Federal-Mogul Holdings' (FDML) CEO Rainer Jueckstock on Q1 2016 Results - Earnings Call Transcript

Federal-Mogul Holdings Corporation (NASDAQ:FDML)

Q1 2016 Earnings Conference Call

April 27, 2016 09:30 AM ET

Executives

Jim Zabriskie - Vice President, Investor Relations and Treasurer

Rainer Jueckstock - Co-Chief Executive Officer and Chief Executive Officer, Powertrain

Daniel Ninivaggi - Co-Chief Executive Officer and Chief Executive Officer, Motorparts

Jerome Rouquet - Chief Financial Officer

Analysts

Brian Sponheimer - Gabelli

Tony Cristello - BB&T Capital Markets

Frank Longobardi - Alcentra

Mark Gold - NewMark Capital

Dan Drawbaugh - FBR and Company

Nicole Torraco - Onex Credit Partners

Operator

Good day ladies and gentlemen, and welcome to the Federal-Mogul Holdings First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I'd like to introduce your host for today's conference, Mr. Jim Zabriskie, Vice President of Investor Relations and Treasurer. Sir, please go ahead.

Jim Zabriskie

Good morning and welcome to the Federal-Mogul Holdings first quarter 2016 earnings call. On slide 2 you'll find the company’s Safe Harbor statement. Please note that the content on the presentation slides and the comments and discussion provided by the speakers are covered by the provisions of this statement.

Our speakers today Rainer Jueckstock, Co-CEO and CEO of Powertrain; Danny Ninivaggi, Co-CEO and CEO of Motorparts; and Jerome Rouquet, our CFO will provide an update on our first quarter ending March 31, 2016. To begin, Rainer Jueckstock will provide a brief total company results overview, followed by each CEO discussing the markets and current developments relating to the respective business segments. Their comments will be followed by those of our CFO, Jerome Rouquet, who will provide further details of our first quarter financial results. Finally, we will take questions. At this time, I will hand the call over to Rainer Jueckstock. Rainer?

Rainer Jueckstock

Thank you, Tim, and good morning to everyone. Please turn to slide 4 which summarize the company’s results for the first quarter 2016. Total company sales increased 3% from prior year to $1.9 billion, an increase of $62 million. This includes $1.52 million [ph] negative impact from currency exchange rate fluctuations which we will cover in further detail in this presentation. The increase in quarter one sales were primarily driven by growth in the U.S. and Canadian aftermarket and Powertrain’s valvetrain business. For quarter one, we are pleased to report that we achieved year-over-year improvement in profit margins.

As you can see from the slide, our gross profit for quarter one was $288 million or 15.2% of sales, 1.5 percentage point margin improvement. While our operational EBITDA was $193 million, 2.5 percentage points higher than during quarter one 2015. These improvements reflect both previously mentioned higher aftermarket sales as well as improved operational efficiencies for both Powertrain and Motorparts divisions as a result of prior period restructuring and integration initiatives.

Solid operational improvements also positively impacted Federal-Mogul’s cash flow for the first quarter of 2016. For the first time in several years, we report for quarter one a positive free cash flow. Solid EBITDA combined with low restructuring cost and strong net working capital management resulted in a $9 million free cash flow versus a roughly negative $200 million outflow in quarter one 2015. Jerome will provide more details on this shortly.

I would now like to provide you with some highlights from the Powertrain side of the business. Please turn to page 5. In the first quarter 2016, Powertrain had revenue of more than $1.1 billion, but down $10 million versus quarter one 2015. On a constant dollar basis, our revenue was up $20 million or nearly 2%. When compared to quarter one 2015, the acquired valvetrain business continues to be the main contributor to our top line growth. While we participated nicely in Europe and North America to healthy volumes for light vehicles and pickup trucks, our businesses engine components for heavy-duty and industrial engines was very negatively impacted by the global downward trends especially in heavy-duty North America into global mining and oil exploration industry.

And similar while we achieved nice gains in India where we experienced 19% increase in our sales versus a market increase of 10%, we got at the same time hit as Brazil and Russia kept trending sales, this was a reduction in national car and truck production. So, sales wise quite a mixed quarter and in summary our top line came in below our own expectations. Powertrain improved its first quarter operational EBITDA by $8 million over the same time last year recording a $119 million or 10.6% of sales compared to $111 million or 9.7% of sales in quarter one 2015. This quarter represents in gross absolute dollar amount as well as its 10.6% return on sales, the best quarter financial Powertrain since we segmented the company into two operating segments. We attribute these improvements to our focused cost control, material cost savings, impact from previous restructuring initiatives and again from a previous real estate transaction.

Finally, I'm pleased to announce that we have been once again recognized with our 14th Automotive News PACE award which recognizes suppliers for superior innovation, advancements and business performance. We were also awarded this time for our Hybrid Induction Welding manufacturing process for steel pistons for passenger car diesel engines for significant reduced internal friction and fuel consumption and also enable for delivering best in class Powertrain products that deliver the highest levels of performance and reliability for our customers around the world.

With these, I had over to Dan. Dan Please.

Daniel Ninivaggi

Thanks, Rainer. Please turn to slide 6. Motorparts delivered solid financial performance in the first quarter largely driven by operational improvements in supply chain which generated both improved year-over-year sales and lower cost. In addition, we're seeing returns from our prior period restructuring and integration actions, and planned productivity investments. Finally, we are being more disciplined on the commercial front even if it means the loss of unprofitable business.

In terms of the year-over-year comparison, I would note that last year's first quarter was affected by supply chain issues that led to poor financial results, so the year-over-year improvement is somewhat exaggerated. Revenue in the first quarter was $831 million, an 8% increase over Q1 2015. Foreign exchange negatively impacted sales by $22 million. The first quarter benefited from strong aftermarket sales in the U.S. and Canada in most product categories. I would note however that the second quarter sales have started off slowly in North America suggesting that we may have experienced some pull ahead of sales in Q1.

During Q1, we also had continued growth in the Asia Pacific region with China aftermarket up 24% year-over-year and India up 9%. We see significant long-term opportunity in China, India and select Southeast Asian markets and we're continuing to make progress building out our product offering sales force and distribution footprint in the region.

Q1 EMEA revenue was relatively flat on a constant currency basis versus the first quarter of 2015. We are in the process of improving our DC network and refining our commercial strategy in Europe to strengthen our competitive position in that market. This will be an area of continuing focus in 2016.

Our operational EBITDA for the quarter of $74 million represents an improvement of $43 million over the first quarter of 2015. Foreign currency adversely affected EBITDA by $6 million in the current period. As I mentioned earlier, this increase was largely the result of stronger North American sales, solid operational improvements and the positive effects from prior period restructuring and integration actions. Even with the easy year-over-year comparison, the first quarter of 2016 was our best quarterly performance in quite some time and I'd like to thank my colleagues at Federal-Mogul Motorparts for their hard work and dedication in serving our customers well and delivering on our commitment to them.

Turning to slide 7. On slide 7, I’ll provide a brief summary of the progress we've made during the quarter on our strategic initiatives. During the first quarter, we continue to enhance our global distribution footprint. In North America, we completed the installation of a sophisticated robotics based picking system and our York Pennsylvania distribution center. This system provides better floor space utilization and enhanced speed and accuracy in the processing of customer orders. Using lessons learned from the installation at York, we intend to begin automating portions of our Smyrna, Tennessee and Marina Valley, California DCs later this year.

In Europe, progress continues on the construction of our new distribution center in Willowbrook, Belgium. This new more centrally located facility will eventually replace two distribution centers as well as warehouses acquired through the Honeywell acquisition and should drive service-level improvements and operational efficiencies. Finally in Q3, we plan to open small distribution centers in Tsingtao and Chang Cheng in China to support continued growth in the aftermarket in China.

In terms of information technology, our business took a substantial step forward during the past 18 months as we modernized our information systems and significantly enhanced the functionality and service capabilities of our IT platform in North America. A similar implementation is now underway in Europe. The new systems being developed are designed to help us reach and communicate more effectively with our suppliers, customers, consumers, and the technician who use and install our products. We believe this enhanced connectivity will strengthen our commercial relationships and support consistent best in class service levels for our customers.

While enhancing our distribution and IT systems, we continue to examine every facet of our operations for efficiency and improvement in our cost structure. This includes our manufacturing service and support footprint globally. Our cost competitive manufacturing base recently expanded for the opening of our wiper production facility in Ploiesti, Romania. This new facility will serve the OE market in Europe and also provide replacement wiper blades to the aftermarket under our Champion brand name.

Turning to product innovation, we are pleased with the markets reception to our recently introduced Wagner OEx braking technology. Wagner OEx brake pads have improved durability and are designed to more efficiently dissipate heat generated by larger vehicles such as light trucks, sport utility vehicles, ultimately providing for shorter stopping distances and safer driving.

Within the chassis category, we recently introduced a new MOOG compression loaded ball joint with a preinstalled integral dust boot making installation easier, saving technicians time and rework. This patented design and many others underway demonstrate our strong commitment to new product development.

Finally, we're also continuing to invest in the next generation of vehicle repair specialists through online, on-demand and on-site training and support under our Tech First program. Since the formal launch of this program one year ago, we’ve expand our technical curriculum and added extended hours and ASE test preparation courses to help technicians keep their skills current and advanced their careers.

We recently opened our 11th Garage Gurus’ technical support center serving the nearly 5,000 vehicle service businesses in greater Houston. Through innovative programs like Garage Gurus in North America, FM-For-Me in Europe and a similar program in China we're returning to our roots as a technician focused field oriented supplier of premium parts and joining with our aftermarket distribution partners to help make professional technicians and repair shops more successful every day.

And with that, I'll turn the call over to Jerome for more detailed financial review.

Jerome Rouquet

Thank you, Dan, and good morning to everyone. Please turn to slide 9 for more details of our first quarter earnings performance. Already explained by Rainer, Q1 2016 showed significant improvement in our net sales, operational EBITDA, net income and cash flow over prior quarters. These sequential improvements demonstrate the positive effect of actions taken in prior quarters with acquisition integration restructuring and strategic initiatives. With improved year-over-year sales of $62 million, we are reporting for Q1 2016 an operational EBITDA of $193 million versus $142 million last year, an improvement of $51 million and adjusted net income of $52 million, an improvement of $41 million versus Q1 2015.

Sales increased by $62 million versus Q1 of last year including $52 million of negative currency exchange rate impacts. So on a constant dollar basis, sales increased by $114 million [indiscernible] acquired Valvetrain business representing about half of this increase. Organic sales growth represented the balance and was driven by Motorparts sales increases in the U.S. and Canada.

Reported gross profit was $288 million or 15.2% of net sales, an increase of $37 million year-over-year or 1.5 percentage points. This improvement was primarily driven additional sales in the Motorparts division versus relatively low sales base in Q1 2015 combined with strong year-over-year operational performance in both PT and MP as well as reduced year-over-year integration costs in the Motorparts division.

SG&A decreased by $5 million in the quarter largely driven by the performance improvements and favorable exchange rate impact. Partially offset by additional SG&A reported for the acquired valvetrain business. Operational EBITDA increased from $142 million in Q1 2015 to $193 million in Q1 2016. Improved gross profit, improved SG&A as well as higher income from real estate gains and joint ventures drove the year-over-year EBITDA improvements.

Net income from continuing operations attributable to Federal-Mogul was $35 million versus a loss of $11 million in Q1 2015 and included restructuring charges of $15 million as well as non-cash impairment charges of $3 million. Adjusted net income was $52 million for the quarter.

Slide 10 provides a reconciliation of our operational EBITDA to net income for Q1 2016 versus Q1 2015. For the quarter, the top half of the slide provides reconciliation of our operational EBITDA of $193 million to the net income of $36 million. With the exception of restructuring and impairment charges previously discussed as well as a loss on sales from an equity method investment last year, most of the major reconciling items that we exclude from operational EBITDA are fairly constant compared to Q1 2015. With respect to the bottom half of the slide reconciling net income of $36 million to adjusted net income of $52 million, the only item in Q1 2016 relates to restructuring and impairment charges previously discussed adjusted for tax.

Please turn to slide 11 for the first quarter results of the Powertrain division. For Q1 2016, Powertrain reported revenue of $1.128 billion, $10 million lower than Q1 2015. As already commented, the year-over-year comparison was impacted by $30 million of negative exchange. In constant dollars, revenue increased therefore by $20 million or 2%. This increase included the sales from the acquired valvetrain business and was partially offset by headwinds in the heavy-duty and industrial segments as well as decline in sales in Brazilian and Russian regions.

Powertrain operational EBITDA increased $119 million or 10.6% of revenue in Q1 2016, compared to $111 million or 9.7% of revenue in the prior-year. Breaking down EBITDA performance for the quarter as shown in the bottom right chart, EBITDA improved by $2 million as a result of increased sales from the acquired valvetrain business, partially offset by the decline in the heavy-duty and industrial businesses, as well as a $5 million increase in warranty cost versus Q1 2015.

EBITDA was positively impacted by operational performance of $14 million, which included improved material sourcing, as well as manufacturing and overall cost performance. This was offset by customer pricing. Finally, EBITDA was positively impacted by a one-time benefit of $8 million, due to property gains realized in 2016, partially offset by $2 million of exchange impact. The chart on the bottom left quadrant shows the recent quarterly financial performance trend of the powertrain division.

The change in EBITDA percentage up to 10.6% in Q1 2016 confirms the continued operational performance achieved in the powertrain division over the last quarter's. Please move to Slide 12, which provides a review of the Motorparts division Q1 2016 financial performance. As already commented by Dan, Q1 reflects another quarter of solid financial performance and it is a continuation of sequentially EBITDA improvements which started in 2015.

Q1 2016 sales increased by 11% in constant dollars. As previously referenced, this is partially due to lower sales base following some challenges during the senior distribution integration in Q1 of last year. The 11 % sales increase was therefore primarily driven by 22% sales increase in the Americas aftermarket. In addition, sales in Asia continue to grow, including a 24% sales increase in China aftermarket, 9% sales increase in India aftermarket, as well as a 14 % sales increase in Asia in OE markets.

These increases were marginally offset by Europe were sales were down 1%, mainly due to resells. Motorparts Q1 2016 operational EBITDA more than doubled from $31 million in Q1 2015 to $74 million this year or 8.9% of revenue. The $74 million represents a quarterly high EBITDA for the Motorparts division.

As you can see in the bottom right chart the major drivers for the year-over-year EBITDA increase of $43 million were increased volume and operational performance improvements. Year-over-year volume generated $21 million of additional EBITDA, a healthy conversion to sales of 30%. Commercial actions, mostly initiated in 2015 consisting of better management of our warranty and return policies, lower selling expenses, and positive pricing added approximately $11 million of EBITDA in the quarter.

Finally, performance generated an additional $23 million of EBITDA, including the benefits from completion of the senior integration, additional improvements from ongoing Honeywell integration on prior period restructuring actions, continued manufacturing productivity and improvement in material costs. This was partially offset by $6 million of year-over-year negative currency impact and a $5 million gain related to asset sale in Q1 2015.

On Slide 13, we provide a summary of the consolidated cash flows for Q1 2016, compared to Q1 2015. Cash flows in the first quarter typically reflects a seasonal increase in the company's business activity, as well as continued investments in the business and 2016 was no different. However, compared to last year cash flow in 2016 was favorably impacted by operational improvements, during the quarter, as well as much improved working capital.

In the first quarter, cash provided from operating activities was $103 million compared to north flow of $99 million during the same period of 2015. The major drivers behind the $20 million improvement included increased profitability in both businesses as previously discussed, as well as significant lower investment in working capital year-over-year. The net decrease in working capital change in Q1 2016 compared to Q1 2015, primarily reflects two items.

First, the reduction in inventory in the Motorparts division in Q1 2016, primarily in North America versus significant builds in Q1 2015, driven by the senior integration and the new East and West US distribution footprint setup. And second, the non-recurrence of working capital build from acquisitions. Moving further down the cash flow statements, cash used by investing activities was negative $105 million, $285 million lower than Q1 2015, which was impacted by the acquisition of the valvetrain business for a similar amount.

Overall, cash used by operating and investing activities was negative $2 million in Q1 2016 compared to an outflow of $489 million in Q1 2015. Funding under the company’s revolving credit lines, as well as local debt increased cash by $52 million during the quarter of 2016. At the end of March 2016, the company had a cash balance of $252 million and liquidity of $442 million. This concludes our earnings presentation and I would like to ask the operator to open the lines for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brian Sponheimer with Gabelli. Your line is open, please go ahead.

Brian Sponheimer

Hi, good morning guys.

Daniel Ninivaggi

Hi Brain, good morning.

Jerome Rouquet

Good morning.

Brian Sponheimer

Obviously great to see the execution continue. Dan just a comment on the portfolio into Q1, how much of that do think was just whether driven? The winter was generally benign in North America and that estimate will take a full 6 to 9 months to work through.

Daniel Ninivaggi

It's a little hard to tell because it varies by customer. I think weather may have played some role. We it slow down in mid-March, the order started slow down in mid-March and late March and that has continued into early April.

Brian Sponheimer

And can you talk a little bit about - I would imagine miles driven increasing continues to help your brake pads and chassis products, but I mentioned wiper blades probably was one of things that got weaker

Daniel Ninivaggi

Yes. A little soft. Of course we’ve had two very strong years in a row, market wise North America, so when I say soft, it is sort of fairly high run rates.

Brian Sponheimer

Okay. And you walked through a lot of the strategic initiatives. One thing, we heard from one of your major customers is that the chassis products, which they likely a lot from you are getting to them on time and as appropriate. Can you talk maybe about what’s left to do from that standpoint to ensure on-time deliveries and makes your customers have their products when they need them?

Daniel Ninivaggi

Yes. So, the service levels in Q1 were very high. They were very strong. But still our cost structure on the division side is too high. We still haven’t completely ramped up York and Moreno Valley, and as I mentioned earlier we’ve just started putting the automation. So the key now for the next 12 to 18 months is really not improving service levels, it's improving turnaround time and taking cost out of distribution. Not only our own cost, but cost for our customers as well.

Brian Sponheimer

Understood. Jerome did I hear that there was a real estate gain as part of EBITDA in the quarter?

Jerome Rouquet

Yes correct. About $8 million.

Brian Sponheimer

Okay and obviously that doesn’t reoccur.

Jerome Rouquet

Absolutely, yes.

Brian Sponheimer

That's it from me guys. Good quarter.

Daniel Ninivaggi

Alright thanks Brian.

Jerome Rouquet

Thank you.

Operator

Thank you and our next question comes from the line of Tony Cristello with BB&T Capital Markets. Your line is open, please go ahead.

Tony Cristello

Thank you good morning. The question I want to ask first is as you go through all the integration and acquisitions that you’ve had over the last couple of years, how would you prioritize now going forward capital allocation? Where do you see the need whether it's for more IT and automation or development? I'm just trying to understand how we sort of spring forward off of what looks like a new run rate for your business.

Daniel Ninivaggi

So, I might speak on the Motorparts side and turn over to Rainer. So, right now I would say most of the heavy lifting is behind us in North America. We still as I mentioned to Brian we have to do more on taking cost out of supply chain, but most of the investments have already been made. Honeywell integration we said at the time would take three years to fully integrate. So there is more work to do in Europe. And then as long as Asia-Pac continues to grow as it has, I imagine there will be continued investment in that region and some other growth markets in Middle East and Africa as well. Most it's going to be internal organic. I don't anticipate any major acquisitions on our side of the business.

Rainer Jueckstock

On the Powertrain side capital allocation going forward will have less restructuring cash outflow heavy lifting fund closures in high-cost countries are done. We still have some downsizing in some operations in high-cost countries and also building infrastructure in China for the time being with redundancies, but we will have continuous o one hand some form of catch-up investment in the newly acquired valvetrain business where we think technology, but also footprint is something we have to invest higher and what was invested into this business in the past that will continue for another one or two years.

And then we still as always in powertrain we have to invest in technology changes. If you look into our products we just mentioned in the press release steel Pistons technology for diesel engine a huge investment going forward for the next few years. We see this like we had it in big business, big trend away from aluminum towards steel and especially in Europe for the diesel engines. We have issues like [indiscernible] completing in some of our products chrome plating is well established technology in bearings and piston rings.

And chrome will be phased out as electroplating technology will be replaced by more advanced technologies like PVD or DLC coatings. And all these are across investments from our side and not at least if you think about technology changes towards US6 or US 10 emission standard tolerance becomes tighter and tighter and doesn’t impact on our technology requirements as well. So, we will continue to invest in the business, but heavy lifting and restructuring and footprint is mostly behind us.

Tony Cristello

That's very helpful. If you look on the IT side and I think it was related to the Motorparts in the discussion you are talking about automation in Europe. In the context of that is it that EMEA seems to be running flat-ish if you will, is there something going on in that market that if you can automate or bring some new technologies to the marketplace that you would expect to see in acceleration or it is just the industry itself is in the categories you represent just running on a flat-ish trend line?

Daniel Ninivaggi

I would say the industry is, the market is growing very slowly in Europe in the mature markets in Europe Western Europe and part of it is that our distribution footprint in Europe is weak. Service levels aren’t where they need to be. And so we are investing in distribution not only Western Europe, but in Eastern Europe. And the growth really is in Eastern Europe Middle East and Africa. So, we're working on a more refined strategy that take advantage of the growth markets in Eastern Europe and those markets. And hold our own in the mature markets. So, it's a combination of all three.

Tony Cristello

Okay. If I can ask one last question on garage gurus, you expanded to the 11th center that you noted in Houston. What has changed or what have you learned as you've gone from opening the first center to the 11th? And have things evolved as you would have expected? Is it better, is it worse? Is there something new that you’ve learned? If you just give more color on that initiative.

Daniel Ninivaggi

Yes. So, now we opened our first one I guess back in March of last year. We set up training programs. We’ve added to the curriculum, as I mentioned. We've added a lot more content online and curriculum through the training centers. We’ve changed our hours, so we tried to make the hours of operation more convenient to the technicians. It's varied by market interestingly. We’ve noticed different strategies in different markets work differently. We’ve learned quite a bit as we have gone along. The important thing is just getting to the technicians. Spending more time in the field with the technicians. In their garages or in our garage guru center as opposed to other activity.

So, there has been a big shift in the allocation of our resources to technicians. The TSC’s help us do that because they give us a physical location within those large metro markets, but the mobile vans are also important we've investments in our field technical staff and sales staff to put more people in the field. We are working with customers in a very collaborative way to do that. So, overall I think we've made good progress, but we still have, we're still learning and we still have more opportunity ahead of us, I think.

Tony Cristello

That's great. I appreciate the color and thanks for your time today.

Daniel Ninivaggi

Thanks Tony, take care.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Frank Longobardi with Alcentra. Your lie is open.

Frank Longobardi

Good morning. I just have some questions on Powertrain and I apologize if the call is cutting in and out, so if you have mentioned this already I do apologize, but – can you tell me what sales would have been, kind of organic sales excluding valvetrain acquisition?

Rainer Jueckstock

We're not providing details for this, but it's around $30 million year-over-year improvement, in increase. We acquired valvetrain in February 2015, so January was completely without valvetrain. And we finished the acquisition with two additional plants in July, so if you add all of these together year-over-year quarter one from a consolidation standpoint is around $50 million benefit.

Frank Longobardi

Okay. $50 million from the acquisition? That $50 million related to the acquisition right?

Rainer Jueckstock

But the $50 million related to the full-year consolidation of the acquisition, yeah, for quarter one.

Frank Longobardi

For quarter one, okay, so sales would have been $50 million lower if you do have it, just want to confirm we are on the same page.

Rainer Jueckstock

Okay. Exchange adjusted would be – before exchange would be – no, no, that's not true. We have $20 million sales gain and $50 million of fees is coming from the valvetrain acquisition, so our sales would be $30 million lower than last year without this acquisition.

Frank Longobardi

Okay, thank you. That’s helpful. And how much does the heavy duty industrial business represent of your Powertrain business?

Rainer Jueckstock

Changing every quarter and this year – this quarter it's lower because we have significant downward trend. If you take North America commercial vehicles, last year heavy duty means class VIII and higher was 560,000 units; for 2016, we see only 460,000, so that’s 100,000 units lower. We see this trend already in quarter one that’s more than 15% down year-over-year. And we see a similar trend in South America Scania, MAN and these guys were down. And even more important for us is the industrial side, you might have seen beside from our industrial customers like Caterpillar, Cummins, John Deere, all of them are down and we are participating in this trend. We're not providing segment information in detail, but we're participating in these downward trend currently on the industrial side.

Frank Longobardi

Okay. Was that 15% down that was for you or for the industry for the first quarter in this cycle?

Rainer Jueckstock

Industry in North America heavy-duty.

Frank Longobardi

Okay. And outside of heavy-duty and industrial and obviously the weak markets in Brazil and Russia, how is the rest of the business, Powertrain business doing?

Rainer Jueckstock

Good. We are participating nicely in the record sales in North America for pickup truck and passenger cars. We participate in the continuous growth in Europe, I think, quarter one was 3% growth in the market. We continue to participate in this and in some of the regions we outpaced like in India. So passenger car market including pickup truck is a good market for us and we participated in the growth in the market.

Frank Longobardi

Okay. But you won’t provide any kind of --?

Rainer Jueckstock

I’m not providing segment details, no.

Frank Longobardi

All right. My last question is on motorsports. Again, I was cutting out, so apologies if you’ve mentioned this, but what was the industry growth in Europe for aftermarket?

Daniel Ninivaggi

Ending Q1?

Frank Longobardi

Yes.

Daniel Ninivaggi

I don't have the data on that now, but we think it was low single-digit.

Frank Longobardi

Okay. And then I think you answered this in one of your last questions. So your underperformance there was due to kind of – still working under distribution efficiency and availability of product?

Daniel Ninivaggi

A lot of it is distribution capacity. Some of the mature markets like France and Germany were particularly weak or have a unique circumstances there, mostly transitional and temporary. We underperformed in Western Europe.

Frank Longobardi

Okay. Thank you very much.

Daniel Ninivaggi

All right. Thanks, Frank.

Rainer Jueckstock

Thank you.

Operator

Thank you. And our next question comes from the line of Mark Gold with NewMark Capital. Your line is open. Please go ahead.

Mark Gold

Thank you. Thank you for taking the call. Good morning and congratulations on the good quarter. I have three questions revolving around the Powertrain, liquidity, and then kind of the status of the parent company’s proposed acquisition range at stock. The first question with regard to the Powertrain, can you discuss the mix between new products and existing products and also the relative margins that you get on a new product versus a pre-existing product?

Rainer Jueckstock

Let me take this in a different direction. We are currently quoting business, which will go in production in 2019-2020. So we get awards from our customer today for business, which will start in three or four years. So what we produce currently is a result of the competitive rates we did in 2012-2013. And this is every year we have an inflow of new orders for an SOP, start of production, two, three years out. Therefore your question how much is new business and how much is old business depends heavily on which time point you take as start point.

So we from an order point of view in terms of cost and life of the order is around 4 to 6 years, heavy-duty is 5 to 8, 9 years, and in the industrial we have a lot of products which have a life of 10 years. What we constantly provide is in all of our product lines, new technology like new coatings, new designs, new materials and see this always starts with low volumes introduction and has a ramp up for use in two or three engine generation. So it's very hard to answer your question without going into deeper discussion about what is your start point and we do not provide margins by different products.

Mark Gold

Yeah, I guess what I was trying to get at is if I understand the business correctly, you have a long run product that you get squeezed by pricing as time goes on, you introduce a new product at a higher margin, higher price point, new and novel and you have a pickup in market as a result of that new product. So I'm just trying to get a sense as where things fit vis-à-vis mix of old versus new, I don’t if can look at the business that way or not, or consider the business that way or not, but maybe you can guide me on that.

Rainer Jueckstock

Not really because, as I said, we – our current products we are currently producing, we won in 2012, 2013 and the price for our products and the price trends are fixed at this for the life of this contract. So our margin from the pricing point of view is quite fixed and established for a large portion of our business. Benefit we all say is the level which we have on margins is mostly on the cost side. That's where we drive the business on the short-term basis, but you are right. These new technologies were quoting business with new performance for the customers and we try to reach better pricing going forward for all new technologies.

Mark Gold

So maybe I can ask this question this way, if I look at the kind of pipeline in the Lab Tech products ready to be launched, how healthy is that potential lineup?

Rainer Jueckstock

We have them – I can’t quantify this numbers, but from a qualitative point of view, we are one of the key development partners for all OEMs for engines, which are currently in development and which will go into production after 2020. We have a very solid pipeline, our long-term forecast shows solid growth and we're participating on the continued development of combustion engines in our industry.

Mark Gold

Last question on the Powertrain side, are you also doing any work on, I’m going to call, the electric cars, so to speak, on the hybrid cars?

Rainer Jueckstock

Hybrid cars do have a combustion engine and so, yes, we're working on these. We are not involved in large-scale into fuel electric cars because we do not have product lines which serving these. We do have some applications on the Powertrain side for system protection where we participate on making car safer from an electrical point of view. But we're not participating in electric development of powertrains.

Mark Gold

Okay, thank you. My last question is on the liquidity. What’s your availability on the [indiscernible] and what’s your cash on the balance sheet?

Jerome Rouquet

So cash on the balance sheet at the end of the quarter was $252 million and we had additional availability of $170 million, which makes a total of $422 million.

Mark Gold

And [indiscernible] liquidity going forward?

Jerome Rouquet

We've been operating in an okay manner for the last quarter with that kind of level, so yes we're.

Mark Gold

Okay. And the last question is just kind of a status on the proposed acquisition of the remaining stock.

Daniel Ninivaggi

Okay. Obviously, we referred the proposal to our independent committee. They've been working very hard, they’ve engaged financial and legal advisors, there’s been back and forth and working with the process, so that is kind of where we stand. There has been no response yet to the offer.

Mark Gold

Is there a timeline on that?

Daniel Ninivaggi

There is not a strict timeline, but I imagine it will be sometime in the next several weeks.

Mark Gold

Okay, thank you very much. I appreciate the time.

Daniel Ninivaggi

Thanks, Mark.

Jerome Rouquet

Thank you, Mark.

Operator

Thank you. And our next question comes from the line of Christopher Van Horn with FBR and Company. Your line is open. Please go ahead.

Dan Drawbaugh

Good morning, guys. This is this is Dan Drawbaugh on the line for Chris. So we just have a couple of questions for guys to follow up on what's been already asked. First towards CapEx, could you give us a sense of the breakdown in this quarter between growth and maintenance spending, if that's possible?

Rainer Jueckstock

It's hard to define these.

Daniel Ninivaggi

Yeah.

Rainer Jueckstock

I'm not able to do this for Powertrain.

Daniel Ninivaggi

I would say maintenance for the Motorparts group on a long-term basis is about $100 million a year. That's what I would call maintenance CapEx. The timing, it’s hard to look at it by quarter.

Rainer Jueckstock

Yeah.

Daniel Ninivaggi

Because a lot of that is just timing. But it’s about – maintenance about $100 million.

Rainer Jueckstock

Yeah, and then it’s a long run for Powertrain. We see around $230 million to $240 million as maintenance capital for Powertrain.

Dan Drawbaugh

Okay, great. Thanks guys. That’s helpful. And then turning to China, so 24% growth in your aftermarket business there, that’s obviously pretty impressive and I guess you mentioned a bit earlier that you are building additional two distribution facilities, is that right?

Daniel Ninivaggi

Yeah, 3PLs, but, yes, we are opening.

Dan Drawbaugh

Okay, okay. So I guess what I'm wondering is over sort of the long run, how significant a portion of your business do you think China could become?

Daniel Ninivaggi

So far, I mean, the growth of the independent aftermarket in China has been pretty significant over the last couple of years. And all indications are that it will continue to grow. The car part obviously is large and continuing to grow, vehicle age is still young there, a little over four years. So, the DIO [ph] is going to age and the government seems to be supporting the development of an independent aftermarket which we would expect. So we think it's good long-term opportunity and continue to grow at high rates.

Of course, it's also very competitive market, so basically every – one of your competitors globally is in China with their own strategy. So there will be growth, but it will be competitive. And our strategy really is to get ahead of that growth. And be there as the car part gets into that 6-year to 12-year age, that's where we need to be with all the product lines and various byproduct line, how quickly we're going to introduce full coverage. So I think it could be very significant over a long period of time, but it will require a lot of investment.

Dan Drawbaugh

Okay, understood. Thank you. That's very helpful color. And I guess on that note is there any way you give me a sense of how pricing for your products currently look their relative to the rest of the world given that competitive environment? And where you think that might go as you continue to invest there?

Daniel Ninivaggi

Yeah, so, again, we're focused on taking advantage of the growth and so the margins I would say are not as good as North America, probably better than Europe. But again we are reinvesting everything we make there back into the market. So it’s not – the focus really is not on optimizing margins, it's really taking advantage of the growth and building out our distribution and our sales team out there.

Dan Drawbaugh

Got it, thank you. And then one last question. This is on Chinese parts imported into the U.S. aftermarket. I know you guys have been out there on this before I think back in 2014. Have you sort of seen since then a pickup in that trend amongst any of your customers?

Daniel Ninivaggi

Like direct import programs from China or --?

Dan Drawbaugh

Right, yeah. Sort of an insourcing through direct import.

Daniel Ninivaggi

Yeah. Some of the bigger customers have direct import programs and again it various by product line and in some cases it replaces u; in some case, it’s side-by-side or a complement, what the traditional suppliers do. But, yeah, they all have direct import strategies of some kind or another. I would say it hasn’t grown, not quite sure you should ask them, I think it is fairly significant though.

Dan Drawbaugh

Okay, all right. Understood. Thank you, guys.

Daniel Ninivaggi

Thanks, Dan.

Operator

Thank you. And our next question comes from the line of Nicole Torraco from Onex Credit Partners. Your line is open. Please go ahead.

Nicole Torraco

Hi, good morning. Just a quick follow-up on the Icahn proposal. Looking at the disclosure in the 8-K, I'm just a little confused by the last sentence that IEP has advised the company’s board that it's not considering selling its stake in Federal-Mogul. It sounds to me like the board thinks it can be sold at a higher price. I just don't understand what the sentence means.

Daniel Ninivaggi

I think they were just clarifying that they are not trying to put the company up for sale and they don't intend to sell their ownership position. Their offer is to buy the minority held shares, not to sell the company and at this point at least they've indicated they have no intention of doing that.

Nicole Torraco

Okay. I just didn’t realize that need to be clarified. Okay.

Daniel Ninivaggi

Well, it may have been a clarification from the committee just to understand the scope of what they were looking at.

Nicole Torraco

Okay.

Daniel Ninivaggi

All right. Thanks, Nicole.

Operator

Thank you. And this does conclude today’s Q&A session and I would like to turn the conference over to Mr. Jim Zabriskie for any further remarks.

Jim Zabriskie

Thank you all for joining us. That completes our first quarter earnings call. Have a good rest of the day.

Rainer Jueckstock

Thank you.

Daniel Ninivaggi

Thanks.

Jerome Rouquet

Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's program and you may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!