Federal-Mogul Holdings Corporation (NASDAQ:FDML)
Q2 2016 Earnings Conference Call
July 27, 2016 09:30 AM ET
Jim Zabriskie - VP, IR & Treasurer
Rainer Jueckstock - Co-CEO & CEO, Powertrain
Dan Ninivaggi - Co-CEO & CEO, Motorparts
Jerome Rouquet - CFO
Brian Sponheimer - Gabelli
Tony Cristello - BB&T Capital Markets
Frank Longobardi - Alcentra
Good day, ladies and gentlemen, and welcome to your Federal-Mogul Holdings Corporation 2016 Q2 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference, Mr. Jim Zabriskie, Vice President, Investor Relations & Treasurer. Sir, you may begin.
Thanks, good morning and welcome to the Federal-Mogul Holdings second 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 today are covered by the provisions of this statement.
Our speakers today Dan Ninivaggi, Co-CEO and CEO Motorparts; Rainer Jueckstock, Co-CEO and CEO Powertrain; and Jerome Rouquet, our CFO will provide an update on our second quarter earnings as of June 30, 2016. To begin, Dan Ninivaggi 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'll provide further details of our second quarter financial results. Finally, we will take questions.
At this time, I will hand over the call to Dan Ninivaggi. Dan?
Thanks, Jim, and good morning everyone. Please turn to Slide 4 which summarizes the Company’s results for the second quarter 2016. Total company sales for the second quarter decreased by 38 million or 2% from the prior year period to 1.9 billion. Higher OE sales as well as sales from Powertrain's acquired Valvetrain business were offset by lower aftermarket sales and 15 million of negative impact from currency exchange rate fluctuations. First half 2016 sales were slightly higher versus the first six months of last year despite 67 million negative impact from currency.
For the second quarter we're pleased to report continued year-over-year profit improvement. As you can see from this slide our gross profit for Q2 was 304 million or 15.8% of sales, a one percentage point margin gain. Our operational EBITDA was 196 million compared to 182 million during the second quarter last year, our third consecutive quarter of year-over-year improvement. These improvements reflect continued operational efficiencies for both the Powertrain and Motorparts divisions and the benefit of prior period restructuring and integration activities offsetting the impact of lower volumes.
The solid operational improvements also positively impacted Federal-Mogul's cash position through the first six months of the year. Solid EBITDA combined with a focus on working capital management resulted in positive 97 million free cash flow. A portion of the improvement reflects increased factoring of receivables in line with seasonality. As of quarter end liquidity increased to 461 million including 290 million of cash and 171 million of availability on our revolving credit facility.
Turning to Slide 5, I'll now provide quarterly highlights from the Motorparts side of the business. Despite somewhat weak sales environment our overall financial results were solid, as we realized benefits from our recent investments and experienced improved operational performance. In addition during the second quarter, we continued to make progress on our strategic initiatives which I'll detail on the next slide.
Revenue in the second quarter was 818 million, 6% lower than Q2 2015. Most of the year-over-year decline occurred in the U.S. and Canada aftermarket. As noted on previous calls, last year's first quarter was impacted by U.S. supply chain issues that led to sharply lower revenue in that quarter. Some of the lost sales from Q1 2015 were pushed into last year's second quarter resulting in a challenging year-over-year comparison this year. At the same time the U.S. and Canada aftermarket environment was relatively soft in this year's second quarter and we've experienced some lost business. The aggregate impact of all these factors was a decline in North America aftermarket sales in the second quarter of 10% at constant exchange on a year-over-year basis.
Second quarter sales in EMEA of 297 million were 8 million lower than the second quarter of 2015 primarily due to lower aftermarket sales in Germany and in the Middle East. Improved OE results in the region were partial offset to the aftermarket decline. In general, the Western Europe aftermarket environment remains relatively stagnant and increasingly competitive impart because of channel consolidation. We are investing and improvements to our distribution network, marketing programs and field activities to enhance our competitive position. But we do expect the aftermarket environment in Europe to remain challenging for the foreseeable future.
While relatively small, Asia-Pacific remains our primary growth market. With China aftermarket up 26% year-over-year, India up 12% and OE up 11% on a constant currency basis. Lower export sales for the region, which we expect to improve and the downsizing of our Australian operations partially offset this growth. We see continued long-term opportunity in China, India and select Southeast Asian markets and we’re continuing to make progress building our distribution footprint, salesforce and product offerings in the region.
However, this growth will require continued investment and results maybe volatile from quarter-to-quarter. Operational EBITDA for the second quarter was 61 million or 7.5% of revenue, compared to 67 million or 7.7% of revenue in the prior year period. Increased marketing investments of approximately 4 million in the current quarter, as well as a 3.3 million legal reserve accounted for the decline in EBITDA year-over-year. As mentioned earlier, improved operational and commercial performance offset the impact of lower volumes.
Please turn to Slide 6 for an update on our strategic initiatives. We continue to focus on enhancing our distribution and service capabilities globally. Our U.S. distribution network is improving with increased volumes through our new East and West Coast distribution centers, the implementation of automated picking technology, and a more efficient replenishment system that both improves inventory availability and lowers cost. The effectiveness of our distribution network is supported by more robust IT systems and supplemented by forward deployed inventory in our 12 technical support centers or TSCs located in nature U.S. cities.
Our objective is to build the best aftermarket distribution network of any supplier in North America offering our customers unparallel speed and accuracy in the processing of orders. This capability will allow our customers to improve their own product availability while reducing supply chain cost and we believe will serve as an important competitive differentiator. Currently, our North American service levels are strong, but our supply chain has not yet been optimized from a service or cost standpoint. This is a process that we’ll carry into 2017.
In Europe, we recently opened a new distribution center in Belgium. This new facility consolidates several smaller warehouses to better service customers in Western and Northern Europe. Finally during the second quarter, we also launched small but scalable distribution centers in Qingdao and Chongqing to support continued growth and the availability of our products in the China independent aftermarket.
On the product side in the second quarter we strengthened our manufacturing footprint through the acquisition of a filter manufacturing business located in Mexico City. The filter manufacturing capability complements our existing product portfolio and positions us to grow in Mexico and Latin America while also supporting our North American Champion branded service offering.
In information technology we’re modernizing our systems and building our online presence through the recent launch of a series of additional global brand Web sites. These sites combined with our new online order management system in North America allow customers to research our differentiated products and where to buy them. During the third quarter, we will be expanding our online presence in Europe through the launch of several new regional brand Web sites in that region. The enhanced connectivity along with an increased use of customer relationship management tools should strengthen our commercial relationships and support consistent best-in-class service levels for our customers.
Federal-Mogul has some of the highest quality brands in the global aftermarket and we're committed to investing in them. In the second quarter, we significantly increased our marketing spend in connection with the launch of our new Wagner OEX high performance break line and the early results are encouraging. Within the chassis category we're receiving excellent customer feedback on a newly launched marketing campaign that highlights the superior durability, strength and performance of new chassis components. In addition we're moving forward this fall with the launch of a series of new service related products under our iconic Champion brand including vipers, filters, lighting, ignition products and batteries. Outside of the light vehicle market we're focusing on leveraging our respected brands in the commercial vehicle segment where we believe we have great opportunity to grow globally.
Finally we're investing in the development of the next generation of vehicle repair specialists through online, on demand and onsite training and support under our Garage Gurus platform. We now have 12 fully operational and staffed TSC locations and 35 mobile product technology vans serving technicians throughout North America. In addition we operate a TSC in Shanghai and are piloting an innovative repair shop support program in Western Europe. As the reach of our Garage Gurus program continues to grow we're building our curriculum and joining with our aftermarket channel partners to help make professional technicians and repair shops more successful every day.
I'm very proud of our team of ASC certified professionals who recently helped Federal-Mogul Motorparts earn recertification through stringent continuing automotive supplier education or CASE standards. As part of the recertification process our Garage Gurus program received commendations for having quote significantly raised the bar for others in technical training and support.
With that I'll now turn it over to Rainer for a more detailed review of our Powertrain segment.
Okay, thank you Dan and good morning everybody on the phone, please turn to Page 7. In the second quarter of 2016 Powertrain had revenue of more than $1.1 billion, up slightly versus quarter two 2015. On a constant dollar basis our revenue was up $12 million or nearly 1% somewhat in line with the global engine production front. When compared to quarter two 2015 the full time consolidation of the Valvetrain business we've acquired in two steps during 2015 remains to be the main contributor to our top-line growth. We continue to enjoy healthy market conditions for passenger cars, SUVs and pickup trucks here in North America, in Europe, as well as in China and India.
In India we saw some most significant Valve growth, a 13% increase close to some market increase of 10%. And we are well positioned with our business there. In China even though the growth is at a slower pace than in the past China's passenger car production is growing by around 6% and we have in most of our production lines a fair share of it. Unfortunately and similar to quarter one 2016 revenue continues to be negatively impacted by declines in heavy duty and industrial segments and the economic conditions in Brazil and to a lesser extent also in Japan and Thailand. The market for heavy duty and industrial engines here in North America is declining and we are impacted by this To make it even more difficult the whole supply chain is reducing inventory, which impacts component suppliers like us even more.
For example, the sales of heavy duty trucks in the U.S. is down year-over-year by around 8.4%. But production of heavy duty trucks is down by 12.3%, which means nothing more than heavy inventory reduction at the OEMs and at dealers. But as we all know, this is a very cyclical business and we do expect it will be reversed including a rebuild of inventory into full supply chain maybe latest early 2018.
A few words about 2 of our big customers, first Brexit, so far the impact for us has been just on the currency the 13% British pound decline has impacted our earnings. Into mid-term, we do expect beyond the impact of a weaker British currency, a less optimistic consumer climate in the UK, with negative impact onto demand from new costs. But at this point, it would be just speculation to talk about when and how deep.
Second VW so-called Dieselgate, we do see a slight decrease demand for diesel components as the sales of diesel engines here in the U.S. by VW has stopped and by other customers at least reduced. This impact is relatively small as the diesel market for passenger cars here in the U.S. was just around 100,000 engines per year. Demand for diesel components in Europe hasn’t changed outside the normal fluctuations between different countries, different customers and between LVP gasoline and diesel. But we do expect into mid-term, there will be a slight shift of volumes from diesel to gasoline especially for sub-compact cars.
In such small applications the cost benefit ratio might be more in favor of gasoline applications. It won’t be a problem for us as we are fairly well balanced between our customers, between the different car segments, as well as between diesel components and components for gasoline engines. Despite challenging mix with less heavy duty and industrial business, I’m very pleased to report that Powertrain improved its second quarter EBITDA by $20 million over the same time last year, recording $135 million EBITDA or 11.5% of sales, compared to $150 million or 9.9% of sales in quarter two 2015.
These improvements are a reflection of the healthier manufacturing footprint after the significant restructuring projects we executed in the last few years. We also invested in late-2015 and early 2016 to open strategic manufacturing constraints to avoid special freight and substantial overtime. Overall in product lines, we see solid improvements in manufacturing performance. I want to use this opportunity to thank all employees of Federal-Mogul Powertrain for their relentless effort to make our business better-and-better.
But the picture wouldn’t be complete without mentioning that our EBITDA was also positively impacted by a $3 million of currency gains and that we see currently year-over-year benefits from the lower cost of raw materials like aluminum, platinum, copper and nickel. A significant part of the lower material costs benefits in the end our customers, via contractual material cost accelerators. But we as a company benefit especially from lower costs for indirect materials. Unfortunately in the last few weeks, some of these material prices have started to creep up again. Powertrain's revenue for the first half year 2016 increased by 32 million in constant dollars and we recorded EBITDA of 254 million versus $226 million in the prior year period.
A few notable highlights for the quarter, in Nanchang China, our new large sealing facility is now fully operational. We announced last year our expansion of this facility in order to meet growing demand for our OEM customers there. We must meet more stringent environmental regulations. This facility is one of our most advanced sealing and gasket manufacturing facilities and supports our business towards a greater market share and better competitiveness in China. We are also very pleased to have been the recipient of several prestigious customer awards during the quarter.
Let me highlight three of them. We were honored this in 2016, Volkswagen Group Award for supply excellence recognized for our delivery of piston, piston rings, bearings and valves on various engines programs for the vehicle manufacturing group. VW is one of our largest customer and we supply VW in all regions and with all of our product lines. It is a business relationship which is very-very demanding customer, it’s deep and strong and we're quite proud to receive this award.
During quarter two we were also the recipient of Green Supplier of the Year award from Yazaki and we won the Pinnacle Award from Delphi Automotive both in recognition of Powertrain System Protection Solutions. In summary while I'm pleased with the trends in our operational performance, growing the top-line remains a single biggest challenge we have. Uncompromised customer focus, perfect launches of new customer programs, best in class quality and competitive cost compliances, innovative new technologies such as our EnviroKool piston cooling technology for heavy duty applications are the elements of a winning business model in our hyper competitive industry.
And now I will turn the call over to Jerome who will provide a more detailed analysis of the quarter. Jerome?
Thank you, Rainer and good morning to everyone. Please turn to Slide 9 for more details of our quarter two and first half earnings performance. As already mentioned by Dan quarter two was another solid quarter for Federal-Mogul with improvements in EBITDA, net income and cash flow generation year-over-year. Sequentially we continued to improve our performance and this is translating into better gross profits and EBITDA run rates. For Q2 we're reporting an operational EBITDA of 196 million or 10.2% of sales versus 182 million last year or 9.3% of sales.
For the quarter sales were 1.924 billion down 38 million year-over-year or 2% including the impact of 15 million of negative exchange. Higher OE sales and increased sales from the acquired Valvetrain business phase two were offset by lower aftermarket sales. For the first half of the year sales remained 1% better than the prior year. Gross profit for the quarter was 304 million or 15.8%, an improvement of 14 million and one percentage point improvement versus quarter two 2015. Both divisions contributed to these improvements.
Gross profits improvement reflected the benefits of material sourcing and prior period integration and restructuring actions, as well as improvement in underlying plants and distribution center productivity. SG&A increased by 15 million in the quarter versus the second quarter of last year. This increase included 4 million of additional marketing spend in the Motorparts division a one-time charge of 3 million relating to a legal reserve an increase of 3 million in pension cost, as well as some other timing related expenses.
Operational EBITDA for the quarter improved by 40 million to 196 million reflecting the changes in gross profit and SG&A discussed combined with 10 million of increased depreciation charge year-over-year and included in gross profit and SG&A. Net income from continuing operations attributable to Federal-Mogul was 31 million versus 15 million in Q2 2015 and included restructuring a non-cash impairment charges of 12 million. Adjusted net income was 47 million for the quarter. Year-to-date performance remained strong with an EBITDA for the company of 389 million, 65 million better than the first half of 2015.
Slide 10 provides a reconciliation of our operational EBITDA to net income for Q2 2016 as well as for the first six months of the year. The top half of the slide provides a reconciliation of our operational EBITDA 196 million for Q2 and 389 million for the first half of 2016 to a net income of 33 million and 69 million, respectively. Year-over-year most of the major reconciling items that we exclude from operational EBITDA are fairly constant. For the quarter, the exceptions are the year-over-year reductions in restructuring and impairment charges. This was offset by pick-up in depreciation as well as interest expenses and financing charges respectively due to prior period investments and debt levels.
We also had the non-recurrence of 7 million of income from discontinued operations in Q2 2015. With respect to the bottom half of the slide reconciling net income of 33 million to adjusted net income of 47 million, the only items in Q2 relate to restructuring and impairment charges previously discussed as well as segmentation and transaction related costs.
Please move to Slide 11 for an overview of the Motorparts division Q2 2016 financial performance. As already mentioned by Dan Motorparts performance was solid in Q2 as we continued to improve our operations and have more discipline on the commercial front. Q2 2016 revenues were lower compared to the prior quarter by 5% in constant dollars with a challenging comparison from last year, due to supply chain disruptions in Q1 in the North America aftermarket uplifting revenue in Q2 2016. In constant dollars, the American aftermarket sales were down 10%. In addition to the timing issues noted, the American aftermarket performance also reflected the impact of a softer U.S. and Canada aftermarket environment in Q2, together with some lost aftermarket business.
In EMEA quarter two sales were down 3% mainly as a result of softer aftermarket sales in Germany and in the Middle East and partially offset by better OE sales. Overall EMEA sales in Q2 were 2% higher than Q1 2016 sales. In Asia, Motorparts sales growth continued with our key aftermarket countries in China and in India with sales for the quarter being up by 26% and 12%, respectively. The growth of this market was partially offset by lower export sales into the Asia region and by the downsizing of our Australia operations. Finally in Q2, OE sales increased in all regions for overall by 2%.
Q2 2016 Motorparts EBITDA was 61 million for the quarter or 7.5% of revenue down 6 million year-over-year with revenues down 53 million. As you can see in the bottom right chart the year-over-year impact from the reduced volume was 16 million which was materially offset by operating and commercial performance improvements including returns from previous restructuring and integration investments, as well as improved material sourcing. Q2 EBITDA also includes 4 million of additional marketing investments and the legal reserve of 3 million.
In summary although Q2 EBITDA was down 6 million for Motorparts, the division continues to perform well. For the six months of the year revenue was 1.649 billion up 5 million including 30 million of negative exchange rate impact. EBITDA was 135 million or 8.2% of revenue up 37 million compared to the first half 2015.
Please turn to Slide 12 for the quarter two results of the Powertrain division. For quarter two Powertrain reported revenues of 1.172 billion up 1% in constant dollars versus quarter two 2015. Additional sales from the acquired Valvetrain business phase two were partially offset by headwinds in the heavy duty and industrial segments, as well as a decline in sales in Brazil. As commented by Rainer we continue to enjoy good market conditions for passenger cars, SUVs and pickup trucks in North America. Powertrain's operational EBITDA increased by 20 million to 135 million or 11.5% of revenue in Q2 compared to 115 million or 9.9% of revenue in the prior year. EBITDA included 3 million of favorable currency impact versus prior year.
Breaking down the EBITDA performance for the quarter as shown in the bottom right chart, the EBITDA from the acquired Valvetrain business was offset by the impact from lower heavy duty and industrial sales. Strong operational performance in the quarter generated an additional 32 million of EBITDA included benefits from improved material sourcing as well as manufacturing performance and overall cost improvements.
In the bottom left chart the quarterly EBITDA trend of Powertrain over the last few quarters in both absolute dollars and percentage of revenue confirms the significant improvements achieved. Powertrain’s first half revenue of 2.300 billion is materially flat versus prior year but included the impact of 37 million negative currency exchange. For the same period EBITDA was 254 million or 11% of revenue up 28 million compared to the first half of 2015.
On Slide 13 we provide a summary of the company's consolidated cash flows for the first half of 2016 compared to the first half of 2015. We're reporting a positive free cash flow of 88 million for the quarter and 97 million for the first six months of the year. This compares to an outflow of about 300 million for the same period last year. This is the result of EBITDA improvements in both PT and Motorparts as well as our focus on working capital since the beginning of year combined with cash received from dividends from non consolidated affiliates. We also had increased level of factoring throughout the first half of the year in line with seasonality. Finally inventory remains a key area of cash opportunity as some of the acquisition, integration and restructuring activities are now behind us.
Capital expenditure was 195 million for the first half of the year compared to a spend of $216 million for the first half of 2016. The reduction is the Motorparts division and reflects the significant spend in the first half of 2015 in the North America distribution footprint. Payments to acquire businesses was an outflow of 24 million in 2016, primarily related to the acquisition of the Motorparts division over its filter manufacturing business in Mexico in Q2 this compares to an outflow of 301 million in 2015, which mainly related to the acquisition of certain assets in the TRW Valvetrain business.
Overall, cash provided by operating and investing activities was 64 million in 2016 compared to an outflow of 585 million in the first half of 2016. Funding under the company’s revolving credit line partially offset by local debt repayment as well as the effect of currency increased cash by 20 million during the first half of 2016. At the end of June, the company had a cash balance of 290 million and liquidity of 461 million.
This concludes our earnings presentation and I will ask the operator to open the lines for questions. Operator?
Thank you. [Operator Instructions] Our first question comes from the line of Brian Sponheimer of Gabelli. Your line is open.
Dan the two things I guess that pop-out in the quarter. One is the lost business in the Motorparts. Can you just talk about that and the other is the marketing spend, up 4 million. I imagine some of that is sticky and is probably going to continue with that run rate, but was there anything that was special about that extra 4 million spent?
Sure. On the sales side, I mentioned there were, I guess three primary factors may be mentioned 2 there was a third. One is the soft market, 2 is lost business the third is some pull ahead probably in Q1. Q1 sales U.S. were pretty strong and we think there was some stocking activity that was ultimately represented a pull ahead especially given the week sales environment in Q2. So we’re not, it’s hard to break it down on the lost business side. There has been some losses, there has been some wins. There are a lot of puts and takes there, so it’s hard to quantify it. But I think given the soft market, there will be some revenue headwinds that will continue throughout the year in U.S. and Canada.
And by the way the other [Multiple Speakers].
[Multiple Speakers] National tyre change things like that. One of your customers Genuine Parts called out some weakness there. Was that a factor?
I’m sorry. Just one other thing Brian I forgot to mention the currency impact in Canada. That as a result to that currency, we had to put through price increases last year and the Canadian markets has been tough and it’s been difficult to absorb some of those pricing, the currency related price increases. I’m sorry, can you just repeat the, and I’m sorry you also asked about marketing spend.
So the bulk of the increased marketing spend was related to the launch of OEX, it’s about three quarters of it. And that was a phased rollout in the first half, mainly through a riley and about 30 deputies in support our brake line. So that was a bit unusual, but we’re anticipating that that would some amount of additional spend would continue in the back half of the year. And then the Champion launch which is now scheduled for October, November that's going to require some additional marketing investment as well. So, I think you're going to see marketing elevated for a little while. The good news is the early results on OEX are very encouraging.
I guess let's move on, so Jerome you mentioned inventory as an opportunity for cash flow improvement, can you bucket that at all or at least directionally talk to us about amounts that you can save?
Yes, you may remember last year with increased inventory pretty significantly largely because of restructuring projects in plants -- plant closures largely as well because of the reshaping of our DC footprint. So, and there was as well the Affinia acquisition which was one factor. So, we do think that there are tremendous opportunities to reduce that inventory level. We've had some good successes I think in Q1 where we were able to reduce inventory while building up for the season. Q2 was more kind of neutral overall, better performance in PT slightly offset by Motorparts. So, for the remaining of the year we still think that we'll be able to reduce further our inventories to the tune of maybe $40 million-$50 million, that is kind of the number we've been talking about for the last six months. So, that's what we see coming for the rest of the year.
40 million or 50 million more?
Our next question comes from the line of Tony Cristello of BB&T Capital Markets.
I wanted to follow-up on the aftermarket side first and just to be clear did you say that you would expect the softer market to sort of continue in near-term because it sounds like perhaps this quarter is off to a similar pace?
Yes so, second quarter seasonally is our strongest quarter and so, the weakness, typically if you have weakness in Q2 it'll continue into Q3 and we're still seeing the environment relatively soft.
Okay. And then on the aftermarket continuing then when you talked about the supply chain and you said you're still soft more opportunity for service or cost optimization, could you talk a little bit more about that and sort of what's left and how you see the timeline for those taking place over the next I don't know of it is six or 12 months?
Yes so, I can’t quantify it exactly but, so when we set up our East and West Coast DCs we obviously had to set them up in parallel to our existing distribution network. So, we're still running largely a redundant network in North America. The focus has been primarily on maintaining service levels and making sure that there was no disruption. So, the East, West Coast DCs, they're increasing volume more or less every month but they're still not at full run rate. Once they get at full run rate it'll give us the opportunity to reduce costs and footprint elsewhere and that ultimately will be the biggest driver of the cost savings. I would say we're still sort of in the middle of that right now. I said we carry into 2017, I’m not sure how far it will carry. It will just depend on how quickly we can execute the whole optimization plan.
Okay, that’s helpful. And then if you look at some of the other areas maybe the, I don’t know if you are going to categorizing this growth or not, but for the aftermarket on the heavy equipment commercial side and then in China. As you look to expand those, I am assuming this to relatively small so if rates are pretty high. But the market potentials on those appear to be pretty sizeable and do you have all the resources and infrastructure in place today to grow those to a more meaningful level or will we see you having to invest and then take the next leg up in sales and then sort of invest again?
Yes so the growth opportunity is China call it roughly 50 million to 60 million in aftermarket sales. So it’s relatively small, but it has been growing in excess of 20% year-over-year from quite some time. India is in the $60 million range also growing double-digit for some period of time. So they are small, but not meaning, they are somewhat meaningful. Commercial vehicle my view is we have sort of underperformed in that area for a while. Our sales are probably between 175 million and 200 million a year in commercial vehicle aftermarket. The big lines there are FP Diesel and National oil seals who have got friction, commercial vehicle friction. So we have a reasonable existing business that’s been flattish for a long time and we think there is an opportunity to grow it globally. Also I mentioned earlier Mexico and Latin America. Mexico is becoming a bigger and bigger business for us the Interfil acquisition gives us another 20-ish million of sales there. And Latin America, we’ve done really relatively little with over the past several years. So we think there is an opportunity to use Mexico’s better platform into Latin America and so we’re investing in that.
Okay, helpful. And if I could just talk a little bit then on the other side of the business, two areas, I just want to touch on the first is some of the top-line growth challenges. Are there initiatives underway that perhaps in some things that may unfold in 2017 or 2018 that can offset some of the challenging environment that you have referred to whether it’s diesel or Volkswagen or some of the other things. And then the second piece is, there continues to be more of a push towards electrification, electric vehicles and those types of things. I’m just wondering where your thoughts are today granted that’s a very small percentage of the global car park but where your thoughts are today and how you fit into that technology shift?
Okay. Rainer speaking Tony I will try to answer these two questions, the first one for the top-line. We have been into last few years quite focused on booking additional business on gasoline as we have been in the past quite heavy on diesel focus. And both on the commercial side as well on passenger cost. We have currently quite a balanced business especially also in Europe with gasoline and diesel are nearly equal 50-50. So we are not exposed to significant issues if the market is shifting. From the top-line we do have challenges to grow faster. I do think we have solid technology to do so. We are very often called in for the most advanced engines and our challenge is to turn this into solid growth for these volume producers. We do have success there but when I look in our market position there's gasoline and diesel engines in Europe or here in the U.S. We are growing this market and I would like to see us growing faster than some market to us that it’s a very cyclical business we have in heavy duty and industrial business.
There are no special campaigns or something like this, we try to remain very disciplined and to find our sweet spot between volumes and margins and that's I think the nature of the competitive place we are in. To the second question, electrification we do see in the next five, eight, even 10 years a rise of especially hybrid cars where you have two Powertrain’s involved one electrical and one with the combustion engine. I think when our customers are talking about electrification, hybrid will be the dominant. Version as an example a leading supply of hybrids is Toyota and Toyota announced that they are not intending to have battery driven cars on the market they are focused on continue to supply and to development hybrid cars. So, in the long run fuel cells, and we see this as a role model into market hybrids will dominate the electrification but it means even in 2020 we see 98% of all cars sold having combustion engine and we're not concerned about changing in the portfolio. We as a company we do not invest in battery technology or in power electronics I think market is not mature enough to understand which technology will be in the end a winning one and so we do have to sync with our R&D spend to make combustion engines better and more reliable, less fuel consuming and less polluting.
[Operator Instructions] Our next question comes from the line of Frank Longobardi of Alcentra. Sir, you may ask your question.
I just wanted to dig in a little bit on the Powertrain side, can you tell me how much the acquisition has contributed to sales, trying to get an idea of what your growth would have been or sales would have been after the acquisitions?
We're not disclosing this type of details. It's a time when we did the acquisitions we said well running around, we're expecting around $0.5 billion and we are in this so far.
That’s on an annual basis?
But you also factor in currency, the impact of currencies and we have done that all that.
Yes of course okay. Are you able to give me what percentage your HD and industrial business represents?
Yes, I can tell you, in peak years when industrial is and heavy duty and industrial is in peak we have more than 40% of our sales in this segment and I think we are currently in the low 30% in this segments.
Okay. And so then kind of outside that segment then really just the light vehicle would you be able to just quantify whether that part of the business was up or down and/or in line with production growth rates in the various markets?
It’s up and it’s in line with production growth rate. But the growth in this segment like vehicle was not enough to offset completely the decline in industrial and heavy duty that’s the reason why despite the acquisition well was somewhat flat.
Okay, was it up in like all markets or really like up in one down another and then it’s up or?
No, no, no we are well positioned here in the U.S., we really enjoy as solid volumes with our customers here in the U.S. Especially on the pick-up truck we are busy with making components for all three OEMs here in the U.S., but also growing this some components for our Japanese customers. Europe, we participate nicely in the growth, into European market is around 6%. Well on this wave and in India I talked about also growth in India is largely passenger cars, but India is also is our only market where we have currently solid growth on heavy duty and we grow in China on the passenger car there.
Okay. So, on the light vehicle you are up in all the markets for the quarter?
With the exception in Brazil and Russia.
Fair enough, okay. And then just turning to the cash flow statement I noticed that you had about 60 million in dividends from your non-consolidated affiliates, which compared to the annual amount you’ve gotten in the last four or five years is much higher. Is there anything happening there or is that one-time in nature or any color would be helpful?
Yes. Rainer speaking and because to a certain extend it has come from Powertrain. We have heavily invested in some of our joint ventures in China as well in Turkey. In the last two years or three years and we had especially last year compare this let’s call it normalized history a significant lower inflow of dividends. And this year some of these investments are starting to operate, we have been able to get a larger dividend in order to utilize, or to the benefit from the investments we’ve made there. We will come back to what I would call normalized way in 2017. So 2015 quite lower dividend ’16 a higher dividend, ’17 we expect to normalize again.
And what is the normalized number. Can you give us any color on that we should expect?
Yes. Normally, we are slightly below in terms of cash, the equity earnings that we are getting in our P&L. So we are traditionally at 70%-80% of what we see in the P&L in terms of cash.
Okay. That’s very helpful. And then, I’m sorry, what was the last part?
So it depends in varies from a year to another one, but it’s traditionally what we.
Understood, okay and then my final question is just on working capital, it looks like, you've discussed the improvements in trade working capital, and looks like those, just under 100 million inflow, but that was kind of offset by some the other assets and liabilities minus 65, roughly, is there anything unusual there or is it just timing or?
Nothing unusual, it's timing, when you look at the first six months it's minus 37, it's, you've got things like rebates in there and stuff like that so, it's just timing, noting unusual.
And then as we go forward --- sorry, this will be the last question, to go forward for rest of the year I think you talked about, just want to confirm you said maybe 40 million to 50 million more improvement in inventory I don’t know if that is a this year event or kind of over the medium term, but we should still seek incremental benefit in the second half of the year from inventory reduction or?
That is correct. Yes.
And I'm showing no further questions in the queue. I'd like to turn the program back to Dan Ninivaggi for closing comments. Thank you.
Okay, thank you everyone for joining the call and thanks especially to the FM, our FM colleagues who are on call for all their contributions for a very strong quarter and look forward to coming back in three months and also having a good quarter. Thanks very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.
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