently and it caused the different product ranges and categories and different customers, I mean, it's not only one which we'll be concerned. It's across, which is encouraging. The second part of the question is how you can transform into profitability. Well, the first client is that, that is additional revenue. Then we see that like additional profit opportunities. Then what we put in place with the model is a very clear strategy of in-house or outsourcing components and product manufacturing. That again, has been progressing positively during the last 12 months since we started this strategy. And we start seeing the tracking of that. Naturally, that has certain implications, that has implication of the model, the supply chain and that is why if you'll recall what I said, I said that we keep investing in developing -- I'm just repeating what they say, we're making investments to develop leadership in new mid-grade and private label products. And that's what we are doing. We think it's the right investment and the customers are very positive on that. And the result is new business bookings. Why they're positive on that because we are giving fair model standards. And we're doing it at competitive cost for us to make a competitive profit. Of course to do that now, as you could imagine, we are developing as well as closes [ph] that different to our competition and positive to us, we are showing the customers that even our supplier base that we could use in China, in India, in other best cost countries, they're making it set on normal standard. And that is what, I think, is turning very positively towards us because they see that we are in that product range and, at the same time, we do it with Federal-Mogul quality, service and technology.

Anthony F. Cristello - BB&T Capital Markets, Research Division

The U.S. piece of your aftermarket business or North America, should I say, I believe, is still around 60% of the mix, if I'm not mistaken, and it continues to be the piece that is declining. And I guess what I'm wondering is when you think over the next couple of years or 3, 5 years out, will the mix or is your focus on limiting or taking your North America mix down and bring up the rest of the world mix such that the rate of decline has less of an impact on the overall profitability for that segment? Or is it a situation where these initiatives are slower to take hold in North America or the U.S. where perhaps it's a bit more competitive and you don't have -- you have to be a little bit more strategic in how you try to win or gain that share?

José Maria Alapont

As I said to Pat, this shows that those of you who know very well the aftermarket, then you know very well for them all. That is a very genuine question. And our strategy is to generate what they said from the very beginning, back in 2005, sustainable global profitable growth. And to do that, you cannot have one or the other. You need to have a global approach. When we said that in 2005, we needed to prove it. Well, the North American market evolution more towards mid-grade and private label has make us to take this new business model. But the reason that we present 60% and not like before, a very -- mostly large majority, is because in parallel, we have been very successfully growing the rest of the world with very good margins and profitability. And it's not -- our intention is not to shrink North America, to grow the rest of the world. But the reality is today, the rest of the world represent 40% and is very healthy, very good [indiscernible] because you know that as well, the premium demand is much stronger. And the demand for mid-grade and what they called, white [ph] level is not such important over here, although we have launched this and we started to use them. The specific answer to your question is, we are going to keep developing winning strategy to lead both in North America and in the rest of the world on both premium, mid-grade, private label. Why this? Well, I said it in the presentation, 2015 the worldwide park is going to be more than 1.2 billion vehicles, and for the first time, you're going to see markets that are going to grow substantially. And when you see, not here, but in our Investor Relation Presentations, if you have access to that, we have a page where we are presenting and you'll see North America CAGR is 0, basically flat between 0 and 1% in the next 5 years, and the rest of the world is growing substantially. And if we keep being successful in both, we are going to have a very good strong growth with profit. But still, we will need to face the challenge of North America and that is what we are doing. And we think that we are doing it positively, although this is not something that change overnight or in a quarter. But we have started right now, quarter-after-quarter showing that the comparisons look positive. And we are going to keep developing the strategy to be successful in the North American market to remain the leaders and that will be together, we've been the leaders worldwide, whether it's Europe or the BRIC or the rest of the world.


Your next question comes from the line of Brian Sponheimer of Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Just a question on your price escalators, if I'm if thinking in generalities, typically it's 3 to 6 month lag between you getting the benefit of prices coming through versus the underlying commodity cost rising?

José Maria Alapont

Yes. That's correct. There is no -- well, first of all, I'm sure you track different companies and you are going to nod, it's that we are probably one of the ones that have a best track record to year-over-year or at least rising towards material cost. And also if you track us, you will see the first quarter tend to be negative because the material cost come from Alamino from wherever and you cannot stop it and the negotiation with the customer are taking place. Second quarter, we were already green. Third quarter we're even more green, all those are carry-overs. Then fourth quarter, we are going to be green again and overall the year we don't give guidance, but you may hear on that. But what I want to say is that, yes, we have material cost escalators monthly across. But each customer has like a different type of approach. Some are doing it on a quarter basis, some are doing on a half year basis and even some of them doing on an annual basis. And it's because all of them, we have managed to get into the material cost escalators, tend to balance quite well, because in some cases, depending how the materials move, and you're taking advantage of the time, some others could be the other way around. But overall, you're right. You're going to have an affect every year of around 3 months or so, where it's going to be a gap. And then what the speed that you have been taking on first quarter is going to be keep growing on the second, third and fourth. But what I consider that should be important for you to observe is that, we do that consistently year-after-year and we keep delivering that positive build up price and investment material cost on that material cost.

Anthony F. Cristello - BB&T Capital Markets, Research Division

Okay. That's helpful. On the OE side, if I may, outstanding job, particularly on European sales. I was hoping that maybe I could just get a little more color, can you be a little more granular on, within Europe the product mix that you're seeing perhaps north versus south, luxury versus your more volume-type brands, just a little more color there would be very helpful.

José Maria Alapont

The markets are normalized in a certain way. We have an unprecedented recession in 2009, then 2010 was going to be very good, but we didn't know it in 2009 that '10 was going to be good. But it was very good and mostly everything compared very well. But you couldn't correlate markets to trends because you didn't know how much was a catch-up type of market and customer and consumer reaction to what happened in 2008 and '09. What we are observing now '11 is more of a normalization. We noticed that south is obviously currently Europe far more affected. At the same time, we noticed that European customers that have a very global footprint beyond Europe are performing much better because they are relying strongly on exports, it's not for me to say, but the press has been making a reference the last couple of days that we have a new worldwide sales leader, which happened to be a European, for the first time. And that is symbolic in the sense that the strategy of having technology and innovation and exporting is working. The fact that you have in Europe as well a very well-balanced on, I would say, different segments. And all of them, in the past, some of them were gasoline, some of the were diesel. Now all of them has disruptions. Then what you have seen and I think we are going to see more and more is that what was considered the recovery of Europe and as well, North American, 2010 now has normalized. And what you're going to do see changes in our perspective from quarter-to-quarter on the mix and the blend. The advantage would come as they fit a mold that we are market leader in practically all customers, all segments, with more than 300 powertrains, 300 big bold [ph] platforms and 700 powertrains is that those swings that could happen from quarter-to-quarter, it works very well for us because we are present mostly everywhere. But in our view and because we have a very good visibility having all these 300 platforms, 700 powertrains in our view what it's going to keep moving is that the consumer, the vehicle buyer is going to take different views depending on the market economy and many, many things he's going to decide to go for this type of vehicle or for another. That in the past was far more stable. Now I think you can see more volatility on that across the quarters. And that is something that is very important to integrate for all of us in terms of flexibility, technology and being present in the largest part of platforms and powertrains. Regarding the vehicles, we have seen the countries that are suffering more on their financing and banking environment tend to go to the smaller vehicle, that is what you should expect. But interestingly enough, countries traditionally with middle, large vehicle, traditionally, like Germany, remains. That is the difference with the States, I think, Europe as soon as the economy recovers a little bit, they have -- they go back to their standard of expenditure. While in the States, as we said, regarding with Tony a little on the aftermarket and that is an example we see that still remains, that spirit of looking to a different pricing perspective in the States than in Europe.

Brian Sponheimer - Gabelli & Company, Inc.

If I can just one more, just in the industry basis, over the last 6 months, suppliers with exposure to the Commercial Vehicle market, like yourself have seen some constraints in the supply chain, causing some premium freight, etc. holding up the supply chain. Any issues that you're seeing there?

José Maria Alapont

We'd like not to be in the front page, that's them. The Commercial Vehicle and I have spent part of my life in one of the Commercial Vehicle manufacturers, it's the signal of the economy. Because if economy remains there, then the Commercial Vehicle sales, the fleet owners are the one who are going to buy new vehicles and not to spend money in maintaining because they lose business efficiency. And it has been very good. That we worked very hard as well to move a lot of the strategical capacity during the recession time, during '08 and '09 and that has positioned us very well to supply the market. It has been challenging, but we have enabled to supply a net. I think it's encouraging that other than regulation emission, new market-by-market requirements that could accelerate one year and a slowdown next year, then we are seeing still a healthy market, which is important not only for the bones [ph] and for us and we have been supplied consistently well, but because that shows that despite the government and the euro currencies and all the environment for the economy and the banking system, despite all of that, the economy has to thrive. And I think that is encouraging for the industry and for the economy.


At this time I would like to turn the call back over to Mr. Pouliot for any closing remarks. Please proceed, sir.

David Pouliot

Thank you. And once again we'd like to thank all of you for joining our third quarter conference call and look forward to your participation at our fourth quarter and full year 2011 financial results call. Thanks again.


Thank you for you participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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